By Cytonn Research Team, Feb 3, 2019
During the month of January, T-bill auctions recorded an oversubscription, with the overall subscription rate coming in at 187.7%, an increase from 60.9%, recorded in December. The subscription rates for the 91-day, 182-day and 364-day papers came in at 173.0%, 141.0% and 240.2%, from 112.3%, 39.7% and 61.6%, in the previous month, respectively. The yields on the 91-day and 182-day papers both declined by 0.2% points, to 7.1% and 8.8% from 7.3% and 9.0%, respectively, while yields on the 364-day declined by 0.1% points to 9.9% from 10.0%, recorded in December. The Monetary Policy Committee (MPC) met in January to review the prevailing macroeconomic conditions and give direction on the Central Bank Rate (CBR). Consequently, the MPC maintained the CBR at 9.0%, citing well-anchored inflation expectations within the target range and that the economy was operating close to its potential. This was despite low private sector credit growth that came in at 2.4% in the 12 months to December 2018, slower than the 3.0% recorded in the 12 months to November 2018;
During the month of January, the equities market was on an upward trend with NSE 20, NASI and NSE 25 all gaining by 4.4%, 7.1%, and 9.1%, respectively. During the month we witnessed increased consolidation in the banking sector with the recently announced merger between tier 1 lender Commercial Bank of Africa (CBA) and listed tier 2 lender NIC Group taking center stage;
During the month of January, there was private equity activity in the financial services, education, and hospitality sectors, as well as a number of fundraising announcements. In the financial services sector, Britam Asset Managers bought a 40.0% stake worth Kshs 1.4 bn in a local electricity producer, Gulf Energy, through a New York-based energy investment vehicle Everstrong Capital. In the education sector, Dubai based GEMS Education, an international education company owned by a consortium of institutional investors, including Varkey Group and American private equity firm Blackstone Group, is set to acquire 100% stake in Hillcrest International Schools from its current owners, Fanisi Capital and businessman Anthony Wahome, for Kshs 2.6 bn. In hospitality, US private equity fund Emerging Capital Partners (ECP) has acquired a majority stake in Nairobi-based hospitality chain ArtCaffé Group for an undisclosed amount. In fundraising, Branch International, a mobile-based microfinance institution headquartered in California with operations in Kenya, Tanzania and Nigeria, raised a further Kshs 500.0 mn (USD 4.9 mn) in capital investment based on its third commercial paper in the Kenyan market;
During the month of January, the real estate sector recorded increased activity across various themes as follows: (i) In the residential sector, Erdemann Properties launched their residential development in Ngara dubbed “River Estate’’ on approximately 5.6-acres (costs undisclosed) that will comprise of one and two-bedroom apartments with price points of Kshs 6.0 mn and Kshs 8.5 mn, respectively, and Cytonn Real Estate launched its Kshs 2.5 bn gated community development dubbed “Applewood”, located in Miotoni, Karen. This signature development shall comprise luxury homes, each sitting on 1/2 acre, and, (ii) In the commercial sector, American-based fast-food restaurant Burger King and Quickmart Supermarket opened shops at Shell Fuel Station on James Gichuru Road in Lavington and Westfield Mall in Lavington, respectively, while Cleanshelf Supermarkets announced plans to open its 10th outlet at Shujaa Mall in Komarock.
T-Bills & T-Bonds Primary Auction:
During the month of January, T-bill auctions recorded an oversubscription, with the overall subscription rate coming in at 187.7%, an increase from 60.9%, recorded in December. The subscription rates for the 91-day, 182-day and 364-day papers came in at 173.0%, 141.0% and 240.2%, from 112.3%, 39.7% and 61.6%, in the previous month, respectively. The yields on the 91-day and 182-day papers both declined by 0.2% points, to 7.1% and 8.8% from 7.3% and 9.0%, respectively, while yields on the 364-day declined by 0.1% points to 9.9% from 10.0%, recorded in December. The T-bills acceptance rate came in at 66.8% during the month, compared to 87.4% recorded in December with the government accepting a total of Kshs 120.4 bn of the Kshs 180.2 bn worth of bids received. The Central Bank of Kenya (CBK) remained disciplined in rejecting expensive bids in order to ensure stability of interest rates.
