Cytonn Weekly #40

By Cytonn Research Team, Oct 9, 2016

Cytonn Weekly

Executive Summary

  • Fixed Income: Yields on Treasury bills remained relatively stable with the 91-day, 182-day and 364-day papers coming in at 7.8%, 10.3% and 10.3% from 7.8%, 10.4% and 10.4% respectively. Meanwhile, the Central Bank of Kenya (CBK), sent out a circular to commercial banks and mortgage financiers requiring them to withdraw all levies being passed on to the customers without approval in the new loans and deposits pricing era;
  • Equities: The equities market registered improved performance with NASI, NSE 20 and NSE 25 gaining by 1.0%, 0.6% and 0.5%, respectively, during the week. The Communications Authority of Kenya (CAK) released Telecommunications Sector statistics for Q2?2016 which indicated market share gains for Safaricom across all categories except for the mobile money segment where the market share of value of transactions and the number of transactions declined to 84.3% from 91.0% and to 81.9% from 83.8%, respectively;
  • Private Equity: Africa private equity funds raise USD 1.1 bn in H1?2016, with a focus on African real estate and financial services. The FMCG industry continues to attract private equity investments supported by a growing middle class;
  • Real Estate: The government has initiated the process of developing the Kenya Railways Corporation?s mega projects in Nairobi, Mombasa, Kisumu and Voi in the wake of private developers embracing masterplan development concepts.

Company Updates

  • Amara Ridge, our signature development in Karen, opposite Bomas of Kenya, is now 100% sold out, six months before delivery. With the 100% sale, Cytonn Real Estate has also returned part of the development loan to Taaleri, the Finnish financier. For more information, see Link: Amara Ridge?s 100% sale
  • To invest in any of our current or upcoming real estate projects, please visit Cytonn Real Estate.We continue to see very strong interest in our products, particularly The Alma, which is now 50.0% sold and has delivered an annualized return of 55.0% p.a. for investors who bought off-plan. We have 12 investment ready projects, offering attractive development returns and buyer's returns of a minimum of 25.0% p.a. See further details here: Summary of investment ready projects
  • Our Senior Investment Analyst, Duncan Lumwamu, was on CNBC discussing NSE Q3'2016 performance and Unga Group FY'2016 results. See the link: Duncan Lumwamu on CNBC.
  • This week our managing partner and CEO, Edwin H. Dande gave a keynote address at Havilah Business Summit, which focused on entrepreneurship and job creation. See link: Havilah Business Summit
  • This week our Real Estate Wealth Advisors Team had an incredible two-day training session at The Monarch Hotel in Nairobi on how to improve sales and better serve the client. See Link: Real Estate Wealth Advisors Team
  • We continue to beef up the team with several ongoing hires: Careers at Cytonn.

Fixed Income

During the week, T-bills were oversubscribed with overall subscription increasing to 160.7%, compared to 129.5% recorded the previous week. Subscription rates increased across all tenors with the 91-day, 182-day and 364-day papers coming in at 151.0%, 201.2% and 126.5% from 118.1%, 144.6% and 122.1%, respectively, the previous week. The increase in subscription rates across all tenors is attributed to the increased liquidity in the money market due to increased government expenditure. The 182-day paper remains the most subscribed as it offers the highest return on a risk-adjusted basis especially given that its rate is the same as the 364-day bill. Yields on Treasury bills declined marginally for the 91-day, 182-day and 364-day papers coming in at 7.76%, 10.34% and 10.34% from 7.82%, 10.42% and 10.42%, respectively, from previous week.

The 91-day T-bill is currently trading below its 5-year average of 10.4%. The downward trend for the 91-day paper is mainly attributed to the expected low interest rate environment following the operationalization of Banking Act Amendment 2015 and the government stepping up their borrowing program which currently is ahead of the pro-rated domestic borrowing target of Kshs 66.2 bn having borrowed Kshs 103.5 bn.

The Central Bank Weekly report revealed that the interbank rate declined by 60 bps to 5.6% from 6.2% the previous week, on account of increased liquidity in the money market attributed to government payments, T-bill redemption and reverse repo purchases worth Kshs 59.4 bn, Kshs 9.1 bn and Kshs 7.8 bn, respectively, leading to a total injection of Kshs 76.3 bn, which more than offset the liquidity withdrawal of Kshs 57.8 bn. Of key note is that there has been an increase in the average excess of cash reserve in commercial banks from the 5.25% required, increasing to Kshs 12.5 bn from Kshs 8.8bn the previous week.

