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RoleofTalentinOurEconomy,&CytonnWeekly#29
ExecutiveSummary
•
FixedIncome:T-billyieldsincreasedacrossalltenorswiththe91,182and364-daypaperscominginat7.9%,10.2%and11.0%from7.6%,9.9%and10.9%,respectively.TheMonetaryPolicyCommittee(MPC)issettomeeton25thJuly2016todiscussthecurrentstateoftheeconomicenvironmentanddecideonanypossiblemonetarypolicyaction.InourviewtheMPCshallholdtheCBRat10.5%;
•
Equities:Duringtheweek,NSE20andNSE25closedonadownwardtrend,decliningby2.0%,and1.2%,
respectively while NASI gained by 0.2%. Kenya Airways released its
FY’2016 results havingrecordedalossofKshs26.2bn;
•
RealEstate:PrimerentsinNairobifellforthethirdconsecutivequarteraccordingtoKnightfrank’sreportonPrimeGlobalRental
Indexbut therewasanupward trend inhouseprices,while
FusionCapitalhasregisteredanundersubscriptionontheKshs2.3bnD-REITshencehasextendedtheclosingdateto26thJuly2016;
•
PrivateEquity:TheeducationandtechnologysectorscontinuetoattractprivatecapitalinAfricaasIFCincreasestheirequitystakeinSouthAfrica’sADvTECHby2.5%to4.1%valuedatUSD13.0mnandDPIpartnerswithEgypt’sB.TECH;
•
FocusoftheWeek:HavinglaunchedourCytonnYoungLeadersProgram,thisweek,weexaminetheroleoftalenttotheeconomy,andhowitimpactstheoveralleconomicgrowth.
CompanyUpdates
• Cytonn Investment Co-operative membership recruitment drive is
still on. For more
information,pleaseseethelink:CytonnCooperative.TheCytonnCo-operativeisregisteredunderTheCo-operativeSocietiesActofKenya,2004.Theco-operativeallowstheordinaryinvestortoaccessaboveaveragemarket
returns that have previously been accessible only to our
privatewealth investors. To
join,pleasecontactusatcoop@cytonn.comordownloadtheformsfromthewebsiteonthislink:Cytonnco-operativeforms.
•
Toinvestinanyofourcurrentorupcomingrealestateprojects,pleasevisitCytonnRealEstate.Wecontinuetoseeverystronginterestinourproducts,particularlyTheAlma,whichisnow50%soldandhas
delivered an annualized return for 55% p.a. for investors who
bought off-plan. We have
12investmentreadyprojects,offeringattractivedevelopmentreturnsandbuyer'sreturnsofaminimumof25%p.a.Seefurtherdetailshere:Summaryofinvestmentreadyprojects
•
OurSeniorInvestmentAnalyst,DuncanLumwamu,discussedKenyaAirways’planstosuspendannualsalaryincrementsforthenexttwoyearsandthefinancingofUSD2.0bnCentum’sAmuPowerprojectbyStandardBankonCNBCAfrica.DuncanLumwamuonCNBCAfrica.
•
Wecontinuetobeefuptheteamwithseveralongoinghires:CareersatCytonn.
FixedIncome
Duringtheweek,T-billswereoversubscribedwithasubscriptionrateof124.9%comparedto82.1%recordedthepreviousweek.Thiswasasignificantimprovementowingtoanincreaseinsubscriptionforthe182-daypaper
with a performance rate of 231.6% from 50.2% last week. The jump in
subscription level can
beattributedtoinvestorslockingtheirfundsinshort-termpapersastheyanticipateratestoriseinnear-term.Wenoteinvestors’preferenceto182-dayT-billasitofferedthemostattractiveeffectiveannualizedreturn,comparedtothe91-dayT-bill.Thesubscriptionforthe91and364-daypapersdroppedthisweekto70.3%and54.8%from80.5%and115.1%,respectively.Yieldshoweverincreasedacrossalltenorswiththe91,182and364-daypaperscominginat7.9%,10.2%and11.0%from7.6%,9.9%,and10.9%,respectively.
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The91-dayT-billiscurrentlytradingbelowits5-yearaverageof10.0%,havingwitnessedadownwardtrendinthepreviousthreemonthstowardsthecloseofthelastfinancialyear.Thedownwardtrendforthe91-daypaperhasreversedandwearewitnessingupwardpressureontheratesduetoGovernmentborrowinggiventhenewfiscalyear,whichhasbeencharacterizedbyanuptickininflation.
Thisweek, thegovernmentoffered twobonds; the5-year
(FXD2/2016/5)and the reopened20-year
(FXD1/2008/20)with11.9yearstomaturity,toraiseKshs30.0bnforbudgetarysupport.Yieldsforthesebondscameinat14.1%and14.8%,inlinewithourrecommendationashighlightedinCytonnWeekly#28,whereweadvisedinvestorstobidbetween13.0%and14.0%forthe5-yearandbetween14.0%and15.0%forthe20-yearbond.TheCentralBankacceptedKshs33.5bncomparedtothetargetamountofKshs30.0bn.Investorsdemandedapremiumof0.5%and0.1%abovethemarketrateof13.6%and14.7%forthe5and20-yearbonds,respectively.
This was due to expectations of upward pressure on interest rates
owing to (i) pressure
onGovernmenttofinancethe2016/2017budget,and(ii)relativelylowliquidityinthemoneymarket.
