2016 Macro & Market Snapshot. December 2016

Transcription

1 2016 Macro & Market Snapshot December 2016

2 Global Economic Overview International Monetary Fund in its World Economic Outlook (October 2016) projects global growth at 3.1% in 2016, down from 3.2% recorded in Global growth in 2017 is expected to stand at 3.4%. In 2016, growth slowed down due to the post-brexit aftermath and the weaker than expected growth in USA in 1H16. Figure 1: World GDP Growth Growth in advanced economies was projected to decline from 2.0% in 2015 to 1.6% in United States and United Kingdom growth was scaled down to 1.6% and 1.8% in 2016 from 2.6% and 2.2% respectively in Emerging and developing economies are expected to record mixed performance resulting in a growth acceleration of 4.2% in 2016 and 4.6% in 2017 (up from 4.0% recorded in 2015). China and India are expected to record a growth of 6.6% and 7.6% respectively in 2016, while large economies in Sub Saharan Africa are expected to record sharp declines with Nigeria recording a -1.7% decline and South Africa s growth is revised downwards to 0.1%. (Source: IMF : World Economic Outlook)

3 Sub Saharan Africa s Economic Overview Sub Saharan Africa recorded a 3.5% growth in 2015, down from 5.0% recorded in IMF estimates subdued growth in the short term, forecasted at 1.4% in 2016 and 2.9% in Figure 2: World GDP vs Sub Sahara GDP Economies less reliant on commodities in Sub Saharan Africa are projected to outperform SSA growth on the back of lower oil import prices, improved business environment and continuous infrastructure investments. Cote d Ivoire, Kenya, Ethiopia and Senegal are expected to grow in excess of 5.0%. Commodity exporters in the Sub Saharan region face economic constraints due to the ripple effects of low global commodity prices. In the short-term, oil exporting economies in particular have worsened in spite of an uptick in oil prices, as economic activities continue to slow down on the back of tightened fiscal policies. These countries include: Democratic Republic of Congo, Ghana, South Africa, Zambia and Zimbabwe. (Source: IMF : Regional economic outlook)

4 Kenya s Economic Growth The World Bank projects Kenya to grow by 5.9% in 2016 and by 6.1% in Growth is expected to be driven by substantial infrastructure investment by the Government of Kenya (GOK), improved agricultural sector courtesy of improved weather conditions and tourism sector recovery. Kenya National Bureau of Statistics (KNBS) recorded a 6.2% GDP growth in Kenya in 2Q16, up from 5.9% recorded in 2Q15. This growth was supported by improved performance in agriculture, forestry and fishing (5.5%), transportation and storage (8.8%), electricity and water (10.8%), real estate and wholesale & retail trade. Manufacturing, construction insurance and financial sectors recorded a slow growth of 3.2%, 8.2% and 7.5% respectively. Agricultural sector is expected to perform well due to a positive food security outlook in Kenya despite most of ASAL (arid and semi-arid lands) counties experiencing drought. Construction sector is expected to record a slow down due to reduced activities in the construction of big ticket projects such as the completion of the Standard Gauge Railway phase (i). Tourism is expected to increase courtesy of lifted travel advisories by European countries such as USA and UK and the upcoming festivities. Figure 3: Second Quarter GDP Growth Rates (Source: KNBS & DBIB Research)

5 Inflation Overview Kenya s November overall inflation rate stood at 6.68%, a 21 bps increase from 6.47% in October Food and non alcoholic index increased by 1.17% m-o-m due to an increase in food inflation, which stood at 11.13% in November Figure 4: Inflation Rate Housing, Water, Electricity, Gas and Other Fuels index increased by 0.11%, with the increase in house rents and kerosene prices surpassing the fall in cooking gas prices. The Transport Index increased by 0.55% m-o-m courtesy of an increase in pump prices of petrol and diesel. In December, we anticipate inflation rates to further increase partly due to an increase in the transport index. This is courtesy of increased pump prices by ERC, coupled with a rise in transport costs as the festive season kicks in. Additionally we expect the food and non alcoholic drink index to rise due to the December festivities. (Source: KNBS & DBIB Research)

