Monthly Highlights: November 2011

•  West African equities retraced following last month's gains
•  East African equities performed well as local currencies rebounded strongly
•  Southern Africa exhibited mixed performance on the month
 

West African equities retraced following last month's gains

West African equities retreated with the NSE ASI (Nigeria), GSE Composite (Ghana) and BRVM Composite falling by -5.69%, -6.13% and -6.71% respectively. On the macro front, the Central Bank of Nigeria left the Monetary Policy Rate at 12.0% whilst maintaining the symmetric corridor and CRR ratio unchanged. That said, the midpoint of the NGN/USD FX band was moved from 150 to 155 as inflation rose to 10.5% on back of higher food inflation and elevated hawkishness given the expected removal of various fuel subsidies. In other action, S&P applied its new methodology to the Nigerian banking sector and while none of the individual company ratings changed, its Banking Industry Country Risk Assessment (BICRA) was reduced from 9 to 8 as economic imbalances (e.g. high political risk, low GDP per capita, large infrastructure needs, et al) and credit risk (e.g. low wealth levels, relaxed underwriting standards, weak payment culture, et al) classify the industry as very high risk. As the earnings season winds down, we digested stronger-than-expected 3Q11 results from Dangote Cement (T/O: +31.1% y/y; PAT: +57.3% y/y) as construction activity rose and margins expanded. Lafarge WAPCO (T/O: +51.0% y/y; PAT: 54.0% y/y) also reported strong 3Q11 performance on back of lower power costs and an increase in cement volumes. By contrast, Dangote Sugar (T/O: +22.1% y/y; PAT: -48.7% y/y) posted weak 3Q11 results as the company failed to pass along higher raw sugar prices as evidenced by the number of rebates granted to key clients and distributors. Guinness Nigeria (T/O: +5.5% y/y; PAT: -2.7% y/y) also posted lackluster performance as an unexpected rise in inventories, with the company talking about reviewing its distribution networks. Shifting to Ghana, inflation remains relatively benign and policy rates are expected to remain unchanged until the end of the year. Yet looking ahead, we believe inflation is poised to rise amid higher debt levels and generally poor fiscal management. On the earnings front, we digested relatively uninspiring results from StanChart Ghana (NII: +4.23% y/y; PAT: -1.2% y/y) and GCB (NII: -28.9% y/y; PAT: +6.7% y/y). Shifting to the Francophone region, WAEMU inflation rose for the first time in five months yet the ongoing correction in Ivorian CPI (38.1% of regional basket) is likely to cap future price pressures. We have grown increasingly bearish on Cote d’Ivoire’s prospects as the nation appears to be softening bondholders in advance of yet another debt restructuring. Should such a scenario materialize, Cote d’Ivoire will have an increasingly difficult time attracting the FDI required to rebuild its economy. Of note, Cote d’Ivoire will be holding its first parliamentary elections since President Ouattara came to power next month. Given the nation’s faltering economy and Ouattara’s inability to reconcile with FPI loyalists, we cannot rule out the possibility of election-related violence. 

East African equities performed well as local currencies rebounded strongly

East African equities performed well as the DSEI (Tanzania) and USE ASI (Uganda) rose by +4.33% and +1.07% respectively while the NSE 20 (Kenya) declined by a relatively modest -0.52% on the month. On the macro front, the Central Bank of Kenya increased its policy rate by a whopping 550bp from 11.0% to 16.5% and nearly doubled its inflation target to 9.0%. The sharp rate tightening, along with USD 250 million in additional IMF support and rising remittances from Kenyans living abroad, appear to have stemmed the currency’s slide as KES/USD rallied +9.81% on the month. We digested 3Q11 earnings from across the banking sector with Barclays posting weaker-than-expected results (PAT: +11.3% y/y) despite healthy cost cuts as evidenced by a -16.0% y/y decline in operating expenses. By contrast, NIC Bank posted strong net earnings (PAT: +29.3% y/y) on back of +25.4% y/y growth in Net Interest Income. NIC posted a +42.4% y/y increase in the loan book as the bank focuses on the high margin SME segment. Looking ahead, we remain somewhat cautious as the rising rates are likely to impact loan quality. In other action, Athi River Mining (ARM) posted healthy top-line results (T/O: +37.0% y/y) although profits (PAT: -62.7% y/y) were negatively impacted by FXrelated charges on USD-denominated borrowings as the result of IFRS accounting standards. Safaricom posted weak 1H12 results as net earnings declined by - 47.4% y/y on back of higher inter-connection rates, license fees and energy costs. Rising data revenue was not sufficient to offset the decline in voice ARPU. Looking ahead, rising costs remain the key downside risk as the operator’s data strategy requires large capital expenditure requirements in order to improve 3G network coverage, 2G capacity, switching capabilities and fibre connectivity. In Mauritius, the SEM-7 Index declined by -3.63% on the month as the trade deficit widened and inflation edged up to 6.4%. We absorbed healthy 1Q12 results from MCB as PAT rose +12.6% y/y despite the difficult operating environment. Looking ahead, we are increasingly comfortable with MCB’s ability to weather a prolonged domestic downturn as the bank’s net contribution from offshore activities rose +52.0% y/y. Shifting to Rwanda, Bank of Kigali posted healthy 3Q11 results as total operating income rose +48.9% y/y on back of a +114.9% y/y rise in non-funded income. The bank continues to grow its loan book (+34.8% y/y) and deposit base (+36.4% y/y) while its cost-to-income ratio fell by -12.6% y/y.

Southern Africa exhibited mixed performance on the month

In Southern Africa, equity performance was largely mixed. On the plus side, the Zimbabwe Industrial Index and MSE DCI (Malawi) rose by +0.98% and +7.96% respectively. By contrast, the Lusaka ASI (Zambia) and Gaborone DCI (Botswana) fell by -3.05% and -3.20% respectively. In Botswana, inflation rose to 8.8% y/y on back of rising food and health prices. On the corporate front, Letshego withdrew its cautionary as the company: i) plans to use alternative collection methods, and ii) is engaged with authorities to obtain greater clarity on proposed payroll deduction changes. Shifting to Zambia, inflation eased to 8.1% y/y on back of declining fuel costs as the nation announced plans to issue a 10-year USD 500 million Eurobond next year. On the earnings front, Zambeef (T/O: +27.7% y/y; PAT: +125.0% y/y) released strong results as the company’s JV with Shoprite resulted in a healthy +54% increase in gross profit from its West African operations. We also saw strong results from ZANACO as net income rose +57.4% y/y on back of a +49.3% gain in NII. In Zimbabwe, Delta Corp announced stellar 1H12 earnings (T/O: +41.0% y/y; PAT: +46.0% y/y) and management raised guidance as the brewer’s lager and sparkling beverage segments contributed strongly to overall performance. Of note, CEO Joe Mutizwa announced his retirement and will be replaced by COO Pearson Gowero, the industry veteran responsible for running SABMiller’s Zambian operations. Although AICO and Seedco reported net losses for 1H12, they each delivered strong top-line performance with y/y revenue growth of +116.6% and +49.0% respectively.