Cytonn Corporate Governance Index, & Cytonn Weekly Report #18

By Cytonn Research Team, May 8, 2016

Cytonn Weekly

Executive Summary

  • Fixed Income: During the week there was a marginal decline in yields on government securities to 8.3%, 10.4% and 11.7% for the 91, 182 and 364 Days T-bills, respectively. Kenya National Bureau of Statistics released the 2015 growth figures which indicated that Kenya?s Gross Domestic Product (GDP) grew by 5.6% in 2015, in line with the upper bounds of Cytonn estimates of 5.3 to 5.7% as published in our Cytonn Annual Markets Review ? 2015. GDP was supported by construction, financial services and agricultural sectors;
  • Equities: The market was on a downward trend this week, with NASI, NSE 20 and NSE 25 losing 0.6%, 1.4% and 0.8%, respectively. NIC Bank released their Q1?2016 results registering a flat growth in core EPS to Kshs 1.55 per share from Kshs 1.55 per share in Q1?2015;
  • Private Equity: Financial services sector continues to attract private equity investments with Barclays Plc offloading 12.2% of their 62.3% stake in Barclays Africa to a conglomerate of investors, the largest being South Africa?s Public Investment Corporation;
  • Real Estate: Listed companies, such as Express Kenya and insurance companies, diversify into real estate to supplement earnings from their main lines while National Construction Authority (NCA) and the National Buildings Inspectorate are set to start a country wide building inspection following the collapse of a six- storeyed building in Huruma estate, Nairobi;
  • Focus of the Week: Having lost approximately Kshs. 264.3 bn to corporate governance related concerns and in the wake of the recent failures at both Imperial Bank and Chase Bank, we have constructed the first ever corporate governance index in Kenya, the Cytonn Corporate Governance Index (?Cytonn CGI?), to assist market participants such as companies, their boards, investors and regulators factor corporate governance into their decision making.

Company Updates

  • This coming week, we shall be launching our latest real estate development, a world class master planned city on approximately 1,000 acres in Athi River at a dinner on Monday 9th, at Kempinski, Nairobi
  • This coming week, on Monday 9th, we shall be releasing Kenya?s first ever Corporate Governance Index of the listed companies, Cytonn Corporate Governance Index, ?Cytonn CGI?
  • This past week, we released our Kenya Listed Insurance Companies FY?2015 Report
  • Our Partner and CIO, Elizabeth N. Nkukuu, CFA, discussed the performance of Kenya?s economy in 2015 on Citizen TV Business Centre. Elizabeth Nkukuu on Citizen TV
  • Our Real Estate Services Manager, Johnson Denge, discussed the state of buildings in Nairobi following the collapse of a building in Nairobi, on KTN News. Johnson Denge on KTN News
  • Our Senior Investment Analyst, Duncan Lumwamu, discussed Genghis Capital?s new cash call to support liquidity on CNBC. Duncan Lumwamu on CNBC
  • Our Senior Investment Analyst, Duncan Lumwamu, also discussed Kenya Airways? recent decision to sub-lease their planes to Turkish Airlines on KTN News. Duncan Lumwamu on KTN News
  • We continue to beef up our team ? Kennon Mwiti has joined the firm as our Financial Controller. Kennon joins us from Eagle Africa Insurance Brokers where he was a Finance Manager. Seraphine Ndala has joined the firm as a Legal Analyst. Seraphine joins us from Coulson Harney where she was an Associate. We currently have the following ongoing hires, Careers at Cytonn

Fixed Income

Treasury bills subscription declined for the second week this month but remained high. The total subscriptions came in at 193.5%, compared to 269.5% in the previous week. Subscription rates for the 91, 182 and 364-day T-bills came in at 399.4%, 99.3% and 150.5% declining from 416.4%, 271.3%, and 220.5% the previous week. The decline is as a result of improved confidence in financial services sector, minimizing capital flight to less risky government securities. Despite the high subscription levels, the yields have remained relatively unchanged with this week rates on the 91, 182 and 364 day papers declining marginally to 8.3%, 10.4% and 11.7% during the week from 8.5%, 10.5% and 11.7% last week. The 91-day paper was most preferred, as investors expect rates to go up beginning the next fiscal year.

