Monthly Highlights: October 2014

•  West African equities came under pressure following the oil price decline, USD strength and commodity weakness
•  East African equity markets were broadly weaker amid poor performance in Kenya, Mauritius, Rwanda and Uganda
•  North African equities underperformed on back of weakness in Egypt
•  Southern African equities declined amid continued weakness in Zimbabwe
 

West African equities came under pressure following the oil price decline, USD strength and commodity weakness

West African equities came under pressure following the oil price decline, USD strength and commodity weakness. Nigeria, Africa’s largest oil producer, felt the greatest impact as oil prices reached a four-year low amid a slightly weaker Naira. We also witnessed a modest decline in Nigeria’s foreign exchange reserves (USD38.7bn as of October 2014) and while this buffer remains greater than nine months’ worth of import cover, we will continue to monitor reserves closely. On the earnings front, we digested a plethora of 3Q14 results. In financials, GTB reported earnings that were largely in-line with our expectations (G/E: +14.2% y/y; PAT: +18.2% y/y) as net interest income rose by +1.1% y/y, other income grew by +37.2% y/y and provisions declined by -29.0% y/y ensuring healthy bottom line growth. Zenith's results were relatively weak (GE: +5.6% y/y; PAT: -3.0% y/y) as the increase in operating income (+4.0% y/y) could not keep pace with rising operating expenses (+5.6% y/y) as the banks' cost-to-income ratio deteriorated from 53.4% to 54.4%. Diamond Bank also posted disappointing results (GE: +16.1% y/y; PAT: -13.6% y/y) on back of a +50.8% y/y rise in interest expense which led to a -1.3% decline in net interest income. Nevertheless, we remain optimistic about the bank’s future prospects as it is the only Nigerian bank with a viable retail strategy. Also, Diamond recently recapitalised, and its valuation remains attractive at a forward P/E of 4.7x after accounting for the dilutionary impact of the rights issue. Skye Bank reported strong results (GE: -7.7% y/y; PAT: +26.0% y/y) on back of +697.4% y/y growth in non-interest income while the impact of cost controls caused operating expenses to fall by -1.7% y/y. Stanbic IBTC posted impressive 3Q14 growth (G/E: +17.2% y/y; PAT: +59.5% y/y) as the bank’s strategy of focusing on non-funded revenue growth pays off as evidenced by a +19.2% y/y rise in other income. On the consumer front, UACN delivered weak 3Q14 performance (T/O: -10.6% y/y; PAT: -52.5% y/y) with base effects relating to UPDC (the company’s property division) primarily responsible for the y/y decline in profitability. Nestle Nigeria posted soft results (T/O: +7.6% y/y; PAT: -15.2% y/y) as gross margins declined by -256bp y/y amid declining levels of discretionary income and ongoing security threats from the north. Nigerian Breweries also released weaker results (T/O: -5.7% y/y; PAT: -3.0% y/y) although margins expanded amid a -5.4% y/y decline in operating expenses which partially mitigated the impact of lower sales volumes and cushioned the decline in PBT. Shifting to the energy sector, Seplat released results that were in-line with our expectations (T/O: -8.7% y/y; PAT: -48.4% y/y) as the company experienced downtime following un-budgeted shut-down of the Trans Forcados System (TFS). Going forward, management have commissioned the Warri Refinery evacuation pipeline as this should provide an alternative route going forward. Management continues to improve gas production and we believe this has potential to drive revenue growth over the medium term. In Ghana, we digested strong 3Q13 results from Ghana Commercial Bank (G/E: +43.7% y/y; PAT: +111.1% y/y) as net interest income grew +44.6% y/y on back of strong loan growth (+35.7% y/y) rising non-interest income (+95.2% y/y). By contrast, Guinness Ghana reported disappointing 1Q15 results despite a +42.0% y/y increase in turnover. The company reported a loss of GHS26.7m as gross margins fell to 15.6% y/y (from 23.2% in 1Q14) on back of a +56.0% y/y rise in cost of sales.

East African equity markets were broadly weaker amid poor performance in Kenya, Mauritius, Rwanda and Uganda

East African equity markets were broadly weaker amid poor performance in Kenya, Mauritius, Rwanda and Uganda. In Kenya, Equity Bank released impressive 3Q14 results (GE: +20.2% y/y; PAT: +36.8% y/y) driven by strong growth in both net interest income (+16.8% y/y) and non-interest income (+30.5% y/y) and a -57.7% y/y fall in provisions. As anticipated, the bank’s cost-to-income ratio was higher at 56.1%, as Equity Bank rolls out of its MNVO strategy. It should be noted that management anticipates its MNVO strategy will lower Equity Bank’s cost-to-income ratio to 32% within the next ten years by materially expanding its customers’ access to banking products and services across East Africa. In utilities, Kenya Power reported strong FY14 numbers (T/O: +18.5% y/y; PAT: +87.4% y/y) as electricity sales grew 30.6% y/y on back of increased retail demand and on-boarding of a large industrial customer. Tanzania was the only East African market to close in positive territory as the IMF agreed to rebase the country's gross domestic product in order to account for expansion across the materials and energy sectors. It should be noted that Kenya recently joined the ranks of Africa's top ten economies after rebasing its economy whereas Nigeria‘s rebasing allowed it to overtake South Africa as the largest economy on the continent.

North African equities underperformed on back of weakness in Egypt

North African equities underperformed on back of weakness in Egypt. On the earnings front, we digested 3Q14 results from Arabian Cement that were in-line with our expectations (T/O: +25% y/y; PAT: -19% y/y) as PAT fell on back of a rise in the company’s corporate tax rate. Going forward, we expect a strong rebound in FY15 earnings on improved demand, higher utilisation rates, and improved EBITDA margins on back of the company’s shift to coal-fired cement production. On the economic front, the Egyptian government has prepared a Medium-Term Economic Plan which targets a 6% GDP growth rate by FY19. The country expects to achieve this target by investing in infrastructure and development projects through public-private partnerships. In addition, the Plan targets a budget deficit of 8 - 9% of GDP by FY19 (from 12.6% of GDP in FY14.

Southern African equities declined amid continued weakness in Zimbabwe

Southern African equities declined amid continued weakness in Zimbabwe as investors grow skittish following the on-going succession battle within President Robert Mugabe's Zanu-PF. On the corporate front, Econet Wireless reported subdued 1H15 results (T/O: +4.2% y/y; PAT: -29.3% y/y) as evidenced by a -15% sequential decline in Voice and SMS ARPUs when compared to 2H14. EBITDA margins slipped to 39.5% on back of the shift to lower-margin data although value-added services made an increasingly significant contribution to revenue. It should also be noted that earnings suffered from a recently instituted air-time tax on the company’s earnings. In retrospect, we find the company’s results commendable given the challenging operating environment, e.g. increased deflationary pressure, tightening liquidity conditions and low aggregate demand. Econet's valuation remains attractive relative to its peers trading at a P/E of 11.5x and an EV/EBITDA of 4.0x. In Botswana, Letshego released lackluster 1H15 earnings (GE: +20.5% y/y; PAT: +2.5% y/y) as profitability slowed on back of rising interest expense and higher operating costs as the company migrates to a new IT platform. It should be noted the management continues to diversify Letshego’s funding base as evidenced by the onset of deposit-taking activities in Mozambique and similar progress in Rwanda and Namibia.