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Cytonn Monthly – February 2017

By Cytonn Research Team, March 5, 2017

Executive Summary

Fixed Income and Macro Economic Review: Yields on T-bills were relatively unchanged during the month, closing at 8.6%, 10.5% and 10.9%, from 8.7%, 10.5% and 10.9% for the 91, 182 and 364-day papers, respectively, at the end of January. Kenya’s inflation rate for the month of February increased to 9.0%, from 7.0% recorded in January, driven by an increase in food and fuel prices;

Equities: During the month of February, the equities market was on an upward trend with NASI, NSE 25 and NSE 20 gaining 2.2%, 4.0% and 7.2%, respectively, taking YTD performance to (6.3%), (7.5%) and (6.0%), respectively. A number of companies released earning results during the month, notably Kengen, BAT, Barclays Bank and Stanbic Holdings, all recording declines in core earnings per share by 18.6%, 14.9%, 12.3% and 9.9%, respectively. Consequently, for all the companies that have reported so far YTD, there has been a 1.6% decline in the market weighted average core earnings per share, for the non-financials, they were down by 2.5%, however, for the financials they were up 1.0%;

Private Equity: The month of February was active for fundraising activity skewed towards the technology sector, especially in Kenya. February also witnessed Detroit-based General Motors exit the Kenyan market by selling its 57.7% stake in General Motors East Africa to Japanese firm Isuzu Motors;

Real Estate: The real estate industry maintains high performance and activity across all segments, with increased development activity expected in low to middle income residential segments and the hospitality segment. Kenya continues to be the preferred business hub in the region, evidenced by PowerChina and Boeing International announcing plans to set up regional offices in Nairobi;

Company Updates

  • Cytonn Investments Management Limited, our Group Holding Company, released 2016 financial year results, posting strong balance sheet growth of 77% to Kshs 11.5 bn as at 31st December 2016, from Kshs 6.6 bn as at 31st December 2015. On core business metrics, number of projects rose 300% to 12 as at FY’16, from 3 in FY’15, whereas projects under mandate increased 85% to Kshs 74 bn as at FY’16, from Kshs 40 bn in FY’15, and shareholder value per share increased by 50%, to Kshs 60 per share as at FY’16, from Kshs 40 per share in FY’15. For more details, see the Consolidated Annual Statement for the Year Ended December 31st 2016. See event note here
  • Cytonn Foundation, the CSR arm of Cytonn Investments, held its Entrepreneurship Hub (eHub) Discussion Forum that brought together a distinguished panel of established entrepreneurs to share their perspective of how to start and grow a business with over 100 budding entrepreneurs. See Event Note here
  • Cytonn staff, through Cytonn Foundation, are collecting donations from staff members to go towards assisting in the ongoing drought in Kenya. All proceeds shall be given through the Kenya Red Cross. We encourage all our clients, shareholders and well-wishers to participate. If interested, please email foundation@cytonn.com
  • Our Investment Analyst, Caleb Mugendi, discussed the high maize exports to Uganda in November and December, even as the country missed its harvest projection by 6.8 mn bags in the same period. Watch Caleb on CNBC here
  • Our Investment Manager, Maurice Oduor, discussed the rise in the uptake of mobile loans, which has resulted in more than Kshs 3.0 trillion being transacted through mobile money. Watch Maurice on Citizen TV here
  • Our Head - Private Equity Real Estate, Shiv Arora, discussed the rise in inflation during the month of February, which has been attributed to the ongoing drought. Watch Shiv on Citizen TV 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
  • In a bid to continue showcasing the real estate developments by our real estate development affiliate, Cytonn Real Estate, we organize site visits every week. If interested in attending the site visits, kindly register here
  • 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 EstateWe continue to see very strong interest in our products:
    • 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

Fixed Income and Macro Economic Review

The month of February was characterized by high T-bill subscriptions, with the overall subscription rate increasing to 177.5%, from 68.5% in January. We noted that during the month, investor preference shifted away from the 91-day paper, which witnessed low levels of subscription, and was skewed towards the 182 and 364-day papers, which offered investors higher returns on a risk-adjusted basis. This was evidenced by the subscription rates for the 91, 182 and 364-day papers, which came in at 67.8%, 316.8% and 111.2%, compared to 95.3%, 69.5% and 44.9% the previous month, respectively. Yields on T-bills were relatively unchanged during the month of February, closing at 8.6%, 10.5% and 10.9%, from 8.7%, 10.5% and 10.9% for the 91, 182 and 364-day papers, respectively, at the end of January. The Central Bank (CBK) has remained disciplined in stabilizing interest rates in the auction market by rejecting bids that CBK considers above market, and we have seen the market respond to this, with the overall bids acceptance rate in February rising to 84.2%, compared to 66.1% in January.

Carrying forward the February trend, during the first week of March, T-bills were oversubscribed for the fifth week running, with overall subscription coming in at 209.5%, compared to 185.4% recorded the previous week, with the subscription rate on the 91 and 364-day papers increasing to 147.4% and 57.4%, from 96.2% and 17.7%, respectively, while that of the 182-day paper decreased slightly to 403.0%, from 412.5%, the previous week. Yields on the 91, 182 and 364-day T-bills remained relatively unchanged during the week, coming in at 8.6%, 10.5% and 10.9%, respectively. Given the possible upward pressures on interest rates, which are currently at low levels, we maintain our recommendation for investors to be biased towards short-term fixed income instruments.