During the week, T-bills remained oversubscribed, with the overall subscription rate coming in at 167.4%, down from 170.2% recorded the previous week. The high subscription was attributed to a favorable liquidity condition in the market. The yields on the 91-day, 182-day, and 364-day papers declined by 0.6% points, 0.5% points and 0.5% points, to 7.1%, 8.8%, and 9.9%, respectively. The acceptance rate rose to 80.5% from 65.0% recorded the previous week, with the government accepting Kshs 32.3 bn of the Kshs 40.2 bn worth of bids received, higher than its weekly quantum of Kshs 24.0 bn. The subscription rate for the 91-day and 182-day declined to 59.7% and 81.0% from 123.8% and 107.3%, respectively, while the subscription rate for the 364-day paper improved to 296.9% from 251.7%, recorded the previous week, as the paper offers better risk-adjusted returns to investors.
The 91-day T-bill is currently trading at a yield of 7.1%, which is below its 5-year average of 9.0%. The lower yield on the 91-day paper is mainly attributable to the low interest rate environment that has persisted since the passing of the law capping interest rates. We expect this to continue in the short-term, given:
During the month of January, the Kenyan Government issued two bonds; issue number FXD 1/2019/2 and issue number FXD 1/2019/15, with tenors of 2.0-year and 15.0-year, both with market determined coupon rates. The government was seeking to raise Kshs 40.0 bn from the two bonds for budgetary support. The two bond issues were over-subscribed with an overall subscription rate of 254.9% with bids worth Kshs 102.0 bn received against the Kshs 40.0 bn on offer. The 2-year bond had a better performance with total bids of Kshs 76.9 bn compared to Kshs 25.1 bn worth of bids for the 15-year bond, an indication of the high demand in the shorter-end of the yield curve. The government accepted Kshs 38.5 bn out of the Kshs 102.0 bn worth of bids received against Kshs 40.0 bn on offer, translating to an acceptance rate of 37.7%, indicating that bids were largely not within ranges the Central Bank of Kenya (CBK) deemed acceptable. The average accepted yield for the 2-year and 15-year issue came in at 10.7% and 12.9%, respectively. This was within target of our expectation of between 10.7% - 10.9% and 12.6% - 12.9% for the 2-year and 15-year bonds, respectively. The Government has re-opened the two bonds with the coupon rates set at 10.7% and 12.9% for the 2-year and 15-year bond, respectively, in a bid to raise Kshs 15.0 bn. Treasury bonds with the same tenor (2.0-years and 15.0-years) are currently trading at a yield of 10.6% and 12.7%, respectively. We expect bids to come in at between 10.6% - 10.8% and 12.7% - 12.9% for the 2-year and 15-year bonds, respectively.
Despite the Government’s effort of issuing longer-term bonds in a bid to lengthen the debt maturity profile and reduce the potential rollover risks in the medium term, it is evident that there is low appetite for the long-dated papers. This is attributed to the saturation of long-end offers, leading to a relatively flat yield curve on the long-end, making Treasury rely on the short-term treasury bills to meet its domestic borrowing target. We are of the view that the Government will need to offer more incentives for the long-term bonds by increasing the yields to attract investors.
Secondary Bond Market:
The yields on government securities in the secondary market remained relatively stable during the month of January as the Central Bank of Kenya continued to reject expensive bids in the primary market. According to the FTSE NSE Bond Index, Treasury bonds listed at the Nairobi Securities Exchange (NSE) gained by 0.2% during the month, bringing the YTD performance to 0.2%.
Liquidity:
The average interbank rate dropped to 3.5% during the month of January from 8.0% in December, pointing to improved liquidity during the month, supported by government payments and debt redemptions.
During the week, the average interbank rate rose to 4.6%, from 3.2% the previous week, while the average volumes traded in the interbank market declined by 83.2% to Kshs 2.5 bn from Kshs 14.8 bn the previous week. Despite the rise in the interbank rate, the money market remained relatively liquid with commercial banks recording excess reserves of Kshs 23.9 bn in relation to the 5.25% cash reserves requirements (CRR) supported by government payments.
