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Is There a Real Estate Bubble in Kenya?, & Cytonn Weekly #10/2017

By Cytonn Research Team, March 12, 2017

Executive Summary

Fixed Income: During the week, T-bills were oversubscribed for the sixth week running despite the withdrawal of the 182-day paper from auction, with overall subscription coming in at 131.7%, compared to 209.5% recorded the previous week;

Equities: During the week, the equities market was on an upward trend with NASI and NSE 25 gaining 0.6% and 1.1%, respectively, while NSE 20 remained unchanged. A number of companies released earning results during the week, notably KCB Group, NIC Bank, Bamburi, and KenolKobil that recorded core earnings per share growth of (0.5%), (3.3%), (0.3%) and 19.7%, respectively;

Private Equity: TA Associates, a US-based global growth private equity firm acquired a minority stake in Interswitch, an Africa-focused integrated digital payments and commerce company; this continues to show continued interest in Africa from global markets PE firms. On the fundraising front, Actis raised USD 2.8 bn in capital commitments for its fourth energy related fund;

Real Estate: Real Estate is getting the bulk of investments by high net worth individuals (HNWI) at 28%, according to the just released 2017 Knight Frank Wealth Report. In addition, there is increased investment in the real estate sector as more multinationals establish regional offices in Nairobi;

Focus of the Week: This week we focus on whether there is a bubble in the Kenyan real estate market.

Company Updates

  • Our Market Research & Site Acquisition Manager, Johnson Denge, discussed the wealth report released by Knight Frank. Watch Johnson Denge on Citizen TV here
  • We continually showcase real estate developments by our real estate development affiliate, Cytonn Real Estate, through site visits every week. The site visits target both investors looking to invest in real estate directly and also to those interested in high yield investment products to familiarize themselves with how we support the high yield returns. If interested in attending the site visits, kindly register here
  • We continue to see very strong interest in our Private Wealth Management training, which is at no cost, and is held bi-weekly, but is open only to pre-screened participants. To register for the training kindly use this link: See training
  • For recent news about the company, see our news section here
  • We have 12 investment-ready projects, offering attractive development returns and buyer's targeted returns of around 25.0% p.a. See further details here: Summary of investment-ready projects
  • To invest in any of our current or upcoming real estate projects, please visit Cytonn Real Estate
    • The Alma, which is over 55.0% sold and has delivered an annualized return of 55.0% p.a. for investors who bought off-plan. See The Alma.
    • Amara Ridge is currently 100.0% sold. See Amara Ridge
    • The Ridge Phase One is currently 20.0% sold. See The Ridge
    • Taraji Heights is currently 10.0% sold. See Taraji Heights
  • Following the completion of sales for Amara Ridge, we are currently looking for land in Karen for our next development. We are also looking for 3-10 acres of land in Garden Estate, Muthaiga North, South C and Langáta. Contact us at res@cytonn.com if you have any land for sale or joint ventures in the above areas
  • We continue to beef up the team with the ongoing hires: Careers at Cytonn
  • Other Relevant Updates: The Proceeds of Crime and Money Laundering (Amendment) Act, 2017 was signed into law on 3rd March 2017. The Act has introduced more stringent regulations to curb and penalize money laundering activities by both individuals and body corporates. In this note, our legal team evaluated the amendments and the steps to be taken to effectively fight money laundering in Kenya; See link.

Fixed Income

During the week, T-bills were oversubscribed for the sixth week running, with overall subscription coming in at 131.7%, compared to 209.5% recorded the previous week. The decline in the subscription rate could be attributed to the withdrawal of the 182-day paper from the auction market this week by the Central Bank. The move to withdraw the 182-day is aimed at management of maturities, by spreading maturities concentration risk evenly across the three papers. The 182-day paper has witnessed the highest level of subscriptions in previous auctions, averaging 334.0% in the last five auctions, compared to 83.8% and 100.4% in the 91 and 364-day papers, respectively, as it offered investors the highest return on a risk adjusted basis. The 182-day paper is also set to be withdrawn from the market in the next auction. Subscription rates for the 91 and 364-day papers came in at 97.0% and 166.4%, compared to 147.4% and 57.4% the previous week, respectively. Yields on the 91-day paper increased by 10 bps during the week to 8.7% from 8.6% recorded the previous week while yields on the 364-day T-bills remained relatively unchanged during the week, closing at 10.9%. The Central Bank (CBK) has remained disciplined in stabilizing interest rates in the auction market by rejecting bids that CBK considers as above market, and we have seen the market respond to this, as indicated by the overall bids received acceptance rate of 93.9%, compared to 71.6% at the beginning of the year. Given the possible upward pressures on interest rates, we maintain our recommendation for investors to be biased towards short-term fixed income instruments.

The average interbank rate declined by 40 bps w/w to 4.8% from 5.2% the previous week, as the liquidity in the money market improved standing at net liquidity injection of Kshs 12.6 bn. The improved liquidity position during the week was supported by government payments, which came in at Kshs 38.6 bn from Kshs 23.5 bn the previous week, and a decline in Reverse Repo maturities to Kshs 7.7 bn from Kshs 20.7 bn the previous week.  The volumes transacted in the interbank market decreased to Kshs 10.5 bn from Kshs 12.6 bn the previous week.

Below is a summary of the money market activity during the week:                                 

all values in Kshs bn, unless stated otherwise

Weekly Liquidity Position – Kenya

Liquidity Injection

 

Liquidity Reduction

 

Term Auction Deposit Maturities

11.0

T-bond sales

0.0

Government Payments

38.6

Transfer from Banks - Taxes

11.0

T-bond Redemptions

0.0

T-bill (Primary issues)

30.0

T-bill Redemption

22.6

Term Auction Deposit

11.0

T-bond Interest

0.0

Reverse Repo Maturities

7.7

T-bill Re-discounts

0.0

Repos

24.6

Reverse Repo Purchases

4.7

OMO Tap Sales

0.0

Repos Maturities

20.0

   

Total Liquidity Injection

96.9

Total Liquidity Withdrawal

84.3

 

 

Net Liquidity Injection

12.6

According to Bloomberg, the yield on the 5-year and 10-year Eurobonds increased by 10 bps and 20 bps w/w to 4.3% and 7.3%, from 4.2% and 7.1%, respectively, the previous week. Since the mid-January 2016 peak, yields on the Kenya Eurobonds have declined by 4.5% points and 2.4% points, respectively, for the 5-year and 10-year bond due to improving macroeconomic conditions. This is an indication that Kenya remains an attractive investment destination.