The 91-day T-bill is currently trading below its 5-year average of 9.9%. The lower yield on the 91-day paper is mainly attributed to the low interest rates environment we have been experiencing, given the Central Bank (CBK) has remained disciplined in stabilizing interest rates in the auction market by rejecting bids that CBK considers above market. However, as indicated previously, despite the current low interest rates environment, there exists possible upward pressure on interest rates as (i) the government having only borrowed Kshs 123.5 bn, of the budgeted foreign borrowing, representing 26.7% of its foreign borrowing target of Kshs 462.3 bn, the balance of which it will most likely plug from the domestic market, and, (ii) the Kenya Revenue Authority (KRA) having already missed its first half of 2016/17 fiscal year revenue collection target by 3.2%, leading to increased borrowing to meet expenditure requirements.

During the month of February, the Kenyan Government offered a 12-year amortized Infrastructure Bond (with an effective tenor of 8.8 years), at a coupon rate of 12.5%, to raise Kshs 30.0 bn for partial support of infrastructural projects in the roads, energy and water sectors. Yields for the bond came in at 13.6%, which was within our bidding recommendation of 13.5% and 14.3% as highlighted in our Cytonn Weekly #7/2017. The government ended up only accepting Kshs 6.0 bn from the total bids received worth Kshs 35.0 bn, translating to an acceptance rate of 17.1%.  Government promptly moved to re-open the bond issue looking to raise the additional Kshs 24.0 bn through a tap sale. The tap sale, which was open to investors up until March 2nd 2017, saw investors participate at the weighted average rate of accepted bids in the initial auction of 13.6%, with subscriptions for the tap sale coming in at Kshs 8.1 bn, translating to a subscription rate of 33.5%. The low subscription witnessed in the bond issue, coupled with a decline in secondary bond market activity during the month of February, is an indication that investors are keeping short due to the uncertainty surrounding interest rates environment. Given that (i) the government has only borrowed Kshs 123.5 bn from the foreign market against its foreign borrowing target of Kshs 462.3 bn, and (ii) the Kenya Revenue Authority (KRA) has already missed its first half of 2016/17 fiscal year revenue collection target by 3.2%, and is expected to miss its overall revenue collection target of Kshs 1.5 tn for the current fiscal year, we expect the government to come under pressure to borrow from the domestic market to meet the high level of debt maturities, which may result  in upward pressure on interest rates.

During the month, the money market saw a new liquidity withdrawal of Kshs 1.0 bn, despite a decline in the average interbank rate that closed at 4.6%, from 7.4% at the end of January. The reduction was a change from net liquidity injection of Kshs 53.8 bn in January, as a result of an increase in T-bill primary issue and Repos which came in at Kshs 95.7 bn and Kshs 75.1 bn, from Kshs 32.3 bn and Kshs 3.8 bn, respectively, last month. The interbank rate is often determined by the liquidity distributions within the banking sector as opposed to the net liquidity position in the interbank market.

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

all values in Kshs bn, unless stated otherwise

February Monthly Liquidity Position – Kenya

Liquidity Injection

 

Liquidity Reduction

 

Term Auction Deposit Maturities

36.1

T-bond sales

6.0

Government Payments

116.5

Transfer from Banks – Taxes

90.1

T-bond Redemptions

28.4

T-bill (Primary issues)

95.7

T-bill Redemption

87.1

Term Auction Deposit

62.8

T-bond Interest

9.1

Reverse Repo Maturities

45.4

Reverse Repo Purchases

38.0

Repos

75.1

Repos Maturities

58.9

OMO Tap Sales

0.0

Total Liquidity Injection

374.1

Total Liquidity Withdrawal

375.1

 

Net Liquidity Injection

(1.0)

As can be seen in the graphs below, the secondary bonds market recorded reduced activity, with turnover decreasing by 21.6% to Kshs 23.4 bn in the month of February, from Kshs 29.8 bn recorded in January, despite the yields on government securities remaining relatively flat during the month. The performance for the secondary bonds stood at 0.2% in February, as per the NSE FTSE Bond Index.



According to Bloomberg, the yield on the 5-year Eurobond increased by 10 bps to 4.3%, from 4.2% in January, whereas that on the 10-year Eurobond decreased by 30 bps to 7.1% from 7.4% the previous month. Since the mid-January 2016 peak, yields on the Kenya Eurobonds have declined by 4.5% points and 2.5% points, for the 5-year and 10-year Eurobonds, respectively, due to improving macroeconomic conditions. This is an indication that Kenya remains an attractive investment destination.

The Kenya Shilling appreciated against the US Dollar by 1.0% during the month to close at Kshs 102.9, from Kshs 103.9 in January. The strengthening of the shilling during the month was primarily driven by dollar inflows from offshore institutional investors and horticultural produce exporters this past week, with the Kenya Shilling gaining 0.8% w/w, to close at 102.7, from 103.6 the previous week. On a year to date basis, the shilling has depreciated against the dollar by 0.2%. In recent months, we have seen the forex reserves reduce to USD 7.0 bn (equivalent to 4.6 months of import cover), from a peak of USD 7.8 bn in October 2016 (equivalent to 5.2 months of import cover). The forex reserve level has now stabilised at 4.6 months of import cover, since December 2016, an indication of the confidence the Central Bank has with the current levels of the shilling.

