By Research Team, Nov 15, 2020
During the week, T-bills were oversubscribed, with the overall subscription rate coming in at 126.6%, up from 115.9% the previous week, mainly driven by the high liquidity in the money markets. The highest subscription rate was in the 91-day paper, which came in at 220.3%, up from 56.9% recorded the previous week. The subscription for the 364-day paper dropped to 135.4% from 210.0%, while that of the 182-day paper increased to 80.3% from 45.5% recorded the previous week. The yields on all the three papers, 91-day, 182-day and 364-day increased marginally by 1.0 bps, 4.0 bps and 5.0 bps to 6.7%, 7.1% and 8.0%, respectively;
During the week, the equities market was on an upward trajectory, with NASI, NSE 20 and NSE 25 recording gains of 1.9%, 1.1% and 2.5% respectively, taking their YTD performance to losses of 32.6%, 13.5% and 20.0%, for NSE 20, NASI and NSE 25 respectively. The equities market performance was driven by gains recorded by EABL, KCB Group, Equity Group and BAT, which gained by 5.5%, 5.3%, 5.1% and 4.3%, respectively. The gains were however weighed down by losses being recorded by Cooperative Bank and Standard Chartered Bank of 1.7% and 0.5%, respectively. During the week, KCB Group and Equity Group Holdings released their Q3’2020 financial results which showed a general decline in profitability;
During the week, the Kenya Bankers Association released the Housing Price Index, November 2020 report, highlighting that house prices contracted by 0.1% in Q3’2020, a marginal improvement from the 0.2% contraction in Q2’2020. Hass Consult also released the Q3’2020 House Price Index indicating that house prices increased by 0.3% over the quarter and 2.3% on an annual basis and the Q3’2020 Land Price Index which highlighted that land prices softened recording a 0.9% decline over the quarter in the Nairobi suburbs while satellite towns recorded a 0.1% drop. In the residential sector, Centum Real Estate launched a Kshs 2.0 bn housing project, dubbed Loft Residences in Gigiri. Acorn Group, a Kenya-based real estate developer, announced that it is set to build two hostels next to the University of Nairobi Chiromo Campus to host approximately 3,000 students. In the retail sector, Quickmart supermarket opened an outlet in Nanyuki Mall, Nanyuki town, as the anchor tenant taking up the space left behind by the struggling retailer, Tuskys. In the hospitality sector, Kenya was voted as Africa’s leading tourist destination in the World Travel Awards, supported by the epic savannah landscapes, wildlife, beaches, and lakes among other tourist attraction destinations;
Following the release of Unit Trust Fund Managers’ results for the first half of 2020, we examine the performance of Unit Trust Funds, with a key focus on Money Market Funds, which is the most popular Unit Trust Funds investment with a market share of 89.6% as at the end of Q2’2020, a rise from 88.0% in Q1’2020. During the period of review, Unit Trust’s Assets Under Management (AUM) grew by 15.1% to Kshs 88.1 bn, from Kshs 76.5 bn as at Q1’2020. Additionally, as at the end of Q2’2020, there were 23 approved collective investment schemes made up of 93 funds in Kenya. Out of the 23 however, only 19 were currently active while 4 were inactive;
Money Markets, T-Bills & T-Bonds Primary Auction:
During the week, T-bills were oversubscribed, with the overall subscription rate coming in at 126.6%, up from 115.9% the previous week, mainly driven by the high liquidity in the money markets as evidenced by the 7.9% increase in interbank volumes to Kshs 8.2 bn during the week, from Kshs 7.6 bn recorded the previous week. The highest subscription rate was in the 91-day paper, which came in at 220.3%, up from 56.9% recorded the previous week. The subscription rate for the 364-day paper dropped to 135.4% from 210.0%, while that of the 182-day paper increased to 80.3% from 45.5% recorded the previous week. The yields on all the three papers, 91-day, 182-day and 364-day increased marginally by 1.0 bps, 4.0 bps and 5.0 bps to 6.7%, 7.1% and 8.0%, respectively. The acceptance rate declined to 97.7%, from 99.2% recorded the previous week, with the government accepting bids worth Kshs 29.7 bn out of the Kshs 30.4 bn worth of bids received.
Additionally, there was low demand for this month’s tap sale for the 25-year bond, FXD1/2018/25, with the overall subscription rate coming in at 39.8%. Investors seemed to prefer shorter dated papers as evidenced by the high subscription rate of this week’s treasury bills of 126.6%. The government accepted Kshs 7.9 bn out of the Kshs 8.0 bn worth of bids received, representing an acceptance rate of 99.3%, which can be attributed to the undersubscription. The allocated average rate for accepted bids was 13.5% while the coupon rate for the bond is 13.4%.
In the money markets, 3-month bank placements ended the week at 7.2% (based on what we have been offered by various banks), while the yield on the 91-day increased marginally by 0.01% points to close at 6.7%. The average yield of the Top 5 Money Market Funds increased by 0.1% points to 10.1% from 10.0% recorded the previous week. The yield on the Cytonn Money Market Fund remained unchanged at 10.5%, similar to what was recorded the previous week.
Liquidity:
Liquidity in the money markets increased during the week, with the average interbank rate declining by 0.5% points to 2.9%, from the 3.3% recorded the previous week. This was supported by government payments, which partly offset tax receipts. The average interbank volumes increased by 7.9% to Kshs 8.2 bn from Kshs 7.6 bn, as recorded the previous week. According to the Central Bank of Kenya’s weekly bulletin released on 13th November 2020, commercial banks’ excess reserves came in at Kshs 9.8 bn in relation to the 4.25% Cash Reserve Ratio.