Below is a summary of the money market activity during the week:

all values in Kshs bn, unless stated otherwise

Weekly Liquidity Position ? Kenya

Liquidity Injection


Liquidity Reduction


Term Auction Deposit Maturities


T-bond sales


Government Payments


Transfer from Banks - Taxes


T-bond Redemptions


T-bill (Primary issues)


T-bill Redemption


Term Auction Deposit


T-bond Interest


Reverse Repo Maturities


Reverse Repo Purchases




Repos Maturities



Total Liquidity Injection


Total Liquidity Withdrawal




Net Liquidity Injection



According to Bloomberg, yields on the 5-year and 10-year bond were stable week on week at 4.4% and 7.1%, respectively. Since the mid-January 2016 peak, yields on the Kenya Eurobonds have declined by 4.4% and 2.5% on account of improving macroeconomic conditions. This is an indication that Kenya remains an attractive investment destination

The Kenya Shilling was stable against the dollar to close the week Kshs 101.3, on account of foreign inflows from diaspora remittances and horticultural exports. However, the shilling was seen to come under pressure on Friday as multinationals prepare to pay dividends to foreigner investors such as Barclays Bank. On a year to date basis, the shilling has appreciated by 1.0% against the dollar. We expect the shilling to remain stable for the remainder of the year supported by (i) the high levels of foreign exchange reserves equivalent to 5.2 months of import cover, and (ii) improved diaspora remittances.

This week, the Central Bank of Kenya (CBK) bank supervision department sent a circular to commercial banks and mortgage financiers requiring them to withdraw all new levies being passed on to the customers without the regulator?s approval. The circular states that any bank charging new fees in the new loans and deposits pricing era will face hefty fines and sanctions as it is illegal, with losing the operating license as one of the penalties. Any bank that has been charging these illegal fees should reverse them with immediate effect, the circular asserted. The CBK highlighted that it has received requests from several financial institutions seeking approval to increase charges and widen their revenue streams. Also, the regulator drew the attention of the banks towards conversion of accounts from call or fixed deposit to transaction accounts in a move to cutting on cost of funds to be reversed immediately. The Central Bank of Kenya is keen on protecting the consumers and it stated in the circular that it will follow up on a case by case basis with any institution that has violated the law with regards to law relating to approval of charges and products being rolled out.

The International Monetary Fund (IMF) reviewed its 2016 global economic growth forecast this week and is projecting a weaker global GDP growth of 3.1% from 3.2% in July on account of (i) global trade slowdown (ii) lower level of investments during the year and (iii) Brexit negotiations which are expected to create some level of uncertainties in some economies. However, the forecasted growth for 2017 is expected to come in at 3.4% driven by emerging markets positive growth and strong U.S economic growth. Economies such as Russia and Brazil in the Emerging Markets category have tracked back from negative growth and are expected to grow steadily going into 2017. This comes as the IMF reported that the level of debt in the world has increased to a record high of $152 trillion even as it continues to encourage some economies to spend more and stimulate economic growth. In the latest IMF Fiscal Monitor Report, the global debt both public and private reached 225% of the global Gross Domestic Product (GDP) in 2015 up from 200% in 2002. The report also indicated that much of the debt (67%) is in the private sector while the public sector constitutes 33%, and also noted that rapid growth in private sector debt often leads to financial crisis.

The IMF has included the Chinese Yuan in the Special Drawings Rights (SDR) basket of currencies starting 1st October,2016. The Yuan joins the US dollar, Euro, Japanese Yen and British Pound as part of the international reserve assets. This comes in as China emerges to be on the lead in coping with Asian and global economic crises at large. The Chinese Yuan is now viewed as a strong currency and will have immense contribution to a more robust and stable monetary policy after joining the SDR basket. We view this as a reward to China for their firm presence as well as their increasing relevance in the financial markets having previously made a call for inclusion in the SDR currencies basket thus broadening the international reserve assets.

The government is ahead of its domestic borrowing for this fiscal year having borrowed Kshs 103.5 bn for the current fiscal against a target of Kshs 66.2 bn (assuming a pro-rated borrowing throughout the financial year of Kshs 229.6 bn budgeted for the full financial year). Interest rates, which had reversed trends due to Government borrowing given the new fiscal year, characterized by an uptick in inflation rates and tight liquidity in the money market, are currently witnessing downward pressure owing to the enactment of The Banking Act Amendment, 2015. It is due to this that we advise investors to be biased towards short to medium-term papers.


