By Cytonn Research Team, Aug 4, 2019
During the month of July, T-bill auctions recorded an oversubscription, with the overall rate coming in at 134.8%, compared to 137.0% recorded in June 2019. The subscription rates for the 91-day and 182-day came in at 131.1% and 64.0%, higher than the 86.4% and 33.0% recorded in June, respectively, while the 364-day came in at 207.0%, lower than the 371.3% recorded in the previous month. The yields on the 91-day and 182-day both declined by 0.1% points to 6.6% and 7.4%, respectively, from 6.7% and 7.5% in June, respectively, while the yield on the 364-day paper increased by 0.2% points to 9.0% from 8.8% in June. The Monetary Policy Committee (MPC) met on 24th July to review the prevailing macroeconomic conditions and decide on the direction of the Central Bank Rate (CBR). The MPC retained the prevailing monetary policy stance leaving the Central Bank Rate (CBR) unchanged at 9.0, which was in line with our expectations. The y/y inflation for the month of July rose to 6.3%, from 5.7% recorded in June, in line with our projections of a rise to 6.2%-6.6%, mainly due to the base effect;
During the month of July, the equities market was on a downward trend, with NASI, NSE 20 and NSE 25 declining by 0.9%, 0.2%, and 0.1%, respectively, taking their YTD performance to gains/(losses) of 6.5%, (7.3%), and 0.9%, respectively. During the week, Equity Group Holdings released their H1’2019 financial results, recording a 9.1% increase in core earnings per share to Kshs 3.2, from Kshs 2.6 in H1’2018;
During the month of July, there was private equity activity in the financial services sector, fundraising and education sector, with (i) Interswitch, a Nigeria-based payments firm that is owned 60.0% by Helios Investment Partners, announcing that it has hired advisors, including JPMorgan Chase & Co., Citigroup Inc. and Standard Bank Group Ltd to resurrect plans for a stock-market listing in London and Lagos later this year, (ii) Investment firm, Centum, through its real estate arm Centum Real Estate, signing a refinancing deal with Nedbank Corporate and Investment Bank (CIB), the Nedbank property finance division, and (iii) Investisseurs & Partenaires (I&P), a Sub-Saharan impact investing firm based in Paris, France, announcing plans to invest EUR 70.0 mn (Kshs 8.1 bn) in Africa’s education sector with the aim of addressing the challenges of access, equity, quality and adequacy of education in Africa;
During the month of July, four real estate sector reports were released, namely; (i) Quarterly Gross Domestic Product Report Q1'2019 by Kenya National Bureau of Statistics (KNBS), (ii) Status of the Built Environment Jan - Jun 2019 by Architectural Association of Kenya (AAK), (iii) Hass Consult Property Sales and Rental Index Q2’2019, and (iv) Hass Consult Land Price Index Q2'2019. In the residential sector, Indian development firm, Shapoorji Pallonji Real Estate (SPRE) and UK private equity investor-developer Actis, announced their plans to begin development of a 624-units, middle-class, residential development on a 4.5-acre parcel of land at the Garden City mixed-use development. In the retail sector, fast-food chain Big Square, and supermarkets, Naivas & Game Stores, opened retail outlets in Mountain View, Ongata Rongai and Kisumu, respectively;
T-bills & T-bonds Primary Auction
During the month of July, T-bill auctions recorded an oversubscription, with the overall subscription rate coming in at 134.8%, a rise from 131.7% recorded in the month of June 2019. The subscription rates for the 91-day and 182-day came in at 131.1%, and 64.0%, higher than the 86.4% and 33.0% registered in June, respectively, while the 364-day came in at 207.0%, lower than the 317.3% registered in the previous month. The yields on the 91-day and 182-day both declined by 0.1% points to 6.6% and 7.4%, respectively, from 6.7% and 7.5% in June, respectively, while the yield on the 364-day paper increased by 0.2% points to 9.0% from 8.8% in June. The T-bills acceptance rate came in at 95.6% during the month, compared to 99.3% recorded in June, with the government accepting a total of Kshs 123.6 bn of the Kshs 129.4 bn worth of bids received. The Central Bank remained disciplined in rejecting expensive bids in order to ensure stability of interest rates.
