Monthly Highlights: October 2013

•  West African equities performed well amid broad based strength across the region
•  East African equity markets continued their upward trajectory
•  North African equity markets posted strong performance on back of improved political backdrop in Egypt
•  Southern African equities remain firm as Zimbabwe continues to build upon last month’s outperformance
 


West African equities performed well amid broad based strength across the region

West African equities performed well amid broad based strength across the region. In Nigeria, we digested results from across the banking sector as Zenith reported 3Q13 results that were largely in-line with our expectations (G/E: +11.4% y/y; PAT: +8.9% y/y). The bank grew net interest income rose +16.0% y/y and NIMs expanded by +6.4% y/y amid healthy growth in loans (+14.8% y/y) and deposits (+18.1% y/y). GTB reported relatively benign 3Q13 results (GE: +9.3% y/y; PAT: +8.6% y/y) as the increase in operating income (+7.2% y/y) could not keep pace with rising operating expenses (+8.6% y/y) and its cost-to-income ratio deteriorated slightly from 41.4% to 41.9%. Diamond Bank also posted satisfactory 3Q13 results (GE: +0.8% y/y; PAT: +10.4% y/y) on back of a +9.3% y/y rise in net interest income. Nevertheless, we remain cautious as management failed to rule out the possibility of a one-off negative surprise in 4Q13 provisions and the bank has temporarily suspended its fundraising plans. Although not unexpected, Skye Bank reported disappointing 3Q13 results (GE: +8.4% y/y; PAT: -11.9% y/y) on back of a –13.8% y/y decline in non-interest income and +37.8% y/y rise in operating expenses. From a bottom-up perspective, Skye remains the most attractively valued bank in the sector. It should be noted that over the past four months, we have halved our exposure to the Nigerian banking sector amid a more challenging operating environment. On the consumer front, UACN delivered solid 3Q13 performance (T/O: +33.7% y/y; PAT: +35.6% y/y) as the company’s food and beverages segment drove heady top-line growth whilst the paints and properties businesses chipped in nicely. By contrast, Unilever Nigeria released soft 3Q13 results (T/O: +8.2% y/y; PAT: -35.3% y/y) as gross margins deteriorated from 39.6% in 3Q12 to 36.4% in 3Q13 amid rising competition from the household and personal care sector. Flour Mills released weak 1H13 results (T/O: +0.2% y/y; PAT: -40.3% y/y) as margins deteriorated amid higher import duties on wheat, rising feed grain prices (i.e. maize and sorghum) and inflationary pressure on packaging materials. In Ghana, the Cedi continues to deteriorate as consumer price inflation rose to a three-year high of 11.9% following the removal of petrol price subsidies and the corresponding impact on fuel and transport prices. Inflation is likely to remain above the Bank of Ghana’s target range (9% +/- 1%) until 2H14 as the elimination of subsidies has caused utility tariffs to rise sharply with water and electricity prices up +52% and +79% respectively on the month. On the earnings front, we digested strong 3Q13 results from Ghana Commercial Bank (G/E: +40.4% y/y; PAT: +50.6% y/y) as net interest income grew +52.8% y/y amid rising loan (+8.7% y/y) and deposit (+10.4% y/y) growth. By contrast, Guinness Ghana reported disappointing 1Q14 results (T/O: -1.8% y/y; PAT: -96.2%) with gross margins shrinking from 31.1% to 22.3% on a sequential basis after cost of sales rose by +11% y/y. It should be noted that management has responded by increasing the prices for its product suite (including Star Lager, Malta Guinness and Alvaro) as higher utility, transportation and storage costs weigh on profitability. Further, Guinness will be rolling out a new cassava-based beer (Ruut Extra) in December as locally-sourced raw material will enable the company to mitigate any adverse impact from a depreciating Cedi.

East African equity markets continued their upward trajectory

East African equity markets continued their upward trajectory on back of strength in Kenya and Tanzania. In Kenya, we digested muted 3Q13 results from Equity Bank (NII: +12.0% y/y; PAT: +7.3% y/y) as NIMs contracted for the fourth consecutive quarter amid lower lending rates and a rise in the cost of deposits. KCB also reported lacklustre 3Q13 results (NII: +11.9% y/y; PAT: +12.0% y/y) as total NPLs rose by +37.2% y/y. Although the bank continues to play catch up on the mobile banking front, sequential loan and deposit growth was up +5.4% and 4.6% respectively as management continues to roll out alternative banking channels. Shifting to the power sector, KenGen reported slower growth in FY13 (T/O: +3.6% y/y; PAT: +1.2% y/y) despite additional supply from improved hydrology and sales growth of +11.4% y/y. It should be noted that KenGen is planning a US$1.65bn rights offer to fund an aggressive expansion plan which will triple the company’s output to 3.4GW over the next few years. In Tanzania, National Microfinance Bank reported strong 1H13 results (NII: +18.6% y/y; PAT: +21.4% y/y) as the bank continues to expand its domestic footprint with 150 branches and over 2,800 employees nationally. In Mauritius, Mauritius Commercial Bank doubled the size of its MTN Programme from US$100m to US$200m amid increased investor demand.

North African equity markets posted strong performance on back of improved political backdrop in Egypt

North African equity markets posted strong performance on back of the improved political backdrop in Egypt. Relative political stability has been buoyed by positive perception of the interim government, adoption of expansionary monetary policy, strong foreign inflows and a lower budget deficit target. Although inflation has remained low amid weak growth and declining domestic consumption, we suspect that recent policy initiatives are likely to pull prices higher over the medium-term. In addition, we remain cautious as the referendum on a new constitution is likely to take shape in January 2014. At present, we remain tactically underweight Egypt although this month’s performance is encouraging with shares of CIB Egypt and Juhayna up +12.8% and +24.8% respectively on the month.

Southern African equities remain firm as Zimbabwe continues to build upon last month’s outstanding performance

Southern African equities remain firm as Zimbabwe continues to build upon last month’s outperformance. In Botswana, Letshego released promising 1H13 results (NII: +7.3% y/y; PAT: +9.1% y/y) as advances rose by +22.0% amid significant contributions from Namibia and Mozambique. As part of the microfinance lender’s strategy of diversifying its funding base, Letshego is expected to begin deposit-taking activities in Mozambique next month. We will certainly monitor the company’s deposit-taking activities as well as its anticipated new debt issue. In Zimbabwe, Delta indicated slower-than-expected volume growth as lager volumes fell amid softening demand in the wake of recent price increases. Nevertheless, we expect the company to record double-digit growth in both turnover and PAT for the full-year. Econet reported mixed interim results (T/O: +10.9% y/y; PAT: -9.6% y/y) as growth in voice services slowed despite a +22% increase in the operator’s overall subscriber base. Nevertheless, we remain bullish with respect to Econet’s forward looking prospects as the number of subscribers in Ecocash rose by +76% to 3 million as management explores new and innovative avenues through which to increase overall profitability.

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