The Kenya Shilling appreciated marginally by 10 bps against the dollar to close the week at Kshs 102.6 compared to Kshs 102.7 recorded the previous week, on account of reduced dollar demand from oil and retail goods importers coupled with inflows from foreign investors seeking to invest in government securities. On a year to date basis, the shilling has depreciated against the dollar by only 0.1%. The forex reserves has now stabilized at about USD 7.0 bn (equivalent to 4.6 months of import cover) after declining from USD 7.8 bn in October 2016 (equivalent to 5.2 months of import cover), an indication of confidence by the Central Bank on the current trading levels of the shilling.

The Central Bank of Kenya (CBK) and National Treasury through a memorandum on economic and financial policies to the International Monetary Fund (IMF), highlighted that the creation of the interest rate cap has made it difficult for the regulator to establish a formal interest rate corridor to improve liquidity in the money market. The inadequacy of the liquidity management framework has led to large banks holding on to huge deposits and lending to each other at lower rates, while the smaller banks have had to settle for higher interest rates to access funds. As highlighted in our Cytonn Weekly Report #3-2017, the average interbank rate increased in late 2016, driven by uneven distribution of liquidity in the money market. In order to cure for this, CBK is in the process of establishing a central collateral depository register to intervene in the interbank market and formulate a fair pricing mechanism for money market. According to the IMF, interbank rates deviated significantly from the Central Bank Rate (CBR) in 2016 reducing the effectiveness of the CBR as a tool of monetary policy. In its first review under the programme supported by the Stand-by Credit Facility last month, the IMF noted that the interest rate caps limit the effectiveness of the CBR and is prone to slowing the inflation-targeting framework that the CBK uses for monetary policy formulation and implementation. The liquidity in the money market is likely to remain skewed towards the large banks with the interest rate caps in place, as large banks continue to lend to each other at lower rates thus affecting the supply of credit in the market further, which will further affect the private sector credit growth that reached a 8-year low at 4.3% in the month of December, 2016. Our recommendation remains that rate caps should be repealed.

East African Breweries Limited (EABL), has been granted approval by the Capital Markets Authority (CMA) to offer additional Kshs 6.0 bn worth of notes out of its Kshs 11.0 bn Domestic Medium Term Note Programme that was approved in 2015. The second tranche aims to raise Kshs 6.0 bn for general use and capital expenditure for the company. The first tranche issued in March 2015, was oversubscribed by 81.0% with total bids received amounting to Kshs 9.1 bn at a yield of 12.3% and is set to mature in March, 2018. The offer is set to run from the 13th March, 2017 to the 24th March, 2017 and is to be listed in the Nairobi Securities Exchange (NSE). This issue comes at a time when investors have expressed interest in the bond market, especially towards government securities due to favorable yields and thus this offer is likely to see investors demanding significant premium over the government securities, with a similar tenor Treasury bond currently trading at 13.4%. In our view, this bond issue has come at a time when the government has recorded poor performance in the most recent bond auction as a result of investors bidding at higher rates. Though the pricing supplement is yet to be released, we think it will only make sense for investors to demand a premium of atleast 2.0% above the prevailing yields on a 5-year treasury bond, which translates to a minimum yield of 15.4%. The issue also signals a reopening to the corporate credit market, with the last issue having taken place 16 months ago.

The United States Federal Open Market Committee (FOMC) is set to meet on 14th and 15th March, 2017 to assess the current state of the US economy and shed light on a possible rate hike. During the Fed’s previous meeting held last month, the committee decided to maintain the rates within the band of 0.50% - 0.75% due to the heightened uncertainty brought about by the impact of the current administration on the economy. Previously, the Fed highlighted plans to accelerate its rate-hiking pace, hinting at 3 rate hikes in 2017 on expectations of an improved economic performance this year. We expect the Fed to raise the rates to a band of 0.75% - 1.00%, given (i) inflation, which rose 2.5% y/y in January above the federal target of 2.0%, (ii) a relatively strong labor market adding approximately 235,000 new jobs in February, from 238,000 in January, with the economy operating at a full employment, having attained unemployment rate of 4.7%, and (iii) a strengthening global economy. With the expected rate hikes, we are likely to see the dollar strengthen in the international markets causing volatility to the other currencies.

The Government is ahead of its domestic borrowing for the current fiscal year having borrowed Kshs 188.1 bn against a target of Kshs 163.4 bn (assuming a pro-rated borrowing throughout the financial year of Kshs 229.6 bn budgeted for the full financial year). It is important to note, however, that the government is in the process of revising its domestic borrowing target upwards to Kshs 294.6 bn, which will take the pro-rated borrowing target to Kshs 209.6 bn, implying that the government will fall behind its borrowing target. The government has only borrowed Kshs 123.5 bn, of the budgeted foreign borrowing, representing 26.7% of its foreign borrowing target of Kshs 462.3 bn, and given Kenya Revenue Authority (KRA) has already missed its first half of 2016/17 fiscal year revenue collection target by 3.2%, and it is expected to miss its overall revenue collection target of Kshs 1.5 tn for the current fiscal year. This creates uncertainty in the interest rate environment as the government might have to plug in the deficit by borrowing from the domestic market, a move that may exert upward pressure on interest rates, and result in longer term papers not offering investors the best returns on a risk-adjusted basis. It is due to this that we think it is prudent for investors to be biased towards short-term fixed income instruments.

Equities

During the week, the equities market was on an upward trend with NASI and NSE 25 gaining 0.6% and 1.1%, respectively, while NSE 20 remained unchanged, taking their YTD performances to (8.2%), (8.5%) and (7.0%), respectively. This week’s performance was supported by gains in select large cap stocks such as KCB and BAT, which gained 15.7% and 5.8%, respectively. Since the February 2015 peak, the market has lost 46.1% and 31.0% for NSE 20 and NASI, respectively.

Equities turnover increased by 85.2% to close the week at USD 23.2 mn from USD 12.5 mn the previous week. Foreign investors were net sellers with net outflows of USD 1.1 mn, an increase of 894.6% compared to a net outflow of USD 0.1 mn recorded the previous week, with foreign investor participation increasing to 82.8%, from 69.1% recorded the previous week. Safaricom was the top mover for the week, accounting for 56.4% of market activity. We expect the Kenyan equities market to be flat in 2017, driven by slower growth in corporate earnings, neutral investor sentiment mainly due to the forthcoming general elections and the aggressive rate hike cycle in the US, which may reduce the level of foreign investors’ participation in the local equities market.