Kenya Eurobonds:
During the week, the yields on all Eurobonds remained unchanged with only the 7-year bond issued in 2019 increasing by 0.1% points. According to Reuters, the yield on the 10-year Eurobond issued in June 2014 remained unchanged closing the week at 4.7%, as was recorded the previous week.
During the week, the yields on the 10-year and 30-year Eurobonds, issued in 2018, remained unchanged during the week closing at 6.1% and 7.7%, as was recorded the previous week.
During the week, the yields on the 2019 dual-tranche Eurobonds remained relatively stable, with the 7-year Eurobond increasing marginally by 0.1% points to 5.7%, from 5.6% recorded last week, while the 12-year Eurobond remained unchanged closing at 6.9%, as was recorded the previous week.
Kenya Shilling:
During the week, the Kenyan shilling marginally depreciated against the US dollar by 0.2% to Kshs 109.1 from Kshs 108.9, mainly attributable to the persistent dollar importer demand. On an YTD basis, the shilling has depreciated by 7.7% against the dollar, in comparison to the 0.5% appreciation in 2019. Some of the challenges facing the currency include:
However, in the short term, the shilling is expected to be supported by:
Rates in the fixed income market have remained relatively stable due to the high liquidity in the money markets, coupled with the discipline by the Central Bank as they reject expensive bids. The government is 76.8% ahead of its prorated borrowing target of Kshs 130.9 bn having borrowed Kshs 231.5 bn. In our view, due to the current subdued economic performance brought about by the effects of the COVID-19 pandemic, the government will record a shortfall in revenue collection with the target having been set at Kshs 1.9 tn for FY’2020/2021 thus leading to a larger budget deficit than the projected 7.5% of GDP, ultimately creating uncertainty in the interest rate environment as additional borrowing from the domestic market may be required to plug the deficit. Owing to this uncertain environment, our view is that investors should be biased towards short-term to medium-term fixed income securities to reduce duration risk.
During the week, the equities market was on an upward trajectory, with NASI, NSE 20 and NSE 25 recording gains of 1.9%, 1.1% and 2.5% respectively, taking their YTD performance to losses of 13.5%, 20.0% and 32.6%, for NASI, NSE 25 and NSE 20 respectively. The equities market performance was driven by gains recorded by EABL, KCB Group, Equity Group and BAT of 5.5%, 5.3%, 5.1% and 4.3%, respectively. The gains were however weighed down by losses being recorded by Cooperative Bank and Standard Chartered Bank of 1.7% and 0.5%, respectively.
Equities turnover declined by 33.9% during the week to USD 19.0 mn, from USD 28.8 mn recorded the previous week, taking the YTD turnover to USD 1.3 bn. Foreign investors remained net sellers during the week, with a net selling position of USD 0.1 mn, from a net selling position of USD 11.1 mn recorded the previous week, taking the YTD net selling position to USD 278.0 mn.
The market is currently trading at a price to earnings ratio (P/E) of 10.0x, 22.8% below the 11-year historical average of 13.0x. The average dividend yield is currently at 4.9%, 0.9% points above the historical average of 4.0%.
With the market trading at valuations below the historical average, we believe there are pockets of value in the market for investors with higher risk tolerance and are willing to wait out the pandemic. The current P/E valuation of 10.0x is 30.0% above the most recent valuation trough of 7.7x experienced in the first week of August 2020. The charts below indicate the historical P/E and dividend yields of the market.
Earnings Releases:
During the week, KCB Group and Equity Group Holdings released their Q3’2020 financial results. Below is a summary of their performance
KCB Group Q3’2020 Key Highlights |
|||
Balance Sheet |
|||
Balance Sheet Items |
Q3’2019 (Kshs bn) |
Q3’2020 (Kshs bn) |
y/y change |
Government Securities |
128.5 |
236.2 |
83.9% |
Net Loans and Advances |
486.4 |
577.5 |
18.7% |
Total Assets |
764.3 |
972.0 |
27.2% |
Customer Deposits |
586.7 |
772.7 |
31.7% |
Deposits per Branch |
2.3 |
2.2 |
(5.6%) |
Total Liabilities |
643.1 |
836.1 |
30.0% |
Shareholders’ Funds |
121.2 |
135.9 |
12.1% |
Income Statement |
|||
Income Statement Items |
Q3’2019 (Kshs bn) |
Q3’2020 (Kshs bn) |
y/y change |
Net Interest Income |
38.7 |
47.9 |
23.7% |
Net non-Interest Income |
21.0 |
21.3 |
1.5% |
Total Operating income |
59.7 |
69.1 |
15.9% |
Loan Loss provision |
(5.8) |
(20.0) |
242.5% |
Total Operating expenses |
(32.5) |
(52.0) |
60.1% |
Profit before tax |
27.2 |
17.1 |
(36.9%) |