The inflation rate for the month of February increased by 200 bps to 9.0%, from 7.0% in January, above our projection of 7.9% - 8.2%. The rise was driven by (i) an increase in food prices, which rose 3.3% m/m, on account of the prevailing drought in the country, and (ii) an increase in transport prices, which rose 0.7% m/m, on account of increases in the pump prices of petrol and diesel. Below is a table with the notable changes during the month;

Key Changes on the Consumer Price Index (CPI) during the month of February

Broad Commodity Group

Price change m/m

Price change y/y

Reason

Food & Non-Alcoholic Beverages

3.3%

16.5%

Increase in the prices of vegetables, attributed to the prevailing drought

Transport

0.7%

4.3%

Increase in the pump prices of petrol and diesel

Health

1.2%

3.6%

Increase in the cost of healthcare following the health crisis in the country

Housing, Water, Electricity, Gas and other Fuels

0.4%

2.3%

Increase in the cost of electricity, kerosene and house rents

Going forward, we expect upward inflationary pressures from (i) the food component of the CPI basket due to the persistent dry weather that is expected to carry on for the first half of the year, with depressed rainfall expected in the long rains season that comes in between March and May, (ii) the global recovery of oil prices spurring cost-push inflation, and (iii) the weakening shilling due to global strengthening of the dollar increasing the cost of imports. We expect upward inflationary pressures to persist in the first half of 2017, and average 8.1% over the course of the year, which is above the upper bound of the government target range of 2.5% - 7.5%, despite expectations that the food situation will improve in the second half of 2017.

During the month, the National Treasury released estimates for the 2017/18 budget, which continues to grow. The growth is however slower compared to the previous increases over the last five years, with a projected growth of 2.4%, compared to 52.9% over the last 5 years, translating to a compounded annual growth rate (CAGR) of 11.2%. According to the estimates, (i) total expenditure is expected to rise by 2.4% to Kshs 2.3 tn, from Kshs 2.2 tn in the 2016/2017 budget, (ii) total revenue collection is expected to rise by 12.5% to Kshs 1.7 tn, from Kshs 1.5 tn projected in the 2016/2017 budget, and (iii) income tax revenue (PAYE) is projected to rise by 16.5% to Kshs 400.5 bn, from Kshs 343.7 bn in the 2016/2017 budget. As highlighted in our Cytonn Weekly #7-2017, the expected 16.5% rise in income tax revenue seems ambitious, considering the number of lay-offs experienced in the banking, manufacturing, media industry & telecom sectors over the past year, coupled with slowing private sector credit growth, which stood at 4.3% in December 2016, compared to 18.0% in a similar period in 2015. While the expansionary fiscal policy is primed to see increased developments in the country with the realization of key infrastructural projects, the heightened domestic borrowing target, coupled with expected subdued revenue collection, is likely to put interest rates under pressure, impacting economic growth adversely.

During the month, the Kenya Bankers Association (KBA), established talks with the government on the withdrawal of interest rate caps, which has seen loans and deposits priced based on the Central Bank Rate (CBR), currently at 10.0%. The private sector credit growth has stagnated at 4.3% as at December 2016, a 16-month low attributed to the law that came into effect in August last year, locking out ‘risky’ borrowers from accessing funds. KBA is assessing the impact of the interest rate cap in the economy and will present the findings to the parliament for assessment and in support of change in the law. The International Monetary Fund (IMF) has recently warned Kenya on the adverse effects of the interest rate caps citing that it would hinder economic growth, which is forecasted to come in at 5.7% for the year 2016. As highlighted in our Cytonn Weekly #46, we do not expect the private sector credit to pick up if the interest rate cap law is retained and have an adverse impact on economic growth for the year, which is projected at 6.1% in 2017 as per the IMF. As detailed in our piece against the bill, the rate cap remains bad for the economy: Cytonn Weekly #34. However, we do not expect any kind of revision or amendment to the bill prior to the upcoming election given the populist nature of the topic.

The Government is ahead of its domestic borrowing for the current fiscal year having borrowed Kshs 187.3 bn against a target of Kshs 159.0 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 204.0 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, whereas Kenya Revenue Authority (KRA) has already missed its first half of 2016/17 fiscal year revenue collection target by 3.2%, and 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 paper 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 month of February, the equities market was on an upward trend with NASI, NSE 25 and NSE 20 gaining 2.2%, 4.0% and 7.2%, respectively, taking their YTD performances to (6.3%), (7.5%) and (6.0%), respectively. The equities market performance during the month was driven by gains in large caps led by NIC Bank, Standard Chartered, Kengen and Barclays, which gained 44.6%, 24.2%, 17.3% and 17.2%, respectively. The market decline YTD can be attributed to: (i) uncertainty surrounding the upcoming August general elections as investors take a wait-and-see approach, and (ii) the decline in the price of banking stocks due to anticipated low earnings due to low interest income as a result of the Banking (Amendment) Act, 2015, which stipulates the loan and deposit pricing frameworks for banks. Since the February 2015 peak, the market has lost 45.6% and 29.6% for the NSE 20 and NASI, respectively.