The market is currently trading at a price to earnings ratio of 9.9x, versus a historical average of 13.5x, with a dividend yield of 7.0% versus a historical average of 3.7%. The current 9.9x valuation is only 19.3% above the most recent trough valuation of 8.3x experienced in December of 2011. The charts below indicate the historical P/E and dividend yields of the market.

During the week, the Capital Markets Authority (CMA) announced its plan to come up with a tax framework for securities lending and borrowing that will ensure the product doesn’t alter normal trading at NSE. The product, which was proposed in October last year, aims to increase the liquidity in the market, especially on the corporate bonds segment. It involves temporary transfer of securities from one party to another with a formal agreement to return the securities at a pre agreed price either on demand or at an agreed time in future. Uneven taxes in a securities market can arise especially to investors looking to do margin trading or short selling and this can cause distortion by driving activity to one segment at the expense of the other. The move by CMA will ensure there is tax neutrality for those looking to borrow or lend stocks, so that they don't enjoy a tax advantage over other traders. This is a step in the right direction that will see improved activity in the corporate bonds segment that has for a very long period of time left corporate bond investors with no option but to classify the bonds as hold to maturity in their portfolio. The move also deepens our capital markets, which is essential for financing economic activity.

KCB Group released FY’2016 results

KCB Group released FY'2016 results posting a flat core earnings per share (EPS) of Kshs 6.46, from Kshs 6.49 in FY’2015, a 0.5% decline, following the scrip dividend issue during the year; without adjusting for the scrip shares, the core EPS would have been at Kshs 6.52. Key highlights for the performance from FY’2015 to FY’2016 include:

  • Total operating income grew by 11.0% to Kshs 69.5 bn from Kshs 62.6 bn in FY’2015. This was supported by a 19.9% growth in Net Interest Income (NII) despite a 4.0% drop in Non-Funded income (NFI);
  • Net Interest Income grew by 11.4% to Kshs 62.8 bn, from Kshs 56.4 bn in FY’2015, with Interest expense registering a decline of 8.0% to Kshs 15.8 bn from Kshs 17.1 bn in FY’2015. This resulted in the Net Interest Margin (NIM) improving to 8.8%, from 7.9% in FY’2015 ;
  • Non-Funded Income (NFI) recorded a decline of 4.0% to Kshs 22.5 bn, from Kshs 23.4 bn in FY’2015. The decrease in NFI was attributed to a 31.0% decline in other fees and commissions that came in at Kshs 6.1 bn, from Kshs 8.8 bn in FY’2015, partly attributable to currency devaluation in South Sudan, which eroded gains in volume achieved during the year, despite a 35.1% growth in foreign exchange trading income that came in at Kshs 5.5 bn, from Kshs 4.1 bn in FY’2015. The current revenue mix stands at 68:32 funded to non-funded income from 63:37 in FY’2015;
  • Total operating expenses grew by 11.9% to Kshs 40.4 bn, from Kshs 36.1 bn in FY’2015, which was driven by a 15.7% growth in staff costs to Kshs 17.7 bn, from Kshs 15.3 bn in FY’2015, despite a decline in loan loss provision (LLP) by 18.9% to Kshs 3.8 bn, from Kshs 4.7 bn in FY’2015, on account of recoveries made during the year from 2 major clients;
  • Cost to Income ratio worsened to 58.1% from 57.6% in FY’2015. Without LLP, Cost to Income ratio stood at 52.6% from 50.1% in FY’2015;
  • Profit before tax (PBT) came in at Kshs 29.1 bn from Kshs 26.5 bn in 2015, a growth of 9.5% while Profit after tax (PAT) grew 0.9% to Kshs 19.7 bn, from Kshs 19.6 bn in FY’2015, mainly as a result of an increase of the effective tax rate to 32.2% from 26.1% in FY’2015;
  • Loans and advances grew by 11.5% to Kshs 385.7 bn, from Kshs 346.0 bn, while customer deposits grew by 5.6% to Kshs 448.2 bn, from Kshs 424.4 bn, leading to an increase in the loan to deposit ratio to 86.1% from 81.5% in FY’2015;
  • KCB Group is currently sufficiently capitalized with a core capital to risk weighted assets ratio of 18.4%, 7.9% above the statutory requirement, with total capital to total risk weighted assets exceeding statutory requirement by 5.2% to close the period at 19.7%;
  • The board recommended a final dividend of Kshs 3.0 per share, an increase of 50% from the Kshs 2 per share paid in FY’2015, equal to a dividend yield of 10.2% as at Friday’s closing share price of Kshs 29.5.

Key Take outs:

  1. Regional expansion strategy continues to erode shareholders value as KCB Group continues to be affected by the ongoing political instability in South Sudan, coupled with the devaluation of the South Sudanese pound (SSP) and hyper-inflationary effects, which resulted in the bank reporting a Kshs 3.4 bn net monetary loss in South Sudan. Excluding the net monetary loss of Kshs 3.5 bn, KCB Group Profit before tax was up 22.7%. This is a clear demonstration that the regional expansion strategy is a distraction and is eroding shareholders value. We have had rumours of other financial players having decided to exit South Sudan, KCB should consider an expeditious exit to protect shareholder value;
  2. KCB Group registered weak performance on NFI, which declined 4.0% y/y, as such losing its grip on revenue diversification with NFI to total income at 32.3% in FY’2016, down from 37.3% in FY’2015. KCB Group has a very strong brand that can be leveraged into fee income businesses such as investment management, stock and insurance brokerage, investment banking, real estate, all of which remain virtually untapped;
  3. The spike in cost to income ratio and the 15% growth in staffing costs during a year with lacklustre performance is worrying and aggressive expense management measures should be explored;
  4. KCB Group registered improved performance on loan book impairment, on account of recoveries made during the year on non-performing loans, which included 2 major clients. We expect the bank to continue with its aggressive approach in loan recovery during 2017, cutting down on expenses and in the process improving profitability.