During the week, T-bills recorded an oversubscription, with the subscription rate coming in at 113.5%, up from 108.4% the previous week. The oversubscription is partly attributable to favorable liquidity in the money market during the week supported by government payments. The yield on the 91-day and 364-day papers increased by 0.1% points and 0.2% points, respectively, to 6.6% and 9.0% from 6.5% and 8.8% recorded the previous week, respectively, while the 182-day paper remained unchanged at 7.4%. The acceptance rate declined to 89.1% from 96.1%, recorded the previous week, with the government accepting Kshs 24.3 bn of the Kshs 27.2 bn bids received.
The 91-day T-bill is currently trading at a yield of 6.6%, which is below its 5-year average of 8.7%. 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 July, the government issued a 15-year tenor bond with issue number FXD 3/2019/15. The issue was oversubscribed with the performance rate coming in at 216.7%. The bond generated total bids of Kshs 86.6 bn, with the accepted yield coming in at 12.3%, and the government accepting Kshs 50.6 bn, an acceptance rate of 58.4%.
For the month of August, the government is set to issue a 10-year bond (FXD 3/2019/10) and re-open a 20-year bond (FXD 1/2019/20) for a total of Kshs 50.0 bn for budgetary support. The government has adopted an approach of a blended issue of a medium-tenor and long-tenor bond, in a bid to plug in the budget deficit while at the same time trying to reduce the maturity risk. The market is expected to maintain a bias towards the 10-year bond as per recent trends are mainly driven by the perception that risks may not be adequately priced on the longer end of the yield curve, which is relatively flat due to saturation of long-term bonds. We will give our bidding range in next week’s report.
In the money markets, 3-month bank placements ended the week at 8.8% (based on what we have been offered by various banks), 91-day T-bill at 6.5%, the average of Top 5 Money Market Funds at 10.1%, with Cytonn Money Market closing the week at an average yield of 11.0% per annum.
Secondary Bond Market:
The yields on government securities in the secondary market remained relatively stable during the month of July as the Central Bank of Kenya continued to reject expensive bids in the primary market. On a YTD basis, government securities on the secondary market have gained with yields declining across the board, which has, in turn, led to price appreciation.
Liquidity:
The average interbank rate declined to 2.3% during the month of July, from 3.1% in June, pointing to improved liquidity conditions in the money market supported by government payments, which offset tax payments. During the week, the average interbank rate remained stable at 2.5% from the previous week. The average interbank volumes increased by 2.6% points to Kshs 8.7 bn, from Kshs 8.5 bn recorded the previous week.
Kenya Eurobonds:
According to Reuters, the yield on the 10-year Eurobond issued in June 2014 declined by 0.8% points to 5.2% in July, from 5.9% in June 2019. The decline is attributable to increased demand for emerging market fixed-income securities in the wake of the pause by the US Fed on its three-year cycle of tightening its monetary policy, having lowered the Fed Rate in July for the 1st time since 2008 to a range of 2.0% - 2.25%, which has made returns from fixed income securities more attractive as highlighted in our H1’2019 SSA Eurobond Performance Note. During the week, the yield on the 10-year Eurobond increased by 0.2% points, to 5.2%, from 5.0% the previous week.
During the month, the yields on the 10-year and 30-year Eurobond issued in February 2018 declined by 0.7% points and 0.5% points to close at 6.5% and 7.8%, from 7.2% and 8.3% in June 2019, respectively. During the week, the yield on the 10-year Eurobond declined by 0.2% points to 5.2%, from 5.0% recorded in the previous week, while those of the 30-year Eurobond rose by 0.1% points to 8.0%, from 7.9% recorded in the previous week.
During the month, the yields on the newly issued dual-tranche Euro-bond with 7-years and 12-year tenors declined by 0.6% points and 0.7% points to 6.2% and 7.1%, from 6.8% and 7.8% recorded in June 2019, respectively. During the week, the yields on the 7-year and 12-year Eurobond increased by 0.2% points and 0.3% points to 6.3% and 7.3%, from 6.1% and 7.0% recorded in the previous week, respectively.
