Monthly Highlights: September 2012

•  West African equities performed well amid broad-based strength in Nigeria
•  East African equities were flat on the month
•  North African equities continued their ascent
•  Southern African equity markets posted mixed performance
 

West African equities performed well amid broad-based strength in Nigeria

West African equity markets performed well amid broad-based strength across Nigeria, Ghana and the Francophone region. In Nigeria, the MPC left policy rates unchanged although recent activity leads us to believe that its stance has shifted from hawkish to neutral. Given the nation’s improved inflationary outlook, rising foreign exchange reserves, and relatively stable naira, we are likely to witness increased MPC dovishness in the months to follow. On the earnings front, Access Bank released 1H12 results (Gross Earnings: +102.7% y/y; PAT: +228.4% y/y) as deposits grew, NPLs declined and returns improved amid the continued consolidation of Intercontinental. Looking ahead, we will look for management to show progress in reducing the bank’s cost-to-income ratio and diversify its loan book away from the highly volatile oil & gas sector. Guinness Nigeria released weak FY12 results (T/O: +2.1% y/y; PAT: -18.2% y/y) as debt increased on back of capacity expansion, increased support to distributors and higher marketing expenditure. Lafarge Wapco released strong 1H12 results (T/O: +57.0% y/y; PAT: +175.7% y/y) as higher fuel costs were offset by a significant reduction in SG&A expenses as management’s cost cutting initiatives take hold. Shifting to the Francophone region, Sonatel announced the appointment of M. Alioune Ndiaye as its new Director General following Cheikh-Tidiane Mbaye’s departure from the company. Ndiaye will be tasked with returning Mali to profitability (following the Touareg uprising), revitalizing growth in Senegal, and building upon his predecessor’s cost cutting initiatives. Looking ahead, removal of the Senegalese surtax on incoming international calls is likely to have a positive impact on results. On the earnings front, PALMCI released weak 1Q12 results (T/O: -14.7% y/y; NI: -44.8% y/y) as the palm oil producer suffered from declining volumes amid a shortage of manpower during the post-election crisis. It should be noted that the average palm oil selling price declined by roughly -11.7% over the comparable y/y period. Looking ahead, the company’s dominant position as the industry’s largest producer remains intact despite the emergence of smaller CPOs and increased capacity from SOGB (the #2 producer). Although we note that Cargill has announced its intention to invest EUR 305 million in the Ivorian palm sector over the next five year period, we do not foresee any meaningful impact until FY18 at the earliest. Looking ahead, we expect productivity to improve as out-grower fertilizer usage expands and average yields increase. It should be noted that out-growers represented approximately 60% of PALMCI supply in FY11.

East African equities were flat on the month

East African equities were flat on the month as markets cool off following their recent outperformance. In Kenya, the MPC lowered the base rate by 350bp to 13.0% as inflationary pressures subside on back of declining food prices. Continued policy easing is now the consensus as declining growth, rising foreign exchange reserves, the narrowing current account deficit & a stable shilling provide the CBK with increased flexibility. On the earnings front, KenGen (Revenue: +11.7% y/y; PAT: +35.7% y/y) posted healthy results amid more efficient fuel consumption, increased capacity, and rising interest income. Although we are not expecting any meaningful catalysts until the company’s geothermal and wind projects come on-line in FY14, the favourable interest rate environment and switch to hydro reinforced our positive view of management’s ability to generate healthy performance over the medium-term. Shifting to Mauritius, SBM reported strong FY12 results (Gross Revenue: +20.5% y/y; PAT: +30% y/y) as net interest margins improved from 2.85% to 3.29% and deposits rose by +7.4% y/y. By contrast, MCB announced worse-than-expected FY12 results (NII: +8.32%; PAT: -8.2% y/y) as profits declined amid an unexpected increase in impairments.

North African equities continued their ascent

North African equities continued their ascent as Egypt remains one of this year’s top performers. Although Egypt has yet to secure IMF financing, last month’s sharp decline in Egyptian yields (1yr: -220bp; 7yr: -143bp) result in more moderate equity risk premiums and improved company valuations. On the earnings front, OCI released in-line 2Q12 results as its fertilizer and construction units continue to perform well. Although fertilizer volumes declined y/y, they rose on a sequential basis as the nearly 25% surge in urea prices did little to discourage demand. It should be noted that the construction segment experienced a -9% q/q decline in backlog as new contracts fell by -66.1% y/y. Given the construction segment’s recent outperformance, this was not unexpected as seasonal issues likely played a role in the decline.

Southern African equity markets posted mixed performance

Southern African equities posted mixed performance on the month as gains in Botswana and Zimbabwe were offset by weakness in Malawi and Zambia. In Zimbabwe, President Mugabe called for a constitutional referendum in November in his bid to end the coalition government with Tsvangirai’s Movement for Democratic Change and set the stage for new elections this coming March. On the earnings front, Lafarge Zimbabwe returned to profitability in 1H12 as demand for cement picked up amid improved residential development. While this is a notable first step, we remain cautious as demand for infrastructure in Zimbabwe has yet to show tangible evidence of picking up. Yet while infrastructure remains key to the company’s medium and long-term growth outlook, Lafarge remains attractively valued and we will continue to monitor management’s progress going forward. Shifting to Zambia, the nation’s highly anticipated USD 750 million 10-year 5.375% Eurobond priced at a final yield of 5.625% on more than USD 15 billion in orders. Given rising international appetite for African credit, we were not at all surprised by the overall level of investor interest, and remain constructive given Zambia’s strong growth prospects, improved debt profile and widening current account surplus.