Going forward, we expect KCB Group growth to be driven by;

  1. Review of the regional expansion strategy with key focus on consolidation of its regional business by optimizing performance in the existing markets while reducing the overall impact from South Sudan. KCB Group will have to focus more on the much profitable and stable Kenyan business. If they must expand regionally, it is more prudent to do so through acquiring stakes or whole acquisitions of well performing banks in the regional markets;
  2. Revenue diversification with new business lines such as Bancassurance through KCB Insurance, as well as investment banking through KCB Capital. In our view, KCB Group should focus more on fee based businesses in order grow non funded income and diversify their revenue;
  3. Continued implementation of cost reduction measures through adoption of digital platform and other alternative channels of distribution for both loan disbursement and deposit mobilisation. This will help the bank achieve efficiency and keep the cost to income ratio at below 50.0% levels. For a more detailed analysis, see our KCB Group FY’2016 Earnings Note.

NIC bank released FY’2016 results

NIC Bank released FY’2016 results recording a 3.3% decline in core earnings per share to Kshs 6.8 from Kshs 7.0 in FY’2015, driven by a 35.8% growth in total operating expenses which outpaced a 17.5% growth in total operating revenue. Key highlights for the performance from FY’2015 to FY’2016 include:

  • Total operating revenue grew by 17.5% to Kshs 16.2 bn from Kshs 13.8 bn in FY’2015, faster than our estimate of a 13.6% growth. This was supported by a 24.9% growth in Net Interest Income, despite a 0.3% decline in Non Funded income;
  • Interest Income grew by 11.8% to Kshs 19.0 bn from Kshs 17.0 bn in FY’2015, while Interest expense declined by 5.8% to Kshs 6.9 bn from Kshs 7.3 bn in FY’2015. The Net Interest Margin thus improved to 8.0% from 6.9% in FY’2015;
  • Non-funded income (NFI) remained flat, recording a 0.3% decline to Kshs 4.0 bn, below our expectation of a 0.3% increase. The decline in NFI was driven by a decline in forex income by 22.8% to Kshs 1.1 bn from Kshs 1.4 bn in FY'2015. The current revenue mix stands at 75:25 funded to non-funded income from 71:29 in FY’2015;
  • Total operating expenses grew by 35.8% to Kshs 10.0 bn from Kshs 7.4 bn in FY’2015 following a 126.9% y/y growth in Loan loss provision (LLP) to Kshs 3.8 bn from Kshs 1.7 bn. Without LLP, operating expenses grew 9.6% to Kshs 6.3 bn from Kshs 5.7 bn registered in FY’2015. Staff costs grew  by 14.4% to Kshs 3.2 bn from Kshs 2.8 bn In FY’2015;
  • Cost to Income ratio deteriorated to 61.9% from 53.6% in FY’2015. Without LLP, cost to Income ratio improved to 38.7% from 41.6% in FY’2015;
  • Profit after tax declined by 3.3% to Kshs 4.3 bn from Kshs 4.5 bn in FY’2015;
  • Loans and advances shrunk by 1.3% to Kshs 114.5 bn from Kshs 116.0 bn in FY'2015, while customer deposits declined by 0.5% to Kshs 111.8 bn from Kshs 112.4 bn in FY’2015, leading to a decline in the loan to deposit ratio to 102.4% from 103.2% in FY'2015; LDR remains way above industry average of 88.8%;
  • NIC Bank Kenya is currently sufficiently capitalized with a core capital to risk weighted assets ratio at 18.7%, 8.2% above the statutory requirement, with total capital to total risk weighted assets exceeding statutory requirement by 8.5% to close the period at 23.0%
  • The board recommended a final dividend of Kshs 1.0 per share, which equals to a dividend yield of 4.1% as at Friday’s closing share price of Kshs 24.5.

Going forward, NIC bank will thrive on increased efficiency through cutting down of costs by: (i) reducing redundant roles across all branches thus cutting down on staff costs, and (ii) exploring technology as a more cost effective measure in deposit collection and loan disbursement. For a more detailed analysis, see our NIC Group FY’2016 Earnings Note.

Of the 4 banks that have released their FY’2016 results, all have recorded a decline in core earnings per share, with the average decline in core earnings across the banking sector at 5.4%, owing to the tough operating environment as a result of the interest rate caps and higher loan loss provision. In addition, the sector has experienced lower loan and deposit growth, with the only metric that banks have been able to protect so far being their Net Interest Margins.

 Below is a summary of the key metrics;

Listed Banks FY'2016 Earnings and Growth Metrics

Bank

Core EPS Growth

Deposit Growth

Loan Growth

Net Interest Margin

Loan to Deposit Ratio

 

FY'2016

FY'2015

FY'2016

FY'2015

FY'2016

FY'2015

FY'2016

FY'2015

FY'2016

FY'2015

KCB Group

(0.5%)

12.1%

5.6%

12.5%

11.5%

21.9%

8.8%

7.9%

86.1%

81.5%

NIC Bank

(3.3%)

2.6%

(0.5%)

11.9%

(1.3%)

13.7%

8.0%

6.1%

94.6%

103.2%

Stanbic

(9.9%)

(13.7%)

1.4%

18.7%

3.4%

26.6%

5.8%

6.4%

85.1%

83.4%

Barclays

(12.6%)

(0.2%)

7.9%

0.2%

15.9%

15.9%

10.5%

10.2%

94.6%

88.1%

Weighted Average*

(5.4%)

3.7%

4.9%

10.3%

10.1%

20.4%

8.7%

8.1%

88.8%

87.1%

*Average market cap weighted

KenolKobil released FY’2016 results

KenolKobil released their FY’2016 results recording a 19.7% increase in Profit After Tax to Kshs 2.4 bn from Kshs 2.0 bn in FY’2015. EPS grew by 19.7% to Kshs 1.6 from Kshs 1.4 in FY’2015, boosted by an increase in the company’s gross profit margins to 7.1% from 6.7%, and a 45.6% decline in finance costs to Kshs 0.4 bn from Kshs 0.7 bn. Key highlights for the performance from FY’2015 to FY’2016 include:

  • Net Sales increased by 19.6% to Kshs 103.5 bn from Kshs 86.6 bn driven by a 30% y/y volume growth as well as the effect of oil price changes;
  • Gross profit increased by 26.5% to Kshs 7.4 bn from Kshs 5.8 bn driven by a positive contribution across all business segments, as well as a focus on investing in areas with high yields. This led to an improvement in gross margin to 7.1% from 6.7%;
  • Operating expenses increased by 19.5% y/y to Kshs 2.5 bn from Kshs 2.1 bn in FY’2015. The growth in operating expenses was due to an increase in the number of retail network stations , which increased by 30 stations;
  • Earnings before interest, tax, depreciation and amortization (EBITDA) increased 13.2% y/y to Kshs 4.8 bn from Kshs 4.2 bn in FY’2015, boosted by a Kshs 2.5 mn exchange gain versus a Kshs 0.2 bn exchange loss in FY’2015. Despite this, EBITDA margin reduced to 4.6% from 4.9%;
  • Finance costs declined by 45.6% y/y to Kshs 0.4 bn from Kshs 0.7 bn in FY’2015, an indication that the debt restructuring program that the company embarked on in 2013 with the aim of reducing financing costs to safeguard shareholders interest is achieving positive results;
  • The group recorded a 19.7% increase in profit after tax to Kshs 2.4 bn from Kshs 2.0 bn in FY’2015
  • The Board proposed a final dividend of Kshs 0.3 per share, which equals to a dividend yield of 2.3%.