Profit after tax |
19.2 |
10.9 |
(43.2%) |
Core EPS |
6.0 |
3.4 |
(43.2%) |
Key Ratios |
|||
Ratios |
Q3’2019 |
Q3’2020 |
% point change |
Yield on Interest Earning Assets |
10.5% |
10.3% |
(0.2%) |
Cost of Funding |
2.9% |
2.6% |
(0.3%) |
Net Interest Margin |
7.8% |
7.8% |
0.0% |
Non-Performing Loans (NPL) Ratio |
8.3% |
15.3% |
7.0% |
NPL Coverage |
56.5% |
58.5% |
2.0% |
Cost to Income with LLP |
54.4% |
75.2% |
20.8% |
Loan to Deposit Ratio |
82.9% |
74.7% |
(8.2%) |
Cost to Income Without LLP |
44.7% |
46.3% |
1.6% |
Return on Average Assets |
3.5% |
1.9% |
(1.6%) |
Return on Average Equity |
22.2% |
13.1% |
(9.1%) |
Key take-outs from the earnings release include;
For a comprehensive analysis, please see our KCB Group Q3’2020 Earnings Note
Equity Group Q3’2020 Key Highlights |
|||
Balance Sheet |
|||
Balance Sheet Items |
Q3’2019 (Kshs bn) |
Q3’2020 (Kshs bn) |
y/y change |
Government Securities |
135.1 |
185.3 |
37.2% |
Net Loans and Advances |
348.9 |
453.9 |
30.1% |
Total Assets |
677.1 |
933.9 |
37.9% |
Customer Deposits |
478.1 |
691.0 |
44.5% |
Deposits per Branch |
1.6 |
2.3 |
43.8% |
Total Liabilities |
568.4 |
796.3 |
40.1% |
Shareholders’ Funds |
107.7 |
130.7 |
21.4% |
Income Statement |
|||
Income Statement Items |
Q3’2019 (Kshs bn) |
Q3’2020 (Kshs bn) |
y/y change |
Net Interest Income |
32.3 |
39.3 |
21.8% |
Net non-Interest Income |
22.5 |
24.8 |
10.1% |
Total Operating income |
54.8 |
64.1 |
17.0% |
Loan Loss provision |
(1.9) |
(14.8) |
686.1% |
Total Operating expenses |
(30.0) |
(45.3) |
50.7% |
Profit before tax |
24.8 |
19.8 |
(20.3%) |
Profit after tax |
17.5 |
15.0 |
(13.9%) |
Core EPS |
4.6 |
4.0 |
(13.9%) |
Key Ratios |
|||
Ratios |
Q3’2019 |
Q3’2020 |
% point change |
Yield on Interest Earning Assets |
10.9% |
10.1% |
(0.8%) |
Cost of Funding |
2.7% |
2.6% |
(0.1%) |
Net Interest Margin |
8.4% |
7.6% |
(0.8%) |
Non-Performing Loans (NPL) Ratio |
8.4% |
10.8% |
2.4% |
NPL Coverage |
45.8% |
52.0% |
6.2% |
Cost to Income with LLP |
54.8% |
70.6% |
15.8% |
Loan to Deposit Ratio |
73.0% |
65.7% |
(7.3%) |
Cost to Income Without LLP |
51.4% |
47.6% |
(3.8%) |
Return on Average Assets |
3.5% |
2.5% |
(1.0%) |
Return on Average Equity |
21.7% |
16.9% |
(4.8%) |
Key take-outs from the earnings release include;
For a comprehensive analysis, please see our Equity Group Q3’2020 Earnings Note
The table below highlights the performance of the banks that have released so far, showing the performance using several metrics, and the key take-outs of the performance.
Bank |
Core EPS Growth |
Interest Income Growth |
Interest Expense Growth |
Net Interest Income Growth |
Net Interest Margin |
Non-Funded Income Growth |
NFI to Total Operating Income |
Growth in Total Fees & Commissions |
Deposit Growth |
Growth in Government Securities |
Loan to Deposit Ratio |
Loan Growth |
Return on Average Equity |
|
KCB |
(43.2%) |
23.0% |
20.8% |
23.7% |
7.8% |
1.5% |
30.8% |
(14.2%) |
31.7% |
83.9% |
74.7% |
18.7% |
13.1% |
|
Equity |
(13.9%) |
21.7% |
21.6% |
21.8% |
7.6% |
10.1% |
38.7% |
2.1% |
44.5% |
37.2% |
65.7% |
30.1% |
16.9% |
|
Q3'20 Mkt Weighted Average* |
(27.5%) |
22.3% |
21.2% |
22.7% |
7.7% |
6.1% |
35.0% |
(5.5%) |
38.6% |
58.9% |
69.9% |
24.8% |
15.1% |
|
Q3'19Mkt Weighted Average** |
8.7% |
4.5% |
4.3% |
4.9% |
7.7% |
15.8% |
37.9% |
22.6% |
11.0% |
3.3% |
75.7% |
11.6% |
19.3% |
|
*Market-cap-weighted as at 13/11/2020 |
||||||||||||||
**Market-cap-weighted as at 29/11/2019 |
Key takeaways from the table above include:
Universe of Coverage:
Company |
Price at 06/11/2020 |
Price at 13/11/2020 |
w/w change |
YTD Change |
Year Open |
Target Price* |
Dividend Yield |
Upside/ Downside** |
P/TBv Multiple |
Recommendation |
Diamond Trust Bank*** |
61.0 |
63.0 |
3.3% |
(42.2%) |
109.0 |
119.4 |
4.3% |
93.8% |
0.3x |
Buy |
Kenya Reinsurance |
2.0 |
2.2 |
7.4% |
(28.4%) |
3.0 |
4.0 |
5.1% |
89.4% |
0.2x |
Buy |
Sanlam |
12.8 |
12.0 |
(5.9%) |
(30.2%) |
17.2 |
18.4 |
0.0% |
53.3% |
1.2x |
Buy |
NCBA*** |
22.0 |
22.0 |
0.2% |
(40.3%) |
36.9 |
30.7 |
1.1% |
40.7% |
0.6x |
Buy |
I&M Holdings*** |
43.2 |
43.7 |
1.2% |
(19.1%) |
54.0 |
57.8 |
5.8% |
38.1% |
0.7x |
Buy |
Liberty Holdings |
7.5 |
7.2 |
(3.5%) |
(30.0%) |
10.4 |
9.8 |
0.0% |
35.4% |
0.6x |
Buy |
Standard Chartered*** |
157.0 |
156.3 |
(0.5%) |
(22.8%) |
202.5 |
197.2 |
8.0% |
34.2% |
1.2x |
Buy |
Co-op Bank*** |
11.6 |
11.4 |
(1.7%) |
(30.3%) |
16.4 |
14.2 |
8.8% |
33.3% |
0.8x |
Buy |
KCB Group*** |
35.6 |
37.5 |
5.3% |
(30.6%) |
54.0 |
46.4 |
9.3% |
33.1% |
0.8x |
Buy |
Equity Group*** |
35.0 |
36.8 |
5.1% |
(31.2%) |
53.5 |
44.5 |
5.4% |
26.4% |
0.9x |
Buy |
ABSA Bank*** |
9.5 |
9.9 |
4.2% |
(25.8%) |
13.4 |
10.8 |
11.1% |
20.2% |
1.2x |
Buy |
Jubilee Holdings |
