Horizon Africa Capital Newsletter- Q1 2017

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Newsletter | Quarter 1 | 2017

Newsletter

Quarter 1 I 2017

HORIZON AFRICA CAPITAL LIMITED

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Economic Roundup

Economic Outlook

Newsletter Feature: Kenya’s Standard Gauge Railway Project

Worth Noting

Transaction highlights in East Africa

News from Horizon

IN THIS ISSUE…

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ECONOMIC

SUB-SAHARAN AFRICA

After slowing to 3.0% in 2015, the World Bank revised down its forecast for economic

growth in sub-Saharan Africa (SSA) to 1.6% in 2016. This slowdown is a reflection of the

challenging economic environment faced by the region’s largest economies such as Nigeria

and South Africa due in part to low commodity prices, tighter global financial conditions,

severe draughts, political and security uncertainties. Despite this, SSA’s economic growth

is expected to rise to 2.9% in 2017 and 3.6% in 2018. The modest rebound in growth is

subject to a gradual improvement in world economy, reestablishment of macroeconomic

stability in the region’s largest economies and a recovery in commodity prices. Moreover, a

quarter of the countries in SSA are showing signs of resilience in economic growth and are

continuing to post annual average growth rates of over 6.0%.

According to the World Bank, SSA countries and in particular, commodity exporters, need

to adjust to lower commodity prices by strengthening domestic resource mobilization and

accelerate structural reforms aimed at boosting competitiveness and diversification to

raise growth prospects. Whilst oil exporters continue to be harmed by low oil prices, most

oil importers are experiencing better growth supported by strong infrastructure

investment and private consumption. The African Economic Outlook (AEO) has projected

an inflation rate of 7.6% in 2017. Inflation induced by currency depreciation could result in

a tighter monetary policy which would hinder private sector activity through higher

interest rates. Declining oil and metal prices have led foreign investors to scale down

operations in resource-rich countries.

Roundup

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Economic Outlook

* Given as at December 2016** Results of Q4 haven't been taken into consideration

Kenya Tanzania Uganda Rwanda

Macro-economicIndicators

2016 F. 2017 2016 F. 2017 2016 F. 2017 2016 F. 2017

GDP** (Avg.) 5.93% 6.0% 6.53% 7.0% 5.65% 5.5% 5.97% 7.2%

Inflation Rate (Avg.) 6.3% 6.09% 5.05% 4.98% 5.5% 5.0% 5.8% 6.8%

Exchange Rate –(Avg.) per USD

103.23 105.35 2228.7 2262.1 3457.4 3650.6 786.53 841.7

Interest Rates

Current Rate*

Previous Rate

Kenya 10% 10.5%

Tanzania 16% 16%

Uganda 12% 13%

Rwanda 6.25% 6.5%

GDP per Capita –USD (2015 to 2016)

1,522 – Increased by 6.1% in 2016

960 – Increased by 0.32% in 2016

623 – Increasedby 2.28% in 2016

723 – Increasedby 0.8% in 2016

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Kenya’s Standard gauge railway projectThe Mombasa-Nairobi Standard Gauge Railway (SGR) is a flagship project under the Kenya Vision 2030 development agenda and Kenya’s biggest and most ambitious infrastructure project since the country’s independence in 1963.

The project involves the development of a modern high speed, high capacity standard gauge railway for passengers and freight within the country’s Northern Corridor and will also extend into Uganda and South Sudan.

The SGR is proposed to connect Mombasa to Malaba, which is on the border of Kenya with Uganda and continue onward to Kampala in Uganda. It will further run with a branch line to Juba in South Sudan. Branch lines along the route will extend to Kisumu (Kenya) and through to Kasese and Pakwach (Uganda).

Kenya Railways Corporation is responsible for the construction of the 1,300km-long track inside Kenya from Mombasa to Malaba via Nairobi while China Road and Bridge Corporation is the contractor. Due to the size of the project, the Mombasa – Malaba section is being developed in two phases.

NEWSLETTER FEATURE1 OF 3

SGR is the flagship project

under the Kenya Vision 2030

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Phase I has an

estimated cost of

US$ 3.27 Billion.

Phase I of the project will link Mombasa and Naivasha. Construction on phase 1 started in November 2013 with tracklaying being completed in December 2016. The railway is expected to be commissioned by June 2017.