6 Exchange Rate Outlook The KES stabilized against the USD, GBP and the EUR recording a 0.2%, 14.5% and 3.0% YTD increase to 102.1, and respectively. This was due to the following. Increased forex reserves which stand at USD 7.3 BN, equivalent to 4.78 months of import cover. Stable inflation rates within CBK s target of 5%+/- 2.5%. Increased foreign remittances and improved performance of forex earning sectors such as tourism, tea and coffee. Active management by the CBK using open market operations (OMO) to cushion the KES against external pressure following Brexit, USA elections and the recent rate hike by the US Federal Reserve to 0.50%-0.75%. Figure 5: Exchange Rate (Source: Central Bank Of Kenya)

7 Interest Rate Outlook Banking Amendment Act was passed by parliament and came into force on 21/09/2016. The Act capped banks lending rates at 400 bps above the Central Bank Rate (CBR) and placed a floor of 70.0% of the CBR on interest earning deposits. CBR currently stands at 10.0%. Figure 6: Interest Rate Movement The Monetary Policy Committee dropped the CBR twice during the year from 11.5% in 2015 to 10.5% in May 2016 and 10.0% in September Interbank rate in the first 11 months recorded a high of 9.14% and a low of 2.45%, compared to a high of 25.62% and a low of 4.41% in The 91 day, 182 day and 365 day T-bills averaged 8.60%, 10.90% and 11.68% respectively. (Source: Central Bank Of Kenya)

8 2017 Outlook Going forward According to IMF, Sub Sahara Africa is forecasted to record a slow growth of 1.4% down from a 3.5% recorded in 2015 courtesy of lower commodity prices and slower global growth. Half of the region is expected to perform well due to lower oil import prices, improved business environment and strong infrastructure projects, on the other hand oil exporters are expected to record a deceleration in spite of an uptick on global oil prices. Kenya is forecasted to grow at 5.9% primarily driven by: agriculture, tourism, investment in infrastructure, manufacturing and service sectors as well as public spend in the upcoming 2017 general elections. We expect the KES to retain its current level of in 4Q16 supported by an increase in foreign exchange reserve, stable inflation rates, increased remittances from foreign countries and the recovery of forex earning sectors in Kenya for example the tourism and horticulture sectors. In addition, the CBK is actively managing the exchange rate to ensure stability on the Kenyan Shilling. We expect the equity market to retain its current trend as the country gears for election, we believe that after a peaceful election the market may record an uptick. The Nairobi Securities Exchange (NSE) is expected to launch the derivatives market and M-Akiba bond platform and facilitate new listings in an effort to further deepen the market and thus attract investors.

9 Market Overview Equity Market Performance in 2016 NSE 20 and NASI indices shed 23.9% and 10.3% YTD to close at 3, and respectively. FTSE 15 and FTSE 25 declined by 15.11% and 12.4% to close at and respectively. During the year, the bourse introduced NSE 25 Index in preparation of the derivatives market. The new index since May 2016 recorded a 18.0% YTD drop to 3, Market capitalization receded from 2, in 2015 to 1, YTD. There was a 12.8% YTD drop in volume traded for the first 11 months to 5.5 BN resulting in a 28.0% YTD decline in turnover to KES BN. Sector Performance in terms of price change YTD Sector Change (%) Sector Change (%) Telecommunication 15.0 Automobile (29.5) Energy & Petroleum (4.9) Banking (30.0) Manufacturing (11.2) Agricultural (31.3) Insurance (22.0) Construction & Allied (36.2) Commercial & Services (22.5) REIT (40.9) Investment (25.7) Investment Services (43.4) (Source: NSE & DBIB Research) Figure 7: Index Performance (Source: NSE & DBIB Research)

10 Foreign Participation Foreign investors remained the largest participants in the market with overall net foreign participation to total equity at 71.1%, up from 62.0% in Foreign investors assumed a net buying position in the 11 months to November 2016, accounting for 73.9% of total market purchases, against 68.4% of sales. Counters that recorded high foreign participation include: BAT Kenya, E.A. Breweries, Equity Group, Safaricom and Umeme. Figure 8: Foreign Participation to Equity Turnover Figure 9: Foreign Participation % purchases % sales %participation BAT Kenya E.A. Breweries Equity Group Safaricom Umeme (Source: NSE & DBIB Research) (Source: NSE & DBIB Research)

11 Gainers & Losers Out of 68 companies listed on the NSE, 9 stocks advanced while 54 stocks declined and 3 stocks held stable while 2 have been suspended. Figure 10: Top gainers & Losers Year to Date Kenol Kobil is the year s top gainer, shoving up 45.8% YTD to close at KES Kenya Airways, Safaricom, Kenya Power and Longhorn were the top gainers appreciating by 22.4%, 15.0%, 9.1% and 9.1% YTD respectively. Uchumi dropped 71.7% to lead the losers while Kapchorua Tea, National Bank, Nation Media, Williamson Tea lost 60.0%, 56.8%, 53.9% and 53.4% YTD respectively. (Source: NSE & DBIB Research)