Equities turnover increased by 4.5% during the month to USD 121.3 mn from USD 116.0 mn in January 2017. Foreign investors were net buyers for this month but the net inflows declined by 74.2% to USD 4.0 mn, compared to net inflows of USD 15.6 mn witnessed in January 2017.

The market is currently trading at a price to earnings (PE) ratio of 9.8x, versus a historical average of 13.5x, with a dividend yield of 7.1% versus a historical average of 3.6%. The charts below indicate the historical PE and dividend yields of the market.

The earnings season has kicked off with some firms announcing their financial results for H1’2017 and FY’2016. Out of 9 companies that have released their financials from January to date, 3 have had an increase in earnings per share while 6 have registered a decrease. The 3 companies that registered an increase are Kenya Power and Lighting Company (KPLC), Sanlam and EABL, while the 6 that registered a decrease are Stanbic, Barclays, BAT, Kengen, Mumias and Uchumi. Key to note, Uchumi recorded a reduction in its loss per share. Of special interest are banks, which are scheduled to release earnings after the first quarter of operation with the interest rate cap, which is projected to significantly decrease their interest earnings. In anticipation, some banks have already laid off staff and closed branches in a bid to cut down on operating expenses.

During the month, we had a number of earnings releases, as covered in our Cytonn Weekly Reports, namely:

  • KPLC released H1’2017 results, earnings per share grew by 11.4% to Kshs 2.2 from Kshs 1.9 in H1’2016, driven by a 5.1% increase in total revenue to Kshs 59.6 bn from Kshs 56.7 bn, and a 22.9% decline in fuel costs to Kshs 6.2 bn from Kshs 8.1 bn, owing to a decline in the unit cost of fuel. See Cytonn Weekly #8/2017 for details on KPLC results.
  • Stanbic Holdings released their FY’2016 results, recording a core EPS decline of 9.9% to Kshs 11.2 from Kshs 12.4 in FY’2015. This was a result of 30.1% increase in operating expenses to Kshs 12.5 bn from Kshs 9.6 bn, attributed to a 93.1% increase in credit impairment charges, to Kshs 1.8 bn from Kshs 0.9 bn in FY’2015. See Cytonn Weekly #8/2017 for details on Stanbic Holdings results.
  • Barclays Bank released their FY’2016 results, recording a core EPS decline of 12.3% to Kshs 1.4 from Kshs 1.6 in FY’2015. This was a result of a 19.8% increase in operating expenses to Kshs 20.8 bn, attributed to a 122.4% increase in loan loss provision costs, which outpaced a 7.5% increase in operating revenue. See Cytonn Weekly #8/2017 for details on Barclays Bank results.
  • BAT released their FY’2016 results, recording a core EPS decline of 14.9% to Kshs 42.3 from Kshs 49.8 in FY’2015. This was a result of a 10.8% decline in operating revenue to Kshs 19.9 bn from Kshs 22.3 bn, attributed to the shift in the excise duty regime in Dec 2015 to a uniform rate system from a tiered approach that saw cigarette prices increase, hence reducing volumes especially of the mainstream brands. See Cytonn Weekly #8/2017 for details on BAT results.
  • Kengen released their H1’2017 results, recording a core EPS decline of 18.6% to Kshs 2.1 from Kshs 2.6 in H1’2016. This was a result of an 11.4% decline in operating revenue to Kshs 17.7 bn from Kshs 20.0 bn, attributed to the decommissioning of Garissa, Lamu and Embakasi gas turbine power plants and the non-receipt of revenue from its commercial drilling services. In the previous financial year, Kengen drilled two wells for a firm neighboring its Olkaria power plant, which was also seeking to enter the geothermal power sector.
  • Mumias Sugar released their H1’2017 results, recording an 87.3% deterioration in loss per share to Kshs 1.9 from Kshs 1.0 in H1’2016. This was mainly attributed to a 48.6% decline in operating revenue, which outpaced a 4.2% decline in operating expenses. The operating revenue decline can be attributed to; (i) reduced sugar cane production in the Western Kenya sugar belt, and (ii) limited cane development programs and hence stiff competition for the sugarcane within the region; while the reduced operating costs can be attributed to reduced yield from farmers;
  • Uchumi supermarket released their H1’2017 results, recording a 46.2% improvement in loss per share to Kshs 1.5 from a Kshs 2.8 loss in H1’2016. This was attributed to a 44.7% decline in operating expenses to Kshs 1.0 bn due to the implementation of cost management tools as its turnaround strategy takes form;
  • Sanlam Kenya released their FY'2016 results, posting a 158.2% growth in earnings per share to Kshs 0.5 from Kshs 0.2 in FY'2015. This was driven by a 58.3% growth in gross written premiums from general insurance, which rose to Kshs 1.0 bn from Kshs 0.6 bn in FY'2015, and a 4.9% decline in benefits, claims and expenses to Kshs 6.8 bn from Kshs 7.2 bn. Key to note, the company changed the valuation methodology of its long-term insurance business liabilities to the Gross Premium Valuation (GPV) methodology, from the previously applied Net Premium Valuation (NPV) methodology. This resulted in higher earnings, however, they did not disclose the size of the impact of the change in policy.  See Earnings Note here

SUMMARY OF EARNINGS GROWTH FOR FINANCIALS AND NON-FINANCIALS YTD

 

Company

Period

Market Cap (Kshs bn)

Earnings Growth

Financials

1.