The 91-day T-bill is trading below its 5-year average, with relative stability in the last two months, in line with the relatively stable interest rates. We note that with the high liquidity, rates have likely bottomed out at the current rates. Below are the yields for the 91-Day T-bill for the past 16 months:

According to data from Bloomberg, yields on the 5 and 10 year Kenyan Euro bonds issued in 2014 have declined by 187 bps and 165 bps, respectively since their peaks in mid-January 2016. However, yields increased slightly during the week to close at 6.3% and 8.0% from 6.2% and 7.8%, respectively, the previous week, with investors pricing in the heightened political activity in Kenya as the country heads towards elections in 2017. See graph below:

The interbank rate rose marginally to 4.0% from 3.8% the previous week due to reduced liquidity in the market as Kshs 93.0 bn was taken out through: (i) T-bills issuances of Kshs 29.5 bn, (ii) term auction deposits of Kshs 37.0bn, (iii) corporate taxes payments of 26.0 bn, and (iv) reverse repo maturities of Kshs 0.4 bn during the week. Total liquidity injection during the week was Kshs 79.3 bn resulting in net inflow of Kshs 13.7 bn to the government.

The Kenya shilling strengthened by 0.6% during the week to close at Kshs 100.6 from Kshs 101.1 the previous week helped by dollar inflows from offshore investors buying government securities. On an YTD basis, the shilling has appreciated by 1.7% against the dollar supported by (i) improved forex reserves currently at USD 7.7 bn, equivalent to 5.0 months of import cover, (ii) the approval of the precautionary facility offered to Kenya by the IMF, and (iii) improved diaspora remittances. We expect the shilling to remain stable during the year supported by favourable local macro-economic factors and exogenous global dynamics such as US Fed holding off rate hikes during the year. 

Kenya?s Gross Domestic Product (GDP) grew by 5.6% in 2015 which was in line with our projection range of 5.3%-5.7%, (see Cytonn Annual Markets Review ? 2015) bringing the GDP at constant market prices to Kshs 4.05 tn from Kshs 3.83 tn. FY?2015 GDP growth came in 30 bps higher from FY?2014 growth of 5.3%. This growth is attributed to a stable macroeconomic environment as exemplified by;

  • 2015 average annual inflation at 6.6% within the CBK band of 2.5% -7.5%,
  • a narrowing current account deficit currently at 11.4% of GDP from 14.5% of GDP in 2014, and
  • an 8.2% growth in exports outpacing a 2.5% growth in imports resulting in an improved export-import ratio to 36.8% from 33.2% in 2014, supported further by improved export prices and decline in oil prices,

Key sectors that contributed to this growth are as follows:

Sectoral Contribution and Growth ? 2014 and 2015


2014 Contribution

2015 Contribution



2015 growth

Agriculture, forestry and fishing










Taxes on products





Transport & Storage





Real Estate





Wholesale and retail trade





Financial and insurance activities















Public Administration & Defence










Overall Growth





Construction sector once again recorded the highest growth of 13.6% in 2015 on the back of ongoing public infrastructural investment in Kenya such as the Standard Gauge Railway and other investments in roads. Real estate and construction sectors contributed a combined 12.4% to GDP and it is expected to continue growing as private capital finds its home there. As the electioneering period approaches, we expect high level of government activities in their infrastructural developments as they race to make strides, which they can leverage on for votes. On the private sector contribution, we expect increased participation by the private developers, like Cytonn Real Estate, anchoring on both commercial and residential developments.

Financial services sector displayed a resilient growth of 8.7% in 2015 from 8.3% in 2014 supported by a 19.2% increase in domestic credit of Kshs 2.8 bn. In our view, insurance is slacking this sector as indicated in our Kenya Listed Insurance Companies FY?2015 Report where listed Insurance companies recorded a 39.1% decline in core EPS in 2015 while listed banks recorded a 2.8% growth in core EPS.  Cytonn FY?15 Banking Report.