269.0 |
270.0 |
0.4% |
(23.1%) |
351.0 |
313.8 |
3.3% |
19.5% |
0.5x |
Accumulate |
HF Group |
3.7 |
3.5 |
(6.5%) |
(46.6%) |
6.5 |
4.1 |
0.0% |
18.8% |
0.2x |
Accumulate |
Britam |
7.5 |
7.6 |
1.3% |
(15.6%) |
9.0 |
8.6 |
3.3% |
16.4% |
0.8x |
Accumulate |
Stanbic Holdings |
80.0 |
80.0 |
0.0% |
(26.8%) |
109.3 |
84.9 |
8.8% |
14.9% |
0.6x |
Accumulate |
CIC Group |
2.2 |
2.1 |
(5.5%) |
(23.1%) |
2.7 |
2.1 |
0.0% |
1.9% |
0.7x |
Lighten |
*Target Price as per Cytonn Analyst estimates **Upside/ (Downside) is adjusted for Dividend Yield ***For Disclosure, these are banks in which Cytonn and/ or its affiliates are invested in |
We are “Neutral” on equities for investors because, despite the sustained price declines, which have seen the market P/E decline to below its historical average presenting investors with attractive valuations in the market. The economic outlook remains grim.
During the week, the Kenya Bankers Association released the Housing Price Index, November 2020 Report, highlighting that house prices contracted by 0.1% in Q3’2020, a marginal improvement from the 0.2% contraction in Q2’2020. The declines in the house prices is attributed to the softening of the economy and the decline in consumption expenditure, which has affected both demand and supply in the residential market. Other key take-outs from the report include;
Hass Consult also released the Q3’2020 House Price Index, and the key take-outs were;
The above findings are in tandem with Cytonn’s Q3’2020 Markets Review Report, which highlighted that the market recorded subdued performance during the quarter due to the tough economic environment evidenced by the (0.1%) decline in prices during the quarter. In terms of annual uptake, detached units recorded an average of 16.9% compared to apartments at 18.9%, indicating the continued demand for apartments supported by affordability amid reduced disposable income. We expect total returns to investors to remain suppressed in the last quarter of 2020 as developers continue to offer discounts to homebuyers. The investment opportunity for apartments lies in the lower mid-end market in areas such as Thindigua and South C, which continued to post above-market returns and annual uptake. For detached units, opportunity lies in upper mid-end segment in submarkets such as Ridgeways and Runda Mumwe due to the attractive rental yields.
Hass Consult also released Q3’2020 Land Price Index, and the key take-outs were;
The land price index is not in line with the Cytonn Q3’2020 Markets Review according to which the land within the Nairobi Metropolitan Area recorded an overall annualized capital appreciation of 2.4%, indicating that investors still consider land a good investment asset in the long term. According to the report, land in satellite towns recorded an annualized appreciation of 4.7% while land within Nairobi suburbs recorded an average of 0.9%. The investment opportunity lies in sub markets such as Kitisuru, Ridgeways and Kasarani, which recorded relatively high annualized capital appreciation of 4.6%, 4.2% and 4.8% respectively. For satellite towns, Athi River recorded the highest annualized capital appreciation of 9.6% for unserviced land whereas Thika recorded the highest appreciation for site and serviced land at 7.3%.
During the week, Centum Real Estate launched a Kshs 2.0 bn housing project, Loft Residences in Gigiri area. The project, which is set for completion in 2022, is expected to have 56 units on 7 blocks. The 280 SQM four bedroom duplex units are valued at Kshs 40.0 mn for the upper floor units and Kshs 42.5 mn for the lower floor units. The unit prices translate to an average of Kshs 147,321 per SQM, 11.1% higher than the upper mid-end residential market average value of Kshs 132,573 per SQM according to the Cytonn Q3’2020 Market Review. The launch of Loft Residences follows the successful completion and handing over of the developer’s two projects, Awali Estate at Vipingo Ridge in Kilifi County and Pearl Marina apartments in Entebbe in October 2020, and the recent launch of 365 Pavilion Place Apartments in Ruaraka and 265 Elmer One in Kasarani. In our view, the launch of the project is a sign of investor confidence in Gigiri area which is ideal for diplomats as the target clients working for the various international agencies such as the United Nations (UN). Gigiri as investment submarket is supported by; i) the area being categorized as a blue diplomatic zone, ii) close proximity to amenities such as Rosslyn Riviera Mall and Two Rivers Mall, iii) ease of accessibility as the area is served by the Limuru Road, and, iv) close proximity to diplomatic offices such as the United Nations headquarters.