Phase II of the project will involve extending the railway to the Uganda border in addition to developing of a new high capacity port at Kisumu.

Following completion of the project, the railway will be operated by the China Communications Construction Company for five years.

Project costs and financingThe SGR was approved as government-to-government financed project with Phase I having an estimated cost of US$ 3.27 billion. 90% of the ongoing development of Phase I was financed by the Export – Import (Exim) Bank of China, while the remaining 10% was financed by the Government of Kenya (GoK). In order to raise funds for the project, the GoK set up a railway development levy, instituting a 1.5% levy on the cost of overseas imports. Financing for Phase I was finalized in May 2014.

The initial Phase I development was supposed to end in Nairobi, but the extension to Naivasha, which was approved at a later stage increased the project cost by a further US$ 1.5 billion. The GoK secured a loan from the Government of the People’s Republic of China to support the development of the increased cost related to the Nairobi – Naivasha line.

Phase II of the project is currently at the financial identification stage.


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The impact of the SGR projectThe completion of the SGR project has been projected to have a significant positive impact on Kenya’s economy with several Kenyan leaders describing the project as a “game changer”.The Government projects that once the SGR starts operating, it will increase the country’s gross domestic product (GDP) by 1.5%, from savings made from the cheaper transport cost and efficiency in ferrying increased cargo volume. It is estimated that 40 – 50% of port-bound cargo will be ferried using SGR’s double stacked trains, reducing road damage, pollution and accidents.

Nonetheless, increased competition is envisaged between cargo and passenger transport operators, with concerns that the SGR will replace the bus and truck. The competition is a result of lower rates to be charged to courier cargo by rail compared to road.

Truck operators have historically dominated cargo transportation between Mombasa and various inland destinations, with up to 90% of total cargo being ferried by road. Although road transporters are envisaged to experience a decrease in cargo ferried in the short term, the increased efficiency in evacuating cargo from the port using SGR will increase the cargo coming into the port and ensure cargo for trucks in the long-term.

To date, the benefit from the SGR project is already being felt with at least 30% of the project costs being spent locally. Manufacturers have benefited from the construction as demand for steel, cement, cables and other inputs have increased. The construction of the SGR has also created more than 20,000 jobs for Kenyans and will continue to provide 2,000 to 3,000 jobs when operations begin.

In addition to propelling Kenya’s growth aspirations, the SGR is critical to the growth of regional economies. Kenya is East Africa’s largest economy and has been the hub for trade, business and investment. The SGR project is set to have an economic multiplier effect on other East African countries, spiraling increased investment in infrastructure projects.


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Worth Noting…

Tanzania to boost tourism by the end of 2018Tanzania Tourist Board (TTB) to raise number of tourists from 1.14 million to 3 milliontourists by the end of 2018. Subsequently, revenue increases from its current $1.35 billionto $4 billion by 2018. The international marketing strategies are set out over a 5 year planand have a large budget.

Total SA gains control of Uganda’s Lake Albert ProjectTotal SA pays $900 million to gain control of Uganda’s Lake Albert project from Tullow OilPlc as a recovery in crude oil prices shines positive signals in the energy industry. Theproject will start pumping by 2021 about 230,000 barrels a day when it reaches its fullproduction, and has been estimated to generate revenues of $43 billion over 25 years.

Uganda to construct link between Kampala and RwandaUganda took a 40 year loan of $151 million from the African Development Bank. This willpartly finance a new 23km – 4 lane major road, linking Kampala with Rwanda, in order tode-congest traffic on the existing road.

Competition between Tanzania and KenyaRwanda and Burundi stopped importing their fuel need through Kenyan port of Mombasabecause of contamination of cargoes, instead they’re using Tanzania as their route. Hence,Mombasa faces increased competition as Tanzania’s port at Dar es Salaam expands at acost of $10 billion. In addition, Tanzania is also planning a $7.6 billion railway that will linkDar es Salaam to Uganda, Rwanda, Burundi and Congo. The country could rival Kenya’s ownnew line targeting the same nations.