Kenya Shilling:
The Kenya Shilling depreciated by 1.4% points against the US Dollar during the month of July to Kshs 103.2, from Kshs 101.7 at the end of June. This was driven by increased dollar-demand from oil and merchandise importers. During the week, the Kenya Shilling appreciated by 0.8% against the US Dollar to close at Kshs 103.0, from Kshs 103.8 in the previous week, supported by inflows from diaspora remittances, which outweighed dollar demand from merchandise importers. The shilling also hit a 3-year low of Kshs 104.2, during the month partly driven by market uncertainty following the announcement that the Treasury Cabinet Secretary would be charged with financial misconduct. On an YTD basis, the shilling has depreciated by 2.4% against the US Dollar in comparison to the 1.3% appreciation in 2018. In our view, the shilling should remain relatively stable against the dollar in the short term, supported by:
Inflation:
The y/y inflation for the month of July rose to 6.3%, from 5.7% recorded in June, in line with our projections of a rise to 6.2%-6.6%, mainly due to the base effect. Month-on-month inflation, however, declined by (0.4%) which was attributable to:
A 0.2% increase was however recorded in the transport index on account of the increase in the pump price of petrol during the same period. There was also a 0.8% increase in the price of cigarettes. Housing, water, electricity, gas and other fuels’ index increased by 0.1% as a result of an increase in prices of electricity with the cost of 50KWh and 200 kWh of electricity increasing by 0.6% and 0.4%, on July 2019, respectively.
Major Inflation Changes in the Month of July 2019 | |||
Brand Commodity Group | Price Change m/m (July-19/Jun-19) | Price Change y/y (July-19/July-18) | Reason |
Food and Non-Alcoholic Beverages | (1.0%) | 8.5% | The m/m decline was due to a decline in prices of potatoes, sukuma wiki (kales), tomatoes, cabbages, and milk. |
Alcoholic Beverages, Tobacco and Narcotics | 0.8% | 9.6% | The m/m increase was due to an increase in the price of cigarettes. |
Housing, Water, Electricity, Gas and other Fuels | 0.1% | 4.1% | The m/m increase is due to an increase in prices of electricity. |
Overall Inflation | (0.4%) | 6.3% | The m/m decline was due to a 1.0% decrease in the food index which has a CPI weight of 36.0% |
Monetary Policy:
The Monetary Policy Committee (MPC) met on 24th July 2019 to review the prevailing macroeconomic conditions and decide on the direction of the Central Bank Rate (CBR). The MPC retained the prevailing monetary policy stance leaving the Central Bank Rate (CBR) unchanged at 9.0%, in line with our expectations citing that inflation expectations remained well anchored within the target range and that the economy was operating close to its potential. As such, the MPC concluded that the current policy stance was still appropriate, but noted that there was a need to remain vigilant on possible spillovers of recent food and fuel prices, the ongoing demonetization, and the increased uncertainties in the external environment.
We expect monetary policy to remain relatively stable in 2019, as the CBK awaits the direction of the discussion on the possible repeal or modification of the interest rate cap, which has weakened the transmission of monetary policy. As per the assessment by the Monetary Policy Committee in 2018, under the interest rate capping environment, monetary policy procedures bring about perverse outcomes. For instance, loosening the monetary policy stance by reducing the CBR in a bid to stimulate credit expansion in the current environment would lead to a lower adjustment in lending rates. As a result, individuals with credit risk above the capped rate would be shunned by banks, resulting in a contraction in private sector credit growth, a counteractive reaction to the intention of the looser monetary policy stance.
The Federal Reserve Bank (Fed) of the U.S through its Federal Open Market Committee (FOMC), has decided to lower its benchmark policy rate to the range of 2.0%-2.25% during its 31 July meeting, from 2.25%-2.50% in its 20 June meeting. The decision was based on expansion of economic activity, strong labor market conditions and inflation. The Fed also highlighted that overall inflation on a 12-month basis for the month ending June 2019 was at 1.6%, which is below the Fed’s target of 2.0%.