Barclays

FY'2016

73.9

(12.3%)

2.

Stanbic

FY'2016

32.6

(9.9%)

3.

Sanlam

FY'2016

8.6

158.2%

 

Market Weighted Average

115.1

1.2%

 

Non-Financials

1.

KPLC

H1'2017

35.8

11.4%

2.

Uchumi

FY'2016

3.3

46.2%

3.

EABL

H1'2017

219.8

1.8%

4.

BAT

FY'2016

78.5

(14.9%)

5.

Kengen

H1'2016

20.3

(18.6%)

6.

Mumias

H1'2016

3.6

(83.7%)

 

Market Weighted Average

361.4

(2.5%)

According to the Central Bank of Kenya (CBK), the total volume of cash transacted in 2016 on mobile money transfer platforms grew by 15.8% to Kshs 3.4 tn from Kshs 2.8 tn in the previous year. This was as a result of an increase in the number of mobile phone lending apps, which in turn led to an increase in loans given out within the country, due to reduced loan disbursement processes such as credit vetting, provision of collateral and filling of paperwork, as compared to traditional loans. Bank backed apps include KCB M-Pesa, M-Shwari, Equitel and M-Co-op Cash, while popular standalone apps include Mambo Mobile, Branch, Tala and Saida. The mobile phone apps are also set to face increased competition with the implementation of the Pesa-link platform, which will enable the real time transfer of funds from one bank account to another. We are of the view that with the implementation of the platform, there will be increased efficiency in money transfer and therefore mobile phone service providers will face increased competition from the banks.

Below is our equities recommendation table. Key changes from our previous recommendation are:

  1. 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.
  2. BAT has also been placed under review because of its recently released FY’2016 earnings. We shall give an updated valuation next week.

all prices in Kshs unless stated

EQUITY RECOMMENDATION

No.

Company

Price as at 31/01/17

Price as at 28/02/17

m/m Change

YTD Change

Target Price*

Dividend Yield

Upside/ (Downside)**

Recommendation

1.

Bamburi Cement

150.0

146.0

(2.7%)

(8.8%)

231.7

7.8%

66.5%

Buy

2.

KCB Group***

23.0

25.3

9.8%

(12.2%)

39.6

7.5%

64.3%

Buy

3.

ARM

19.7

19.7

(0.3%)

(22.9%)

31.2

0.0%

58.8%

Buy

4.

Kenya Re

20.5

19.6

(4.6%)

(13.1%)

26.9

3.6%

41.2%

Buy

5.

HF Group

11.1

11.1

(0.5%)

(21.1%)

13.8

9.2%

34.1%

Buy

6.

Liberty

12.6

10.6

(15.5%)

(19.7%)

13.9

0.0%

31.1%

Buy

7.

Stanbic Holdings

65.0

69.0

6.2%

(2.1%)

84.7

7.9%

30.7%

Buy

8.

Britam

9.6

10.6

11.0%

6.0%

13.5

2.9%

30.2%

Buy

9.

Equity Group

24.3

26.3

8.2%

(12.5%)

31.3

7.7%

26.9%

Buy

10.

Sanlam Kenya

18.0

25.5

41.7%

(7.3%)

30.5

0.0%

19.6%

Accumulate

11.

I&M Holdings

79.0

79.0

0.0%

(12.2%)

90.7

3.9%

18.7%

Accumulate

12.

Co-op Bank

11.5

12.6

9.1%

(4.9%)

13.6

6.8%

15.2%

Accumulate

13.

DTBK***

107.0

105.0

(1.9%)

(11.0%)

116.8

1.8%

13.0%

Accumulate

14.

NIC

20.8

30.0

44.6%

15.4%

30.8

3.5%

6.2%

Hold

15.

Jubilee Insurance

457.0

485.0

6.1%

(1.0%)

482.2

1.8%

1.3%

Lighten

16.

Barclays

7.3

8.5

17.2%

0.2%

7.6

10.8%

0.2%

Lighten

17.

SCBK***

165.0

205.0

24.2%

8.5%

157.7

6.6%

(16.5%)

Sell

18.

NBK

6.8

6.0

(12.5%)

(17.4%)

3.8

0.0%

(36.1%)

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

During the month of February, acquisitions in Africa’s private equity space continued to gather pace, evidenced by the entrance and increased activity of large U.S. based commercial private equity players such as Carlyle and TPG. A number of companies also reported closed fundraising rounds for their expansion.