During the week, the Kenyan equities market registered improved performance with NASI, NSE 20 and NSE 25 gaining by 1.0%, 0.6% and 0.5%, respectively, taking their YTD performances to (5.2%), (19.3%) and (13.2%), respectively. Since the February 2015 peak, the market has lost 22.2% and 40.7% for NASI and NSE 20, respectively. The week?s performance was driven by gains in selected large cap stocks such as Safaricom and EABL gaining 1.5% and 0.7%, respectively, despite marginal losses of 2.4% and 0.9% in Equity Bank and KCB.

Equities turnover declined by 43.2% to close the week at Kshs 2.1 bn from Kshs 3.7 bn the previous week.  Foreign investors were net buyers with net inflows rising by 139% to USD 6.7 mn, compared to a net inflow of USD 2.8 mn recorded the previous week, with foreign investor participation decreasing to 67.1% from 82.5% previously. Safaricom was the top mover for the third straight week accounting for 27.7% of market activity and gaining 1.5%. We maintain our expectation of stronger earnings in 2016 compared to 2015 supported by a favorable macroeconomic environment. However, the key risk is the volatility in the banking sector that may depress earnings for banks especially for the fourth quarter.

The market is currently trading at a price to earnings ratio of 12.1x, versus a historical average of 13.7x, with a dividend yield of 6.3% versus a historical average of 3.5%. The charts below indicate the historical PE and dividend yields of the market. Based on valuations, the market is really attractive for long term investors.

The Communications Authority of Kenya (CAK) released Telecommunications Sector statistics for Q2?2016. Key highlights from the report were;

  • Mobile subscriptions rose by 3.7% to 39.7 mn from 38.3 mn registered in the previous quarter hence achieving a 10% y/y growth with mobile penetration increasing by 0.9% to 90% from 89.2% registered in the previous quarter,
  • The minutes of use per subscriber per month in the industry declined by 3.4% to 86, from 89 registered the previous quarter,
  • The total number of Short Messaging Service (SMS) sent during the quarter increased significantly by 78.5% to 11.6 bn messages from 6.5 bn registered in the last quarter. This growth is attributed to the Create Your Plan Bundles SMS tariff that was introduced by Safaricom Limited during the period under review. Similarly, the volume of SMS sent throughout the year grew by 19.9% to 31.3 bn messages up from 26.1 bn sent during the previous year.
  • The number of internet broadband subscriptions increased during the quarter under review to 10.8 mn from 7.9 mn recorded in the previous quarter attributed to high uptake of internet enabled mobile phones that are affordable and readily available in the market. The broadband penetration closed at 24.5% from 18.6%
  • Internet subscriptions, meanwhile, stood at 26.8 mn during the quarter under review up from 24.8 mn registered in the previous quarter, resulting into a growth of 8.2%. Consequently, the number of internet users grew by 0.8% to 37.7 mn from 37.4 mn registered in the previous quarter. This growth has been mainly attributed to the increased adoption of internet enabled mobile phones supported by expansion of 3G networks

There were market share gains by Safaricom across all categories except mobile subscribers and mobile money. Other service providers? highlights from the report were;

  • Airtel?s total mobile subscriptions declined by 2.0% to stand at 6.5 mn during the period under review from 6.7 mn in the previous quarter while the pre-paid subscriptions declined by 2.1% and post-paid subscriptions declined by 1.4%. Airtel market share by subscriptions dropped by 0.9% to 16.6% in Q2?2016 from 17.5% registered in the previous quarter,
  • Orange Kenya had a subscription growth of 8.9% at 5.2 mn up from 4.8 mn recorded in the previous quarter while the total number of pre-paid subscriptions grew by 8.9% with the post-paid subscriptions growing by 1.8%. Orange Kenya?s market share by subscriptions increased by 0.7% to 13.2% in the quarter under review from 12.5% recorded in the previous quarter,
  • Safaricom?s subscriber market share declined marginally by 0.4% to 65.2% while its minutes? market share increased by 1.0% to 77.8%. However, the gains in minutes? market share was on the back of negligible growth in overall industry minutes. Safaricom?s SMS market share increased from 89.9% to 93.9% on account of its new SMS bundle offers,
  • The mobile money statistics, however, indicated that Safaricom?s market share of the value of transactions and transaction numbers had declined to 84.3% from 91.0% and to 81.9% from 83.8%, respectively. The loss in market share is mainly attributed to Equitel though Equitel is an additional banking channel and hence banking transactions have been included in its market share data whereas Safaricom exclusively focuses on money transfer and payments.