TheCentralBankWeeklyreportrevealedthattheinterbankratedecreasedby220bpsto4.2%,from6.4%thepreviousweek,duetoimprovedliquiditylevelsinthemoneymarketwhichresultedintoanetliquidityinjectionofKshs14.7bn.TheliquidityinjectionwasasaresultofTermAuctionDepositMaturitiesworthKshs.12.7bn.OfinterestisthehighT-billrediscountthatwesawthisweekshowingthattheremusthavebeeninvestorswithasignificantliquiditycrunch.UsuallytheT-billrediscountingrateispunitivetoinvestorsasitiscalculatedat3.0%higherthantheprevailinginterestrate.
Belowisasummaryofthemoneymarketactivityduringtheweek:
allvaluesinKshsbn,unlessstatedotherwiseWeeklyLiquidityPosition–Kenya
LiquidityInjection LiquidityReduction
TermAuctionDepositMaturities 12.7 T-bondsales 0.0GovernmentPayments
4.7 TransferfromBanks-Taxes 10.8T-bondRedemptions 0.0
T-bill(Primaryissues) 11.6T-billRediscount 24.7 TermAuctionDeposit
0.0T-bondInterest 0.0 ReverseRepoMaturities 0.0ReverseRepoPurchases
0.0 Repos 20.0
22.5%
11.7%
7.9%
Average=10.03%
5.0%
7.5%
10.0%
12.5%
15.0%
17.5%
20.0%
22.5%
25.0%Jan-15
Feb-15
Mar-15
Apr-15
May-…
Jun-15
Jul-1
5
Aug-15
Sep-15
Oct-15
Nov-15
Dec-15
Jan-16
Feb-16
Mar-16
Apr-16
May-…
Jun-16
Jul-1
6
91-dayT-billRate's5-yearAverage
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ReposMaturities 15.0 TotalLiquidityInjection 57.1
TotalLiquidityWithdrawal 42.4 NetLiquidityInjection 14.7
AccordingtoBloomberg,yieldsforthe5-yearand10-yearEurobondsissuedin2014increasedweekonweekby0.1%each
to5.4%and7.4%, respectively, from5.3%and7.3% lastweek,
respectively. Since themid–January 2016 peak, yields on Kenyan
Eurobond have declined by 3.4% and 2.2%on account of
improvingmacroeconomicconditionsandtherecentcoolingofpoliticaltemperaturessincetherulingcoalitionandtheoppositioncoalitionagreedondialoguearoundelectoralreforms,causingtheoppositioncoalitiontoceasestreetprotests.Theinvestmentcommunityiskeenthatdiscussionswillleadtoaresolutiontoavoidanyfurtherchaosanddisruptionofeconomicactivities.
TheKenyaShillingdepreciatedagainstthedollarby0.3%thisweek,toclosetheweekat101.6,comparedto101.3
the previous week, driven by endmonth dollar demand from importers.
The shilling was howeversupportedby theCentral Bank intervention in
the foreign exchangemarket through the sale of dollars
asindicatedbythedropindollarreservestoUSD7.83bnfromUSD7.84bn.Weexpecttheshillingtoremainstablefortheremainderoftheyearsupportedby(i)thehighlevelsofforeignexchangereservesequivalentto5.1monthsof
import cover, and (ii) improveddiaspora remittances,with
cumulative12months’diasporainflowstoMay2016increasingby11.1%toUSD1.6bnfromUSD1.5bnintheyeartoMay2015.
TheMonetaryPolicyCommittee(MPC)issettomeetonMonday25thofJuly,todiscussthewayforwardwithregardtomonetarypolicyandpossibleactionsontheCentralBankRate(CBR).Intheirpreviousmeeting,MPCcutthepolicyrateby100bpsto10.5%owingtoimprovedandfavorablemacroeconomicfactorscharacterizedbyfalling
inflationandastablecurrency.Anumberofmacro-economic
indicatorshavechangedsinceMay2016MPCmeetingassummarizedinthetablebelow;
KeyMacro-EconomicIndicators–Kenya
7.4%
5.4%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
22-Jul-14
22-Aug-14
22-Sep
-14
22-Oct-14
22-Nov-14
22-Dec-14
22-Jan
-15
22-Feb
-15
22-M
ar-15
22-Apr-15
22-M
ay-15
22-Jun
-15
22-Jul-15
22-Aug-15
22-Sep
-15
22-Oct-15
22-Nov-15
22-Dec-15
22-Jan
-16
22-Feb
-16
22-M
ar-16
22-Apr-16
22-M
ay-16
22-Jun
-16
22-Jul-16
KenyaEurobondYields
10-Year 5-Year
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Indicators
Expectationsatstartof
2016/2017FiscalYear
ExperiencesincethelastMPC
meetingonMay23,2016
GoingforwardProbableCBRDirection
(Thismonth)
ProbableCBRDirection(LastMPCMeeting)
GovernmentBorrowing
GovernmentisexpectedtoborrowKshs.
229.0bnforthe2016/2017financialyear
Thegovernmenttobeontrackwithits
borrowingscheduleforthenewfiscalyear
Weexpectsomepressureongovernment
borrowinginthemediumtermduetothehighlevel
ofmaturities
KenyaRevenueAuthority
KRAtomisstherevenuecollection
target
TheKRAdidnotmeettheir
2015/2016fiscalyeartargetofKshs.