Monthly Highlights:
The Kenya National Bureau of Statistics (KNBS) released the Q1’2019 Gross Domestic Product (GDP) report indicating that the country’s economic activity experienced relatively slower growth, expanding by 5.6%, compared to the 6.5% growth recorded in Q1’2018, but in line with the 5-year average growth rate of 5.6%. The table below shows differences in y/y growth of major sectors of the economy, as we seek to look at sectoral performance in Q1’2019:
Sector | Contribution Q1'2018 | Contribution Q1'2019 | Q1'2018 Growth | Q1'2019 Growth | Weighted Growth Rate Q1' 2018 | Weighted Growth Rate Q1'2019 | Variance of Growth (% Points) |
Agriculture and Forestry | 26.1% | 26.3% | 7.5% | 5.3% | 2.0% | 1.4% | (2.2%) |
Taxes on Products | 10.3% | 10.2% | 5.7% | 5.3% | 0.6% | 0.5% | (0.4%) |
Manufacturing | 9.9% | 9.7% | 3.8% | 3.2% | 0.4% | 0.3% | (0.6%) |
Real Estate | 8.2% | 8.1% | 5.3% | 4.2% | 0.4% | 0.3% | (1.1%) |
Wholesale and Retail Trade | 6.8% | 6.7% | 5.9% | 5.3% | 0.4% | 0.4% | (0.6%) |
Education | 6.8% | 6.7% | 4.9% | 5.4% | 0.3% | 0.4% | 0.4% |
Transport and Storage | 6.1% | 6.2% | 8.5% | 6.7% | 0.5% | 0.4% | (1.8%) |
Financial & Insurance | 5.9% | 5.9% | 5.2% | 5.0% | 0.3% | 0.3% | (0.2%) |
Construction | 5.0% | 5.0% | 6.6% | 5.6% | 0.3% | 0.3% | (1.0%) |
Information and Communication | 4.0% | 4.2% | 12.5% | 10.5% | 0.5% | 0.4% | (2.1%) |
Public Administration | 3.6% | 3.6% | 6.2% | 6.5% | 0.2% | 0.2% | 0.3% |
Electricity and Water Supply | 2.5% | 2.5% | 6.5% | 6.1% | 0.2% | 0.2% | (0.5%) |
Professional Administration | 2.1% | 2.0% | 4.0% | 4.8% | 0.1% | 0.1% | 0.8% |
Health | 1.5% | 1.5% | 4.6% | 4.0% | 0.1% | 0.1% | (0.6%) |
Accommodation & Food Services | 1.4% | 1.5% | 13.1% | 10.1% | 0.2% | 0.1% | (3.0%) |
Other Services | 1.2% | 1.2% | 4.2% | 3.2% | 0.1% | 0.0% | (1.1%) |
Mining and Quarrying | 1.1% | 1.1% | 2.4% | 2.2% | 0.0% | 0.0% | (0.2%) |
Financial Services Indirectly Measured | (2.4%) | (2.3%) | 0.2% | (3.5%) | (0.0%) | 0.1% | (3.7%) |
GDP at Market Prices | 100.0% | 100.0% | 6.5% | 5.6% | 6.5% | 5.6% | (1.0%) |
We expect the 2019 GDP growth to slow down to a range of 5.7% - 5.9% from 6.3% in 2018, due to the delayed long rains with most parts of the country expected to experience depressed rainfall that is set to lead to a decline in agricultural production. Consequently, this will have an adverse effect on the manufacturing sector, as the major growth driver in the sector is agro-processing. For a more comprehensive analysis, see the Q1’2019 Quarterly GDP Review and Outlook Note.
Rates in the fixed income market have remained relatively stable as the government rejects expensive bids. A budget deficit is likely to result from depressed revenue collection with the revenue target for FY’ 2019/2020 at Kshs 2.1 tn, creating uncertainty in the interest rate environment as additional borrowing from the domestic market goes to plug the deficit. Despite this, we do not expect upward pressure on interest rate environment as additional borrowing for 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.
Markets
During the month of July, the equities market was on a downward trend, with NASI, NSE 20 and NSE 25 declining by 0.9%, 0.2%, and 0.1%, respectively. The decline recorded in NASI was driven by declines in large-cap stocks such as NIC Group, Diamond Trust Bank, and Safaricom, whose declines of 5.7%, 2.6%, and 2.1%, respectively, outweighed the gains made by KCB Group, BAT, Equity Group Holdings and EABL of 4.6%, 3.0%, 2.7%, and 2.5%, respectively. For this week, the market was on a downward trend, with NASI, NSE 20 and NSE 25 declining by 0.4%, 2.5%, and 0.7%, respectively, taking their YTD performance to gains/(losses) of 5.6%, (8.7%) and 0.9%, respectively. The decline in NASI was largely due to losses recorded in large-cap counters such as Bamburi and NIC Group, which recorded losses of 7.2% and 1.7%, respectively.