The industry has recorded improved growth in terms of mobile subscriptions and data consumption. Given the rapid population growth and technological advancements, we expect the industry to continue experiencing strong growth.

ARM Cement announced completion of its efforts to raise capital from CDC group. ARM Cement issued 353.6 mn ordinary shares in the company at a price of Kshs 40.0 per share to CDC Africa Cement Limited (CDCAC), for Kshs 14.0 bn, which will bring CDC group?s shareholding in the company to 40.65%. ARM has also issued 90.0 mn ordinary shares in the company to the ARM Employee Share Ownership Plan (ESOP). According to the management, the full capital raised will be used to (i) retire their short term debt currently at Kshs. 15.4 bn, thereby reducing financing costs and (ii) completing the grinding plant in Tanga that will improve production capacity. In our view, this investment will serve to enhance ARM?s financial capacity and enable the company to meet the growing demand for sustainable production of cement across Sub-Saharan Africa. Therefore, we maintain a buy recommendation on ARM with an updated valuation of Kshs 37.0,taking into account the newly issued ESOP shares. At the current market price of Kshs 24.75, this results into a potential upside of 49.5%.

Below is our equities recommendation table. Key changes from our previous recommendation are:

  • Equity Group has moved from an ?Accumulate? recommendation, with an upside of 18.9% to a ?Buy? recommendation with an upside of 21.7%, following a 2.4% w/w price decline

all prices in Kshs unless stated




Price as at 30/09/16

Price as at 07/10/16

w/w Change

YTD Change

Target Price*

Dividend Yield

Upside/ (Downside)**



KCB Group***








































Kenya Re










HF Group










Co-op Bank


















































Equity Group




















I&M Holdings










CfC Stanbic










CIC Insurance


















































Sanlam Kenya



















*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 with a bias to positive? for investors with short to medium term investments horizon and we have now turned ?positive? for investors with long-term investments horizon.

Private Equity

During the first half of 2016, Africa private equity funds achieved a final close of USD 1.1 bn, buoyed by investor appetite for real estate in Africa, and increased deal activity. This is according to the bi-yearly African Private Equity Data Tracker from the African Private Equity and Venture Capital Association (AVCA). The total value of private equity deals completed in Africa during the first half of 2016 reached USD 900 mn, comprising 83 reported transactions, with 75% under USD 250 mn in size. 46% of the total value raised, approximately USD 0.5 bn, was dedicated exclusively to real estate, highlighting the growing attractiveness of Africa Real estate sector. This was primarily through Actis Africa Real Estate Fund, which raised USD 500 mn, and will invest predominantly in retail, office and industrial developments as highlighted in our Cytonn Weekly #23.

A consortium of investors consisting of DEG ? a German investment and development company - and Development Partners International (DPI) are jointly buying a 49.0% stake for USD 55.0 mn in Generale Emballage, an Algeria-based corrugated cardboard supplier. The duo is buying out AfricInvest ? a Tunisia-based private equity company concentrated in the Pan-Africa region ? that looks to exit after having benefitted from Generale Emballage?s 5.0x turnover expansion and 8.0x EBITDA growth since 2009. Generale Emballage is a growing company that made its debut into the market in 2002 and to date has 1,000 employees and 3 production facilities in major towns in Algeria. The cardboard supplier is expected to grow further going forward supported by (i) an expected rise in consumption in Algeria supported by the growing middle class and, (ii) local consumer industries continued preference for locally manufactured products. DEG and DPI expect to realize returns from this growth as has been realized by AfricInvest from 2009 to present. We are of the view that the rising middle class in Africa is gradually leading to an investor- focus shift from extractive to consumer-facing and Fast Moving Consumer Goods (FMCG) industries and is positive for most sectors.