The table below shows upper mid-end residential apartments performance in Q3’2020;
(All values in Kshs unless stated otherwise)
Upper Mid-End Residential Apartments Performance, Q3’2020 |
||||||||
Area |
Average Price Per SQM Q3'2020 |
Average Rent per SQM Q3'2020 |
Average Occupancy Q3'2020 |
Average Uptake Q3'2020 |
Average Annual Uptake Q3'2020 |
Average Rental Yield Q3'2020 |
Average Price Appreciation Q3'2020 |
Total Returns Q3'2020 |
Loresho |
112,601 |
541 |
90.0% |
89.0% |
11.4% |
5.4% |
0.8% |
6.1% |
Westlands |
172,924 |
775 |
88.2% |
88.1% |
23.3% |
5.8% |
(0.2%) |
5.6% |
Parklands |
116,456 |
613 |
91.1% |
81.5% |
15.3% |
5.2% |
0.2% |
5.4% |
Kileleshwa |
128,500 |
662 |
79.2% |
84.2% |
18.8% |
4.7% |
(0.5%) |
4.2% |
UpperHill |
130,030 |
741 |
71.6% |
77.3% |
18.2% |
4.0% |
0.0% |
4.0% |
Kilimani |
134,924 |
904 |
87.0% |
82.3% |
27.3% |
5.3% |
(2.3%) |
2.9% |
Average |
132,573 |
706 |
84.5% |
83.7% |
19.0% |
5.1% |
(0.3%) |
4.7% |
Source: Cytonn Research
Acorn Group, a Kenya-based real estate developer, announced that it is set to build two hostels next to the University of Nairobi Chiromo Campus, along Science Crescent Road, off Riverside Road to host approximately 3,000 students. One of the projects will be under the Qejani brand and is expected to accommodate approximately 2,112 students. The development will consist of 704 units on 18-floors. The units will include; double and quadruple where students will be sharing study and common rooms. The second project will be under the Qwetu brand and it is expected to accommodate approximately 837 students. This project will consist of 574 units on 16 floors and the room typologies will include; single, twin and cluster units. The developer has continued to focus on student housing having developed other hostels under the Qwetu brand in Ruaraka, Parklands and Jogoo Road. The focus on the concept is supported by; i) student housing deficit which is driven by continued increase in student numbers, ii) expanding middle class leading to growth in disposable incomes thus driving student mobility as more people seek quality higher education, creating more markets for student housing, iii) hedge against economic headwinds as student enrolment increases every year despite the economic climates, and, iv) attractive returns- according to Cytonn’s topical Student Housing Market in Kenya, student housing posted relatively high rental yields averaging 7.4% and surpassing Mixed-use developments (MUDs) and residential sectors with 7.3% and 5.0%, respectively, as shown below:
Source: Cytonn Research
We expect the residential sector to record increased activities supported by the continued launch of projects and focus on student housing accommodation as the real estate sector continues to witness gradual recovery from the effects of COVID-19 pandemic.
During the week, Quickmart supermarket opened its latest outlet in Nanyuki Mall, Nanyuki town, as the anchor tenant taking up space left behind by the struggling retailer, Tuskys. This brings the total number of Quickmart’s outlets to 35, with 6 outlets opened in 2020. The move by the retailer to invest in the Nanyuki retail market is supported by; i) positive demographics with Nanyuki having a population of 72,813 as of 2019, 47.9% higher than 49,233 recorded in 2009, according to the Kenya National Bureau of Statistics (KNBS) Population and housing census report, ii) the attractiveness of the region as a tourist hub as Nanyuki hosts key tourist attractions such as the Ol Pejeta Conservancy and Mount Kenya National Park, and, iii) a growing middle class with increased consumer purchasing power.
In terms of performance, Nanyuki which falls under the Mt. Kenya Region, was the best performing region in the retail market according to the Cytonn’s Kenya Real Estate Retail Sector Report 2019 with average yields of 8.6%, 1.6% points higher than the market average of 7.0%. The performance is attributed to high occupancy rates at 80.0%, 2.7% points higher than the market average of 77.3% and high rental rates of Kshs 129.8 per SQFT, which is 10.0% higher than the market average rates of Kshs 118.0 SQFT. The region accounts for 7.7% retail market share and its performance was mainly driven by low supply of malls in the region. However, with the existing pandemic, the performance is expected to slightly go down as most retail chains scale down their operations to cushion themselves against the pandemic.