1.4tn
WeexpecttheKRAtocontinuemissingtheircollectiontargets
Inflation AbovetheCBKtargetof7.5%
Increasedto5.8%inthemonthofJunedrivenby
risingfoodprices
Weexpectupwardinflationarypressureinthemediumtermasfoodpricesconsistentlyriseandduetothelevy
imposedonpetroleumproductswhichwilltrickledowntothe
transportsectorandalsoindirectlyaffectingfood
prices
Exchangerate(USD/Kshs)
Toremainstablesupportedbystrongdollarreservesand
improvedforeignexchangeinflowsthroughimproved
diasporaremittancesand
teaexports
Theshillinghasdepreciated0.8%againstthedollar
Toremainstablesupportedbystrongdollarreservesandimprovedforeign
exchangeinflowsthroughimproveddiasporaremittancesandtea
exports
BankingSector
Weexpectimproved
governance,followingtheclosureof
ImperialandDubaiBanksandconsolidationswithinthe
bankingindustry
Therehasbeenconsolidationin
thebankingsectorwiththe
acquisitionofGiro,ECBandOrientalBankbyI&M,MwalimuSaccoandBankM
Weexpectcontinuedstrictgovernanceand
M&Aswithinthebankingsector
Liquidity
Liquidityexpectedtoimprovegivenhighmaturitiesof
governmentsecurities
Liquidityhasgenerallyimprovedbutinthepast2
weeks,liquidityhasbeentightowingtoCBKmoppingupliquiditythroughRepostotamerisinginflation
Weexpectliquiditytobetightintheshort-termasCBKmopsupliquidityto
anchorinflationaryexpectations
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Withtheabovestateofaffairs
inthemoneymarketenvironment,where2outof6
indicatorsarepointingtowardsanupwardpressureoninterestrateswhile4areneutral,weexpecttheMPCtomaintaintheCBRrateat10.5%.WebelievethatmaintainingtheCBRwillbethebestoptionsoasnottostifleeconomicgrowth.
WeareprojectinginflationforthemonthofJulytorisetowithintherangeof6.5%-6.7%,drivenbyincreasesinfuelpricesthatwill
leadtoanincreaseintransportationcostswhilehavingapassthroughtowardsfoodproduction,andalsotheeffectofamuchlowerbasefromlastyear.ThegovernmenthasintroducedaKshs6.0RoadMaintenanceLevyinthepricesofsuperpetrolanddiesel,leadingtoasharpincreaseinthepumppricesduringthemonthofJuly,2016.However,weexpectinflationtoremainwithinthegovernmenttargetannualrangeof2.5%-7.5%,goingforwardtotheendoftheyear.
Sovereign debt management was the main agenda this week as the
14th session of the United
NationsConferenceonTradeandDevelopment(UNCTAD)inNairobiputtingthedevelopedworldatloggerheadswiththeirdevelopingcounterparts.ThedisagreementwasduetotheEuropeanUnion’s(EU)wantingtoblockthe“developingworld-backedtext”.This“text”stateshowsovereigndebtshouldbetreatedandwhichreferredtodebtrestructuringasopposedtotheEUdebtmanagement.Debtrestructuringisbeingpushedbyagroupcomprisingof77countrieswhiletheothergroupcomprisingof134countriesareadvocatingforthepassingofanewlegalregimeforsovereigndebtmanagement.Thecurrentstructureactsasaguaranteetolendersandthereforeimprovesaccesstofundstotheindividualdevelopingcountries.Webelievethattheratificationofthis
regime will protect developing nations against hedge funds that
have been buying bad debts andsubsequently
imposingprolongeddebtpaymentsperiodswith the affected
countriesbyeventually
payingmorethantheoriginaldebtwhichtheydefaultedon.
ThegovernmentisaheadwithitsdomesticborrowingforthisfiscalyearhavingborrowedKshs23.3bnforthecurrentfiscalagainstatargetofKshs17.7bn(assumingapro-ratedborrowingthroughoutthefinancialyearofKshs229.6bnbudgetedfor
the full financialyear). Interest
rateshavebottomedoutandwearecurrentlywitnessingupwardpressureoninterestratesgivenrelativelylowliquiditylevelsgiventhecentralbank’smopupactivitiesinthemoneymarketinordertoanchorinflationaryexpectations.Itisduetothisthatweadviseinvestorstobebiasedtowardsshorttomedium-termpapers.
Equities
DuringtheweekNSE20andNSE25closedonadownwardtrend,decliningby2.0%,and1.2%,respectivelywhileNASIgainedw/wby0.2%,withtheYTDperformancecominginat-12.8%,-8.4%and-4.9%forNSE20,NSE
25 andNASI, respectively. Thisweek’s performance is attributable to
gains in Safaricom at 4.0% anddeclines in select large cap stocks
with Co-op Bank, EABL and Equity Group losing 2.0%, 3.3% and
3.9%,respectively. Since the February 2015 peak, the market has
lost 31.9% and 22.3% for NSE 20 and NASI,respectively.
Equitiesturnoverroseby19.5%tocloseatKshs3.8bnfromKshs3.1bnthepreviousweek,withtheforeigninvestorsbeingnetbuyersrecordingnetinflowsofUSD6.6mn,comparedtoanetinflowsofUSD217,000recordedthepreviousweek.Wemaintainourexpectationofstrongerearningsgrowthin2016comparedto2015,withanestimatedgrowthof12.5%,supportedbyafavorablemacroeconomicenvironment.Giventhelowvaluations,long-terminvestorsshouldgraduallybetakingpositionsinthemarket.