As highlighted in our Cytonn Weekly # 11/2016, going forward we expect sustained earnings for the oil marketer given the focused expansion of the retail network through addition of new service stations, and the continued reduction of their debt obligations with the aim of reducing the cost of debt.

Bamburi Cement released FY’2016 results

Bamburi Cement released their FY’2016 results recording a flat EPS of Kshs. 14.4 from Kshs 14.5 in FY’2015.  Key highlights for the performance from FY’2015 to FY’2016 include:

  • Turnover decreased by 3.0% y/y to Kshs 38.0 bn from 39.2 bn, driven by lower volumes from inland African exports and increased competition in the home builder market;
  • Operating revenue grew by 8.2% y/y to Kshs 7.9 bn from Kshs 7.3 bn in FY’2015, which outpaced growth in operating expenses, which rose by 2.4% to Kshs 5.4 bn from Kshs 5.3 bn.
  • The growth in operating revenue was driven by an 8.0% reduction in cost of sales to Kshs 24.8 bn from Kshs 26.7 bn as a result of the Group’s cost management measures, and the realization of the plant’s efficiency projects in Kenya and Uganda;
  • This led to an improvement in EBITDA margin to 20.7% from 18.6% in FY’2015;
  • Profit Before Tax decreased by 2.2% to Kshs 8.3 bn from Kshs. 8.5 bn on account of lower currency gains which decreased by 96.7% y/y to Kshs 33.0 mm from Kshs 1.0 bn;
  • Profit after Tax recorded a flat growth of 0.3% to Kshs 5.89 bn from Kshs 5.87 bn despite the 2.2% decline in profit before tax as a result of high tax payments in 2015;
  • The Board proposed a final dividend of Kshs 6.0 per share, which equals to a dividend yield of 4.1%.

As highlighted in our Cytonn Weekly #10/2016, the future of the company will be driven by (i) on-going infrastructural developments in Kenya and the region, which will increase the company’s turnover and (ii) the company’s restructuring initiatives, which is expected to keep costs under control.

Below is our Equities Recommendation table. Key changes from last week include;

  • Sanlam moved from a “Buy” recommendation with an upside of 22.0%, to an “Accumulate” recommendation with an upside of 11.9%, following a 9.0% w/w price increase;
  • Safaricom has been placed under review owing to a recent dominance report from the Communications Authority of Kenya (CAK) that highlights the potential split of Safaricom’s non-telecom business lines from its telecom business lines due to monopoly on the local telecommunications industry. We will be meeting with management to discuss the same, and shall give an updated valuation next week;
  • BAT has also been placed under review because of its FY’2016 earnings. We will be meeting with management to discuss the FY”2016 results and the business strategy going forward in order to update our valuation.

all prices in Kshs unless stated

EQUITY RECOMMENDATION

No.

Company

Price as at 03/03/17

Price as at 10/03/17

w/w Change

YTD Change

Target Price*

Dividend Yield

Upside/ (Downside)**

Recommendation

1.

Bamburi

146.0

147.0

0.7%

(8.1%)

231.7

7.8%

65.4%

Buy

2.

ARM

19.9

19.1

(4.0%)

(25.3%)

31.2

0.0%

63.8%

Buy

3.

Kenya Re

19.4

19.1

(1.6%)

(15.3%)

26.9

3.6%

44.8%

Buy

4.

KCB***

25.5

29.5

15.7%

2.6%

39.6

7.5%

41.7%

Buy

5.

Britam

10.4

10.0

(3.8%)

0.0%

13.5

2.9%

37.9%

Buy

6.

HF Group

10.6

11.1

4.2%

(21.1%)

13.8

9.2%

34.1%

Buy

7.

NIC

25.5

24.5

(3.9%)

(5.8%)

30.8

3.5%

29.2%

Buy

8.

Liberty

10.8

11.0

1.9%

(16.7%)

13.9

0.0%

26.4%

Buy

9.

Equity Group

25.8

27.0

4.9%

(10.0%)

31.3

7.7%

23.6%

Buy

10.

Co-op Bank

12.5

12.5

(0.4%)

(5.7%)

13.6

6.8%

16.0%

Accumulate

11.

DTBK***

102.0

104.0

2.0%

(11.9%)

116.8

1.8%

14.1%

Accumulate

12.

I&M

81.0

83.0

2.5%

(7.8%)

90.7

3.9%

13.2%

Accumulate

13.

Sanlam

25.0

27.3

9.0%

(0.9%)

30.5

0.0%

11.9%

Accumulate

14.

Jubilee

485.0

485.0

0.0%

(1.0%)

482.2

1.8%

1.3%

Lighten

15.

Barclays

8.8

9.1

2.8%

6.7%

7.6

10.8%

(5.2%)

Sell

16.

StanChart***

210.0

205.0

(2.4%)

8.5%

157.7

6.6%

(16.5%)

Sell

17.

NBK

5.5

6.3

13.6%

(13.2%)

3.8

0.0%

(39.2%)

Sell

*Target Price as per Cytonn Analyst estimates

**Upside / (Downside) is adjusted for Dividend Yield

***Indicates companies in which Cytonn holds shares in

Accumulate – Buying should be restrained and timed to happen when there are momentary dips in stock prices.

Lighten – Investor to consider selling, timed to happen when there are price rallies

We remain "neutral with a bias to positive" for investors with short to medium-term investments horizon and are "positive" for investors with long-term investments horizon.