Agricultural sector, the largest contributor to GDP, recorded a 5.6% growth in 2015 supported by improved weather conditions characterized by the favourable rains that led to a significant increase in maize and horticultural output as well as livestock production. However, tea and coffee production declined 10.3% and 16.0%, respectively, as a result of high costs of labour, escalating costs of farm inputs and poor governance at the cooperatives. The decline in the two crops is worrying as they form part of our largest export basket. Wholesale and retail sector growth came in lower at 6.0% compared to 7.5% growth in 2014 as a result of decline in wholesale prices for all petroleum products due to the prevailing low prices in the international market.

The employment climate seems to have improved with a total of 841,600 jobs created and the total wage growth coming in at 14.2% to Kshs 1.5 tn in 2015 from Kshs 1.3 tn in 2014. The private sector continues to be of importance in job creation with the sector growing by 5.4% in 2015, faster than the 2.5% growth in public sector. Self-employment remains the highest contributor to overall employment creation, with a growth of 19.6%, demonstrating the entrepreneurial aspect of the Kenyan economy.

Moving forward, we expect 2016 GDP growth to come in between 5.5%-6.0% supported by; (i) further growth in the construction sector as both public and private projects continue coming in, (ii) the recovery of tourism sector on improved security and increased allocation to the ministry of tourism to support the sector, (iii) stable shilling backed by dollar reserves by the CBK to 5.0 months of import cover coupled with the IMF credit facility, (iv) improved credit uptake supported by relatively low interest rate that have, in our view, bottomed out, and (v) the supportive weather which will contribute to growth in the agricultural sector.

The government is ahead of schedule with its borrowing programme, having borrowed Kshs 272.5 billion for the current fiscal year compared to a target of Kshs 178.1 billion (assuming a pro-rated borrowing throughout the financial year of Kshs. 219.0 billion budgeted for the full financial year). This shows that the government has surpassed its domestic borrowing target, and will therefore shift their attention to achieve the foreign borrowing target. However, failure to borrow in the foreign markets may lead to upward pressure on domestic rates as domestic borrowing will be increased. Interest rates have dropped since the beginning of February 2016 due to (i) reduced pressure on government borrowing, and (ii) high liquidity in the market. With interest rates coming down, we advise investors to lock in their funds in short to medium-term papers of tenors between six months and one-year, as the rates are attractive on a risk-adjusted basis.


During the week, the equities market was on a downward trend with NASI, NSE 20 and NSE 25 losing 0.6%, 1.4% and 0.8%, respectively, taking their YTD performance to (0.1%), (1.9%) and 0.3%, respectively. The decline was on the back of declines in Safaricom and KCB Group, which declined by 1.2% and 4.2%, respectively. The top mover for the week was Equity Group accounting for 26.8% of market turnover. KCB Group recorded the highest net foreign inflows of USD 0.4 mn while Safaricom recorded the highest net outflows of USD 1.3 mn for the second week as investors took profit following the stock reaching a peak of 17.9 in April 2016. Since the peak in February 2015, NASI and NSE 20 are down 18.0% and 27.9%, respectively.

Equity turnover fell further by 15.2% during the week to USD 15.9 mn from USD 18.8 mn last week on account of a short trading week after the Labour Day celebrations fell through Monday 2nd 2016. Foreign investors turned net buyers with net inflows of USD 0.7 mn compared to net outflows of USD 0.5 mn last week, increasing foreign participation to 72.2% from 62.0% last week.