Theequitiesmarketiscurrentlytradingatapricetoearningsratioof12.3x,versusahistoricalaverageof13.8x,withadividendyieldof4.8%versusahistoricalaverageof3.4%.ThechartsbelowindicatethehistoricalPEanddividendyieldsofthemarket.
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KCBGrouphasannouncedtheresultsofthescripissue,recordingasubscriptionrateof54.0%raisingatotalofKshs1.6bnoutofthetargetedKshs2.9bn.InFY2015,KCBGroupdeclaredfinaldividendsofKshs2.0persharewithshareholdershavingtheoptionofreceivingKshs1.0ofthedividendpershareincashorconvertingtheequivalentpayouttosharesatKshs38.0pershare.Theundersubscriptioncanbeattributedtothefactthatasat17thJune2016,thefinaldayofexercisingtheoption,theconversionpricewas8.6%higherthanthemarketpricemeaningthatshareholderspreferredtoreceivetheirscripdividendincashandbuythesharesfrommarketatacheaperprice.KCBGroupissettocarryoutarightsissueinthecourseoftheyearbutdetailsofthisareyettoberevealed.ThebankplanstoraiseatotalofKshs10.0bnofcapitalthroughissueofequityin2016,andconsideringthat
theyhavealreadyraisedKshs1.6bnthroughthescrip,KCBGroupwouldberaisingtheremainingKshs8.4bnbalanceintheupcomingrights.
Deacons,apopularclothing-lineretailshopinKenya,planstolistintheNairobiSecuritiesExchange(NSE).Theretailer
is floating 123.6mn shares at Kshs 15.0per shareon theAlternative
InvestmentMarket
Segment(AIMS)oftheNSEthushaltingitstradingontheover-the-counter(OTC)market.TheOTClistingpricein2010wasKshs62.5andsincethen,therehasbeenasplitof2:1andabonusshareissueof1:1in2012.ThisbringsanadjustedpricetoKshs15.6andhencean
indicationthattheshareholdersare
losing4.0%basedonthecurrentofferpriceofKshs15.0.ThefundsraisedfromtheOTC
listingenabledDeaconsto: (i)
Increasethenumberofstoresby24.0%to31in2015from25in2010,(ii)ExpandregionallytoRwandain2011,and(iii)IntroducenewbrandstoitsportfolioincludingBabyshopin2011andBossiniin2013.Throughtheseactivities,
12.3x
8.0x
10.0x
12.0x
14.0x
16.0x
18.0x
20.0xNASIP/E
4.8%
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
6.00% NASIDividendYield
Average=3.4%
Average=13.8x
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thecompanyhasmanagedtogrowrevenuesbyaCAGRof24.2%fromKshs116.1mnin2011toKshs141.6mnin2015,albeitbuoyedbyhighoperatingcostsandhencenarrowprofitmargins.Deacons’intentiontolistaimstoenabletheretailerto(i)discoveritsmarketvalueandanalternativeexitoptionforitsshareholders,(ii)haveaccesstotheliquiditythecapitalmarketprovidesforitsfutureexpansionstrategies,(iii)realizegrowthforitsinvestors,and(iv)increasethepublic’sawarenessofitsbrand.
SwedfundInternational,PinpointInvestmentsLimited,OldMutualLifeAssurance,KestrelCapitalNominees,areamongDeacon’sexistingtoptenshareholders.Havingbeenoperationalsincethelate1950s,brandssuchasMr.Price,Babyshop,Angelo,4u2,Reebok,Adidas,BossiniandTruworthshavebecomehouseholdnamesinKenya,Mauritius,
Uganda and Rwanda – the fourmarkets in which it operates. The
clothing and
fashionindustrycontinuestogrowdrivenby:(i)TherisingmiddleclasspopulationinAfricawith7ofthe10fastestgrowingeconomiesgloballybeinginthecontinentandgrowingatmorethan4.0%overthelast10years,and(ii)risingspendingpowerleadingtorisingconsumption.Deaconsisthereforesettogainfromthisandfrom:(i)
Thepopulation’s preference for quality products as themiddle class
digress from settling for third
rateproducts,and(ii)Brandconsciousnessbroughtaboutbyincreasedawarenessthroughtheinternet,cableTVand
extensivewestern-world visits. Tomeet Africa’s rising demand for
traditional-themed clothing as
thepopulationseekstoembracetheirheritage,Deaconswouldhavetoconsiderventuringintothislineofclothing.
KQreleasedFY’2016resultsrecordingalosspershareofKshs17.5fromKshs17.2inFY’2015drivenbyasurgeincostswitha14.1%growthinfleetownershipcostsanda48.9%riseinfinancecosts,despitea5.4%growthinrevenue.Keyhighlightsinclude:
•
Totalrevenuegrewby5.4%toKshs116.2bn,fromKshs110.2bninFY’2015,whichisattributabletoa1.2%riseinnumberofpassengersto4.20mnfrom4.18mnresultingina5.0%increaseinpassengerrelatedrevenue;
•
Financecostsgrewby48.9%toKshs7.0bn,fromKshs4.7bninFY’2015asaresultofariseinforeignexchangelossesbyKshs9.7bnbroughtaboutbythestrengtheningUSDagainsttheKenyaShillingby12.9%fromKshs89.0perUSDtoKshs100.5perUSDonaverageduringtheperiod.