Kenya Eurobonds:
According to Bloomberg, the yield on the 5-year and 10-Year Eurobonds issued in June 2014 declined by 0.8% points and 1.4% points to 4.2% and 6.9% in January, from 5.0% and 8.3% in December, respectively. During the week, the yields on the 5-year Eurobond issued in 2014 declined by 0.2% points to 4.2% from 4.4%, while the 10-year Eurobond issued in the same year declined by 0.1% points to 6.9% from 7.0% the previous week. Since the mid-January 2016 peak, yields on the Kenya Eurobonds have declined by 4.6% points and 2.8% points for the 5-year and 10-year Eurobonds, respectively, an indication of the relatively stable macroeconomic conditions in the country.
During the month, the yields on the 10-year and 30-year Eurobond issued in February 2018 declined by 1.4% points and 1.2% points to 7.6% and 8.6% from 9.0% and 9.8% in December, respectively. During the week, the yields on the 10-year and 30-year Eurobonds declined by 0.1% points and 0.2% points, to 7.6% and 8.6% from 8.7% and 8.8% recorded the previous week, respectively. Since the issue date, the yields on the 10-year Eurobond and 30-year Eurobond have both increased by 0.3%.
The declining yields on all the Eurobonds during the month signals improving country risk perception by investors, which was partly attributed to bullish expectations of improved economic growth in 2019 as well as increased Eurobond demand in emerging markets with a similar trend observed in other Sub-Saharan African Eurobonds, driving the prices up and effectively the yields down.
The Kenya Shilling:
The Kenya Shilling appreciated by 0.9% against the US Dollar during the month of January to Kshs 100.9 from Kshs 101.8 at the end of December. This was driven by hard currency inflows from diaspora remittances and offshore investors buying government debt, coupled with thin end month dollar-demand from oil importers. During the week, the Kenya Shilling appreciated by 0.5% against the US Dollar to close at Kshs 100.6 from Kshs 101.1 in the previous week, anchored by dollar inflows from diaspora remittances and portfolio investors buying government debt amid reduced dollar demand from the energy and manufacturing sector. On an YTD basis, the shilling has appreciated by 1.2% against the US Dollar. In our view, the shilling should remain relatively stable against the dollar in the short term, supported by:
Inflation:
The Y/Y inflation rate for the month of January declined to 4.7% from 5.7% recorded in December. This was not in line with our projections of 3.8% - 4.2%, as highlighted our Cytonn Weekly Report #04/2019. The variance was due to a 0.8% rise in the food and non-alcoholic drinks’ index, which has a weighting of 36.0%, against our expectations of a marginal decline of 0.3%. The Y/Y decline was mainly due to the base effect. M/M inflation however rose by 0.4%, attributed to the 0.8% rise in the food and non-alcoholic beverages index coupled with a 0.2% rise in the housing, water, electricity, gas and other fuels index due to higher cost of house rents and cooking fuels. The rise was also partly due to increased prices of domestic electricity consumption for 50 Kwh as well as for 200 KWh, which rose by 1.7% and 1.2%, respectively, attributed to the increase in foreign and inflation adjustment charges. Inflation, however, was mitigated by the 1.4% decline in the transport index attributable to a decline in pump prices of petrol and diesel. Below is a summary of key changes in the Consumer Price Index (CPI) in November:
Major Inflation Changes in the Month of January 2019 |
|||
Broad Commodity Group |
Price change m/m (Jan-19/Dec-18) |
Price change y/y (Jan-19/Jan-18) |
Reason |
Food & Non-Alcoholic Beverages |
0.8% |
1.6% |
This was on account of a decline in prices of several foodstuffs in January 2019 compared to the previous year. Prices of other foodstuffs also increased at a faster rate than the price decreases |
Transport Cost |
(1.4%) |
11.1% |
This was on account of a decline in pump prices of petrol and diesel |
Housing, Water, Electricity, Gas and other Fuels |
0.2% |
12.7% |
This was on account of higher cost of house rents and cooking fuels, coupled with increased prices of domestic electricity consumption due to increase in foreign and inflation adjustment charges |
Overall Inflation |
0.4% |
4.7% |
The m/m increment was due to a 0.8% increase in the food index which has CPI weight of 36.0% |
Monetary Policy:
The Monetary Policy Committee (MPC) met on Monday 28th January 2018 to review the prevailing macroeconomic conditions and give direction on the Central Bank Rate (CBR). The MPC maintained the CBR at 9.0%, in line with our expectations as detailed in our MPC Note, citing that inflation expectations were still well anchored within the target range and that the economy was operating close to its potential, as evidenced by:
The MPC noted that the current policy was still appropriate, but it would continue monitoring any perverse response to its previous decisions as well as developments in the global and domestic economy to take additional measures as necessary. See the CBK Release.
