Cytonn Monthly ? February 2016

By Cytonn Research Team, Mar 6, 2016

Cytonn Weekly

Executive Summary

  • Fixed Income: Yields on government securities were on a downward trend during the month, continuing to fall in the first week of March. Kenya?s Inflation rate declined to 6.8% for the month of February;
  • Equities: The equities market was on an upward trend during the month with NASI, NSE 20 and NSE 25 returns at 3.8%, 2.4% and 3.7% compared to declines of 6.1%, 6.6% and 6.1%, respectively in January. Last week a number of banks reported and so far growth is poor with average earnings growth per share down 4.5%. All banks have reported negative earnings per share growth except KCB, which has reported 12.1% growth;
  • Private Equity: Private equity as an asset class has seen increased deal flows in the month of February, with financial services sector registering increased flows;
  • Real Estate: The Kenyan Real Estate segment receives additional foreign funding as the sector diversifies its public fund raising channels to incorporate Development - REITs

Company Updates

Fixed Income

Subscriptions on Treasury bills increased in the month of February, with overall subscriptions at 312.1% compared to 138.4% in January. Yields on T-bills declined by 240 bps, 250 bps and 120 bps for the 91-day, 182-day, and 364-day bills closing the month at 9.3%, 11.9%, and 13.3%, down from 11.7%, 14.4%, and 14.5%, respectively, at the end of January 2016. The interbank rate declined by 2.9% to 4.2% at the end of February from 7.1% in January. The decline in yields was as a result of:

  1. The government?s intention to reduce the budget by Kshs. 93.8 bn leading to a reduction on the domestic borrowing for the 2015/16 fiscal year by Kshs. 53.3 bn,
  2. The relatively attractive returns in the government bond market,
  3. High liquidity in the money market as a result of high government maturities of Kshs. 71.0 bn in February, following another Kshs. 86.0 bn in January
  4. The increase in portfolio allocation to fixed income due to uncertainty in the equities markets.

Last week there was a decline in the treasury bills subscription levels but remained high at 174.9%, compared to 312.2% the previous week. Yields continued on their downward trend, with the 91-day, 182-day and 364-day papers coming in at 9.1%, 11.3%, 12.8%, down from 9.3%, 11.9%, and 13.3%, respectively.

During the month the government reopened a 5-year and 10-year Treasury bond (FXD 1/2015/5 and FXD1/2012/10) to raise Kshs 25 bn for budgetary support. There was a 226.1% performance rate for the bonds, with total subscriptions of Kshs 56.5 bn, of which they accepted Kshs 30.3 bn. The yields came in at 13.9% and 14.3% for the 5 and 10-year, respectively. The rates were significantly lower than the same bonds issued in January, and this can be attributed to the high liquidity in the money market and the willingness of the investors to lengthen duration.

Activity in the secondary market despite improving remains relatively low compared to the 5-year historical averages. Bond turnover rose by 12.8% to Kshs 24.7 bn February from Kshs 21.9 bn January. The FTSE bond index has also gained by 1.1% YTD. This can be attributed to the declining yields over the month.

The inflation rate declined to 6.8% for the month of February from 7.8% in January as the Energy Regulatory Commission slashed petrol, diesel and kerosene prices by an average of Kshs 2.1, Kshs 8.8 and Kshs 6.5 per litre, respectively. This led to a decline in prices of the various inflation basket components where (i) food and Non-alcoholic beverages prices declined by 0.4%, (ii) transport prices by 1.6%, and (iii) housing, water and electricity by 1.8%. We expect the inflation rate to continue dropping, with our projection coming in at 6.5% for the month of March supported by the low fuel prices. For the full year, we expect inflation to be within the CBK range of 2.5% to 7.5%.