•
Fleetownershipcostsroseby14.1%toKshs29.6bnfromKshs25.9bninFY’2015duetoimpactofleaseofaircraftandleaseprovisionforaircraftleasedoutorsold,allinthelasttwofinancialyears;
Despitethis,KQrecoverystrategydubbed‘OperationPride’hasseenanincreaseinrevenueby5.4%,a1.2%riseinnumberofpassengersinlightofa4.0%reductioninavailableseatsperKManda5%increaseinrevenuefrompassengers.Lastweek,KQreceivedaKshs10.0bnbridgingloanwhichKenyanTreasurysecuredfromtheAfricanExport-ImportBank(AfrieximBank)inabidtoeasecash-flowconstraints.Theairlinealsolaidoff80employeesinlinewithitscostcuttinginitiativetoreducepayrollcostsbyapproximatelyKshs2.0bnperannumbydownsizing
itsworkforceby15.0%.
Inourview,OperationPrideseemstobeworkingsupportedbytheTreasury–Governmentbailouts.However,westillmaintainthattheseareshorttermsolutionsanditisnotclearthatthelong-termchallengesthatledtoKQsfinancialproblemshavebeenaddressed.
UAP Holdings plans to acquire all OldMutual Kenya subsidiaries
including OldMutual Capital, OM
AssetManagers,OMLifeAssurance,FauluKenya,OMSecuritiesandOMPropertiesbefore
it
listsontheNairobiSecuritiesExchangeasplanned.InJuly2015,OldMutualPlcbought60.7%ofsharesinUAPHoldingsforKshs25.6bninadealthatsawamergerofbothassetmanagementandlifeinsurancebusinesses.Byacquiringthesubsidiaries,thetwocompanieswilleventuallymergeformingonlyoneassetmanagementsubsidiaryandonelifeinsurancesubsidiary,subjecttoregulatoryapproval.OldMutualKenyawillstillremainashareholderatUAPwhilestilloperatingitssubsidiariesintheregion.ThemoveissettoexpandUAP’scountrywidereachandclientelebasewhilestillearningdividendsforOldMutualasamajorityshareholderthereforequalifyingasamutuallybeneficialarrangement.
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AshighlightedinCytonnWeekly#28,thisweekwepublishourrecommendationonBritishAmericanTobacco(BAT)Kenya.WerecommendanAccumulateonBATwithafairvaluepriceofKshs970.6,an18.0%upsidefromthecurrentpriceofKshs869.0withaforwarddividendyieldof6.3%.Ourrecommendationisbasedon;
•
SteadyDividend:Maturecompanypayingoutallearningswithstablegrowthinearnings•
Higherexcise taxes subsiding: Increased regulationof the sector
coupledwith frequentexcise tax
increaseswillcontinuetohamperfurthergrowth.However,weseemtobeatthepeakoftaxrevisionbasedoncomplianceofthecigarettemanufacturerswhohaveadoptedtherequiredregulations
•
Steadystategrowth:BAThasreachedamaturecompanystate,withaflatgrowthinrevenuedrivenbyasteadygrowth
innewnumberofcustomers,withcustomersup-trading
intastes.Exportsalesgrowthhasgrownsteady,asthefeedermarkets’uptakeincreaseindemand.
Fordetailsonthevaluation,seeourvaluationnoteon:BritishAmericanTobacco(BAT)KenyaValuationNote.
Belowisourequitiesrecommendationtable.KeyChangesfromourpreviousrecommendationare;
•
EquityGrouphasmovedfroman“Accumulate”recommendation,withanupsideof15.5%toa“Buy”recommendationwithanupsideof20.0%,followinga3.9%w/wpricedecline
•
JubileeInsurancehasmovedfroma“Sell”recommendation,withadownsideof(0.5%)toa“Lighten”recommendationwithanupsideof4.6%,followinga4.9%w/wpricedecline
•
WehaveincludedBAT(K)inouruniverseofcoveragewithanAccumulaterecommendation.
allpricesinKshsunlessstated EQUITYRECOMMENDATION
No. Company Priceasat15/07/16Priceasat22/07/16
w/wChange
YTDChange
TargetPrice*
DividendYield
Upside/(Downside)** Recommendation
1. KCBGroup*** 32.3 32.5 0.8% (25.7%) 49.4 6.2% 58.2% Buy2.
KenyaRe 19.8 19.8 0.0% (5.7%) 26.7 3.8% 38.6% Buy3. Centum 43.8
44.25 1.1% (4.8%) 57.2 2.3% 31.5% Buy4. DTBK*** 167.0 160 (4.2%)
(14.4%) 204.2 1.6% 29.2% Buy5. Liberty 14.1 13.9 (1.1%) (28.7%)
17.2 0.0% 23.7% Buy6. EquityGroup 38.3 36.75 (3.9%) (8.1%) 42.1
5.4% 20.0% Buy7. Barclays 10.1 10.0 (0.5%) (26.5%) 10.9 10.0% 19.0%
Accumulate8. BAT(K) 865.0 869.0 0.5% 10.7% 970.6 6.3% 18.0%
Accumulate9. NIC 34.0 31.75 (6.6%) (26.6%) 35.7 3.9% 16.4%
Accumulate10. HFGroup 19.6 19.9 1.5% (10.6%) 21.6 6.5% 15.1%
Accumulate11. Co-opBank 15.2 14.9 (2.0%) (17.2%) 16.0 5.4% 12.8%
Accumulate12. Britam 13.8 13.1 (4.7%) 0.8% 14.1 2.3% 9.9% Hold13.
CfCStanbic 80.0 82.5 3.1% 0.0% 83.6 7.5% 8.8% Hold14.