The Federal Reserve Bank of the U.S, through its Federal Open Market Committee (FOMC) has maintained its benchmark policy rate within a band 2.25% - 2.5%. The Fed also discarded earlier promises it had made on further gradual rate increases, saying it would exercise patience before making any further moves. The decision rides on the back of fears of a global economic slowdown, despite a robust U.S economy evidenced by the creation of 304,000 jobs in December 2018. In our view, the slowdown in rate hikes by the Fed may bring to a halt the recent foreign capital flight from emerging markets and allow for a recovery in asset prices.
Rates in the fixed income market have remained stable as the government rejects expensive bids despite being 9.4% behind its domestic borrowing target for the current financial year, having borrowed Kshs 167.2 bn against a pro-rated target of Kshs 184.5 bn. However, a budget deficit that is likely to result from depressed revenue collection creates uncertainty in the interest rate environment as any additional borrowing from the domestic market goes to plug the deficit. Despite this, we do not expect upward pressure on interest rates due to increased demand on government securities, driven by improved liquidity in the market owing to the relatively high debt maturities. Our view is that investors should be biased towards medium-term fixed income instruments to reduce duration risk associated with long-term debt, coupled with the relatively flat yield curve on the long-end due to saturation of long-term bonds.
Market Performance
During the month of January, the equities market was an upward trend with the NSE 20, NASI and NSE 25 all gaining by 4.4%, 7.1% and 9.1%, respectively. The performance recorded during the month was driven by large cap stocks with EABL leading with month-on-month gains of 21.9%, and gains in the banking sector which saw NIC Group, Equity Group, Co-operative Bank, KCB Group and Barclays Bank all gaining by 21.4%, 17.4%, 12.6%, 8.7%, and 5.5%, respectively.
Equities turnover increased by 85.5% during the month to USD 149.4 mn, from USD 80.7 mn in December 2018. Foreign investors remained net sellers for the month, with a net selling position of USD 13.4 mn, which is a 15.7% decrease from December’s net selling position of USD 15.9 mn.
During the week, equities turnover increased by 83.3% to USD 60.3 mn, from USD 32.9 mn the previous week, bringing the year to date (YTD) turnover to USD 157.0 mn. Foreign investors remained net sellers for the week, with a net selling position of USD 7.6 mn, which is 2298.9% increase from last week’s net selling position of USD 0.3 mn.
The market is currently trading at a price to earnings ratio (P/E) of 10.3x, 30.2% below the historical average of 13.4x, and a dividend yield of 4.7%, above the historical average of 3.8%. With the market trading at valuations below the historical average, we believe there is value in the market. The current P/E valuation of 10.3x is 6.0% above the most recent trough valuation of 9.7x experienced in the first week of February 2017, and 23.7% above the previous trough valuation of 8.3x experienced in December 2011. The charts below indicate the historical P/E and dividend yields of the market.
Monthly Highlights
The amendment to the Income Tax Act, included in the Finance Act 2018, was made public. The amendment introduced a requirement for Kenyan firms to pay a 30.0% tax on dividends received from their subsidiaries, and are redistributed to shareholders. This was a significant alteration to previous legislation in which a holding company would receive dividends from its subsidiary, without paying the withholding tax, if its ownership in the subsidiary exceeded 12.5%. We analysed the implications of this ammendement as follows;
A proposal was tabled by Mr. Moses Kuria, the Member of Parliament for Gatundu South, to amend the Banking (Amendment) Act 2015, to allow credit consumers negotiate for interest rates on loans, depending on their risk profile, with an upper limit of up to 6.0% above the existing interest rate cap levels, currently at 13.0%. This proposal, if passed, will see borrowers be able to access credit at rates of a maximum of 19.0% per annum. The move comes in a bid to try and improve credit extension to the private sector, comprised largely of the Micro, Small and Medium Enterprises (MSMEs), as private sector credit growth (highlighted in the chart below) averaged 3.3% in 2018, way below the 5 year average of 11.8%. The Central Bank of Kenya echoed this sentiment and lauded the members of parliament for acknowledging the negative effect of interest rate capping on the economy. Despite recognizing the proposal as a commendable course of action, CBK Governor Dr. Patrick Njoroge still maintains his stance that the law should be completely overhauled to encompass a system that allows banks to adopt a risk-based lending approach.