In February the shilling strengthened by 0.78% against the dollar closing at 101.6, compared to 102.4 at the end of January, and on a year to date basis the Shilling has appreciated by 0.6% against the dollar.  The current appreciation of the Kenya shilling can be attributed to: (i) large forex reserves with 4.6 months import cover, (ii) current low oil prices which have eased up the country?s current account deficit, (iii) growth in exports to  record levels at Kshs. 581.0 bn in 2015, a 9.4% increment from Kshs. 531.2 bn in 2014 further supporting the trade balance, which improved from 10.4% of GDP in 2014 to 8.9% of GDP in 2015, and (iv) the willingness of the IMF to continue supporting the country by extending the USD 688 mn (Kshs 69 bn) facility. We expect the shilling to remain relatively stable given the above factors.

The Treasury released an updated Budget Policy Statement, which indicated a reduction in the total budget by Kshs 93.8 bn with the recurrent and the development expenditure declining by Kshs 23.3 bn and Kshs. 70.5 bn, respectively. On the financing side the projected revenue collections declined by Kshs. 46.9 bn and the total borrowing declining by Kshs. 46.9 bn (Kshs 53.3 bn decline in domestic borrowing in Treasury bills and bonds, and an increase in foreign borrowing by Kshs. 5.9 bn). Even though the government plans to slash Kshs. 70.5 bn from development expenditure, the move may not have a significant impact on the economy due to:

  • The absorption rate for development expenditure allocation has been low given that as of December 2015, Kshs. 139 bn allocated to development projects had not been utilized,
  • Assuming that the government is on track on the foreign borrowing and revenue targets are met, the reduced domestic borrowing target by the Treasury by Kshs. 53.3 bn will greatly ease the government?s borrowing pressure, and
  • Stability in the interest rates will be good for the private sector as access to credit from banks will play a crucial role in stimulating economic growth through private investments in various sectors.

In addition to the above, the government?s move is prudent taking into account the current volatile state of the global economy. Keeping a tight lid on government spending will help position the Kenyan economy better against external shocks, a positive outcome in the long-run.

This week saw the Government re-open an additional two bonds to raise Kshs 25 bn for budgetary support; a 10-year (FXD 1/2013/10) and a 15-year (FXD2/2013/15). This is a clear indicator that the Government is comfortable issuing longer dated papers, as they are comfortable with the current interest rate environment. We shall give a comprehensive yield recommendation a week to the value date.

Given the developments in the fixed income market over the last two months, we revisited our initial 2016 assumptions and compared them to the actual performance over the first 2 months of the year.


Expectations at start of 2016

YTD experience

Going forward

Effect on Interest Rates

Government Borrowing

Government expected to borrow Kshs 219 bn for the 2015/2016 financial year

Government plans to cut its domestic borrowing by 53 bn for the current fiscal Yr.

We expect reduced pressure on Government borrowing based on the proposed reduction in government expenditures, the reduced KRA targets, and given the Government is way ahead of schedule by Kshs 46.6 bn

Policy Decisions

The CBR to be maintained but the KBRR to be revised upwards

MPC met in January and retained the CBR and KBRR at 11.5% and 9.87%, respectively

The CBR is expected to be maintained to stabilise the interest rates

Kenya Revenue Authority

KRA to continue missing their collection target

The Authorities are expected to reduce their targets by 52.9 necessitating a reduction in expenditures

Despite the reduction in the collection target we still expect them to miss their target


Liquidity expected to improve given high maturities of government securities

The market has been relatively liquid evidenced by the low interbank rates of 4.16% in February

With a further Kshs 219.6 bn in maturities to June, the market is expected to remain relatively liquid


Above the CBK target of 7.5%

Inflation declined from the high of 8.01% in December through January to February at 6.84%

Expected to remain within the CBK target rising in September when additional VAT on petroleum is introduced

Exchange rate (USD/Kshs)

To remain under pressure given a strong dollar and high capital goods importation

The shilling has been stable having appreciated against the dollar by 0.72%

We expect the Shilling to remain stable given support from a strong dollar reserve, expected reduction in development expenditures, improved forex inflows from remittances and tea exports


The high liquidity and the reduction in domestic borrowings are an indicator that rates should be on a downward trend, however the uncertainty of Governments? ability to fully fund the budget using revenue collections and foreign financing puts questions on how far rates can decline. With Interest rates coming down, upward risks still remain in the interest rates environment and we therefore advise investors to lock in their funds in short to medium-term paper, as the returns are higher on a risk-adjusted basis.