The market is currently trading at a price to earnings ratio of 13.1x versus a historical average of 13.8x, with a dividend yield of 4.3% versus a historical average of 3.3%. The charts below indicate the historical PE and dividend yields for the market;

NIC Bank released their Q1?2016 results

NIC Bank reported Q1?2016 results, registering flat growth in core EPS at Kshs 1.55 per share driven by 28.7% growth in operating revenue despite a faster growth in operating expenses of 53.7%. Key points to note are:

  1. Operating revenue grew by 28.7% y/y to Kshs 4.1 bn in Q1?2016 from Kshs 3.2 bn in Q1?2015 driven by a 32.8% growth in interest income to Kshs 5.0 bn in Q1?2016 from 3.8 bn in Q1?2015. Interest expense grew by 30.2% to Kshs 2.1 bn in Q1?2016 from Kshs 1.6 bn in Q1?2015, resulting in a decline in the net interest margin to 7.1% from 7.3% in Q1?2015. Non-interest income grew by 15.3% to Kshs 1.3 bn from Kshs 1.0 bn in Q1?2015 supported by other income that grew by 45.9% attributable to sale of bonds that were acquired during the last quarter of 2015
  2. Operating expenses rose by 53.7% y/y to Kshs 2.7 bn in Q1?2016 from Kshs 1.8 bn in Q1?2015 driven by a 212.3% increase in loan loss provisions to Kshs 1.3 bn from Kshs 0.4 bn in Q1?2015, with the increase attributed to provisions of 5 large clients who jointly accounted for over 70% of provisions. Cost to income ratio increased to 65.8% in Q1?2016 from 55.1% in Q1?2015, compared to the listed industry average of 61.4% despite staff costs declining marginally by 6.5% to Kshs 0.6 bn from 0.7 bn
  3. The bank reported a 14.8% y/y increase in customer deposits to Kshs 133.8 bn in Q1?2016 from Kshs 119.7 bn in Q1?2015 while net loans increased 6.1% y/y to Kshs 112.0 bn in Q1?2016 from Kshs 105.6 bn in Q1??2015. This resulted in a decline in the loan to deposit ratio to 101.5% from 109.8%, but still way above industry average of 89.0% speaking to the need to see much better deposit mobilization by NIC Banks
  4. Non-performing loans grew marginally by 0.3% to Kshs 9.2 bn compared to an increase in gross loans of 2.9%, which led to a decrease in non-performing loans ratio to 8.0% from 8.2%

NIC Bank?s performance going forward will be propelled by the bank capitalizing on cross-selling its products to its existing customer base, managing the loan to deposit ratio to below 100%, and capitalizing on its asset financing business where the bank has a 27% market share. The rollout plan for 7 new branches in 2016 will also assist the bank grow its customer base as part of their liability driven strategy for this year, although this will also lead to an increase in operating expenses associated with opening of the new branches. For more earnings details on NIC Bank Q1?2016 results, please see our earnings note at: NIC Earnings Note

ARM Cement released their FY?2015 Results

ARM Cement released their FY?2015 results, recording a loss per share of Kshs 5.8 from earnings per share of Kshs 3.0 in FY?2014, driven by unrealised foreign exchange loss of Kshs 3.7 bn. Key points to note are;

  • Operating revenue increased 7.2% y/y to Kshs 14.7 bn from Kshs 13.7 bn, which was supported by increased sales as demand for cement increased by more than 10% during the year
  • Operating expenses increased by 3.1% y/y to Kshs 10.9 bn from Kshs 10.6 bn in FY?2014. The cost containment was as a result of increased use of the firm?s own clinker, thereby reducing the cost of raw material input. This led to the Earnings before interest, tax, depreciation and amortization (EBITDA) rising by 10% y/y to Kshs 3.4 bn from Kshs 3.0 bn in FY?2014, with an improvement in the EBITDA margin to 26% from 23% in FY?2014
  • The depreciation of the Kenyan and Tanzanian Shilling to the US dollar during the year 2015 by 12.8% and 23.8% respectively, led to the firm booking an unrealised foreign exchange loss of Kshs 3.7 bn during the year owing to the firm?s huge dollar denominated borrowings