12 DYER & BLAIR INVESTMENT BANK CHERRY PICKS

13 Equity Group Holdings Snapshot Key metrics We are BUY on Equity Group Holdings based on the following: Upside: Superior Asset Quality: Equity has an NPL ratio of 5.7% against a banking average of 6.9% as at 3Q16. Attractive return multiples: Equity has superior ROA and maximized ROE at 4.3% and 24.6% against industry medians of 3.05% and 19.51% respectively by mitigating the decline in NIMs Downside: Interest Rate Cap: The capping of rates is expected to exert downward pressure on Equity Group NIMs. However, given its large client base and relatively good asset quality, Equity can optimize on volumes to grow its bottom line sufficiently. Current Price week range Market Cap (USD MN) 1,104.6 YTD Return -24.4% Free Float 81.05% Issued shares (MN) 3,703.0 EPS 5.31 P/E 5.7x P/B 1.4x 52 WK SHARE PRICE PERFORMANCE (Source: NSE, DBIB Research)

14 Centum Investments Snapshot Key metrics We issue a BUY rating on Centum Investments based on the following: Upside: Effective Cost Management: We expect Centum to maintain its cost efficiency ratio at below 2.0% of total assets. Two Rivers Mall Launch: We expect the 1Q17 launch of the mall to give the company market visibility. Manageable debt and adequate liquidity levels: We expect Centum to maintain its long term debt to equity ratio at below 20.0%. Downside: Interest Rate Cap: The capping of rates is expected to exert downward pressure on Sidian Bank NIMs. That said, Sidian contributes about 3.0% to Centum s profit and about 5.0% of Centum s total assets. Current Price week range Market Cap (USD MN) YTD Return -21.0% Free Float 44.66% Issued shares (MN) EPS P/E 2.5x P/B 0.6x 52 WK SHARE PRICE PERFORMANCE (Source: NSE, DBIB Research)

15 Safaricom Limited Snapshot Key metrics We are overweight on Safaricom based on the following: Upside: Service revenue to be impelled by non-voice (MPESA & Data) revenue growth going forward: We see strong nonvoice upside potential courtesy of penetration rate improvement going forward and the new business (C-2- B, B-2-C, B-2-B, Lipa na MPESA) segment gains traction, ultimately improving the money multiplier within the M- PESA transaction space. EBITDA margins continue to register steady improvement in excess of 50.0% in FY17: Improvements in site energy costs coupled with IT & network support contracts rationalization and optimization will contribute to fairly modest opex growth, relative to contribution growth, going forward. Downside: Voice cannibalization by data: courtesy of younger subscribers opting for internet-based texting and social media platforms over phone calls. This coupled with tapering off of voice subscriber growth in the medium term at 0.8x population growth to result in modest voice revenue growth going forward. Current Price week range Market Cap (USD MN) 7,494.8 YTD Return 16.6% Free Float 25.0% Issued shares (MN) 40,065.4 EPS 1.10 P/E 17.3x P/CFO 24.0x 52 WK SHARE PRICE PERFORMANCE (Source: NSE, DBIB Research)

16 KCB Group Holdings Snapshot Key metrics We issue a BUY rating on KCB Group Holdings based on the following: Upside: Attractive trading multiples: On a trailing basis, KCB is trading at a P/E and P/B multiple of 3.2x and 1.0x against sector medians of 4.85x and 0.96x respectively. Loan book growth: This will be driven by continued growth of its alternative lending channels specifically, its mobile platform as well as a bump in refinancing applications courtesy of the interest rate cap. Loan book growth will spur growth in the group s bottom line. Downside: Asset Quality: With an NPL of 7.9% against a 3Q16 Tier I banking average of 6.98%, KCB compares unfavorably to its competitors. Current Price week range Market Cap (USD MN) YTD Return -34.9% Free Float 73.97% Issued shares (MN) 3,066.1 EPS 8.89 P/E 3.2x P/B 1.0x 52 WK SHARE PRICE PERFORMANCE (Source: NSE, DBIB Research)