StandardChartered*** 210.0 208 (1.0%) 6.7% 208.6 8.2% 8.5% Hold15.
PanAfrica 37.0 36.5 (1.4%) (39.2%) 39.0 0.0% 6.8% Hold16.
CICInsurance 4.5 4.55 2.2% (26.6%) 4.7 2.2% 5.5% Hold17.
JubileeHoldings 489.0 465 (4.9%) (3.9%) 477.8 1.8% 4.6% Lighten18.
I&MHoldings 109.0 108 (0.9%) 8.0% 109.5 2.7% 4.1% Lighten19.
Safaricom 17.4 18.05 4.0% 10.7% 16.6 4.2% (3.8%) Sell20. NBK 9.5
9.0 (5.3%) (42.9%) 5.4 0.0% (40.0%) Sell
*TargetPriceasperCytonnAnalystestimates
**Upside/(Downside)isadjustedforDividendYield
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We are neutral with a bias to positive on Equities given the
higher earnings prospects, supported by
afavorablemacroeconomicenvironment.
PrivateEquity
InternationalFinanceCorporation(IFC)hasacquireda2.5%equitystakeinADvTECHvaluedatUSD13.0mn,effectivelyvaluingthecompanyatUSD520mn.ThistransactionresultedtoanincreaseIFC’StotalholdingsinADvTECH
to 4.1% after an earlier acquisition of 1.6%. ADvTECH leads the
private sector in the fields
ofeducationandresourcinginSouthAfricawithaproventrackrecordofexpandingeducationalopportunitiesandimprovingskillsforpeopleenteringthejobmarketorseekingtoimprovetheiremploymentprospects.ThenewcapitalwillbeusedtofacilitateADvTECH’sexpansionstrategyinSub-SaharanAfricathatentails:(i)increasing
its schoolsandtertiaryeducationprograms, (ii)
increasequalityeducationorvocational
trainingaccessforatleast30,000additionalstudentsand(iii)providenewlearningoptionsforstudentsleavinghighschool.TheinvestmentwillalsoinvolvesynergiesindrivingstrategywithIFCprovidingADvTECHwithaccesstoaninvaluablenetworkofin-countryexpertsandeducationofficialsalongwithprivateandstateeducationprovidersatschoolsandtertiarylevelaswellasassistingthecompanytoexpandintonewmarketsinAfrica.Thisexpansionwillbedrivenby(i)Africa’sfastgrowingandyouthfulpopulationwhichrequiresincreasedjobsandpeoplewithskillstofillthem(ii)Existinggapsinthemarketwithdemandforqualityprimary,secondaryandtertiaryeducation(iii)Agrowingmiddleclasswithpurchasingpower.
DevelopmentPartners International (DPI),oneof the
leadingAfricanprivateequity
specialistswithUS$1.1billionundermanagement,hasthroughitsADPIIfundconcludedaninvestmentandstrategicpartnershipwithEgypt’sleadinghouseholdappliancesandconsumerelectronicsretailer,B.TECH,whichwillseethefundinvestEGP
300 million in the company. B.TECH operates a fast-growing
portfolio of 67 retail stores across
22governoratesinEgyptwithanetworkof362wholesaledealerssupportedbythreemainwarehousesand57after-sales
service centers. B.TECH distributes leading household appliances
and consumer electronicsproducts including leading global brands
such as Indesit, Ariston, Miele, Apple and Braun. B.TECH
hasconsistentlygrownitsbusinessatanimpressive18%annualizedsalesgrowthoverthelast5yearsdrivenby(i)growingdemandforconsumerdurablesandelectronicsfromEgypt’smiddleclass(ii)B.TECH’smarketleadinginstalmentpaymentsystemwhichhasservedover700,000Egyptianstodateand(iii)afast-growingonlinepresencesupportedbyanadvancedwarehouseandafter-salescapability.
RealEstate
PrimerentsinNairobifellforthethirdconsecutivequarteraccordingtoKnightFrank’sreportonPrimeGlobalRentalindex.Theindex,whichtrackstheperformanceofluxuryresidentialrentsacross17keyworldcities,showedprimerentsfellgloballyforathirdconsecutivequarterwithrentsfallingonaverageby0.5%intheyeartomarch2016.Accordingtothereport,primerentsforNairobifell7.9%y/yinQ12016,rankingNairobilastpositionamongothercities.Overafour-yearperiodriseinrenthavebeendecliningwithNairobifallingfromposition1inQ12013at24.20%Y/Ychangetolastpositionat-7.90%Y/YQ12016intheglobalranking.Thisfallisattributabletoincreasedsupplyanddecreaseindemandforhousing,asmostofdemandforprimepropertieshasmainlybeenfromexpatriates.ThusRentshavetrendedlowerasthereisweakeneddemandfrom
this segment of the market due to multinational firms downsizing as
a result of adverse
economiccircumstancesdrivenbylowcommoditypricessuchasslowdownintheoilindustry.ThistrendisexpectedtocontinuewithcompaniessuchasCoca-ColaannouncingthatitisreducingitsoperationsinKenya.Increaseinhousingsupplyinprimeendhomesalsocontributedtofallinrentsasthemarketisstagnatingatlowerrentalyieldsof3%-4%ascomparedtomiddleincomemarketsat5%-6%.
***IndicatescompaniesinwhichCytonnholdssharesin
Accumulate–Buyingshouldberestrainedandtimedtohappenwhentherearemomentarydipsinstockprices.
