Monthly Highlights: October 2016

•  West African equity markets retreated led by weakness in Nigeria
•  East African equity markets were broadly weaker led by poor performance in Kenya as volumes declined
•  North African equities were higher as Egypt outperformed
•  Southern African equities were positive with Zimbabwe gaining +22%
 

West African equity markets retreated led by weakness in Nigeria

West African equity markets retreated led by weakness in Nigeria as deteriorating economic conditions continue to weigh on investor sentiment. On the earnings front, the third quarter earnings season moved into full swing as we digested a plethora results. In the financial sector, GTB reported impressive numbers (G/E: +57.1% y/y; PAT: +94.8% y/y) as net interest income rose by +34% y/y while non-interest income grew by +184.4% y/y driven by further revaluation gains of NGN32bn vs. NGN60bn in 2Q16. Similar to GTB, Zenith's results were buoyed by significant gains from FX revaluation (NGN 28.2bn booked in 3Q16) (GE: -7.7% y/y; PAT: +84.4y/y). Diamond Bank posted disappointing results (GE: +8.1% y/y; PAT: n/a) as asset quality deteriorated with loan loss provisions growing by +230% y/y. Access Bank reported relatively weak results (GE: +12.2% y/y; PAT: +4.8% y/y) on the back of NGN42bn in net foreign exchange losses reported in 3Q16 vs. NGN11bn reported in 2Q16. On the consumer front, results were generally weak, with corporates suffering from a lack of availability of FX and high rates. Flour Mills delivered weak 1H17 performance (T/O: +43.8% y/y; PAT: -73.1% y/y) as a 400bps expansion in gross margin to 14.3%, was offset by a significant spike in other operating expense to –NGN8.1bn (vs. +NGN1.8bn 2Q16) and a +17.5% y/y rise in general operating expenses. Cadbury Nigeria posted disappointing 3Q16 results (T/O: +1.2% y/y; PAT: n/a) as gross margins declined by -939bp y/y following the devaluation of the Naira. Nigerian Breweries also released weaker results (T/O: +3.3% y/y; PAT: -77.8% y/y) as the prevailing macroeconomic headwinds, including a slowdown in consumer spend, FX liquidity issues, and a significantly weaker naira continue to impinge on the company’s earnings. Okomu Oil reported sturdy 3Q16 results (T/O: +22% y/y; PAT: +59.9% y/y) as the performance was boosted by weaker competition from imports due to FX devaluation coupled with a -16% decline in operating expenses. Shifting to the materials sector, Dangote Cement released results that were in-line with our expectations (T/O: 21.6% y/y; PAT: -16.8% y/y) as gross margins declined by -1,773bp y/y driven by higher fuel cost due to disruptions to gas supplies as a result of the vandalized gas pipeline infrastructure. Going forward, Management expects a recovery in margins following the price increase in September and increased coal substitution (which reduced reliance on more expensive LPFO) in the fuel mix. In Ghana, we digested strong 3Q16 results from Ghana Commercial Bank (G/E: +43.7% y/y; PAT: +111.1% y/y) on the back of +24% growth in net interest income and a +138% rise in non-interest income. Guinness Ghana reported encouraging FY16 numbers as the loss position narrowed to GHS7.7m from GHS45m in the previous year after a strong top-line performance (+29.5%), with EBITDA margin improving by +8178bp to 20.4%.

East African equity markets were broadly weaker led by poor performance in Kenya

East African equity markets were broadly weaker led by poor performance in Kenya as volumes declined amid lower foreign investor participation. On the earnings front, Kenya Power reported flat FY16 numbers (T/O: +1.5% y/y; PAT: +1.7% y/y) as electricity sales grew by +3.6% y/y while power purchasing costs (excluding fuel and FX costs) rose +15.6%y/y as a result of additional capacity charges and an increase in energy charges. Kengen’s FY16 results were mixed (T/O: +28.8% y/y; PAT: -41.5% y/y) as strong revenue performance was offset by a tax charge for the year compared to a tax credit in the previous year. The operational performance was strong with EBITDA increasing by +49% y/y as electricity sales volumes rose by +11% following the completion of expansion projects and favorable hydrological conditions. In Tanzania, NMB posted in-line 3Q16 results (GE: +24.9%% y/y; PAT +8.6% y/y) as strong net interest income growth of +23.7% y/y was offset by higher provisions (+751%).

North African equities were higher as Egypt outperformed

North African equities were higher as Egypt outperformed after IMF Managing Director, Christine Lagarde, said Egypt is “very close” to securing the necessary financing required to seal the USD12bn loan, adding that she hopes the Fund’s Board would approve the Country’s request in a few weeks. On the earnings front, we digested mixed 3Q16 results from Juhayna (T/O: +10.9% y/y; PAT: -34% y/y) as FX driven margin pressure continued for the second consecutive quarter, and net interest costs surged +40% y/y. In Morocco, Attijariwafa bank announced an agreement to sell 50% of its 79.3% shareholding in Wafa Assurance to SNI in a transaction valued at MAD 4.5bn, which will provide the Bank with the required funding to finance its recently announced acquisition of Barclays retail business in Egypt whilst remaining fully compliant with Basel 3 capital requirements in Morocco.

Southern African equities were positive with Zimbabwe gaining +22%

Southern African equities were positive with Zimbabwe gaining +22% as local investors look for an alternative means to “store” their cash as a result of the impending Government bond note issue. On the corporate front, Econet Wireless reported subdued 1H16 results (T/O: -6.7% y/y; PAT: -36.6% y/y) as the operating environment has been riddled with challenges, including regulatory intervention, liquidity crisis as well as deteriorating disposable incomes, among others. EBITDA margins slipped to 35.1% on the back of the shift to lower-margin data although value-added services made an increasingly significant contribution to revenue. In another action, Delta Corporation issued a cautionary statement stating the company has been notified by Coca-Cola of its intention to terminate the Bottlers’ Agreements with Delta Beverages and its associate Schweppes Holdings Africa Limited. Gross sales from the soft drinks business were worth USD183m or 28.9% of the company's total revenue for the financial year ended March 31, 2016. In Zambia, the Government has told the International Monetary Fund (IMF) that it will gradually cut subsidies amounting to about USD1bn as part of an economic recovery plan. Zambian Government subsidies include about USD 600m annually for electricity and fuel.