Equities turnover increased by 4.6% during the month to USD 108.3 mn, from USD 103.6 mn in June 2019. Foreign investors remained net sellers for the month, with a net selling position of USD 20.6 mn, a 133.3% increase from June’s net selling position of USD 8.8 mn. For this week, equities turnover decreased by 8.9% to USD 21.3 mn, from USD 23.4 mn the previous week, bringing the year to date (YTD) turnover to USD 882.8 mn. Foreign investors were net buyers for the week, with a net buying position of USD 2.1 mn, as compared to last week’s net selling position of USD 4.3 mn.
The market is currently trading at a price to earnings ratio (P/E) of 11.5x, 13.5% below the historical average of 13.3x, and a dividend yield of 5.3%, 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 11.5x is 18.6% above the most recent trough valuation of 9.7x experienced in the first week of February 2017, and 38.6% 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.
Earnings Releases
Equity Group Holdings released their H1’2019 financial results, recording a 9.1% increase in core earnings per share to Kshs 3.2 from Kshs 2.6 in H1’2018, faster than our projections of a 7.3% increase to Kshs 3.1. The performance was driven by a 14.8% increase in total operating income, despite the 19.4% increase in total operating expenses. The variance in core earnings per share growth against our expectations was largely due to the faster 14.8% growth in total operating income to Kshs 37.6 bn from Kshs 32.8 bn in H1’2018, which outpaced our expectation of an 8.4% increase to Kshs 35.5 bn. Highlights of the performance from H1’2018 to H1’2019 include:
Key Take-Outs:
For more information, please see our Equity Group Holdings Earnings Note.
Monthly Highlights
Barclays Bank of Kenya announced that three of its branches namely, Bamburi, Maragua and Supplies, were up for sale, valued at Kshs 65.0 mn. This is in line with the lender’s strategy of deepening digital channels to accommodate the changing pattern of customer preferences towards alternate channels. Previously, in FY’2017, the lender closed 13 branches as part of its consolidation strategy and drive to achieve operational efficiencies. For a more detailed analysis, please see our Cytonn Weekly #27/2019.
The Kenya Bankers Association (KBA) released the State of Banking Industry Report 2019. The report gives the various factors that shaped the banking sector’s performance in 2018, the emerging trends, and the outlook for the sector going forward. For more information please see more detailed analysis here Cytonn Weekly #28/2019
KCB Group released the offer document for the intended 100% acquisition of the National Bank of Kenya (NBK), and timelines for the acquisition. The expected timelines are as follows:
For more details, please see our Cytonn Weekly #28/2019
The Banking Amendment Bill was tabled in the National Assembly. The Bill seeks to seal the loopholes in the wordings of the Banking (Amendment) Act 2015. In March 2019, the High Court suspended the Banking (Amendment) Act 2015 in a ruling that declared Section 33B (1) and (2) of the Banking Act unconstitutional, and gave the National Assembly one year to amend the anomalies, failure to which will mean a reversion to a free-floating interest rates regime. For more details, please see our Cytonn Weekly #30/2019
Universe of Coverage
Banks | Price as at 26/07/2019 | Price as at 02/08/2019 | m/m change | w/w change | YTD Change | Target Price* | Upside/ Downside** | P/TBv Multiple | Recommendation |
Diamond Trust Bank | 114 | 114 | (3.2%) | 0.0% | (27.2%) | 228.4 | 96.2% | 0.6x | Buy |