Lighten–Investortoconsiderselling,timedtohappenwhentherearepricerallies
-
ThefollowingisasummaryofQuarteronerentalperformanceover4yearsaccordingtoKnightFrank
Nairobi’sPrimeRentsPerformance Year 12Monthchange 6Monthchange
3Monthchange Rank2013 24.2% 17.0% 14.4% 12014 25.8% 7.5% 2.1% 12015
0.7% 0.7% 0.0% 112016 (7.9%) (7.9%) (2.9%) 17
Source:KnightFrankPrimeGlobalRentalindexreport
PrimeresidentialpricesinNairobihasalsobeenonadecreasingtrendinconsistenttorentsasfrom2013to2015.However,pricesbuckedthetrendandincreasedby1.5%betweenDecember2015andMarch2016,and3.3%intheyeartoMarch2016rankingposition15outof32citiesaccordingtoKnightFrank.Usually,luxuryrentalandsalesmarketstendtomoveinsamedirections,withbuyerstargetingrentalyields,priceandcapitalappreciation.Theincreaseinpricesin2015to2016isdrivenbyincreaseinlandpricesovertime,withNyari,RundaandKarenrecording6.28fold,5.28fold,6.48foldrespectivelyamongothersoveraperiodof8yearsasindicated
in Hass property House price Index Q1 2016 report.More so the
consistent drop in prices
hasconsistentlyattractedbuyershencethemarketisreactingtothedemandatthecurrentpricesaveragingKshs277,419–Kshs341,819persqminprimeareas.
ThefollowingisasummaryofNairobipriceperformanceover4years
Nairobi’sPrimePricesPerformance Year 12Monthchange 6Monthchange
3Monthchange Rank2013 8.4% 3.1% 1.6% 102014 4.2% 1.5% 1.0% 192015
(0.5%) 0.3% (1.0%) 262016 3.3% 2.2% 1.5% 15
Source:KnightFrankGlobalCitiesIndexreport
Thepricesinthissegmentaregrowingataslowratebutthereisnoexpectationofadeclineintheshorttomediumterm.InourviewtheresidentialmarketinKenyaisstillanattractiveinvestmentforbothrentandsalemarketsgiventhatonlyapproximately17%ofKenya’spopulationlivesintheirownhomes,andthereisahousingunit’sdeficitof250,000unitsperannumagainstasupplyof50,000housingunits.Thisopportunityishowevermore
concentrated in themiddle income class areas and satellite Towns
and therefore
investorsshouldfocusmoreintothesemarketstotapontotalreturnsatminimumof25%.
Thefollowingisasummaryofreturnsinvariousmarketsegments
TotalReturnsaccordingtoZonesZone AverageYield
AverageCapitalAppreciation AverageTotalReturn
Satellite 5.3% 22.9% 28.2%
UpperMiddle 5.7% 19.7% 25.5%
Highend 4.4% 20.3% 24.7%
LowerMiddle 4.6% 19.8% 24.4%
Average 5.1% 20.7% 25.8%
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Satellite towns had the highest returns in Q1’2016 due to high
capital appreciation rates driven
byinfrastructuraldevelopment,andincreasedinvestmentintheseareas.
Source:CytonnResearch,HassConsultLandPriceIndexQ12016
FusionCapitalhasregisteredanundersubscriptionontheKshs2.3bnD-REITshencehasextendedtheclosingdateto26thJuly2016fromtheinitialdateof15thJuly2016.ThelowsubscriptionratescanbeattributedtoinvestoreducationasmostoftheparticipantsinthecapitalmarketareyettounderstandandembraceREITsasaninvestibleassetclass.FusionCapital’sextensionofthedatesisaimedatgivinginvestorsmoretimetoapply
for theD-REITS.The listingdate for
theD-REIThasalsobeenpushedto10thAugust2016.Formoreinformation,pleaseseeCytonnweekly#27.
RoleofTalentinOurEconomy
To transition to a mid-income economy, a low-income but
developing economy, such as Kenya, has
toimplementamyriadofeconomicgrowthinitiativesinordertoachievesustainedeconomicgrowththatwilltranslate
to higher incomes and better standards of living. Such initiatives
include (i) a generally
enablingbusinessenvironment,(ii)openmarketsallowingforthefreeflowoflabor,capital,goodsandservices,(iii)astable
and democratic system of governance based on the rule of law, and
(iv) a highly
educated,entrepreneurialandinnovativepooloftalent,amongother
initiatives.ThisfocusnotediscussestheroleoftalentingrowingoureconomyinthecontextofourownexperienceatCytonnandmakessomesuggestionsonhowtodeepenourtalentpooltoimproveoureconomy.
LastweekweofficiallylaunchedourCytonnYoungLeadersProgramme(“CYLP”),whichisourcorestrategyforidentifying,attractinganddevelopingtheverybesttalentwecanget.SinceinceptiontwoyearsagoCYLPhastrained
over 180 university graduates and we have made employment offers to
61 of these programparticipants.About50%ofourpermanentstaff
ismadeofpeoplewerecruitedstraightoutofcollege.Thisprogramhasbeenoneofthekeydriversofourrapidgrowth,hencethedecisiontodoafocusnoteontalentrightaftertheCYLPlaunch.FormoreinformationaboutCYLP,seeCYLP:
Talent, in the context of economic growth, can be defined as a
group of people, such as employees of
acompany,whohaveanaptitudeforparticulartasks.Peopleinanorganizationarereferredtoastalentbecauseit
is through their unique skill sets, commitment and hard work that
the organization grows. A
growingcompanyemploysmorepeople,paysmoretaxes,andproducesmorerelevantgoodsandservices;allofwhichculminateintoagrowingeconomywithbetterstandardsofliving.