During the month of February, the market was on an upward trend with NASI, NSE 20 and NSE 25 gaining 3.8%, 2.4% and 3.7%, respectively on the back of gains in some large cap stocks such as Bamburi, BAT and DTB which gained 11.4%, 7.8% and 7.5% respectively. Other large cap stocks such as KCB Group, Equity and Safaricom recorded price improvements. Safaricom and KCB Group were the top movers with KCB Group recording the highest net foreign inflows of USD 3.3 mn, with investors taking advantage of its low price point. During the week, the upward trend persisted, with NASI, NSE 20 and NSE 25 rising 4.1%, 2.8% and 4.1%, respectively, taking their YTD performance to 0.9%, (1.5%) and 1.1%, respectively. Since the February 2015 peak, the market is now down 27.5% and 16.5% for the NSE 20 and NASI, respectively.

Equity turnover fell by 23.8% during the month to Kshs 9.9 bn from Kshs 13.0 bn in January due to decreased local investor participation as foreign investors increased their participation in large cap stocks, taking advantage of relatively lower prices. Foreign investors were net buyers with net inflows rising 82.0% to Kshs 617 mn compared to net inflows of Kshs 339 mn witnessed in January. The sustained foreign investor inflows can be attributed to improved investor sentiments, which has seen stock market recover from -6% in January to  0.9% year to date. We expect earnings to improve during the year by about 10% due to a favourable macroeconomic environment of low interest rates and a stable shilling.

The market is currently trading at a price to earnings ratio of 12.9x versus a historical average of 13.8x, with a dividend yield of 4.0% versus a historical average of 3.3%.

The charts below indicate the historical PE and dividend yields of the market.

Earnings season has picked up the pace, with a number of companies announcing their results.

During the past one-week, the following companies announced their results:

KCB Group reported FY?2015 results

KCB Group reported respectable results amidst a difficult operating environment in 2015. Most key metrics were within reasonable range with core profits, adjusted for one-time tax credit, growing 12.1% and ROaE of 25%. Key areas of concern were (i) interest expense growth of 48.8%, which far outpaced interest income growth of 18.8%, and (ii) Loan growth of 21.9% also far outpaced deposit growth of 12.5% leading to loans to deposit ratio rising to 81.5% from 75.2% in 2014. The key issue to watch around KCB is ability to attract deposits at a reasonable price.

For more earnings details on KCB Group, please see our earnings note, KCB Note.

Barclays reported FY?2015 results

Barclays reported flat PAT growth of 0.2%, driven by operating revenues growth of 4.1% that were outpaced by operating expense growth of 8.7%, which was driven mainly by growth in staff costs and loan loss provisions. While loans grew by 15.9%, deposit growth was flat at 0.2%, no wonder Barclays is considering agency banking to mobilize deposits. With the flat earnings growth, rising costs and inability to generate deposit growth, we see Barclays increasingly being pushed out of the Kenyan market. If Barclays Kenya?s performance is anything to go by, it is not surprising that Barclays Global wants to exit the Africa business. We think the unique local banking dynamics, such as agency banking, flexibility, customized solutions and mobile banking will leave Barclays with very little room for growth. The only positive metric in Barclays result was the 8.2% dividend yield. For more earnings details on Barclays, please see our earnings note at Barclays Note

NIC bank reported FY?2015 results

NIC reported PAT growth of 8.9% driven by operating revenue growth of 19.0%, which was however offset by operating expense growth of 38.1%. NIC delivered below industry average ROaE of 18.4%. NIC in our view has several issues (i) First is the operating expense growth is too high, second is the high loan to deposit ratio of 103.2% and (iii) is the high NPLs of 12.1%. NIC bank?s 2015 performance was below our estimates of an EPS of 8.5, owing to the increase in loan loss provisions. NIC needs to turn key attention to deposit mobilization, which will help them also reduce their expensive borrowing to fund rapid loan growth or constrain loan growth. For more earnings details on NIC Bank, please see our earnings note at NIC Note