The table below shows a summary of 2019 retail performance in key urban cities in Kenya;
(All values in Kshs unless stated otherwise)
Summary of 2019 Retail Performance in Key Urban Cities in Kenya |
|||
Region |
Rent 2019 |
Occupancy Rate 2019 |
Rental Yield 2019 |
Mt. Kenya |
129.8 |
80.0% |
8.6% |
Nairobi |
168.6 |
75.1% |
8.0% |
Eldoret |
131.0 |
82.3% |
7.9% |
Mombasa |
122.8 |
73.3% |
7.3% |
Kisumu |
96.9 |
75.8% |
5.6% |
Nakuru |
59.2 |
77.5% |
4.5% |
Average |
118.0 |
77.3% |
7.0% |
Source: Cytonn Research
The table below shows the summary of the number of stores of the key local and international retail supermarket chains in Kenya;
Main Local and International Retail Supermarket Chains |
||||||
Name of Retailer |
Initial number of branches |
Number of branches opened in 2020 |
Closed branches |
Current number of Branches |
Branches expected to be opened |
Projected total number of branches |
Naivas Supermarket |
65 |
5 |
0 |
66 |
4 |
70 |
Tuskys |
64 |
2 |
14 |
50 |
0 |
50 |
QuickMart |
29 |
6 |
0 |
35 |
0 |
35 |
Chandarana Foodplus |
19 |
1 |
0 |
20 |
0 |
20 |
Carrefour |
7 |
1 |
0 |
8 |
3 |
11 |
Uchumi |
37 |
0 |
33 |
4 |
0 |
4 |
Game Stores |
2 |
1 |
0 |
3 |
0 |
3 |
Choppies |
15 |
0 |
13 |
2 |
0 |
2 |
Shoprite |
4 |
0 |
2 |
2 |
0 |
2 |
Nakumatt |
65 |
0 |
65 |
0 |
0 |
0 |
Total |
307 |
16 |
127 |
190 |
7 |
197 |
Source: Online research
Going forward, we expect the retail sector’s performance to be cushioned by; i) the continued expansion of both local and international retailers taking up space left behind by struggling brands, ii) improving infrastructure such as the expansion of Ngong Road, iii) positive demographics with Kenya’s current urbanization and population growth rates at 4.0% and 2.2% against a global average of 1.9% and 1.1%, respectively, according to the World Bank, iv) changing tastes and preferences of consumers, and, v) shifting consumer trends which have fuelled the entry of international retailers thus increasing demand for formal retail space. Nevertheless some of the challenges expected to face the sector include; i) exit by some retailers to cushion themselves against the impact of the COVID-19 pandemic, ii) growing focus on e-commerce thus reduced demand for physical space, iii) the existing oversupply of 2.8 mn SQFT of retail space in certain locations which is likely to result in pressure on landlords to provide concessions and other incentives to attract new clientele or retain existing tenants, and, iv) reduced consumer spending power attributed to the tough economic environment.
During the week, Kenya was voted as Africa’s leading tourist destination in the World Travel Awards, supported by the epic savannah landscapes, wildlife, beaches and lakes among other tourist attraction centers. Additionally, Kenyatta International Conference Centre (KICC) was voted as Africa’s leading meeting and conference center. Fairmont Mount Kenya grabbed the title of Africa’s leading hotel, while the Aberdare Country Club was voted Africa’s leading Green Hotel. Additionally, Kenya Airways was ranked as Africa’s leading Airline-business classes and Africa’s leading Airline-economy class. The wide array of awards indicates continued confidence in Kenya’s hospitality industry despite the impact of COVID-19 pandemic. Currently, the sector is undergoing gradual recovery supported by; government strategies such as the Ministry of Tourism Post-Corona recovery funds aimed at offering financial aid to hotel and other establishments in the hospitality industry through the Tourism Finance Corporation (TFC), repackaging of the tourism sector products to appeal to domestic tourists, and, relaxation of travel advisories aiming at increasing the number of international tourist arrivals into the country. We expect the positive accolades to boost investor confidence in the sector coupled by; improved security, political stability, and improving infrastructure.
The real estate sector is expected to continue recording activities driven by the launch of residential projects, focus on student housing, expansion of local retail chains taking up prime spaces left behind by struggling retailers, and recovery of the hospitality sector as it leverages on positive accolades.
Unit Trust Funds, “UTFs”, are collective investment schemes that pool money together from many investors and are managed by professional Fund Managers, who invest the pooled funds in a portfolio of securities to achieve objectives of the trust. Following the release of Unit Trust Fund Managers’ results for Q2’2020, we examine the performance of Unit Trust Funds, as they are among the most popular investment options in the Kenyan market. We will further analyze the performance of Money Market Funds, a product under Unit Trust Funds, currently the most popular in terms of Assets Under Management, with 89.6% of the UTF market as at Q2’2020. In our previous focus on Unit Trust Funds, we looked at the Q1’2020 Performance by Unit Trust Fund Managers. In this topical, we focus on the Q2’2020 performance by Unit Trust Fund Managers, where we shall analyze the following:
Section I: Performance of the Unit Trust Funds Industry
As defined above, Unit Trust Funds are essentially investment schemes that pool money from investors and are managed by a professional Fund Manager. The fund manager invests the pooled funds in line with the portfolio’s objectives. The funds in the unit trust earn returns in the form of dividends, interest income, and/or capital gains depending on the asset class the funds are invested in. The main types of Unit Trust Funds include;
In line with Capital Market Regulations (2002) Part IV (32), Unit Trust Funds Managers released their Q2’2020 results. As per the Capital Markets Authority CMA Quarterly Statistical Bulletin - Q3 2020, the industry’s overall Assets Under Management (AUM) grew by 15.1% to Kshs 88.1 bn as at the end of Q2’2020, from Kshs 76.5 bn as at the end of Q1’2020. In the last three-years, Assets Under Management of the Unit Trust Funds have grown at a CAGR of 16.6% to Kshs 88.1 bn in Q2’2020 from Kshs 55.5 bn recorded in Q2’2017.