Private Equity

Acquisitions:

TA Associates, a US-based global growth private equity firm, has acquired undisclosed minority equity interest in Interswitch, an Africa-focused integrated digital payments and commerce company that facilitates the electronic circulation of money as well as the exchange of value between individuals and organizations for undisclosed amount of money. Interswitch is a recognized leader in the payments space in Nigeria, where the company owns and operates the country’s principal domestic debit card scheme, Verve, as well as serves as a third-party transaction processor for most of Nigeria’s largest banks. Interswitch currently operates in Nigeria, Gambia, Kenya and Uganda. Helios Investment Partners remains the majority shareholder of Interswitch.

This transaction is underpinned by: (i) Interswitch leading position in the emerging marketplace, especially in debit cards, which comprise 99% of all cards in Nigeria, (ii) strategic partnership and alignment of Interswitch interests with key banks, merchants and other institutions, thus making it a leading provider for payments solutions in an emerging and rapidly growing market in Nigeria, (iii) alignment with Interswitch efforts of consolidating the impact of their services and increasing financial inclusion as well as its expansion plans into other markets in the African continent and, (iv) TA’s domain expertise in the payments space and its global reach will be of benefit to Interswitch’s goal of digital payments evolution.

On the Fundraising front:

Actis, a leading growth markets investor, raised USD 2.8 bn in capital commitments for its fourth energy-related fund surpassing the USD 2.0 bn target. The fund was raised by Actis’ in-house team and was significantly oversubscribed in just seven months into the market. Actis Energy 4 (AE4) fund will invest in select countries in Latin America, Africa and Asia targeting investments in electricity generation businesses offering scale, diversification, growth and market leading high growth electricity distribution businesses. This transaction is underpinned by high and rising demand for electricity and quality infrastructure in growth markets. According to research by Actis, the demand for new investment within the electricity sector is USD 1.5 bn every day with renewable energy generating USD 0.5 bn of investments per day in non OECD countries and an estimated USD 10 tn of investment is required by 2035 across non-OECD countries to meet the growing demand.

Private equity investment into Africa increased in 2016 by 52.0%, according to the latest data from African Private Equity and Venture Capital Association (AVCA), with a total of 145 deals worth USD 3.8 bn compared to a total deal value of USD 2.5 bn in 2015. Sectors that recorded an increase in deal value include; Financial services, FMCGs, Utilities, Energy and telecommunication services. The increasing investor interest is attributed to rapid urbanization, a resilient and adapting middle class and increased consumerism. Going forward, the increasing investor interest and stable macro-economic environment will continue to boost deal flow into African markets.

Private equity investment activity in Africa has continued to improve, as evidenced by the increase in the number of deals and deal volumes in the region. Preference this week has been skewed towards the financial technology and energy sectors. We remain bullish on PE as an asset class in Sub-Saharan Africa given (i) the abundance of global capital looking for investment opportunities in Africa, (ii) attractive valuations in the private sector, and (iii) strong economic growth projections, compared to global markets.

Real Estate

During the week, Hass Petroleum Group announced that the largest contractor in the world, China State Construction Engineering Corporation (CSCEC) won the tender to construct its signature development, Hass Towers in Upper hill Nairobi. On completion, the 67 storey, 300 meters building will be the tallest in Africa and will be composed of hospitality, retail as well as office space. Construction is set to begin in April this year and set for completion in 2020. The move highlights the continued dominance of Chinese contractors in Kenya. Other Chinese contractors  that have been engaged locally include; (i) China Wu Yi who are constructing The KCB Plaza in Upperhill, (ii) China Jiangxi International constructing ICPAK Complex along Thika Highway, (iii) Zhongxing Construction Company  who constructed Cardinal Otunga Plaza in the CBD, and (iv) China National Aero- Technology Engineering Corporation (CATIC) who are the contractors for the Two Rivers Development along Limuru Road and Cytonn Real Estate’s The Alma Development in Ruaka. This increasing dominance of Chinese contractors is as a result of;

  1. Financial muscle compared to Kenyan construction companies, since they receive backing from their mother companies both in terms of funding and construction equipment; and
  2. Higher levels of experience, skill and execution since most of them are international companies with years of experience in both real estate and infrastructural construction.

According to the just released 2017 Knight Frank Wealth Report, Kenyan Chapter, Real Estate is getting the bulk of investments by high net worth individuals (HNWI) at 28%, against 20% invested in personal business and 18% invested in equities and precious metals. The report further highlights that the number of dollar millionaires grew by 10.6% from 8,500 in 2015 to 9,400 in 2016, and this is expected to further increase by 79.8% in the next decade to 16,900 people. The thematic distribution among those investing in real estate is 63% residential, 56% commercial office, 31% retail, 25% in leisure and 13% industrial.

 The HNWI individuals are attracted to real estate investment mainly as a result of;

  1. High returns in the sector, for instance in 2016 real estate delivered returns of on average 25.8% against an average of 8.6% for the 91-day T bill, (8.5%) for the NASI and (0.2%) for the FTSE bond index across the other asset classes;
  2. The intrinsic characteristics of real estate such as capital growth and preservation of value which are the most important factors the HNWI consider before investing, and
  3. The lower risk associated by real estate as an asset class compared to the other asset classes as its returns are less volatile and it preserves the capital invested

With the continued poor performance of the stock market, reduced interest rates, increased demand for residential units by the middle class as well as government initiatives such as tax cuts to large-scale developers, we expect increased investments in the real estate sector and not just by HNWI but also by the middle class.

The Board of Registration of Architects and Quality Surveyors of Kenya (BORAQS) unveiled a five-year strategic plan that aims at improving professionalism in the sector by harmonizing practice standards, setting up an examination body to ensure the practitioners are well qualified and to have a one stop shop for environmental, public health, water, and physical planning functions. The plan thus aims at improving on the quality of buildings in Kenya and easing the approval processes for developers seeking clearance.  The body will also test the quality of building materials such as the Alternative Building Technology (ABT) that is currently gaining traction in Kenya. Also included in the strategic plan were new regimes such as: manuals for use by architects and quantity surveyors, an e-payment product, and BORAQ Visa which will soon be the sole payment platform for construction services and a reviewed training curriculum for the building sector in tertiary institutions. In our opinion, this is a positive move as it will reduce the number of quacks defrauding players in the construction industry and ease the approval process which has been tedious and involving different permits form different bodies in different locations.