Private equity investment activity in Africa has continued to improve, as evidenced by the increase in the number of deals and deal volumes into the region, with funds continuing to prefer financial services, energy, real estate, healthcare, education, and IT sectors although infrastructure, Fast Moving Consumer Goods (FMCG) industries and natural resources are gaining ground. We remain bullish on PE as an asset class in Sub-Saharan Africa given (i) the abundance of global capital looking for investment opportunities in Africa, (ii) attractive valuations in the private sector, and (iii) better economic growth projections compared to global markets.

Real Estate

Over the past week, the government commissioned studies to determine the most effective investment option for the mega projects that will be strategically located along the Standard Gauge Railway in Mombasa, Nairobi, Kisumu and Voi. The envisaged plan will involve putting up of office blocks, hotels, shopping malls and industrial parks. The proposed undertaking of Kshs 217.0 bn will be done through a mix of joint ventures, franchises and build-operate-transfer (BOT). The BOT option will allow the investors to develop a section of the cities, operate them until they recover their initial capital outlay as well as their profits after which the investors will be expected to transfer the development back to the government. The Kenya Railways Project will be set on 100 acres in Mombasa, 200 acres in Nairobi and 75 acres in Kisumu. Once completed we expect Kisumu to be opened up as a major transport terminal in the great lakes region and consequently attract more real estate investors in the region. Nairobi on the other hand will be the greatest beneficiary given the strategic location of the parcel between the CBD and the industrial zone hence being a preferable residential area and consequently attract retail investment.

Chandaria Industries announced their plans to set up a Kshs 5.0 bn tissue paper manufacturing factory within their 29-acre leased parcel which is part of the Tatu Industrial Park in a bid to double its production capacity. The firm hopes to complete the construction in the next 4 years resulting in creation of over 1,000 job opportunities. Unilever, Kim-Fay East Africa and Maxam are some of the other major firms that have shown interest in the 2,500-acre masterplan development. Newtown Athi River, Tatu City, Konza City, Northlands, Tilisi and Thika Greens are some of the major masterplan cities earmarked for development within the Nairobi Metropolis. This is an indicator of the huge demand for comprehensive developments with reliable infrastructure. The biggest advantage that end users will derive from the masterplans are reliable power supply, good quality and widespread road network, water and sewerage connection which are not very reliable in scenarios where they are provided by the public sector. We expect the continued success of masterplan developments backed by comprehensive studies to address the needs of the end users as well as sound source of finance. The continued improvement of transport network by the government such as the Standard Gauge Railway, superhighways and by-passes will also play a major role in ensuring that such developments are a sustainable investment opportunity. This will arise in decentralization from the CBD as a major business hub since the masterplan developments will be a ?live, work, play? environment.

Over the week, Knight Frank released the market report for the H1?2016. The report indicates that the construction and real estate sectors continued to thrive resulting in growth of Kenya?s GDP by 5.9% for Q1?2016 compared to a 5.0% growth for a similar period last year. The retails segment in Nairobi witnessed stagnation of the monthly rent at an average of USD 48.0 per square meter. This is due to increased retail space supply with more retail space anticipated in the coming years. Consequently, tenants leasing retail space continued to enjoy flexibility in their lease structures such as zero escalation rates which is a bid by the retail space providers to attract the right tenant mix within the malls. Other key highlights include;

  • Office space experienced a 28.0% increase in the absorption of Grade A & B offices space compared to the H2?2015 and a 22% increase compared to H1?2015. However, due to the increased supply, the rents and the selling prices remained relatively stable over the period at approximately USD 21.0 per square meter per month and Kshs 130,000 to 150,000 per square meter exclusive of VAT respectively, and
  • For the residential sector, the prices for high end developments increased by 1.3% in H1?2016 as compared to a 2.0% increase in H1?2015. The rents for this class of residential property dropped by 8.0% in H1?2016 compared to a 0.0% change in the similar period last year. This can be attributed to increased supply and the downsizing of operations by firms in the oil & allied sector and decentralization of parastatals which had previously taken up a sizeable Grade A & B office space. On the other hand, favorable interest rates resulted in the increase of mortgage uptake by 11.0% in H1?2016.

Despite the stabilization of the asking rents, the outlook for the retail sector still remains positive especially for the already established malls which continue to enjoy customer loyalty in the midst of increased mall supply. The uptake for office space is expected to continue with the upward trend especially for a space range of 1,000-3,500 Sq.ft. while the selling prices is expected to remain unchanged. We expect the drop in rent for the prime residential units to continue in H2?2016 due to tight corporate budgets and increased supply of high end residential developments.


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.