Commercial Bank of Africa (CBA) issued a cash buy-out offer of Kshs 1.4 bn to Jamii Bora bank. The Kshs 1.4 bn buyout represents a steep discount from the Kshs 3.4 bn book value as at Q1’2018. This implies the transaction, if the offer is accepted and no further injections made, would happen at a Price to Book ratio (P/Bv) of 0.4x, significantly lower than the average P/B ratio of 1.6x of recent transactions in the banking sector. Analysis of this transaction was covered in our CBA Acquisition Note. See table below on banking sector transaction multiples.
In another transaction involving CBA and following the initial announcement of negotiations in December 2018, the respective Boards of Directors of CBA and NIC Group have proposed to recommend the merger of NIC and CBA to their shareholders. Pending fulfilment of a certain set of conditions, customary to transactions of this nature, the merger agreement is to be transacted as highlighted below:
Some key issues that are yet to be addressed include the following:
For a detailed analysis of the transaction, see our NIC-CBA Merger Note.
Private Equity firms AfricInvest, which is based in Tunisia, and Catalyst Principal Partners, based in Kenya, acquired 24.2% stake in Prime Bank Kenya. The stake was valued at Kshs 5.1 bn, with the capital injection targeted to carry out strategic plans including expanding locally and into the region. The investment was carried out through a special purpose vehicle, AfricInvest Azure, formed jointly by AfricInvest and Catalyst, on terms which were not disclosed. As at Prime Bank’s last reporting in Q3’2018, the bank had a book value of Kshs 21.2 bn. As such, the transaction was carried out at a price-to-book value (P/Bv) of 1.0x, which was a 23.6% discount to the market’s trading valuation of 1.3x P/Bv for listed Kenyan banks at the time. For more details on the transaction, please see our Prime bank acquisition note.
Consolidation activity in the banking sector picked up pace in the month of January and we continue to track these transactions as highlighted in the table below;
Acquirer |
Bank Acquired |
Book Value at Acquisition (Kshs bns) |
Transaction Stake |
Transaction Value (Kshs bns) |
P/Bv Multiple |
Date |
CBA Group |
Jamii Bora Bank |
3.4 |
100.0% |
1.4 |
0.4x |
19-Jan* |
AfricInvest Azure |
Prime Bank |
21.2 |
24.2% |
5.1 |
1.0x |
19-Jan |
CBA Group |
NIC Group |
33.5** |
53:47*** |
Undisclosed |
N/A |
19-Jan* |
KCB Group |
Imperial Bank |
Unknown |
Undisclosed |
Undisclosed |
N/A |
18-Dec |
SBM Bank Kenya |
Chase Bank ltd |
Unknown |
75.0% |
Undisclosed |
N/A |
18-Aug |
DTBK |
Habib Bank Kenya |
2.4 |
100.0% |
1.8 |
0.8x |
17-Mar |
SBM Holdings |
Fidelity Commercial Bank |
1.8 |
100.0% |
2.8 |
1.6x |
16-Nov |
M Bank |
Oriental Commercial Bank |
1.8 |
51.0% |
1.3 |
1.4x |
16-Jun |
I&M Holdings |
Giro Commercial Bank |
3 |
100.0% |
5 |
1.7x |
16-Jun |
Mwalimu SACCO |
Equatorial Commercial Bank |
1.2 |
75.0% |
2.6 |
2.3x |
15-Mar |
Centum |
K-Rep Bank |
2.1 |
66.0% |
2.5 |
1.8x |
14-Jul |
GT Bank |
Fina Bank Group |
3.9 |
70.0% |
8.6 |
3.2x |
13-Nov |
Average |
|
|
76.10% |
|
1.6x |
|
* Announcement date |
||||||
** Book Value as of the announcement date |
||||||
*** Shareholder swap ratio between CBA and NIC, respectively |
We expect consolidation in Kenya’s banking sector to continue as banks merge to form strategic partnerships, and struggling banks especially those that do not serve a niche, are acquired. This is an important and compelling trend given that the Kenyan banking sector is overbanked, relative to other markets. This will lead to a more stable and safer banking sector.