CRDB | 105.0 | 100.0 | (9.1%) | (4.8%) | (33.3%) | 207.7 | 88.8% | 0.3x | Buy |
UBA Bank | 5.5 | 5.9 | (3.2%) | 7.3% | (23.4%) | 10.7 | 87.0% | 0.4x | Buy |
Zenith Bank | 18.5 | 18.4 | (7.6%) | (0.5%) | (20.4%) | 33.3 | 83.0% | 0.8x | Buy |
KCB Group*** | 39.8 | 40.0 | 4.6% | 0.6% | 6.8% | 60.4 | 66.7% | 1.1x | Buy |
GCB Bank | 5.0 | 5.0 | 1.0% | 1.0% | 8.7% | 7.7 | 64.2% | 1.2x | Buy |
I&M Holdings | 53.0 | 52.0 | (5.9%) | (1.9%) | 22.4% | 81.5 | 54.9% | 1.0x | Buy |
Access Bank | 6.5 | 6.2 | 0.8% | (4.6%) | (8.8%) | 9.5 | 52.6% | 0.4x | Buy |
Co-operative Bank | 12.1 | 12.0 | (3.6%) | (1.2%) | (16.4%) | 17.1 | 50.5% | 1.0x | Buy |
Equity Group | 40.3 | 40.3 | 3.2% | 0.0% | 15.5% | 53.7 | 42.7% | 1.7x | Buy |
NIC Group | 29.8 | 29.3 | (3.3%) | (1.7%) | 5.2% | 42.5 | 42.3% | 0.6x | Buy |
CAL Bank | 1.0 | 1.0 | 1.0% | 1.0% | 1.0% | 1.4 | 40.0% | 0.8x | Buy |
Barclays Bank | 10.5 | 10.7 | 1.9% | 2.4% | (2.3%) | 12.8 | 32.7% | 1.3x | Buy |
Stanbic Bank Uganda | 29.0 | 29.0 | 0.0% | 0.0% | (6.5%) | 36.3 | 29.1% | 2.1x | Buy |
SBM Holdings | 5.5 | 5.5 | (2.2%) | 0.7% | (7.7%) | 6.6 | 23.0% | 0.8x | Buy |
Guaranty Trust Bank | 28.7 | 27.9 | (13.7%) | (2.6%) | (19.0%) | 37.1 | 21.4% | 1.7x | Buy |
Stanbic Holdings | 98.5 | 98.5 | (0.5%) | 0.0% | 8.5% | 113.6 | 20.6% | 1.1x | Buy |
Ecobank | 8.5 | 8.5 | 0.0% | 0.0% | 13.3% | 10.7 | 19.2% | 1.9x | Accumulate |
Union Bank Plc | 6.4 | 7.0 | 0.0% | 9.4% | 25.0% | 8.2 | 16.4% | 0.7x | Accumulate |
Standard Chartered | 196.0 | 197.0 | 0.6% | 0.5% | 1.3% | 200.6 | 9.5% | 1.4x | Hold |
Bank of Kigali | 274.0 | 275.0 | 0.0% | 0.4% | (8.3%) | 299.9 | 8.5% | 1.5x | Hold |
FBN Holdings | 5.6 | 5.6 | (13.0%) | 0.0% | (29.6%) | 6.6 | 5.7% | 0.3x | Hold |
Bank of Baroda | 128.0 | 128.0 | (0.6%) | 0.0% | (8.6%) | 130.6 | 3.4% | 1.1x | Lighten |
Standard Chartered | 19.0 | 19.0 | 0.0% | 0.0% | (9.5%) | 19.5 | 2.3% | 2.4x | Lighten |
National Bank | 3.9 | 3.9 | (7.0%) | 0.0% | (27.6%) | 3.9 | (4.8%) | 0.2x | Sell |
Stanbic IBTC Holdings | 38.1 | 38.1 | (5.1%) | 0.0% | (20.5%) | 37.0 | (6.5%) | 2.0x | Sell |
Ecobank Transnational | 8.5 | 7.6 | (25.5%) | (10.6%) | (55.3%) | 9.3 | (15.6%) | 0.3x | Sell |
HF Group | 4.0 | 4.1 | 2.2% | 1.3% | (26.9%) | 2.9 | (27.7%) | 0.2x | Sell |
*Target Price as per Cytonn Analyst estimates **Upside / (Downside) is adjusted for Dividend Yield ***Banks in which Cytonn and/or its affiliates are invested in ****Stock prices indicated in respective country currencies |
Below is a summary of our SSA universe of coverage:
We are “Positive” on equities for investors as the sustained price declines have 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 July, there was private equity activity in the financial services sector, fundraising, and education sector:
Financial Services
Fundraising
Education
During the week, the Capital Markets Authority (CMA) admitted three Fintech firms into the Regulatory Sandbox to test their innovative solutions. The Regulatory Sandbox is a tailored regulatory environment meant for conducting limited scale, live tests of innovative products, solutions, and services. This initiative by the CMA seeks to provide a conducive environment for the development of a variety of innovative emerging technologies and business models that have the potential of contributing towards the deepening and broadening of the capital markets in the country. Another objective of the initiative is to enable innovative products and services to be deployed and tested in a live environment before their release to the open markets. This allows the authority to understand emerging technologies and come up with regulations that promote investor empowerment and protection.
