Monthly Highlights: October 2012

•  West African equities performed well as Ghana rebounded amid an improved macroeconomic backdrop
•  East African equity markets rose on back of strength in Kenya
•  North African equity markets retreated on back of weakness in Egypt
•  Southern African equities were broadly weaker
 

West African equities performed well as Ghana rebounded amid an improved macroeconomic backdrop

West African equities performed well as Ghana rebounded amid an improving macroeconomic backdrop. As we approach the December elections, we are growing increasingly bullish on Ghana’s medium-term prospects as USD demand appears to be trending lower with the cedi appreciating by +3.3% over the past 90 days. On the earnings front, we digested strong results from Ghana Commercial Bank (G/E: +35.6% y/y; PAT: +128.8% y/y) as the bank nearly doubled its loan book amid declining NPLs and a +19.6% y/y rise in deposits. We were also pleased with results from GGBL (T/O: +17.0% y/y; PAT: +56.1%) although part of the income gain is attributable to a -69.0% decline in finance charges as the company pays down its debt. Shifting to Nigeria, we digested relatively healthy 3Q12 results from across the banking sector although we remain justifiably cautious as net interest margins have begun to weaken amid a more challenging interest rate environment. FBN posted solid results (G/E: +18.9% y/y; PAT: +48.4% y/y) as net interest income increased +21.7% y/y. On the whole, we remain comfortable with our current positioning as the bank’s loan book continues to expand with asset quality improving amid declining NPLs. We were also pleased with results from GTB (GE: +21.9% y/y; +58.8% y/y) and believe management is well positioned to compete in a more demanding rate environment. It should also be noted that GTB loan growth slowed in 3Q12 although the quarterly decline in net loans & advances is largely the result of pay-downs from existing borrowers. This is something we have commented on previously as prepayment risk across the sector is likely to remain elevated over the coming months. Zenith posted strong 3Q12 results (G/E: +25.2% y/y; PAT: +50.6% y/y), and while management is also contending with the weakening trend in interest income, we were pleased to see continued improvement in the bank’s operating efficiency vis-à-vis its cost-to-income ratio. On the consumer front, UACN delivered solid performance (T/O: +9.3% y/y; PAT: +26.5% y/y) as the company’s food and beverages segment is driving a rebound in top-line growth. We were equally pleased with performance across the company’s property, paint and logistics businesses as recent cost controls appear to be taking effect. Nestlé Nigeria delivered strong 3Q12 earnings (T/O: +20.5% y/y; PAT: +63.1% y/y) although much of the 900bp in PBT margin expansion may be attributed to claw back of the company’s outsized marketing & distribution expenses from 2Q12. Despite consensus expectations for a seasonally strong 4Q12, we remain on the sidelines as Nestlé valuations appear rich at 22x FY13 earnings given the potential for sales volumes to come under pressure amid an underlying deceleration in consumer spending.

East African equity markets rose on back of strength in Kenya

East African equity markets rose on back of strength in Kenya as the macroeconomic backdrop continues to improve amid diminished inflationary pressures and greater FX stability. Although Equity Bank has yet to release its 3Q12 results, KCB posted strong numbers (G/E: +23.4% y/y; PAT: +45.7% y/y) as net interest income rose +30.7% y/y amid a much leaner cost structure as illustrated by the 600bp y/y decline in the bank’s cost-to-income ratio. Shifting to the consumer sector, we were encouraged to learn that Scangroup had finally selected a CEO to run its Nigerian operation as this is critical to the company’s strategy of securing a greater percentage of large multinational advertising budgets. Further, we have raised our FY12 forecasts for Scangroup following recent conversations with management as an improved operating environment has resulted in healthy spending increases and a more highly competitive landscape in key sectors such as beverages, banks and telcos. In Mauritius, we anticipate generally uninspiring 3Q12 results from MCB next month as slow credit growth and declining spreads weigh on net interest income. Despite our affinity for the overall potential of Uganda’s burgeoning power sector, we have elected to remain on the sidelines for Umeme’s upcoming IPO as the long-term impact following 1Q12 removal of power subsidies remains unclear in our view. Further, power theft remains a pervasive problem in Uganda and Umeme’s efforts to curb vandalism remains in question when viewed through the eyes of domestic customers who are now paying 30 – 50% more for electricity when compared to last year.

North African equity markets retreated on back of weakness in Egypt

North African equity markets retreated on back of weakness in Egypt as BoP pressures appear likely to continue amid heightened anticipation for IMF relief. Although IMF assistance remains elusive, we are constructive given the promise of foreign inflows from Qatar and Turkey. On the corporate front, shares of OCI declined following President Morsi’s Oct. 6th speech in which he implied that the company owes unpaid capital gains taxes from the sale of its cement business to Lafarge in 2007. While this will undoubtedly weigh on OCI shares over the near-term, management believes it acted appropriately and expressed confidence during our meeting in late October. Even so, we will closely monitor the company’s negotiations with Egyptian tax authorities which are poised to begin in earnest next month. Looking ahead, we anticipate strong 3Q12 results from CIB as the bank is expected to release results in early November.

Southern African equities were broadly weaker

Southern African equities were broadly weaker although Zimbabwe continues to build upon September’s exceptional performance. In Botswana, Letshego released promising 1H12 results (Operating Income: +35.0% y/y; PAT: +10.5% y/y) as we applaud management’s more cautious approach given the shifting regulatory environment in Botswana. Nevertheless, we were encouraged by the company’s success in building a more geographically diversified loan book, keeping costs low, and identifying new & innovative sources of low cost funding. In Zimbabwe, shares of Delta continue to rise amid increased foreign interest as the company is positioned to release strong 1H12 results on back of improved turnover in the company’s lager and soft-drink segments.