Universe of Coverage
Below is our universe of coverage table;
Banks |
Price as at 31.1.19 |
Price as at 31.12.18 |
m/m change |
YTD Change |
Target Price* |
Dividend Yield |
Upside/ Downside** |
P/TBv Multiple |
Diamond Trust Bank |
149.3 |
156.5 |
(4.6%) |
(5.8%) |
283.7 |
1.7% |
90.9% |
0.9x |
Ghana Commercial Bank*** |
4.4 |
4.6 |
(4.6%) |
(10.9%) |
7.7 |
8.4% |
80.0% |
1.1x |
Access Bank |
5.8 |
6.8 |
(15.4%) |
(11.8%) |
9.5 |
7.1% |
76.8% |
0.4x |
NIC Group |
33.8 |
27.8 |
21.4% |
25.0% |
48.8 |
3.4% |
68.0% |
0.8x |
Zenith Bank*** |
22.5 |
23.1 |
(2.4%) |
(0.7%) |
33.3 |
12.6% |
67.5% |
1.0x |
KCB Group |
40.7 |
37.5 |
8.7% |
8.7% |
61.3 |
7.7% |
65.7% |
1.2x |
CAL Bank |
0.9 |
7.7 |
(8.2%) |
(8.2%) |
1.4 |
0.0% |
60.9% |
0.7x |
CRDB |
135.0 |
85.0 |
(10.0%) |
(10.0%) |
207.7 |
0.0% |
53.9% |
0.5x |
UBA Bank |
6.8 |
14.3 |
(11.7%) |
(7.1%) |
10.7 |
11.0% |
50.0% |
0.5x |
I&M Holdings |
95.0 |
150.0 |
11.8% |
11.8% |
138.6 |
3.7% |
49.6% |
1.0x |
Ecobank |
7.5 |
34.9 |
(0.1%) |
(0.1%) |
10.7 |
0.0% |
49.0% |
1.6x |
Equity Group |
40.9 |
7.5 |
17.4% |
17.4% |
56.2 |
5.0% |
45.7% |
1.9x |
Co-operative Bank |
16.1 |
1.0 |
12.6% |
10.1% |
19.9 |
5.3% |
36.6% |
1.3x |
Union Bank Plc |
6.3 |
31.0 |
11.6% |
11.6% |
8.2 |
0.0% |
32.5% |
0.6x |
Stanbic Bank Uganda |
30.0 |
34.5 |
(3.2%) |
(3.2%) |
36.3 |
3.9% |
24.8% |
2.1x |
Barclays Bank |
11.5 |
5.6 |
5.0% |
5.0% |
12.5 |
8.8% |
18.9% |
1.5x |
Guaranty Trust Bank |
33.5 |
5.5 |
(2.9%) |
(2.2%) |
37.1 |
7.0% |
14.5% |
2.2x |
HF Group |
6.9 |
11.0 |
25.3% |
18.8% |
6.6 |
5.7% |
13.6% |
0.2x |
Bank of Kigali |
278.0 |
6.0 |
(7.3%) |
(7.3%) |
299.9 |
5.0% |
12.9% |
1.5x |
SBM Holdings |
6.0 |
300.0 |
0.7% |
0.7% |
6.6 |
4.9% |
12.5% |
0.9x |
Standard Chartered |
194.8 |
194.5 |
0.1% |
0.3% |
196.3 |
6.4% |
7.5% |
1.6x |
Stanbic Holdings |
90.0 |
90.8 |
(0.8%) |
0.6% |
92.6 |
2.4% |
3.1% |
0.9x |
Bank of Baroda |
134.0 |
140.0 |
(4.3%) |
(4.3%) |
130.6 |
1.9% |
(1.4%) |
1.2x |
National Bank |
6.0 |
8.0 |
12.0% |
12.8% |
4.9 |
0.0% |
(7.2%) |
0.4x |
Standard Chartered |
21.1 |
21.0 |
0.4% |
0.4% |
19.5 |
0.0% |
(9.1%) |
2.7x |
FBN Holdings |
7.3 |
5.3 |
(8.2%) |
(7.5%) |
6.6 |
3.3% |
(10.1%) |
0.4x |
Stanbic IBTC Holdings |
45.2 |
48.0 |
(5.7%) |
(5.5%) |
37 |
1.3% |
(20.0%) |
2.4x |
Ecobank Transnational |
14.0 |
17.0 |
(17.6%) |
(17.4%) |
9.3 |
0.0% |
(38.1%) |
0.5x |
*Target Price as per Cytonn Analyst estimates |
We are “Positive” on equities for investors as the sustained price declines has seen the market P/E decline to below its historical average. We expect increased market activity, and possibly increased inflows from foreign investors, as they take advantage of the attractive valuations, to support the positive performance.