During the week, Johnson and Johnson the manufacturer of medicinal, pharmaceutical and personal hygiene products announced that it will set up its East African Headquarters in Nairobi citing political stability, government support, established distribution channels as well as an educated and entrepreneurial population as the key reasons behind the decision. Other multinationals that have recently announced plans to set up offices in Nairobi include Volkswagen and Wrigley’s. This influx of foreign investors in Kenya will increase demand for Grade A offices, which are currently in low supply and hence boost the returns from the current   average rental yield of 10.2% and occupancy of 85.6%.

Increased investment expected in real estate across all themes boosted by the high returns being earned in the sector, increasing incomes, improved security situation in the country and positioning of Nairobi as a regional hub as regulators work on ensuring quality products are delivered to the market.
 

Focus of the Week: Is There a Real Estate Bubble in Kenya?

Over the last decade, Kenya has experienced a Real Estate boom with prices rising rapidly amid high demand from both long-term investors and speculators. Over the last 8 years between 2007 and 2015, the average price of a one to three bed room apartment has risen from Kshs 5.2mn to Kshs 13.4 mn, translating into a compounded annual growth rate (CAGR) of 14.5%. This has led some participants in the real estate market to wonder whether the rise in property prices is a bubble that is likely to burst in the near future. This week we thus seek to identify whether there is a bubble in the Kenyan property market. We start by defining what bubbles are and their characteristics, we then look at major property bubbles that have been experienced before, focusing on the causes and how they burst, and finally look at the key metrics in Kenyan property market to gauge whether there is a bubble, we then list conditions precedent for a bubble to be witnessed in the Kenyan market and finally conclude with an outlook for the real estate market.

Real Estate bubble refers to a periodic phenomenon characterized by rapid increase in value and hence prices of property to levels that are unaffordable by the population, which results into lower demand hence prices declining tremendously. The Real Estate bubbles are characterized by;

  1. Increase in demand for property leading to overvaluation relative to fundamentals that support the pricing of property. This is due to increasing demand that supersedes supply, which eventually leads to a property bubble as the prices rise to levels that are unaffordable by the public;
  2. Speculation in the real estate market, which increases demand and hence rapid rise in prices, most investors become irrational believing that the high prices being witnessed will continue to prevail in the future. This environment thus creates need of acquiring property immediately for speculation hence increased demand of property;
  3. Easy access to credit. Most economies that have experienced property bubbles, are characterized by ease of access to credit. Access to credit also leads to excessive credit growth in the market which increases the demand for property leading to prices increasing to unsustainable levels;
  4. Disruption in the credit market, which leads to an increase in interest rates leading to an increase defaults levels and non-performing loans, which exposes the banking system. This results into reduced credit supply, and hence demand suddenly falls leading to a sharp fall in prices, and hence loss of value for homeowners, speculators and banks, and the bubble is said to have burst.

Having looked at what real estate bubble is and its characteristics, we now turn our attention to case studies of United States and Ireland, which experienced bubbles that eventually burst between 2000 and 2008.

The USA Property Bubble

The USA property bubble and eventual burst was experienced in the late 20th Century to early 21st Century and it burst in 2007/2008 financial year, its timeline was as follows:

  • After the 2000 stock market crash, because of the dotcom bubble, people started allocating funds to real estate, in the view that property prices will always be on the rise;
  • The 2000 dotcom bubble had led to a recession in the American economy and in a bid to revive the economy, The Federal Reserve lowered the fed rate and hence low interest rates in the economy that made mortgages cheaper;
  • The lower rates encouraged uptake of mortgages and hence increased the demand for housing units in the market;
  • Rapid increase in demand led to house prices increasing from a median of USD 169,000 in 2000 to USD 246,500 at the peak of the bubble in 2006 at a CAGR of 7.8%;
  • The market then developed irrational exuberance believing that the prices would continue on an upward trend and hence increased demand;
  • Financial institutions took advantage of this and lowered credit analysis standards issuing subprime loans and securitizing them hence leveraging and exposing whole system;
  • Majority of these subprime loans were given AAA rating standards, and mortgage backed securities were created, which used a pool of mortgages and securitized them so that individuals could purchase as investment instruments;
  • Speculation was fueled by the ease of access to credit with banks and other mortgage institutions funding up to 125% of mortgages for individuals with little or no credit history; These mortgages were also given at adjustable rates;
  • In 2006, with the recovery of the stock market, the Federal Reserve raised the interest rates from the average of between 1%-4% to a high of 5.25%, at the high rates, the mortgage subscribers were unable to service the mortgages and hence there were massive defaults in the financial sector;
  • This led to the prices and value of such mortgage backed securities plunging, leading to huge losses for banks and other financial institutions that had securitized the mortgages, which then led to investors panic and sell-off and hence the bubble burst;
  • On the busting of the bubble, the whole system was deleveraged leading to widespread foreclosure by banks. The banks could however not recover their money due to drop in property prices by up to 50%. The result was that banks became bankrupt such as Lehman Brothers. This further resulted into unemployment, decline in purchasing power and consequently the economy experienced a recession again, this time a deep and protracted recession, hence the Great Recession.

The Ireland Property Bubble

The situation was fairly similar in Ireland and over the same period, there was a bubble that burst due to:

  • Increased demand for housing driven by economic fundamentals such as strong GDP growth of 7.5% between 1994 and 1999 of as well as income levels and population growth from foreigners working in Ireland due to the presence of multinationals such as Dell and IBM. This led to an increase in the levels of income and urbanization and consequently increased demand for houses which led to an increase in the supply. This then created a euphoria with the general belief in the market that the prices were to continue rising;
  • Increased credit creation and access to credit: The Irish people, under the irrational belief that the house prices could not go down took up second mortgages and further fueled demand. Developers then supplied to satisfy the demand. It is estimated that at the peak of the bubble in 2006, 90,000 houses were constructed an 80% increase from the 50,000 constructed in 2000
  • Poor regulation of the banking system: Irish banks were borrowing internationally to fund the high demand for mortgages, which they were financing up to 100% and giving up to 10 times an individual’s income with no proper collateral. When the global financial crisis hit Europe, Irish banks liquidity was curtailed and they were unable to lend to the population resulting in reduced demand in an oversupplied market. Then Eastern European Nations joined Euro and their economies picked up leading to most of the foreigners leaving Ireland. This resulted into a sharp fall in demand and hence a decline in prices for houses.