TheeconomicdevelopmentofSingaporeundertheleadershipofLeeKuanYewisfamousasoneofthegreatesteconomicsuccessstoriesinhistory.Singapore’spercapitaGDPjumpedfromaroundUS$500in1965,byastaggering2,800%,toUS$14,500by1991,theendofhisrule;theGDPpercapitahassincecontinuedtogrowtoUS$55,000.LeeKuanYewimplementedalotofinitiativestomakeSingaporethemostprosperousnationinSoutheastAsia,andnurturingandattractingtalentwasoneofthecoreinitiatives.
Inhisbook,“FromThirdWorldtoFirst”,LeeKuanYewsays,“talentisacountry’smostpreciousasset…itisthedefiningfactor.”Inthe1950s
and 1960s, the leadership focused on building an efficient,
universal education system that
wouldprovideaskilledworkforceforSingapore’sindustrializationprogrammeaswellastoreduceunemploymentrates.LeeKuanYewalsosawtheneedtobuildaprofessionalteachingforceandinternationallycompetitivelocaluniversitiesthatwouldputSingaporeontheworldmap.SingaporeworkedwithitsmissionsinBritain,theUS,Australia,NewZealandandCanadatoidentifypromisingstudentsinforeignuniversitiesandinterestthemwithjobsinSingapore.Today,mostofSingaporeUniversitiesareknowninternationallyforhighteaching
-
standardsespeciallyinthefieldofscienceandmathematics.Singaporecurrentlyhasanunemploymentrateof1.9%makingitoneofthelowestunemploymentratesintheworldwithmajorityofthelaborforcebeinghighlyskilledandwelleducated.
WhileSingaporeisdifferentfromKenya,wecanlearnagreatlessonthattalentindeedpromoteseconomicgrowthandtalentcanbothbedevelopedlocallyandalsoimportedascasewasforimmigrantsinSingapore.
ThegovernmentofKenyaisalreadydoingalottoincreasethetalentpool,including:
i. Introductionoffreeandcompulsoryprimaryeducation
ii.
Promotingaccesstohighereducationbyincreasingthenumberofuniversitiesandtertiarycolleges,whilealsoincreasingtheintakeperiodstoaccommodatemorestudentsintotertiaryeducation
iii.
Providingloansandbursaries,throughtheHigherEducationLoansBoardandotherdevolvedfunds,toneedy
students to finance theiruniversity
education,whilemaintainingaffordableeducation
inpublictertiaryinstitutions
iv. Effecting other programmes such as National Industrial
Training Authority (NITA), Kenya
NationalVolunteersProgram(KNVP)andKenyaYouthEmpowermentProgram(KYEP)
tohelp
indevelopingskillsthatarerelevanttothejobmarketandhencereducingunemploymentlevelsinthecountry.
However,thegovernmentandtheprivatesectorneedacollaborativeefforttodoalotmore.Wethinkthefollowingmaybehelpful:
i. Increase access to education in both secondary and
university, by extending free education tosecondary levels
andmakinguniversity educationmoreaccessible andaffordable; thiswill
needamoreefficientstudentloandisbursementandcollectioneffort
ii.
Makeiseasierforforeigntalentandimmigrantstoobtainworkpermits.Thecurrentsystemistoobureaucratic
andmakes it hard to bring in themuch needed foreign talent and
skills, which canenhanceourproductivecapacityandcreatemorejobs
iii.
Haveaclearandaggressiveindustrializationandmanufacturingprogram,whichwillcreatejobsforgraduatesfromtechnicalinstitutestherebyreducingunemploymentandincreasingproductivitywhichinturnleadstogrowthoftheeconomy
iv.
Createsignificantincentivesforemployerswithstrategictalentdevelopmentprograms,suchasCYLP,whicharefocusedonequippingrawtalentfromuniversitieswithproductiveskills
v.
DevelopstrategieswithkeyKenyanmissionsandembassiesaroundtheworldtoattracttalentedandskilled
Kenyan diaspora back home to enable skills transfer. This may
involve giving
significantincentivestobothreturningskilledKenyandiasporaworkersandthecompaniestheyjoin
vi.
Corporatesshouldplayakeyroleintermsofinvestingintrainingprogramstoincreasethepoolofskilledtalent,bytrainingandemployingrawtalentfromuniversities,ratherthancompetingforthelimitedpoolofexperiencedtalent.While
thismayseem likeCorporateSocialResponsibility, it
isastrategiccompetitiveadvantagetocorporates.
-
TheKenyaneconomyisonagrowthtrajectorygiventheprevailingmacroeconomicstability,ayoungandgrowingpopulation,andincreasingeaseofdoingbusiness.Itiscriticalthatwequickenourgrowthtrajectorybyinvestingheavilyandoverasustainedperiodoftime,andasanationalpriorityjustasSingaporedid,innurturingandattractingtalent.Itisastrategicpriorityforthecountryandparticularlyforitsprivatesector.
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of the writers where
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to time. This
publication is meant for general information only, and is not a
warranty, representation
or solicitation for any product that may be on offer. Readers
are thereby advised in all
circumstances, to seek the advice of an independent financial
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purposes.