On Acquisitions:

  1. Washington-based Carlyle Group and San Francisco-based TPG, are among a group of institutional investors set to acquire Kenyan coffee chain Java House in a transaction estimated to be worth USD 100 mn (Kshs 10.3 bn). Java is currently owned 90% by Washington-based Emerging Capital Partners (ECP), which bought the stake in 2012 from the coffee chain’s founders, Kevin Ashley and John Wagner. For more information, see our Cytonn Weekly #6/2017.
  2. The Carlyle Group has also acquired, through its Sub-Saharan Africa Fund, a majority stake in Johannesburg-based CMC Networks (CMC), Africa’s largest managed connectivity provider, for over USD 100 mn (Kshs 10.3 bn). CMC estimates that demand for high quality bandwidth is growing by 30.0% annually. The high growth rate can be seen in CMC’s good performance; given that it has quadrupled its revenue in the last five-years. For more information, see our Cytonn Weekly #6/2017.
  3. Listed South African transport and logistics company, Imperial Holdings, is set to acquire a 70.0% stake in Kenya’s Surgipharm, in a deal valued at USD 35.0 mn (Kshs 3.6 bn), effectively valuing the company at USD 50.0 mn (Kshs 5.1 bn). Surgipharm, a leading distributor of pharmaceutical and medical supplies in Kenya, has an annual turnover of approximately USD 70.0 mn (Kshs 7.2 bn) implying the transaction will be carried out at a 0.7x Price-to-Sales multiple, compared to an industry average of 0.83x, implying a discount paid of 15.7%. For more information, see our Cytonn Weekly #7/2017.
  4. Amethis Finance, a French based Private Equity (PE) fund focused on long term investment in Africa, and Metier, a South African PE fund, have jointly acquired a 40.0% stake in Kenafric Industries for an undisclosed amount. Kenafric Industries is one of the largest manufacturers of confectionery, culinary, stationery, and footwear products in Kenya, of which 45.0% are sold in 10 African countries outside Kenya, through its impressive distribution network. For more information, see our Cytonn Weekly #8/2017.
  5. Kenyan businessman Chris Kirubi, has begun the process of buying back the 51.0% stake of Haco Industries that he had sold to Tiger Brands for around Kshs 363.0 mn in 2008. He will pay a premium to take total control of the Kenyan FMCG company. Tiger Brands is exiting Haco Industries due to (i) a financial scandal at the Haco Industries that saw the parent company make a loss of Kshs 312.0 mn in 2015, (ii) disagreements on the current business model adopted by Haco Industries which is not aligned to Tiger’s business model of fully owning leading brands, and (iii) Tiger’s strategic plan to promote its own products across the market, which has conflicted with Haco’s licencing agreements. For more information, see our Cytonn Weekly #8/2017.
  6. ARM-Harith infrastructure fund (ARMHIF) through its fund manager, ARM-Harith Infrastructure Investment Limited, has invested an undisclosed amount in Amandi IPP, in Ghana. Amandi is the only large scale independent power generating project in Sub-Saharan Africa that came to its financial close in 2016. The Company has commenced the construction of the USD 552.0 mn (Kshs 56.6 bn) Amandi power plant in Aoadze, Ghana, with a capacity of 200 Megawatts. The Project, which has a debt to equity ratio of 3.1x is financed with USD 134.0 mn (Ksh 13.7 bn) equity from sponsor groups and USD 42.9 mn in debt financing. For more information, see our Cytonn Weekly #7/2017.
  7. CapitalWorks, a South African private equity firm, has acquired AON’s shareholdings from ten of its African operations, for an undisclosed amount. AON is a leading global insurance broker and provider of risk management and human resource consulting, with a market leading operation in Africa. CapitalWorks, specialised in investing on the continent, manages over USD 515.0 mn (Kshs 52.8 bn) in assets for investors, and brings to the table a sound understanding of local market conditions, strong governance and operational experience. The deal is structured to allow AON to operate through exclusive correspondent networks, which offers them success in a number of markets. For more information, see our Cytonn Weekly #8/2017.

On the Fundraising front:

  1. Bamba Group raised USD 1.1 mn (Kshs 112.9mn) in its first round of seed funding from investors in less than a year, for its expansion strategy. In November 2016, Bamba Group received USD 0.24 mn (Kshs 24.6 mn) worth of investment from Darshan Chandaria, CEO and Director of Chandaria industries Group, after pitching their business model at Lion’s Den, a TV investment Forum sponsored by NTV Kenya and KCB Group. Bamba Group founded in 2015, has been providing SMS based solutions and data collection software to companies and organizations in different sectors in any country’s economy. Their clientele includes organizations involved in market research consulting, private equity, agriculture, education, health finance government agencies, NGOs and private companies. For more information, see our Cytonn Weekly #7/2017.
  2. Kenyan digital currency payments platform BitPesa has closed a USD 2.5 mn (Kshs 256.5 mn) funding round. The round was led by US-based Draper Associates, an early stage venture-capital firm that encourages entrepreneurs to transform industries with new technology, and Greycroft Partners, alongside existing investors. This brings BitPesa’s total amount of funding raised to date to nearly USD 6.0 mn (Kshs 615.6 mn). For more information, see our Cytonn Weekly #6/2017.
  3. Mobile credit firm Tala, formerly known as Mkopo Rahisi, has raised more than USD 30.0 mn (Kshs 3.1 bn) in series B financing from IVP, Rabbit Capital and existing investors including Lowercase Capital, Data Collective, Collaborative Fund, and Female Founders Fund (F3). Tala currently operates in East Africa and South East Asia, targeting 2.0 bn people globally underserved by traditional finance companies. Based on customer profile and the loan size, Tala gives loans of up to Kshs 50,000 via Mpesa at 15.0% interest rate p.a. with a repayment period of six months. The collected funds will be used to (i) accelerate product development, (ii) expand to new markets, and (iii) build its international team. For more information, see our Cytonn Weekly #8/2017.