ARM Cement?s performance has been weighed down by high finance costs, and foreign exchange losses. However, the company has secured a USD 140 mn (Kshs 14.0 bn) equity investment from CDC Group, the UK government-owned finance institution, aimed at strengthening ARM Cement?s balance sheet. The Kshs 14.0 bn injection in return for 40.0% stake equates to a total firm valuation of Kshs 35.0 bn, almost equal to the firm?s enterprise value (EV) of Kshs 37.8 bn. Given the latest EBITDA of Kshs 3.4 bn, this translates to an EV/EBIDTA multiple of 11.3x. The company plans to use USD 110.0 mn in debt reduction, which currently stands at Kshs 14.4 bn, and the balance directed towards growing its business. We view this as a positive step going forward, as this will boost ARM Cement?s ability to compete with international cement players who are eyeing a stake in the growing construction business within the region.

TransCentury release their Full Year Results

TransCentury released their FY?2015 results, recording a loss per share of Kshs 7.1, which was a slight improvement from a loss per share of Kshs 8.5 in FY?2014. The performance was weighed down by forex losses of Kshs 1.1 bn and impairment losses of Kshs 371.6 mn on its business units. Key points to note are;

  • Operating revenue increased 15.0% y/y to Kshs 11.8 bn in FY?2015 from Kshs 10.2 bn in FY?2014, driven by an improved performance in the engineering division and improved local utility order book coming from the government.
  • Operating expense increased by 15.1% y/y to Kshs 11.8 bn from Kshs 10.3 bn in FY?2014 driven by increased capital expenditure as the firm finalised on increasing capacity and efficiency in their new copper factory
  • EBITDA came in at Kshs 126.2 mn from a loss of Kshs 751.6 mn in FY?2014, as the firm booked a loss on sale of its investment in Rift Valley Railways of Kshs 1.0 bn in 2014. This resulted in an EBITDA margin of 1.1% in FY?2015
  • Finance costs increased 38.1% y/y to Kshs 791.2 mn from Kshs 572.8 mn in FY?2014, owing to the increase in current and long term borrowings by 82.6% to Kshs 6.4 bn from Kshs 3.5 bn in FY?2014
  • The depreciation of regional currencies against the dollar during the year resulted in an increase in foreign exchange losses by 506% to Kshs 1.1 bn, from Kshs 184.4 mn in FY?2014

TransCentury was able to settle its agreement with convertible bondholders, where they were able to renegotiate on repayment plans of the debt to USD 40 mn. Following this reduction, the firm will be able to write back the principal and interest charges for 2016, which amount to Kshs 19.4 mn. We view this as a positive to the firm, which has been weighed down by finance costs, and moving forward, they will benefit from the sustained growth in investment in infrastructure projects, where the firm will continue to attract a strong deal pipeline.

Uchumi Supermarket is in talks with suppliers to convert the suppliers? outstanding debt amounts into equity in the retailer. This follows a petition for liquidation filed by a group of the company?s suppliers. Uchumi has been seeking to offload some of its fixed assets in order to generate cash to pay off suppliers and stabilize its operations. Additionally, the retailer has closed non-profit making outlets in order to create a leaner, and profitable structure. Total supplier liability currently stands at Kshs 3.9 bn bringing the total current liabilities to Kshs 6.0 bn which is more than the Kshs 0.7 bn current shareholders? equity for Uchumi. With details regarding proposed debt restructuring remaining scanty, current shareholders are at risk of significant dilution should all the debts be converted to equity at face value. The retailer?s management noted that the Government has indicated willingness to inject funds into the company and its assets have attracted buyers despite some being tied in court cases Despite the conversion, Uchumi will need to raise more capital to remain operational in a competitive retail environment, as highlighted in our coverage note

Below is our equities recommendation table: Key changes for the week include:

  • We updated our insurance valuations following the release of our Kenya Listed Insurance Companies FY?2015 Report
  • Standard Chartered has moved from an ?accumulate? to ?hold? following price correction after the stock tumbled post books closure on the dividend and bonus issue
  • I&M Bank moved from ?lighten? to ?hold? as it shed 2.6% this week following their book closure for dividend payment
  • We exited our position in Britam, which we bought on 19th April 2016 at a price of Kshs 11.70 when Britam reported better than expected earnings. Given the exit price of Kshs 14.00, we recorded a gain of 19.7%, equal to 4,615% annualized.