Kenya’s first cruise ship terminalKenya began constructing its first cruise ship terminal in December 2016 for KES 350 millionat its Indian Ocean seaport of Mombasa, in the hope of boosting tourism. Currently, cruiseships use the main cargo terminal, thus the new terminal facilitates it for customized luxuryvessels. This will further increase visitors by 140,000 and generate $52 million annually.

Ethiopia's power plant to double its outputEthiopia began a 15 billion Euro hydropower plant that will nearly double the totalelectricity output to 4,238 megawatts (MW). This will ascent the manufacturing sector andincrease electricity exports to neighboring countries.

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Transaction highlights in East Africa

Sector Acquirer Target Transaction Description

October 2016

Energy

Investec

Asset

Managem

ent

Mobisol

Investec has a acquired a significant stake in a leading provider of

off-grid solar home systems (SHS), Mobisol. The firm will partner

with Mobisol to accelerate company’s growth of its existing

markets as well as new markets in Africa.

Healthcare

Catalyst

Principal

Partners

Zenufa

Laboratories

Ltd.

Catalyst acquired a majority stake of Zenufa Laboratories Ltd. The

aim behind the acquisition is to offer locally made – cost

effective, quality medication manufactured to the highest

international best practice standard, as the health sector remains

dominated by foreign imports.

November 2016

Pharmaceutical LeapFrogGoodlife

Pharmacy

LeapFrog acquired a majority stake in Kenya’s Goodlife Pharmacy,

at a cost of $22 million, as Catalyst Principal Partners exits. The

main idea was to build on its financial services to diversify its

private equity investment into a closely related sector –

healthcare.

FMCGPioneer

Foods

Weetabix

East Africa

Ltd.

British multinational Weetabix Food Company has bought a

controlling stake in Weetabix East Africa from Kenyan

businessman Ahsan Manji, who is divesting from the firm.

The UK firm took over 50.11 per cent shareholding, with South

Africa’s Pioneer Foods Group — producers of Bokomo, Ceres,

Safari, Spekko and ProNutro among others — taking up the

remaining 49.89 per cent stake.

December 2016

TechnologyToyota

TsushoSeven Seas

Toyota Tsusho has bought a 9.5 percent stake in Kenyan

information technology firm Seven Seas for a reported $3 million.

The purchase, which was carried out by Toyota Tsusho's

subsidiary, CSV Africa, a venture fund it established in 2014,

values the Kenyan firm at 3.2 billion shillings ($31.4 million).

Manufacturing Juniper

Glass

Juniper Glass announced that it has received all regulatory

approvals necessary to conclude the final investments in its $70

million Greenfield container glass factory in Debre Birhan,

Ethiopia.

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Transactions UpdateSelected Completed Transactions: 2016 Due diligence for an agro-processing company in Kenya Business plan development for a financial services company in

Kenya Working capital financing for a technology retailer Restructuring advisory for a hospitality group in Kenya Commercial due diligence of a major residential development

scheme in Kenya. Restructure and refinancing of bank facilities for a manufacturing

company in Kenya

Selected Ongoing Transactions: 2017

Mergers & Acquisitions

Sell-side advisor for a logistics company in Tanzania Sell-side advisor for an education institute in Kenya Sell-side advisor for a retail business in Kenya Sell-side advisor for a manufacturing company in East Africa

Capital Raising

Debt raise for the development of four real estate projects in East Africa

Capital raise for a microfinance institution in Kenya Debt raise for three manufacturing companies across East Africa Debt raise for a power business in Kenya

Advisory Financial advisory and capital raise for an agricultural business in

Kenya Business planning and feasibility study for a carriage-freight

service retailer in Kenya Financial due diligence on an upcoming service department

development in Kenya

Horizon’s Sector Expertise

Agriculture & Agro-processing

Real Estate

Energy, Oil & Gas

Fast-Moving Consumer Goods

Financial Services

Hospitality

Heavy & Light Manufacturing

Information and Communication Technology

Infrastructure

Telecommunications

Transport & Logistics

News from Horizon

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Horizon Africa Capital Limited

Apollo Centre | 2nd Floor | Ring Road Parklands

P.O. Box 103646- 00101, Nairobi, Kenya

Telephone: +254 20 3742614/5

www.horizonafrica.com

Horizon Africa Capital Newsletter- Q1 2017

Economy & Finance