Source: CMA
This growth can be largely attributable to:
According to the Capital Markets Authority, as at the end of Q2’2020 there were 23 approved collective investment schemes made up of 93 funds in Kenya. Out of the 23 however, only 19 were currently active while 4 were inactive. During the period under review, total Assets under Management grew by 15.1% to Kshs 88.1 bn in Q2’2020, from Kshs 76.5 bn as at Q1’2020. The table below outlines the performance of Fund Managers of Unit Trust Funds in terms of Assets under Management:
Assets Under Management (AUM) for the Approved and Active Collective Investment Schemes |
||||||
No. |
Fund Managers |
Q1’2020 AUM (Kshs mns) |
Q1’2020 Market Share |
Q2’2020 AUM (Kshs mns) |
Q2’2020 Market Share |
AUM Growth Q1’2020 – Q2’2020 |
1 |
CIC Asset Managers |
29,784.6 |
38.9% |
36,313.7 |
41.2% |
21.9% |
2 |
BRITAM |
10,004.4 |
13.1% |
10,444.7 |
11.9% |
4.4% |
3 |
ICEA Lion |
8,040.9 |
10.5% |
9,801.9 |
11.1% |
21.9% |
4 |
Commercial Bank of Africa |
7,724.8 |
10.1% |
9,263.0 |
10.5% |
19.9% |
5 |
Old Mutual |
6,133.1 |
8.0% |
6,129.0 |
7.0% |
(0.1%) |
6 |
Sanlam Investments |
3,320.2 |
4.3% |
4,328.5 |
4.9% |
30.4% |
7 |
African Alliance Kenya |
1,883.4 |
2.5% |
1,907.4 |
2.2% |
1.3% |
8 |
Stanlib Kenya |
1,419.5 |
1.9% |
- |
0.0% |
(100.0%) |
9 |
Dry Associates |
1,781.4 |
2.3% |
1,947.9 |
2.2% |
9.3% |
10 |
Madison Asset Managers |
1,372.0 |
1.8% |
1,481.0 |
1.7% |
7.9% |
11 |
Nabo Capital (Centum) |
1,106.4 |
1.4% |
1,284.4 |
1.5% |
16.1% |
12 |
Zimele Asset Managers |
1,102.3 |
1.4% |
1,206.2 |
1.4% |
9.4% |
13 |
Cytonn Asset Managers |
757.8 |
1.0% |
951.6 |
1.1% |
25.6% |
14 |
Amana Capital |
597.2 |
0.8% |
203.5 |
0.2% |
(65.9%) |
15 |
Apollo Asset Managers |
471.5 |
0.6% |
498.4 |
0.6% |
5.7% |
16 |
Genghis Capital |
458.9 |
0.6% |
655.4 |
0.7% |
42.8% |
17 |
Equity Investment Bank |
397.1 |
0.5% |
329.7 |
0.4% |
(17.0%) |
18 |
Alpha Africa Asset Managers |
143.4 |
0.19% |
192.4 |
0.22% |
34.2% |
19 |
Co-op Trust Investment Services Limited |
10.8 |
0.0% |
1,156.4 |
1.3% |
10,568.3% |
20 |
Wanafunzi Investments |
0.0 |
0.0% |
0.2 |
0.0% |
343.1% |
|
Total |
76,509.8 |
100.0% |
88,095.1 |
100.0% |
15.1% |
Source: Capital Markets Authority: Collective Investments Scheme Quarterly Report
Key to note from the above table:
Among unit trust products, Money Market Funds continued to be the most popular product in terms of market share, accounting for Kshs 78.9 bn equivalent to 89.6% of all the funds under management by Collective Investment Schemes for the quarter ended 30th June 2020, an increase from 88.0% in Q1’2020 as shown in the table below;
Assets Under Management (AUM) by Type of Collective Investment Scheme (All values in Kshs mns unless stated otherwise) |
||||||
No. |
Product |
Q1’2020 AUM |
Q2’2020 AUM |
Q1’2020 Market Share |
Q2’2020 Market Share |
Variance (% Points) |
1 |
Money Market Funds |
67,358.0 |
78,936.2 |
88.0% |
89.6% |
1.6% |
2 |
Equity Fund |
3,631.6 |
3,630.3 |
4.7% |
4.1% |
(0.6%) |
3 |
Balanced Fund |
1,166.5 |
1,245.6 |
1.5% |
1.4% |
(0.1%) |
4 |
Others |
4,188.2 |
4283.0 |
5.7% |
4.9% |
(0.8%) |
|
Total |
76,344.3 |
88,095.1 |
100.0% |
100.0% |
|
Source: Capital Markets Authority: Collective Investments Scheme Quarterly Report
Key take-outs from the above table include:
Section II: Performance of Money Market Funds
Money Market Funds (MMFs) in the recent past have gained popularity in Kenya with their AUM growth outperforming the growth in bank deposits. One of the main reasons is the higher returns from money market funds compared to the returns on bank deposits. According to the Central Bank of Kenya data, the average deposit rate during the quarter declined to 6.9%, post the removal of the deposit rate cap floor in August 2018, from an average of 7.8% when the legislation was in place.
Source: CBK
As per the regulation, funds in MMFS’ are invested in liquid interest-bearing securities that have a weighted average maturity of less than 12-months. These securities include bank deposits, securities listed on NSE, and securities issued by the Government of Kenya. The allocation to these three asset classes in Q2’2020 was 35.2%, 7.9%, and 43.7% for bank deposits, securities listed on NSE, and securities issued by the Government of Kenya, respectively in Q2’2020. The Fund is best suited for investors who require a low-risk investment that offers capital stability, liquidity, and require high-income yield. The Fund is also a good safe haven for investors who wish to switch from a higher risk portfolio to a low risk portfolio, especially during times uncertainty.