During the month of January, there was private equity activity in the financial services, education, hospitality and fundraising sectors.
Financial Services Sector:
Education:
The increased investments in the education sector is an indication of investor’s interest in the education sector in Sub-Saharan Africa, which is motivated by; (i) increasing demand for quality and affordable education, according to The Business of Education in Africa report by Caerus Capital, the Gross Enrolment Ratio (GER) has doubled over the last ten years, from 4.5% in 2006 to 8.5% in 2016, and (ii) support such as ease of approvals, offered to investors in the education sector by governments looking to meet Sustainable Development Goals (SDGs) targets of universal access to education. For more information, see our Cytonn 2019 Markets Outlook,
Fundraising:
Hospitality:
There is a great opportunity in Eastern Africa for casual dining concepts especially in Kenya, which has led to increased expansion of coffee shops to tap the country’s emerging coffee drinking culture and demand for snacks and meals. The investments are an indication of investors’ interest in the casual dining concept in Kenya, which is motivated by:
Despite the recent slowdown in growth, we maintain a “Positive” outlook on private equity investments in Africa, as evidenced by the increasing investor interest, which is attributed to; (i) economic growth, which is projected to improve in Africa’s most developed PE markets, (ii) attractive valuations in Sub-Saharan Africa’s private markets compared to its public markets, and (iii) attractive valuations in Sub-Saharan Africa’s markets compared to global markets. Going forward, the increasing investor interest, stable macro-economic and political environment will continue to boost deal flow into African markets.
During the month of January, the real estate sector recorded an increase in activity driven by; (i) intensified efforts by the Kenyan Government, international bodies and the private sector, to bridge the housing deficit in the country, which stands at 2.0 mn units and is growing at an annual rate of 10%, equal to 200,000 units, according to National Housing Corporation, (ii) positive demographics such as a high population growth rate of 2.5%, 1.3% points higher than the global average of 1.2% and a high rate of urbanization of 4.3%, compared to the global average of 2.0% as at 2017 as per the World Bank, which has created sustained demand for housing and commercial real estate across the country, and (iii) a stable macroeconomic environment, with GDP growth averaging at 5.1% over the last 5-years, and we expect growth to come in at 5.8% in 2019.
In this report, we have highlighted industry reports that were released during the month, and then delved into the review of the residential, commercial, hospitality and listed real estate sectors activities during the month.
Three reports released during the month of January underlined the performance of the real estate sector as explained in the table below:
Industry Reports Released in January 2019 |
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Coverage |
Report |
Key Take Outs |
Residential |
|
|
Land |
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During the week, JLL, a professional services firm that specializes in real estate and investment management, released their Nairobi City Report 2019 highlighting the performance and outlook on the real estate investment market with a focus on the office, retail and hospitality sectors. The following were the key take-outs;
The report is in line with Cytonn 2019 Market Outlook, where we forecasted subdued performance in the office sector due to surplus supply in the market with the Nairobi region having an oversupply of 5.3 mn SQFT in 2018 that is forecasted to increase to 5.7 mn SQFT in 2019. For the retail sector, we have a neutral outlook due to increased supply leading to a decline in yields to 9.0% in 2018 from 9.6% in 2017, and projected decline to 8.7% in 2019. However, we expect the entry and expansion of international and local retailers to cushion the market. In the hospitality sector, we have a positive outlook given the country’s political stability, the continued marketing of Kenya as an experience destination, and the improved air transport with several airlines that have increased their flight frequencies in and out of the country.
