Monthly Highlights: September 2014

•  West African equities rose amid strength in Ghana
•  East African equities continue to outperform on back of strength in Kenya and Tanzania
•  North African equities rose on back of continued strength in Egypt
•  Southern African equities were broadly lower amid weak performance in Botswana, Malawi, Zambia and Zimbabwe
 

West African equities rose amid strength in Ghana

In Nigeria, the battle between the Peoples’ Democratic Party (PDP) and All Progressives Congress (APC) is beginning to take center stage with just over five months to go until national elections. Although security concerns and the heightened threat of Ebola are asymmetric risks which will continue to impact companies operating across the country, industrial and economic activity remain robust as an improving external position and tight fiscal deficit lead to greater investment and stronger growth. One of the big macro drivers has been a rebound in Nigeria’s oil export earnings as the energy sector benefits from the emergence of indigenous operators (e.g. Seplat, OER, Eland, Mart, et al) who have proven adept at turning around low-risk brownfield assets. Looking ahead, we expect policy conditions in Nigeria to ease and the recovery in consumer spending to gain traction as we approach year-end. On the earnings front, we digested mixed 1H14 results from Oando (T/O: -30.6% y/y; PAT: +110.3% y/y) as persistent operational challenges at the company’s lower margin, downstream businesses weighed on top-line performance. Although finance charges remain a concern going forward, the sharp rise in Oando’s after-tax profit may be attributed to margin improvement and increased production from the company’s upstream operations. In the consumer sector, we digested disappointing FY14 results from Guinness Nigeria (T/O: -10.9% y/y; PAT: -19.8% y/y) as elevated pressures on disposable income and an increasingly competitive landscape caused consumers to down-trade into less expensive, value-oriented brands. Guinness’ Harp and Malt brands suffered sharp declines although management believes that enhanced capacity and a renewed focus on route-to-market will drive unit volume growth in FY15. Shifting to Ghana, valuations continue to improve and we are growing increasingly optimistic about the nation’s forward-looking prospects. Although high inflation and a depreciating Cedi have exacerbated Ghana’s economic downturn, banks remain well capitalized and asset quality remains relatively healthy. Although loan growth is expected to moderate on back of limited money supply growth, we remain cautiously optimistic as private credit growth has the propensity to accelerate in the months ahead. In the consumer sector, we digested weak FY14 results from Guinness Ghana (T/O: +3.0% y/y; PBT: -23.0% y/y) as the company swung to an after-tax loss on back of increased operating expenses and a sharp rise in finance costs.

East African equities continue to outperform on back of strength in Kenya and Tanzania

East African equities continue to outperform on back of strength in Kenya and Tanzania. Having now digested 1H14 results from across the Kenyan banking sector, we remain positive on the future outlook as improved credit growth and stable net interest margins are supported by continued cost containment. Although private sector credit growth remains strong on back of increased lending to the transport, construction, financial services and consumer durables sectors, loan growth is likely to subside over the coming quarters as deposit uptake softens. Nevertheless, we believe that Equity Bank’s SME focus and ability to expand delivery channels through adoption of new technology will enable it to consistently generate above market returns over the coming quarters. Although we have scaled back exposure on back of recent share price appreciation, Equity Bank remains a core position within the portfolio and we believe management will prove successful in leveraging the bank’s leadership position by expanding into high growth areas such as payment processing and merchant services. Shifting to Tanzania, we remain constructive on the future outlook although the nation’s highly favourable demographic profile remains constrained by poor infrastructure and a lack of basic services such as water and electricity. In Uganda, we have grown considerably more optimistic as economic activity continues to recover amid lower fuel prices, improved access to electricity and a rise in private sector credit growth. We have increased our exposure in recent months as domestic consumption and public investment appear to be gathering momentum as interest rates decline and inflation remains under control.

North African equities rose on back of continued strength in Egypt

North African equities rose on back of continued strength in Egypt amid heightened expectations for a sustained period of moderate economic growth. Government stimulus measures designed to revive factory output appear to be taking hold as the manufacturing sector is showing signs of a modest recovery. As expected, we digested weak results from Ezz Steel (T/O: -6.4% y/y; EBITDA: -58.9% y/y) as margins remains compressed on the back of gas shortages that are forcing the company to rely on imports of scrap steel. Although the company posted a loss of EGP 176m in 2H14, it should be noted that any improvement in energy supply to the company’s main 3mtpa steel-producing plant in Alexandria, will result in a sharp turnaround in both operating margins and cash flow. Shifting to Morocco, we are warming to the nation’s banking sector as Bank al-Maghrib has taken on a dovish bias as evidenced by last month’s decision to cut rates by 25bp. This marked the first interest rate cut since March 2012 as muted inflation and softer-than-expected 1H14 economic growth fuel the need for more expansionary monetary policy. Looking ahead, such policy moves have the potential to reduce banks’ cost of capital whilst fueling greater bank lending to the private sector. In addition, net interest margins are projected to rise and NPLs are expected to normalize over the coming quarters.

Southern African equities were broadly lower amid weak performance in Botswana, Malawi, Zambia and Zimbabwe

Southern African equities were broadly lower amid weak performance in Botswana, Malawi, Zambia and Zimbabwe. In Zimbabwe, we digested weak FY14 results from Innscor (T/O: +3.0% y/y; PAT: -30.4% y/y) as the company’s financials have been adjusted to reflect fully consolidated results which include National Foods and Irvines. National Foods performed well as volumes grew and margins rose amid improved plant efficiencies and lower raw material costs. The company’s Colcom subsidiary also performed well despite increased competition amid a challenging operating environment. By contrast, the Spar subsidiary continues to underwhelm as declining disposable income and write downs relating to two large store closures detracted from overall performance. Dairiboard continues to operate at a loss as 1H14 results were in-line with expectations (T/O: -10.8% y/y; EBITDA: +52.0% y/y) on back of declining food and beverage volumes, down -14% and -11% respectively on a sequential basis. Shifting to Zambia, we digested strong results from Zanaco (GR: +25.6% y/y; PAT: +57.8% y/y) as deposits rose (+12.1% y/y) amid improved operational efficiency (CTI Ratio down from 64% in 1H13 to 59% in 1H14). In other news, performance at Zambeef appears to recovering as the poor conditions which negatively impacted 1H13 results (e.g. African swine fever, contaminated meats, low soya bean prices, FX volatility, et al) have improved dramatically. Looking ahead, we believe margins exhibit the potential for considerable improvement so long as input costs from the company’s stock feed, edible oils, cropping and poultry divisions remain well contained.