The firms admitted to the program are Innova Limited, who have come up with a cloud-based data analytics platform meant to serve investors, fund managers, custodian banks, actuaries, pension administrators and regulators, and Pezesha, who have an internet-based crowd-funding platform for SMEs. The authority highlights its intentions to treat all non-public information received in connection with the regulatory Sandbox as confidential and proprietary to the concerned firms, hence, the third firm chose to remain anonymous. The admission of the three firms is solely based on meeting requirements published under the Regulatory Sandbox Policy Guidance Note.
In our view, the CMA has taken a proactive approach in terms of regulation with the Regulatory Sandbox. This is positive for the Fintech sector since the regulations put in place are intended to promote investor protection and the growth of the sector, which has had a considerable amount of activity throughout the year.
During the week, mobile lender, Branch International, through Barium Capital, announced the issuance of its fourth commercial paper and full repayment of its previous issue worth Kshs 500.0 mn. Barium Capital, which is a wholly-owned subsidiary of Centum PLC, offers transaction advisory services specializing in capital raising and mergers and acquisition advisory services. As of 2018, the company’s debt was 1.9 times the company’s equity. To date, the firm has been able to raise Kshs 16.5 bn from the private capital market.
Since its launch in 2015, Branch has become one of the first technology companies that have been able to successfully raise debt in both the local market and international markets. In international markets, the company raised Kshs 17.0 bn earlier this year from investors such as the Foundation Capital, Visa, International Finance Corporation, Trinity Ventures, and Andreessen Horowitz. As for local markets; (i) in 2017, they issued commercial papers worth Kshs 200.0 mn, (ii) in 2018, they issued commercial papers worth Kshs 350.0 mn, and (iii) in May 2019, they issued commercial papers worth Kshs 500.0 mn. These funds will be used to expand their services in Kenya where they have disbursed more than Kshs 30.0 bn since its launch.
In our view, the Fintech sector in the country is positioned for growth aided by the CMA’s intentions to spur growth in the sector and considering the recent performance of firms such as Branch International.
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, real estate saw overall increased activity in the residential sector and retail sectors, while the commercial office sector and other themes remained sluggish.
Coverage | Report | Key Take-outs |
Real Estate & Infrastructure |
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General Real Estate | Status of The Built Environment Jan-Jun 2018 (AAK noted that the report will be published on a later date) |
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Residential Sector |
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Land Sector |
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Based on the above real estate research reports, we retain our neutral outlook for the real estate sector mainly constrained by commercial real estate space surplus in the market, inaccessibility and unaffordability of off-take financing and slow credit growth at 3.4% as at February 2019, compared to a 5-year average of 12.0%. The sector, however, exhibits pockets of value in select sectors driven by; (i) the improving macroeconomic environment, (ii) continued National Government support for the affordable housing initiative, and (iii) the continued infrastructural improvement.
During the month, activity in the residential sector was mostly focused on the Affordable Housing Initiative (AHI) as shown below:
In the mid-end segment, Cytonn Real Estate, the development affiliate of Cytonn Investments, handed over the first phase of its Ruaka project, The Alma, upon completion and full uptake of the 16 one-bedrooms, 70 two-bedroom and 27 three-bedroom units selling at Kshs 6.3 mn, Kshs 9.9 mn and Kshs 12.9 mn, respectively. For more information, see our Cytonn Weekly #29/2019.
We expect the residential sector to continue recording activities owing to; (i) improved business environment, which is bound to attract foreign investors, (ii) improved infrastructure, and, (iii) the National Government’s commitment towards the Affordable Housing Initiative
In the commercial sector, Kenya Ports Authority (KPA) announced plans to put up an office building, to be located in Mombasa. According to the state agency, the building will have a total built-up area of 75,000 SQM. The KPA Office Tower Complex, which is currently at the tendering process, is set to have 1,000 parking bays covering 18,000 SQM, 12,000 SQM of conference facilities, 15,000 SQM of commercial spaces, 12,000 SQM lettable office space while KPA will occupy 9,000 SQM. For more information, see our Cytonn Weekly #29/2019.