The two case studies follow a similar cycle – there is increased investment in real estate as it delivered higher returns than other asset classes, real estate prices increase in response to the increased demand and investment leading to boom period which creates a period of irrational excitement with people demanding and taking credit to purchase houses. A disruption then occurs mostly in the credit cycle leading to reduced demand in an oversupplied market.

In Kenya, we have witnessed strong increase in prices with Hass consult approximating that residential property in Kenya has increased in value by a compounded annual growth rate, CAGR, of 10.3% between 2000 and 2015 to Kshs 31.1 mn from Kshs 7.1 mn. This is against an average GDP growth of 4.4% over the same period. This however doesn’t translate to a property bubble as the price increment over this time was driven by fundamentals such as;

  1. Economic growth: Over the same period, the Kenyan economy recorded a growth in real terms with GDP per capita increasing from USD 479.6 in 2000 to USD 1,434.4 in 2015 a CAGR of 7.6%. This increased people’s disposable income enabling them to purchase property, increased demand consequently leading to increase in prices;
  2. Improved infrastructure, which opened up areas for development and increased the value of land in these places with new infrastructural developments by up to 31.0%;
  3. Increased diaspora remittances which have grown at a CAGR of 14.6% between 2000 and 2016 have also resulted into increased demand for property and other real estate backed products;
  4. A growing middle class, with the population growing at an average of 2.6% p.a. hence leading to increased demand for housing in the country;
  5. Urbanization rate which currently stands at 4.4% p.a. has also caused an increase in demand for houses especially in urban areas further increasing demand;
  6. Large Housing deficit that stands at 200,000 units per year.

So how do we know that the current demand is not fueling a property bubble? Here we look at several economic fundamentals that characterize bubbles.

  1. First is the interest rate environment: At the occurrence of the American housing bubble, there was a deliberate effort by policy decision makers to facilitate the recovery from the dot com bubble and the Federal Reserve lowered interest rates. In the early 2000’s the rate averaged at less than 6% throughout the years reaching an all-time low of 1% in 2004 which led to low interest rates in the economy with the average rate for a 30-year fixed mortgage rate averaging at 5.84% in the same year. In Ireland, the real rates averaged at -0.9% over the bubble period. In the Kenyan market, interest rates on loans have remained relatively high, over the last couple of years averaging at more than 18.0% before the interest rate cap. It is thus high enough to prevent excessive borrowing from financial institutions to fund speculative purchase of property that may result into unsustainable demand;
  2. Access to credit: In the American market, at that time of the bubble, there was excessive lending with credit being extended to un-credit worthy individuals through subprime mortgages. Many financial institutions were also highly leveraged with real estate backed securities. It is estimated that mortgages formed 70% of the loan portfolios of the banking institutions. In Kenya, there are stringent underwriting rules and credit is extended to only credit worthy individuals. Mortgages constitute 1% of banks loan portfolios, an indication that the current demand for real estate is not an access to credit driven demand;
  3. Price to income ratio: in the USA, the prices of properties rose, fueled by speculation, with no considerable increase in the populations’ income. For instance, between 2000 and 2006, the median house price increased by a CAGR of 7.8% from USD 169,000 to USD 246,000 while the median income declined by a CAGR of (0.4%) from USD 57,790 to USD 56,663. This is different from Kenya, the rising house prices are in tandem with the people’s incomes and rental incomes as well, rental escalation in Kenya is at 10.0% per annum, the joint movement of the above factors indicate that this is a fundamental driven price movement;
  4. Land restrictions: Limited supply led to price hikes in the USA. In Kenya, there are no such restrictions and there is sufficient land for development. On the contrary, there are relaxations on zoning regulations in Kenya allowing developers to maximize and densify on their pieces of land;
  5. Demand: A bubble bursts when the supply exceeds the demand and this was the same reason in the two case studies above. In Kenya, there is a need for over 200,000 houses annually according to the National Housing Cooperative (NHC) with Nairobi experiencing deficit of about 120,000. Approximately 35,000 houses are constructed each year in Nairobi meaning there is an unmet demand of 85,000 housed annually in Nairobi and its metropolis. The demand clearly outweighs the supply indicating that there is no bubble in the market and no burst is likely to be experienced, at least in the medium to long term. What we are currently experiencing in Nairobi is a prolonged boom that are backed by fundamentals that determine the demand for real estate products. There could be oversupply in some markets, especially in the upper middle income areas and thus calls for investors conducting proper market research to match supply and demand

Based on the above factors, for Kenya property market to experience a bubble and burst, the following must occur:

  1. Increased supply of housing units from current 50,000 to more than 200,000 required annually in all income classes. With the high construction costs as well as high costs of finance and inadequate infrastructure in most parts of the country, this target is not likely to be met in the short to medium term;
  2. Very low interest rates averaging at 5.0% as per Cytonn affordable index in our Residential Report of June 2016, which is the level at which approximately 90% of the households will be able to afford mortgages. At current borrowing rates of 14.0% we have only 24,500 mortgages in the country which is just 4.2% of GDP as compared to the USA whose ratio of mortgages to GDP was 70% in 2008. Kenyans also have unique acquisition methods such as buying in Chama’s in which they buy houses using savings as opposed to credit and hence the system is not highly leveraged;
  3. An increase in income levels to allow for increased speculation in house prices. At current levels of income houses are a store of value and hence limiting speculation in the residential and commercial markets; and
  4. There must be a constraint in the land supply in the market either through increased development or zoning regulations, currently the supply is sufficient and most restrictions on developments are being relaxed to facilitate construction.

In addition to the above factors, the Kenyan real estate market is still in its nascent stage and is just being institutionalized. A real estate bubble typically occur in well-established real estate markets. The Kenyan market is thus not experiencing a bubble but the normal real estate cycles of rising demand, peaking market, falling market then bottoming out and the rapid price increments witnessed are because the Kenyan real estate market is in the rising phase that is characterized by low supply, high demand leading to an increase prices. When supply matches the demand, we are likely to experience cooling off of prices and higher vacancies as some sub markets have started showing. Largely the Kenyan real estate market remains a developer’s market.

Disclaimer: The views expressed in this publication, are those of the writers where particulars are not warranted. This publication, which is in compliance with Section 2 of the Capital Markets Authority Act Cap 485A, is meant for general information only, and is not a warranty, representation, advice or solicitation of any nature. Readers are advised in all circumstances to seek the advice of a registered investment advisor.
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© 2017 Cytonn Investments Management Ltd