all prices in Kshs unless stated




Price as at 29/04/16

Price as at 6/05/2016

w/w Change

Target Price*

Dividend Yield

Upside/ (Downside)**



KCB Group***









Kenya Re



























Equity Group***






















































HF Group




































Co-op Bank









CfC Stanbic



























Pan Africa








*Target Price as per Cytonn Analyst estimates

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

***Indicates companies in which Cytonn holds shares in

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

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.

Private Equity

In a report released by investment advisory and financial analytics firm Riscura Solutions, private equity firms are paying record highs for stakes in African companies driven by high fundraising activities, competition and the continent?s expanding middle class. The total value of Africa private equity funding in 2015 was USD 4.3 bn, the highest in six years, compared to USD 2.3 bn in 2014. The higher price to earnings multiples is a clear indication of the direction the private equity space is taking in 2016 driven by: (i) higher growth expectations, (ii) increased competition for deals, (iii) growing consumerism driven by the upsurge in the middle class, and (iv) improved access to financial services and mobile technology that is opening up markets. This follows the recently released report by Ernst and Young and the Africa Private Equity and Venture Capital Association on exit activity in Africa which highlighted the growth in private equity from 2007 to 2015. The report noted that there has been an increase in the number of exits by 12.8% to 44 in 2015 from 39 in 2014 with South Africa, Egypt, Nigeria and Kenya accounting for over two-thirds of total exits. According to the report, 2016 is expected to see less number of deals in Southern Africa and more deals in Eastern Africa. The top industries that witnessed exits within 2014-2015 were financial services (24% of exits), consumer & goods services (16%), Industrials (14%), Healthcare (14%) and retail sectors (11%).

Barclays Plc has offloaded 12.2% of its 62.3% stake in Barclays Africa worth roughly USD 879 mn to simplify its structure in line with the current CEOs strategy of selling down Barclays Plc?s stake in Barclays Africa Group. The shareholding has been sold to a conglomerate of companies, with the largest buyer being South African government pension fund Public Investment Corporation (PIC) whose shareholding was initially 6.0%. PIC is currently Africa's largest fund manager with more than USD 122 bn of South African government employees? pension assets under its custody. The unfavourable sentiment attached to the business with Barclays Plc having a 6.9% drop in profits in Q1?2016 to £ 433 mn from £ 465 mn in Q1?2015 will see the rest of the shareholding possibly sold at below market value. This presents a good investment opportunity for private equity firms who want to own a stake in the bank such as Atlas Mara headed by former Barclays CEO who have already expressed interest together with Carlyle Group.

The Abraaj Group, one of the largest funds focused on healthcare in Africa, has fully exited its investment in 2011 in Tunisia?s Unimed Pharmaceuticals through an initial public offering (IPO) on the Tunisia stock exchange. Unimed?s IPO, with an estimated market capitalization value of USD 150 mn, was oversubscribed by 32.6x, an indication of the overall market sentiment on the future growth prospects of the company and the sector. The Abraaj Group, together with PROPARCO, began the exit in December 2015 by selling an 83% stake to SQM, Blakeney Asser Management Tunisian-Kuwait Consortium of Development and two other local investors. The exit through an IPO was part of the strategy put in place after the pre-IPO 83% stake sale to increase capacity and get listed with support of new partners. The Abraaj Group has deployed over USD 1.0 bn in various investments in healthcare in Tunisia as well as in the larger Sub Sahara Africa such as Lily Hospitals, Lusaka Trust Hospital, Nairobi Women?s Hospital and Vine Pharmaceuticals speaking to their bullish sentiment on the healthcare industry in Africa.