Kenya’s retail sector was vibrant during the month, attracting interest from the renowned international retailers as well as the robust expansion of local retailers as shown below:
With the increased commercial space supply in the Nairobi Metropolitan Area (NMA), we expect declined activities in the sector, with developers expected to shift focus to counties such as Mombasa, boosted by ongoing infrastructural developments and the national economic expansion, which has a spill-over effect as companies expand to the nation’s largest cities including Mombasa, hence increasing demand for commercial real estate.
Nairobi City Council announced that it would cap the new land rates at 1.0% of the current value of the plots as opposed to using the 1980 valuation, where property owners pay land rates at 25.0% of the unimproved site value. The specific rates will be based on the current value of undeveloped land and the new fees will be effective in January 2020. For more information, see our Cytonn Weekly #30/2019.
Private equity firm Fusion Capital has partnered with real estate firm, Optiven Group to sell 70 prime residential plots located on Gatanga Road, Thika (the details are yet to be disclosed). This follows a similar partnership last year when two parties partnered to sell a 100 -acre land development called Amani Ridge in Ruiru, Kiambu County. Thika market has attracted many investors supported by (i) increased housing demand in satellite towns driven by increased urbanization rate at 4.4% against a global average of 2.1%, (ii) high capital appreciation with land prices in the area growing by a 7-year CAGR of 10.7% p.a, and (iii) infrastructural development in the area such as connectivity via the Thika- Nairobi highway and a railway station providing access to the 131km of railway line available in the county.
Other highlights during the month;
Stanlib Fahari I-REIT released their H1’2019 earnings, registering a 16.2% growth in earnings to Kshs 0.42 per unit, from Kshs 0.36 per unit in H1’2018. Total income rose by 10.8% to Kshs 193.5 mn, from Kshs 174.6 mn in H1’2018, while net profit grew by 16.2% to Kshs 76.4 mn, from Kshs 65.8 mn in H1’2018. The performance was driven by a 26.3% growth in rental income to Kshs 170.7 mn, from Kshs 135.1 mn in H1’2018, as the REIT positively benefitted from rental income contribution as a result of increased occupancies by its properties, including the Grade A office, 67 Gitanga Place, which was acquired in May 2018. The REIT did not recommend an interim distribution of dividends for the period ended 30th June 2019. It was noted that a full distribution will be declared in line with the requirements of the REITs Regulations to distribute a minimum of 80% of distributable earnings within four months after the end of the financial year, which ends on 31st December 2019.
We project a FY’2019 dividend yield of 7.9%, assuming the market maintains an average price of Kshs 9.2 per unit and the dividend payout ratio remains at the 3-year average (2016 -2018) of 96.5%, with the dividend yield in line with the commercial real estate market average of 8.0%, with 8.2% rental yield for retail space and 7.9% yield for office space in H1’2019. However, the expected high yield is attributable to its declining stock price closing at Kshs 9.2 per unit as at 28th June 2019 in comparison to Kshs 11.3 as at 29th June 2018, representing an 18.6% loss of value.
For a more comprehensive analysis on the REIT H1’2019 performance, see our Stanlib Fahari I-REIT Earnings Note - 2019.
On the bourse, the REIT’s performance has been on a decline since its listing at Kshs 20.0 in November 2015. Stanlib Fahari I-REIT share price declined by 2.4% to close at Kshs 8.98 per share at the end of July, from Kshs 9.2 per share at the end of June. On average, the REIT traded at Kshs 8.81 per share in July, a 6.3% decline from an average of Kshs 9.4 per share in H1’ 2019. The REIT closed the week at Kshs 8.54 per share. The instrument has continued to trade in low prices and volumes, due to; (i) opacity of the exact returns from the underlying assets, (ii) inadequate investor knowledge, and (iii) lack of institutional support for REITs.
Our outlook for Stanlib’s listed real estate is neutral supported by favorable projected dividend yield, in line with the real estate performance.
We expect the real estate sector to continue recording increased activities in the residential, retail and listed real estate sectors supported by the National Government’s commitment to the Affordable Housing initiative, the continued demand for commercial space in prime locations and increasing demand for alternative sources of capital in the real estate industry.
Disclaimer: 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.