CFC Stanbic reported FY?2015 results

CFC Stanbic reported a 13.7% decline in PAT, given flat operating revenue growth of 0.4%, which was outpaced by operating expense growth of 2.5%. CFC also delivered a subpar ROE of 17.9%, below industry average of 22.7%. CFC is a corporate bank with 45% of its revenues coming from non-funded fee income, which we would have expected to remain steady in a difficult operating environment but this has not panned out. It appears majority of the non-funded income is strongly correlated with the funded income in areas such as bond trading and capital markets.  There was really nothing to like about CFC?s results, they were bad across the board. For more earnings details on CFC Stanbic, please see our earnings note at CFC Stanbic


Of the banks that have reported so far, we would classify their performance as resilient to the tough economic environment of 2015.

EPS Growth





KCB Group









Equity bank is expected to release their FY?2015 results next week and we expect a 7.9% growth in earnings per share (EPS) to Kshs. 5.0 per share from Kshs. 4.6 per share in 2014. Stripping off the one off gain they booked in 2014 of Kshs. 1.1 bn, from the disposal of an associate, we expect the bank to deliver a 15.0% core growth in EPS as per our estimates. The growth expected to be largely driven by high growth in non-funded income, leveraging on their alternative channels of distribution such as agency banking and mobile banking. We expect the non-funded income line item to be further be boosted by the Equitel platform which is the fastest growing mobile virtual network operator.

Moving away from financial services firms, Uchumi reported half year results, posting Kshs 1.0 bn loss after tax, compared to an after tax loss of Kshs 262.4 mn recorded the same period last year, on account of a decline in revenues and increased operating expenses.

  • Net sales declined 37.6% to Kshs 4.3 bn, from Kshs 6.8 bn, due to low stock levels after suppliers cut supply owing to non-payment and the closure of the two Kenyan branches, and all the Uganda and Tanzania branches
  • Operating expenses grew by 11.7%, from Kshs 1.8 bn to Kshs 2.0 bn, driven by staff restructuring costs
  • Uchumi?s balance sheet shrunk during the period, with total assets declining by 22.9% to Kshs 6.2 bn from Kshs 8.0 bn. A 49.4% drop in inventory and a 79.8% decline in receivables drove the decline, all this associated by the reduced supply and closure of branches.
  • Total liabilities grew by 50.7% from Kshs 5.6 bn to Kshs 6.4 bn driven by a 40.3% increase in payables to Kshs 3.9 billion, underlining the struggles by Uchumi to meet its obligations.
  • Shareholders? funds now stand at a negative territory, at Kshs -181.8 million, driven by the increased losses, which has wiped out the shareholder?s reserves.


Uchumi continues to struggle in their core operations, and the reduced inventory levels are pointing to a clear downward trajectory in revenue growth. The company is currently seeking to raise Kshs 5.0 of additional capital, which will go towards retiring old debts, paying their suppliers and restocking the branches. We maintain our view that the company will continue struggling to fund its operations both in the medium and long-term. The company will find it hard to attract an investor who will inject the amount needed to restructure the company, Kshs 5.0 billion, considering the only positive value on offer is the brand. However, we have recently visited some of the branches and we are noticing an improvement in stocking.

Kengen reported H1?2016 results

The company posted Kshs 5.7 bn profit after tax, a 15% y/y growth from H1?15 of Kshs 4.9 bn, mainly attributed to increase in revenues and the company realizing tax credits

  • Revenues grew by 52% y/y from Kshs 12.2 bn to Kshs 18.5 bn as a result of electricity revenue growing by 26.6% on the back of expanded generation capacity from geothermal at 35% and other sources of revenue, drilling services and steam sales, which were up 888%
  • Operating expenses grew by a marginal 1.4% y/y to Kshs 4.0 bn from Kshs 3.9 bn  
  • The company?s finance costs went up by 17% to Kshs 1.62 bn from Kshs 1.32 bn in H1?on account of increase in the company?s liabilities by Kshs 5 bn
  • The company has a strong outlook given the increase of its production capacity and diversification of energy sources from geothermal, hydroelectric, diesel and gas and wind that brings the total capacity at 168MW, one of the highest in Africa and favourable demographics that support increased power consumption. The company will face challenges in converting the government debt given its dilutive effect. Despite the dilutive effect, the debt conversion will reduce the firm?s obligation in terms of interest payments, allowing them increased capital to divert to expansion activities.