Private equity investments in Africa remains robust as evidenced by the increased deals and deal volumes in the region key note sectors; financial services, energy, FMCG, real estate, and technology. Given (i) the high number of global investors looking to cash in on the growing middle class of Africa, (ii) the attractive valuations in private markets compared to global markets, (iii) better economic projections in Sub Sahara Africa compared to global markets, and (iv) the high number of exits that is evidence of the attractiveness of the region, we remain bullish on PE as an asset class in Sub-Sahara Africa.

Real Estate

Several listed companies are diversifying into real estate to boost their earnings. This is due to a tough operating environment that has seen many of them record lower profits or losses all together. A good example is Express Kenya, which broke ground on a 15.8 acres? project in Nairobi?s industrial area. The project will encompass 1,500 residential units and a shopping mall, to be implemented in phases over a five-year period. The first phase will be set on 3.5 acres and will comprise of 224 one, two and three bedroomed units at a project cost of Kshs 2.0 bn. Other listed companies that have diversified into real estate include, Eveready Kenya and Car & General. These companies have registered losses in their main business lines and thus have been attracted to the high yielding real estate sector to diversify their income streams. Express Kenya registered a loss of Ksh 23.3 mn for the six months ended June 2015, while Eveready shut down its Nakuru battery factory in 2014 due to unfair competition from cheap imports. Eveready plans to use the land on which the factory used to sit to construct a business park or a mall.

In addition to the tough economic environment, many companies are diversifying their business lines into real estate sector due to:

  1. High returns ? The real estate sector registered on average more than 20.0% in annual returns in the last 5 years as compared to the traditional investments with a 10.0% average annual return in the same period.
  2. Real estate hedge inflation ? Rental rates and home prices rise with inflation
  3. Housing demand- Currently the Kenyan housing demand is approximately 250,000 houses per annum targeting the middle and low income earners hence creating an opportunity for institutions to venture into real estate to curb it.

We expect continued investment in real estate by other listed companies as the tough economic environment persists and real estate continues outperforming other asset classes. However most of these developers are targeting the middle income earners for instance the target prices for the houses to be constructed by Express Kenya is between Kshs 8.0-14.0 mn which is not very affordable to the targeted market. Hence this increased development is not likely to reduce the housing gap which is widest in the low income earners group.

National Construction Authority (NCA) in coordination with the National Buildings Inspectorate are set to start country wide building inspection next week following the collapse of a six- storey building in Huruma Estate Nairobi. The Huruma building was sub-standard, having been constructed in 5 months and on a swampy ground. The construction was not approved by the NCA prior to its construction and it was one of the 226 buildings marked unsafe during the 2015 building audit carried out by the NCA.

Counties are starting to remodel the planning of their towns to avoid such incidences in future. For example, Kakamega town in partnership with the World Bank has set out Kshs 300 mn to be used in remodelling of the town?s initial plan so as to enable expansion, curb construction trends that have seen urban sprawl. Mombasa and Nairobi Counties also recently launched a plan to remodel redundant estates through private public partnership in a bid to curb urban sprawl and increase access to housing.

Buildings collapsing has become a major issue in the real estate sector causing residents to stay in fear of their lives due to lack of knowhow of the quality of the buildings they live in. At least eleven buildings have collapsed since 2011, to name a few; the storeyed building in Zimmerman Estate Nairobi, a five storeyed building in Kaloleni Estate Nairobi and a three storeyed building in Mabona area, Vihiga County.

The main factors leading to buildings collapsing are:

  • Poor planning of the towns/cities- buildings are built on unsafe grounds such as swampy areas and near water banks
  • Poor quality of concrete and other building materials - For instance, specifications for good mix are never followed as constructors employ unskilled workers to cut on construction costs
  • Weak foundations- In swampy areas the foundations can cost up to half the construction cost. Developers avoid this by laying the substructure on hard-core instead of reinforced concrete strip footings
  • Poor building design through use of quacks

The NCA and National Building Inspectorate need to put strict regulations and ensure they are adhered to. They will however need to build capacity, automate processes and support from both government and other industry stakeholders to do so. The government can also lower licenses and approval fees to encourage compliance by developers many of whom find the current rates too high; for instance, the NCA levy which is 0.5% of construction cost. Developers should also exercise responsibility through professionalism in building construction.