Exits:

Detroit-based General Motors has exited the Kenyan market after the successful sale of its 57.7% stake in General Motors East Africa (GMEA) to Japanese firm Isuzu Motors for an undisclosed amount. The transaction will see the motor dealer rebrand to Isuzu East Africa. This acquisition is critical as Isuzu Trucks and buses account for 95.6% of GMEA’s total sales in East Africa. The sale will enable Isuzu to implement its strategy of expanding the production and sale of its commercial vehicles. Other shareholders include ICDC (20.0%), Centum Investments (17.8%) and Itochu Corporation (4.5%).

Private equity investment activity in Africa has continued to improve, as evidenced by the increase in the number of fundraising and acquisitions in the region. 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

In 2017, the real estate market has witnessed increased activity despite fears that the industry will slow down owing to the upcoming general elections. Earlier in the month, the World Bank ranked the economic value of real estate in the major cities of the East African countries with exception of Burundi and Uganda. In the report, Dar-es Salaam was ranked at the top with its real estate value estimated to be worth Kshs 1.2 tn followed by Nairobi at Kshs 927.0 bn. Addis Ababa and Kigali followed in 3rd and 4th with values of Kshs 618 bn and Kshs 206 bn, respectively. The report sited that land fragmentation and weak property rights were the major challenges facing the sector in the region. This results in limited scale of developments within the cities, rendering it costly to lay down support services and infrastructure.

The performance of the industry under the various thematic groups has been discussed below:

Commercial Sector

In the last 5-years or so, the commercial office market has witnessed a paradigm shift with developers preferring other commercial districts such as Upperhill, Westlands & Kilimani to the Central Business District (CBD). This is a response to the traffic congestion and inadequate parking that characterizes the CBD. Developers in the CBD have resorted into converting their buildings to retail spaces in the lower floors and small offices in the upper floors. This is because the retail tenants will tap into the high human traffic given that the CBD still plays host to major transport terminuses. Unlike major corporations which opt to be based outside of the CBD due to the above-mentioned challenges, start-up SMEs do not require much office space and can still manage to run from the CBD. Some of the major activities that shaped this theme in the past month include:

  • The opening of the much anticipated Two Rivers Mall in Ruaka, which is officially the largest shopping complex in the East and Central African region. The mixed-use development provides over 700,000 square feet of lettable office and retail space. The Kshs 25.1 bn mall is the first phase of the proposed shopping and living complex that shall occupy the 102 acres of land. The mixed use being constructed by the China National Aero-Technology International Engineering Corporation (CATIC) and other subcontractors, shall comprise of the shopping space, office blocks, mid-density residential units and two hotels with 3 and 5-star rating facilities.
  • Highlighting the demand for Grade A office space, US-based aerospace and defence company Boeing International has announced plans to open offices in Africa with Kenya being chosen over Ethiopia to host the Eastern Africa offices. The move by the firm will see it tap into new Africa deals, whose air traffic in and out of the continent is expected to grow at a rate of 6.1% annually, which shall demand 1,150 new airplanes over the next 20-years.
  • Another firm setting up their regional headquarters in Kenya is Power China, a Chinese power construction firm, which will serve 26 countries in the Eastern and Southern Africa regions. The firm which ranks as position 200 in the Fortune 500 companies is scouting for land within Nairobi where it will set up its office within the next 3-years.

Nairobi continues to experience increased investment in the real estate sector going by the official data from the City Hall with regards to building approvals. The data indicates the approvals for new office blocks and homes in Nairobi grew from Kshs 242 bn in 2015 to Kshs 314.2 bn in 2016 owing to investors citing ever increasing returns in the sector, as rising rents drove investors to real estate. This is a 29.7% rise, which is higher than what was recorded between 2014 and 2015, at 6.6%. Residential property accounts for 60% of these approvals with the remaining 40% being taken up by commercial space.

Amid concerns that there might be an oversupply of commercial retail spaces in the city, the sub-sector has continued to attract occupancy levels averaging 80% and upwards, with annual yields averaging 10%. This translates to an opportunity in the sector which can be illustrated through a trend of developers opting for neighborhood malls in suburbs such as Kilimani, Karen and estates along Thika road. 

Commercial office space has a shortage of Grade A offices, which account for less than 10% of the total office supply as at 2016. Multinationals such as the ones mentioned above are the target market for such offices, hence this presents itself as an opportunity for developers in this subsector. Grade A office spaces have the best returns with average yields of 10.4%, against 9.4% and 8.5% for Grade B and C offices respectively, with average market occupancies of over 85% across all office grades, as highlighted in the Cytonn Office Report 2016.