The total Assets Under Management in Money Market Funds grew by 17.2% to Kshs 78.9 bn in Q2’2020, from Kshs 65.7 bn in Q1’2020. The top five Money Market Funds control an AUM of Kshs 64.5 bn, which translates to 81.7% of the total AUM in Money Market Funds. The table below shows the top five Money Market Funds as at Q2’2020:
Top 5 Money Market Funds by Assets Under Management |
||||||
No. |
Fund Managers |
Q1’2020 Money Market Fund (Kshs Mns) |
Q2’2020 Money Market Fund (Kshs Mns) |
Q1’2020 Market Share |
Q2’2020 Market Share |
Variance (% Points) |
1. |
CIC Money Market Fund |
29,016.0 |
35,735.1 |
44.0% |
45.3% |
1.3% |
2. |
British-American Money Market Fund |
7,334.1 |
8,463.9 |
11.0% |
10.7% |
(0.3%) |
3. |
NCBA Money Market Fund |
6,446.2 |
8,240.8 |
9.8% |
10.4% |
0.6% |
4. |
ICEA Lion Money Market Fund |
6,800.2 |
7,424.1 |
10.3% |
9.4% |
(0.9%) |
5. |
Old Mutual Money Market Fund |
4,545.5 |
4,636.2 |
6.9% |
5.9% |
(1.0%) |
|
Total |
54,141.9 |
64,500.1 |
82.0% |
81.7% |
(0.3%) |
Source: Capital Markets Authority: Collective Investments Scheme Quarterly Report
As at the end of Q2’2020, Co-op Money Market Fund recorded the fastest growth in Assets under Management (AUM) coming in at 21,890.3% to Kshs 1.2 bn, from Kshs 5.3 mn recorded in Q1’2020. The top five Money Market Funds in terms of growth rate recorded in Q2’2020 as highlighted below:
Top 5 Money Market Funds by Growth Rate |
||||
No. |
Fund Managers |
Q1’2020 AUM(Kshs Mns) |
Q2’2020 AUM(Kshs Mns) |
Q2’2020 Growth Rate |
1 |
Co-op Money Market Fund |
5.3 |
1,156.4 |
21,890.3% |
2 |
Sanlam Money Market Fund |
2,700.2 |
4,292.7 |
59.0% |
3 |
GenCapHela Imara Money Market Fund |
434.0 |
623.6 |
43.7% |
4 |
Cytonn Money Market Fund |
588.6 |
776.7 |
31.9% |
5 |
NCBA Money Market Fund |
6,446.2 |
8,240.8 |
27.8% |
Source: Capital Markets Authority: Collective Investments Scheme Quarterly Report
During the period under review, the following Money Market Funds had the highest average effective annual yield declared, with the Cytonn Money Market Fund having the highest effective annual yield at 10.8% against the industrial average of 8.7%.
Top 5 Money Market Funds by Yield in Q2’2020 |
||
Rank |
Money Market Funds |
Effective Annual Rate (Average Q2’2020) |
1 |
Cytonn Money Market Fund |
10.8% |
2 |
Zimele Money Market Fund |
9.9% |
3 |
Alphafrica Kaisha Money Market Fund |
9.8% |
3 |
Nabo Africa Money Market Fund |
9.8% |
4 |
CIC Money Market Fund |
9.6% |
|
Industrial Average |
8.7% |
Section III: Comparing Unit Trust Funds AUM Growth with Bank Deposits Growth
Unit Trust Funds assets recorded a growth of 15.1% in Q2’2020, compared to a growth of 1.1% in Q1’2020, while the listed bank deposits grew by 18.5% in Q2’2020 compared to a growth of 14.3% recorded in Q1’2020.
Key take-outs from the graph include:
Kenya’s Mutual Funds / UTFs to GDP ratio at 5.4% is still very low compared to global average of 61.8%, showing that we improve and enhance our capital markets.
Source: World Bank Data
According to World Bank data, in well-functioning economies, businesses rely on banks for just 40.0% of their funding with the larger percentage of 60.0% coming from Capital Markets. However, in Kenya businesses rely on banks for a staggering 99.0% of their funding; with less than 1.0% coming from Capital Markets. In order to improve our Capital Markets and stimulate its growth, we recommend the following actions:
Section IV: Conclusion
In conclusion, Money Market Funds continue to lead among unit trust products accounting for 89.6% of the total Unit Trust Funds in Q2’2020. For continued growth, there is a need to leverage more on innovation and digitization in order to further propel the growth of MMFs in Kenya. For instance, China’s first online money market fund known as Yu’eBao that has explosively grown into one of the world’s largest MMF with an AUM of USD 185.2 bn as at 30th June 2020, despite being launched in 2013. Yu’eBao of Tianhong Asset Management was launched as a spare cash management platform, allowing users to transfer idle cash as low as USD 0.15 (Kshs 15.6) into the money market fund, with the use of the Alipay e-wallet. The use of technology as a distribution channel for mutual fund products opened up the fund manager to the retail segment, which is characterized by strong demand among retail clients for convenient and innovative products. The advent of digitization and automation within the industry has enhanced liquidity. Closer home, Cytonn Money Market Fund clients can issue withdrawal instructions and have funds remitted to their bank accounts within 2 – 4 working days while funds withdrawn through the USSD or digital platforms are remitted to their M-Pesa and Bank accounts within 5 minutes and 2 working days respectively; the Cytonn Money Market Fund is accessible through dialing *809#. As highlighted in our topical Potential Effects of COVID-19 on Money Market Funds, we believe that amidst the Coronavirus pandemic, returns for Money Market Funds will remain stable with a bias to a slight increase upwards should rates on government securities increase. They will also remain the most liquid of all mutual funds providing a short-term parking bay that earns higher income yields compared to deposits and savings accounts.
Disclaimer: The views expressed in this publication are those of the writers where particulars are not warranted. This publication, which is in compliance with Section 2 of the Capital Markets Authority Act Cap 485A, is meant for general information only and is not a warranty, representation, advice or solicitation of any nature. Readers are advised in all circumstances to seek the advice of a registered investment advisor.