During the month, activity in the residential sector was mostly focused on the affordable housing initiative under the Big 4 Agenda and the high-end segment as shown below;
With the continued government support of the affordable housing initiative, we expect to see increased activities towards provision of more housing for the lower-middle and low-income section of the population.
In the high-end residential segment, Cytonn Real Estate launched its Kshs 2.5 bn gated community development dubbed “Applewood”, located in Miotoni, Karen. This signature development shall comprise luxury homes, each sitting on 1/2 acre. The development consist of eighteen, five-bedroom luxury villas.
In the retail sector, we saw increased uptake of retail space by both global and local retailers expanding their operations. In our view, the expansion of retailers is on the account of:
The table below shows the various stores and their newly opened shops and expansion plans:
Table Showing Retailers and their Expansion Activities in January 2019 |
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Name |
Country of Origin |
Type of Store |
Stores opened or announced during the month |
No of Stores in Kenya |
Location of Stores in Kenya |
Burger King |
United States |
Fast Food |
1 opened at Shell Fuel Station on James Gichuru Road in Lavington |
5 |
Thika Road Mall, Two Rivers mall, Nextgen Mall, The Hub and Shell Fuel Station on James Gichuru Road in Lavington |
Quickmart |
Kenya |
Supermarket |
1 opened at Westfield Mall in Lavington |
10 |
Nakuru, Kahawa Sukari, Waithaka, Eastern Bypass, Ruaka, Ruai, Thindigua on Kiambu Road and Lavington |
Cleanshelf |
Kenya |
Supermarket |
1 planned for opening at Shujaa Mall |
10 |
Langata road, Ruaka, Kiambu, Magadi road, Kilimani, Komarock – Shujaa mall |
Source: Cytonn Research
We expect the continued entry of international retailers and expansion of local retailers to continue cushioning the retail real estate sector performance through increased occupancy rates.
During the month of January, Kenya Airways and Silverstone Airlines, announced plans to introduce daily direct flights from Nairobi to Seychelles, and from Nairobi to Lodwar, respectively. This follows the improvement of air transport operations recorded in 2018, with several airlines increasing flight frequency in and out of the country. For instance, Ethiopian Airlines increased their weekly frequencies from Addis Ababa to Mombasa from 7 to 14 per week. In our view, the improving air transport operations, political stability and continued marketing of Kenya as an experience destination, will result in increased tourist arrivals, which according to Kenya National Bureau of Statistics (KNBS), recorded a 39.8% increase from 1.4 mn in 2017 to 2.0 mn in 2018, and we expect the numbers to grow by 30.0% y/y to 2.6 mn in 2019. As a result, we expect continued demand for hospitality services, with serviced apartments expected to record relatively high occupancies of above 80.0% in 2019, according to our Cytonn 2019 Markets Outlook.
During the month, Stanlib’s Fahari I-REIT saw a decrease of 7.8%, closing at Kshs 10.1 per share from Kshs 11.0 per share at the end of December 2018. On average, the REIT traded at an average of Kshs 10.1 per share, a 1.0% drop from an average of Kshs 10.2 per share in December 2018. The prices for the instrument have remained low largely due to; (i) Fahari I – REIT performing poorly with a dividend yield of 5.7% as opposed to brick and mortar retail and office in Nairobi with 8.1% and 9.0%, respectively, (ii) inadequate investor knowledge, and (iii) lack of institutional support for REIT’s. We expect the REIT to continue trading at low prices and in low volumes.
We expect the real estate sector in Kenya to continue on an upward trajectory given (i) continued National Government support on affordable housing initiative, (ii) expansion by global retailers into the country, (iii) expanding middle-class, and hence growing disposable incomes, and (iv) positive demographics necessitating the need for adequate housing.
Disclaimer: The Cytonn Weekly is a market commentary published by Cytonn Asset Managers Limited, “CAML”, which is regulated by the Capital Markets Authority, CMA and the Retirement Benefits Authority, RBA. However, the views expressed in this publication are those of the writers where particulars are not warranted. This publication 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.