 Residential Sector

Investors have increased their efforts towards providing housing, especially to the lower income segment of the market. The looming gap is as a result of majority of the investors providing housing for the mid and high-end income groups, leaving out the lower income segment. Key activities in this theme in February 2017 include:

  • At the beginning of the month, the Kenya Bankers Association released the Housing Price Index (KBA-HPI) for Q4’2016. The report indicates that the average house prices in Kenya increased by 1.6% in Q4’2016, compared to a 2.2% increase in Q3’2016. The low price increase can be attributed to the effects of interest rate capping, leading to reduced lending by banks to individual home owners. Apartments accounted for 60.0% of the total sale transaction, with the remaining share being maisonettes and bungalows at 23.0% and 17.0% respectively. Nonetheless, the mid and high-end markets dominated activity in the residential real estate market, even though demand is highest in the low-end market.
  • On the other hand, the county government’s efforts to provide low cost housing through redevelopment of estates such as Old & New Ngara, Jevanjee Bachelors, among others, has hit a snag. This follows a delay in documentation at the National Land commission (NLC) on compensation. The first phase of the project, which was supposed to kick off in July last year seeks to provide 14,000 units to Nairobi residents
  • Deyaar, a leading property developer based in Dubai, pitched camp in the country seeking to market and sell one of its projects, The Atria. Deyaar targeted High Net Worth Individuals (HNWIs) looking to buy into the Kshs 22.5 bn development in Dubai. The development scheduled for completion at the end of 2017, comprises serviced apartments, offering buyers 14.0% annual returns.

In 2016, residential property recorded an increase in prices for detached units & low density suburbs at 11.3%, whereas prices for residential property in satellite towns increased by 8.6% over the same period. Rental prices on the other hand increased by 4.0% in 2016 according to the Hass Consult House Price Index for Q4’16. This affirms the continued demand for residential housing in Nairobi, which is approximated to be 200,000 housing units annually.

 Hospitality

Efforts have been made by both the private and public sectors to revamp the tourism industry in the country. These efforts are geared towards diversifying from beach tourism to domestic and Meeting Incentives Conferences and Exhibitions (MICE) tourism. In February, key activities in the hospitality sector included:

  • Urithi Housing Cooperative announced its plans to enter the tourism market through provision of 200 one and two-bedroom furnished units in Mombasa. A one-bedroom unit will go for Kshs 2.5 mn, whereas a two-bedroom unit will be sold at Kshs 3.5 mn. The targeted market for the Kshs 700 mn project is buyers who will opt to rent out the units to tourists at the coast.
  • Crowne Plaza Hotel in Nairobi built a Kshs 5.0 bn mixed-use property dubbed ‘Crowne Plaza Annexe’, adjacent to the hotel. The annex will consist of parking space, rental office space and accommodation facilities on four, six and four floors, respectively. The target market consists of both business travelers as well as companies seeking office space in Upper Hill.

Despite the relatively poor performance of the tourism industry, especially between 2011 & 2015, business tourism performance still stands out, as evidenced by an average increase of local and international delegates at 12.1% over the same period. Domestic tourism has continued to boost the sector in the wake of insecurity and travel advisories issued against the country, evidenced by the Mt. Kenya region being the 2nd best performer in 2016, after the Maasai Mara region, for 5-star hotels, recording a TRevPar of USD 221 and USD 270 respectively. These findings are documented in the Cytonn Hospitality Report 2016, released in October last year. We expect that there will be continued spending in hotels this year especially prior to the election period.

Land

Land prices within the Nairobi Metropolis have continued to be on an upward trend, backed by improved infrastructure and urban population growth. According to the Hass Consult Land Index Q4’16, land prices increased by an average of 5.1% and 21.8% in 2016, across the suburbs and satellite towns, respectively.

Over the month, activity in the land sector has been characterized by transactions on large tracts of land outside Nairobi and some legal tussles. This can be witnessed in some of the sector’s events in February 2017 as shown below:

  • Actis Limited filed a suit seeking a refund of Kshs 1.95 bn and accrued interests from East Africa Breweries Limited (EABL) after a deal gone sour. The former had offered to purchase 15-acres of land owned by the latter through a subsidiary, Kasarani Investment Holdings Limited (KIHL). The dispute arose after Actis issued a rescission notice, following a request by EABL, which was yet to deliver on its end of the deal, for an extension of time, having not secured corporate approvals to build its headquarters on the property. For a legal summary of the matter, see a note from our legal team: EABL – Actis Legal Dispute
  • Sasini Ltd sold more than 500-acres of land in Nyeri County which was under a coffee plantation and exotic forest. The firm will utilize the proceeds from the sale to construct a macadamia factory in a bid to diversify its existing tea, coffee and dairy businesses.
  • E-Farm Housing Co-operative Society acquired 300-acres of land in Embu under a long-term lease to boost its revenue from horticulture. In so doing, the firm also hopes to reduce its dependence on member contributions to finance its projects. The society endeavors to provide 5,000 low-cost houses in Konza, Juja, Nanyuki, with a target price of Kshs 1.0 mn for a one-bedroom unit.

Overall, the real estate industry is expected to maintain high performance across all sectors, with increased development activity expected in low to middle income residential segments and business hotels. Development activity is expected to slow down in commercial spaces and land development as developers adopt the wait and see strategy, picking up after the general elections.

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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