Focus of the Week: Cytonn Corporate Governance Index

The Kenyan investing public has recently lost roughly Kshs 264.3 bn across various companies. As discussed in our Focus of the Week on Corporate Governance in Kenya, most of the losses appear to have been driven mainly by a failure of corporate governance. The losses are shown in the table below:

Shareholders? Loss attributed to Poor Corporate Governance in Kenya


Peak Share Price (Kshs)

Current Share Price

No. of Shares (bns)

Loss in Value (bns)

Kenya Airways





Imperial Bank*




















Chase Bank**





National Bank











* Includes the Kshs 2.0 bn bond

** This is the Kshs 4.8 bn Medium Term Note issued by Chase Bank

Source: Cytonn Investments

Corporate governance constitutes the mechanisms, processes, and relations through which companies are controlled and governed. Corporate governance is founded on the pillars that businesses have to practice accountability to stakeholders, fairness, have transparency in business activities and exhibit independence in decision making of the board. The benefits of good corporate governance are numerous as (i) it protects the interest of the investing public, (ii) improves access to funding at better costs, (iii) reduces risks of corporate crisis, (iv) improves firm valuation and share price performance, and (v) generally improves the performance of the entire firm and enhances sustainability.

Having highlighted the challenges the market is facing, we decided to take the next step to produce an actionable index that market participants, whether investors, companies or regulators, can rely on to factor corporate governance in their decision making.

We did research on various corporate governance indices (CGI) around the world and extracted 25 metrics that can be used to evaluate corporate governance in an organization. We ultimately used 24 of the metrics, and dropped one, litigation against a company, because we could not find sufficient and reliable litigation data.

Based on these 24 metrics, we collected data and created a score for all listed companies with at least Kshs 1.0 bn in market capitalization. The data and score for each of the listed companies was shared with the Chief Executive Officer of each of the companies for their reaction. What is interesting is that companies that rank high on CGI are also very open and responsive; of the top 10 rankings by CGI, 90% (KCB Group, Safaricom, Stanchart, Kengen, Jubilee, Barclays, Bamburi, DTB and I&M) responded to the request to confirm their data and scoring, demonstrating their openness and responsiveness to the investing public. We have released all the data collected to develop this report so that it can be reviewed and critiqued by interested parties.

Key highlights of the findings include:

  1. There is a strong correlation between corporate governance and returns. The top 25 companies in the Cytonn CGI have delivered an absolute return of approximately 55.6% over the last 5 years compared to the bottom 25 companies, which have delivered an absolute return 9.1% per annum of the last 5 years.
  1. Gender diversity is also directly correlated with stock returns. The top 25 companies by gender diversity have delivered and 5-year absolute return of 42.4% compared to 25.6% delivered by the bottom 25 companies
  1. Ethnic diversity is also directly correlated to stock returns as evidenced by the top 25 companies on ethnic diversity delivering a 5-Year absolute return of 52.9% compared to 12.5% delivered by bottom 25 companies.
  1. The top two companies, KCB Group and Safaricom, have come out publicly in support of a transparent and open private sector devoid of corruption.

*We have excluded agricultural stocks due to their repricing as they were priced due to their Real Estate holding

Please find on this link, the Cytonn Corporate Governance Index.

The results demonstrate that good corporate governance is essential to well-functioning and vibrant financial markets; And vibrant financial markets are essential to funding economic growth, which in turn creates jobs and raises the standards of living for Kenyans. Consequently, good corporate governance is a national imperative and we have a choice: we either focus on it and get it right for the benefit of all Kenyans, or give it lip service for the benefit of a few unscrupulous players. We hope that the Cytonn CGI will make its contribution towards improving corporate governance in Kenya and ultimately, deepening capital markets, funding growth and improving the standards of living.

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.