17 Kenya Re Snapshot Key metrics We are overweight on Kenya Re based on the following: Upside: Primary reinsurer: Given the implementation of marine insurance regulations, we anticipate more reinsurance business for Kenya Re as the primary reinsurer in Kenya. Diversified premium growth: the split between Kenyan and non-kenyan premium growth as at 1H16 stood at 48:52 showing lower dependence on the Kenyan market compared to listed peers. Current Price week range Market Cap (USD MN) YTD Return 3.6% Free Float 36.79% Issued shares (MN) EPS 4.99 P/E 4.4x P/B 0.7x 52 WK SHARE PRICE PERFORMANCE Downside: Stock illiquidity: Talks are under way to improve Kenya Re s stock liquidity by releasing a portion of the 60.0% stake held by the government of Kenya. (Source: NSE & DBIB Research)

18 I&M Holdings Snapshot Key metrics We are overweight on I&M based on the following: Upside: Low cost to income ratio: at 33.8%, I&M has the lowest CTI compared to listed lenders giving it an added advantage as banks focus on cost efficiency in the post-rate cap environment Liquidity & Asset quality: at 4.9%, I&M s NPL ratio stands 200 bps lower than the listed peer median of 6.9%, showing prudent loan book management. It is also sufficiently capitalized, showing little need for outside funds to generate loan book growth. Investor confidence: The recent purchase of a 10.7% stake in I&M by CDC Group indicates foreign investor confidence in the lender. Downside: Stock liquidity: I&M liquidity is low with only 25.02% free float. Banking Amendment Act: capping of rates is expected to put pressure on earnings with I&M funded income reliance at 76.0% Current Price week range Market Cap (USD MN) YTD Return -5.0% Free Float 25.02% Issued shares (MN) EPS P/E 5.5x P/B 1.2x 52 WK SHARE PRICE PERFORMANCE (Source: NSE & DBIB Research)

19 Bamburi Cement Snapshot Key metrics We are overweight on Bamburi Cement based on the following: Upside: Attractive trading multiples: On a trailing basis Bamburi is trading at P/E and P/CFO multiples of 12.2x and 13.5x and EV/EBIT and EV/Capacity multiples of 10.4x and USD respectively. Market diversification via special products and high strength cement: Sales from infrastructure segments in both Kenya and Uganda are expected to support revenue going forward. In Kenya, Bamburi is the sole cement supplier of 52.5 cement grade necessary for the construction of the Standard Gauge railway. Downside: Slowed down private sector construction in Kenya & Uganda coupled with price stagnation to dampen top line growth potential: We estimate cement consumption to grow c. 8.0% in 2016, vis-à-vis 2015 s 12.6%. Geo-political in the inland export markets are expected to further dampen cement demand. Current Price week range Market Cap (USD MN) YTD Return -12.6% Free Float 73.97% Issued shares (MN) EPS P/E 12.2x P/B 2.1x 52 WK SHARE PRICE PERFORMANCE (Source: NSE, DBIB Research)

20 E.A. Breweries Snapshot Key metrics We are overweight on EABL based on the following: Upside: Attractive trading multiples: On a trailing basis, EABL trades at P/E and EV/EBITDA multiples of 19.0x and 11.0x respectively, relative to a frontier market median of 23.4x and 10.6x respectively. Key strategic adjustments to yield results going forward: Reinforcing outbound logistics by completing and embedding the route-to-consumer transformation in Kenya and Uganda as well as sustaining pricing and marketing strategies in Tanzania to be key driver in growing the brewer s top line growth Downside: Forex exposure & uncertain inland export market prospects: Inland export market outlook remains bleak, with the only upside potential stemming from Rwanda s market. Additionally, forex exposure of the company to the UGX, TZS, SSP and RWF coupled with low global commodity prices exposes EABL to significant forex translation risk. Current Price week range Market Cap (USD MN) 1,810.2 YTD Return -15.0% Free Float 50.0% Issued shares (MN) EPS P/E 19.0x P/B 5.4x 52 WK SHARE PRICE PERFORMANCE (Source: NSE, DBIB Research)

21 DISCLAIMER Dyer & Blair may do business with companies covered in its research reports. Although the views expressed in this document are solely those of the Research Department and are subject to change without notice, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. We do not guarantee the accuracy or completeness, nor will the company be held liable whatsoever for the information contained herein. Dyer & Blair may deal as principal in or own or act as market maker for securities/instruments mentioned or may advise the issuers. Members of the firm may have pecuniary interest the listed companies. The document is exclusively for our clients and duplication is not allowed.