We remain neutral on equities given the low earnings growth prospects for this year. The market is now purely a stock picker?s market, with few pockets of value.

In our Cytonn Weekly #2 we launched our Cytonn 10 equities portfolio, which recorded a return of 3.6% for the month of February, relatively at par with the market represented by NASI. On a YTD basis, NASI has recorded a growth of 0.9%, while Cytonn 10 is at 0.0%. The Cytonn 10 performance below the market is due to Safaricom, which is contributing 1.0% to its underperformance on an attribution basis, as it has a lower allocation compared to its market cap of 33.3%. Despite the underperformance to date, we are confident that Cytonn 10, with a substantial allocation towards financial services, will outperform the market.

Following our completion of coverage of Centum, which has an upside of 29.3%, we are removing Britam from the Cytonn 10 portfolio recommendation and replacing it with Centum with effect 07th March 2016. In addition to having a larger potential upside, we believe Centum?s strategy of being a diversified financial services group is more clearly laid out.


Portfolio Weight

Market Weighting

Return YTD

Weighted Contribution Return

Weighted Benchmark Return

Weighted Variance

Total Expected Return

































Standard Chartered
















I&M Holdings








Kenya Re
































Cytonn 10





*** - as a s result of the uncertainty surrounding the divesture of Barclays PLC from its Africa business, we shall also be reviewing Barclays Kenya allocation to Cytonn 10 and shall communicate our decision in the next week report

Below is our equities recommendations table:

all prices in Kshs unless stated

EQUITY RECOMMENDATIONS - for the week ending 04/03/2016



Price as at 26/02/16

Price as at 04/03/16

w/w Change

Target Price*

Dividend Yield

Upside/ (Downside)**



KCB Group
















































































































































Pan Africa









CfC Stanbic








*Target Price as per Cytonn Analyst estimates

**Upside / (Downside) is adjusted for Dividend Yield

Accumulate ? Buying should be restrained and timed to happen when there are momentary dips in stock prices.

Lighten ? Investor to consider selling, timed to happen when there are price rallies

Data: Cytonn Investments


*** Given the uncertainty surrounding the Barclays PLC divesture of its Africa business, the Barclays model is currently under review and its recommendation shall be communicated next week


Private Equity

In our Private Equity summary for the month, the financial services industry continued to witness consolidation and restructuring.  Genghis Capital received regulatory approval from the Competition Authority of Kenya (CAK) to absorb Orchid Capital. Genghis Capital is Chase Bank?s investment banking arm while Orchid Capital is the bank?s investment unit. The move by Chase Bank is aimed at (i) increasing efficiency by offering more services in a single location, (ii) reducing compliance costs, and (iii) enhancing execution. The move highlights the current trend by financial services firms to revamp their banking units to cater for clients who are increasingly demanding more sophisticated services and products. Other banks that have revamped their businesses include Barclays Bank that has recently revived Barclays Financial Services and KCB Group, which is also reviving its investment-banking arm.

Continental Reinsurance Plc, which holds a 3.5% in the Kenyan reinsurance market through their East African affiliate, has sold a 49% stake to Nigerian based Capital Alliance Private Equity IV Limited for an undisclosed amount, a private equity fund sponsored by African Capital Alliance (ACA). The acquisition dilutes Moroccan Saham?s Finances (the insurance arm of the Saham Group) which initially had a 100% stake in the company. The Lagos-based firm has operated in Kenya since 2009 and has a market share of 9.6% and 3.5% in non-life and life business respectively (based on 3Q15 figures). The move positions Continental Reinsurance favourably to bolster strategic objectives and strengthen its Pan-African foothold, expansionary plans and market positioning as the largest private Pan-African reinsurer, outside of South Africa. Continental Re has operations in 44 African countries, with its main offices in Nigeria, Kenya, Cameroon, Côte d'Ivoire, Tunisia and Gaborone.

Interest in the FMCG sector continued during the month with Indian conglomerate Godrej Consumer Products buying a 75% stake in Canon Chemicals, the makers of Valon petroleum jelly, for an undisclosed amount. Canon Chemicals is a family-run manufacturer that is based in Mlolongo, Machakos County. Canon?s revenues for 2015 stood at Ksh1.15 billion and they have a strong track record of serving consumers in Kenya for over 40 years. The deal came on the heels of Flame Tree Group acquisition of four beauty brands from Beauty Plus Trading East Africa late January. The FMCG sector is expected to continue witnessing increased activity from both local and global players after Lancôme, a leading cosmetics brand with sales turnover of USD4.5 billion, entered the Kenyan market in late 2015 acquiring Inter-Consumer Products and company?s products clocked 40 million units in sales from just 2 million the year before.

We maintain our outlook that the Sub Saharan Africa market will continue to attract private equity capital driven by the potential for high returns generated in the region, the stable macro-economic environment and political reforms that have improved the ease of doing business, easier exit routes for global institutional investors and better economic growth projections as compared to global markets. We remain bullish on the PE industry and expect more funds to be raised in the Financial Services, Education, ICT, Healthcare and Fast Moving Consumer Goods sectors. 

Real Estate

This month has seen increased foreign investments into the Kenyan real estate sector. This is as evidenced by the recent receipt of a Kshs 2.5 bn loan from the Islamic Corporation for Development (ICD) as well as a Kshs 836.4 mn equity investment from Africa Development Corporation Bank (AfDB) to Shelter Afrique. Cytonn Investments also received Kshs 400 million additional funding from Finland based Taaleri for its ongoing real estate developments in Karen and Ruaka. In addition, Home Afrika is looking to raise money through a mix of equity and debt financing over the next 18 months to be invested in its existing and new real estate developments. We expect this to result into increased growth in the sector, most especially through development of residential and commercial properties. A bulk of these investments will be channelled towards provision of affordable housing mostly in Machakos, Kiambu and Nairobi counties, with Ruaka emerging as the preferred investment location with returns of over 21.0% per annum. The recently released Oxford Business Group report which ranked the country?s retail segment as 2nd most developed retail segment in Africa is also expected to result in improved investor confidence thus making it easy for local developers to acquire foreign financing. At a penetration rate of 30% - 40%, there is an opportunity for further growth of the Kenyan retail segment, which recorded about 170,000 square metres of new leasable retail space in 2015.

This week, Fusion Capital was given the green light by the Capital Markets Authority to issue Kenya?s first two Development REITs, targeted at raising up to Kshs 7.4 Billion. The D-REITs are classified as commercial and residential and are to be listed on the NSE within the next six months. The residential D-REIT will be retailing at a nominal price of Ksh. 23 a unit while the commercial D-REIT will be retailing at Ksh. 17 a unit. The D-REITs will be mainly targeting professional and institutional investors, as the minimum investment set at Kshs 5 mn will  lock out retail investors in the market. Kshs 5.2 bn of the target capital will be directed towards the development of the company?s investments in residential property in Meru, Mombasa and Nakuru while a targeted 2.3 bn will be directed towards commercial developments in Upper hill. Once listed, D-REITs serve to provide relatively cheaper financing options to developers as compared to loans, a good incentive for developers to source for finances from the public through the capital markets. They are also set to provide an opportunity for investors to properly evaluate a development?s potential before investing. Proper market awareness is however necessary so as to prevent a slow uptake of the D-REIT as previously experienced in Stanlib?s Fahari 1 I-REIT, which is currently trading at its initial public offer price of Kshs 20.



Disclaimer: The views expressed in this publication, are those of the writers where particulars are not warranted- as the facts may change from time to time. This publication is meant for general information only, and is not a warranty, representation or solicitation for any product that may be on offer. Readers are thereby advised in all circumstances, to seek the advice of an independent financial advisor to advise them of the suitability of any financial product for their investment purposes.