Cytonn Weekly Update #14 with a focus on the impact of insecurity on investments

By Cytonn Research Team, Apr 10, 2015

Cytonn Weekly

Executive Summary

  • Fixed Income: Investors still interested in high yielding securities, both government and corporates. The Kenyan Shilling touches a three year low after the Garissa attack.
  • Equities: The Equity markets declined for the sixth week with the NASI falling by 2.2%. Equity Bank fell 5%, losing its position as the largest Kenyan bank by market capitalization to KCB bank
  • Real Estate: Infrastructure developments aid in property prices rally. Shopping centre concepts are gaining popularity as the growing middle class seek a better lifestyle and decentralization helping in creating new markets
  • Private Equity: Kenya continues to attract private equity investors into the country and continues to be the preferred hub for global brands such as Wrigley.
  • Focus of the week: The current issues of insecurity could act as short term distractors to investment in Kenya but in the long term the country has a positive investment potential as long as the government curbs the recurrence of the terror attacks.
  • Company Updates: Incase you missed it, this week we received coverage on the closing of our Private Placement and on our development affiliate, Cytonn Real Estate, see links below, respectively:

Fixed Income Review

There continues to be high investor appetite for government securities as evidenced by the oversubscription of government securities issued during the week despite the minimal changes in yields. The yield for the 91-day paper was 8.4% while the 182 and 364- day papers had yields of 10.2% and 10.6% respectively. The treasury secured Kshs 24 billion from the 12-year infrastructure bond tap sale at a yield of 11.6%. The 3-year EABL corporate bond also received huge oversubscription of Kshs. 9bn against a target of 5 bn, at a yield of 12.3%.

The Kenya Shilling weakened albeit marginally against the Dollar to close at a 3-year low of 92.8 on Friday after the deadly terrorist attack in Garissa University last week. Unless insecurity is quickly and aggressively contained, we are of the opinion that a downward revision of the economic growth forecast for the country from IMF?s prediction of 7% may be imminent. In the coming weeks however,  the Central Bank?s activity in the market in support of the Shilling should help stabilize the Shilling against the Dollar.

In the Eurozone, Greece was able to repay the IMF?s loan of 460 million Euros on Thursday buying itself time to secure the final portion of its 240 billion Euro international bailout. Eurozone partners have given the Greek government six days to improve the package of proposed reforms submitted last week before any more bailout funds are released. We are optimistic that Greece will be able to secure the next batch of bailout funds, hence averting the possible crisis of financial contagion in the event that it defaults on its debt.

Equity Market Update

The NASI fell 2.2% while the NSE 20 fell 1.4%. The decline was led by a 5.4% drop in Equity Bank?s stock price; we attribute the drop to two events, first, the bank announced the approval to create an additional 411 million ordinary shares, which are approximately 11.1% dilutive to existing shareholders if fully issued. Second, the close association between Britam and Equity may have caused some investors unease given the Mauritian regulator?s accusing Bramer Bank of running a Ponzi Scheme ? Britam and Bramer have common directorships. With the drop in its stock price, Equity subsequently lost its position as the # 1 bank by market capitalization to KCB Bank, which rose 4% during the week to stand at a market capitalization of Kshs 183.5 billion against Equity Bank?s Kshs 175.8 billion.

In the Insurance sector, Liberty Kenya Holdings reported a 3.8% increase in profit to Kshs 1.1 billion, to become the last listed insurer to report their 2014 full year results. Performance was driven by a 7% increase in premiums and a 12% increase in investment income, leading to a 4.4% rise in earnings per share.

The market has continued to trade side ways and this has been affected by first the reintroduction of the capital gains tax, lower earnings than the previous year by listed stocks and the insecurity in the country. However, there are also a number of key support factors, greatest of them being the expected high GDP growth rate and continued good ratings in the global markets. However, as mentioned in our Q1 update, we think valuations are stretched and the market may pause before further increments.   

Real Estate

The Real Estate sector has benefited significantly from the huge infrastructure expenditure in the recent past and this is expected to continue. Good examples of this are areas like Kileleshwa, whose land prices have sky rocketed to north of Kshs. 250 million per acre. All the other bypasses have led to high prices and the key for most investors is to understand where major roads and other infrastructures are going to be in future and plan the real estate investments around the areas.

With continued growth in the middle class, increased decentralization and the willingness of the young people to lead a good life, Malls as an investment has gained a lot of traction. We have seen Housing Finance agreed to finance a Kshs. 820 million mall, Cedar Mall, to be built by Esteel Construction limited in Laikipia County. We also saw recently Uchumi supermarket sign an agreement as anchor tenants for the Lake Basin Mall on the Kisumu-Kakamega Highway. 

Private Equity

Investments into private companies and expansion by companies in Kenya has continued and last week we saw Wrigley (a US based chewing gum maker) break ground on a new Kshs 5.8 billion factory in Mavoko on a 20 acre piece of land and it aims to double its production capacity as it relocates from industrial area. 

Fanisi capital has injected $2.1 million into European Foods Africa Limited, a local firm processing and distributing pizza, berries and juices. Fanisi?s equity and debt stake in the company will be used to expand the distribution channels. Fanisi?s stake in European Foods in addition to its existing investments in a Kenyan meat processor and a Rwandan grain handler indicates that Fanisi is bullish on the agro-business and food-processing sector. 

Cytonn Investments recently closed its Private Placement Offer that valued the company north of Kshs 1 billion. Cytonn intends to use the proceeds towards add-on acquisitions that provide complimentary services and yield synergies within its portfolio and towards developing its affiliate company Cytonn Real Estate. We saw very good appetite from both local and global high net-worth investors. 

Norfund, Norway?s development fund, is partnering with Britain?s development fund CDC to buy a stake in Globeleq Africa in a plan to increase its investment in SSA up to three-fold in the next 5 years. Globeleq Africa produces electricity, yet another add-on investment to Norfund?s existing portfolio of stakes in power plants including its investment in the Lake Turkana Wind Power Park. 

Focus of the Week: The impact of Insecurity on Investments

Nairobi?s Windsor Hotel played centre stage as it hosted the Kenya Diaspora Investment Conference. Attendees, among others, included the Head of State, Ministers and Ambassadors, past and present from Nations across the World. The conference highlighted the investment opportunities in the country. But two days after the opening, Kenya made international news for a reason other than the investment opportunities in the country. Al Shabaab militants, a terror group in Somalia, linked to Al Qaeda, attacked the Garissa University College in Garissa, Kenya, killing at least 150 people.

The attack, as expected, stoked global outrage and raised questions on the security functions of the current Kenyan Government to tackle insecurity. It is these attacks that are purported to ?send shivers down the spine? of investors, who place a higher risk premium on nations with insecurity issues. With insecurity causing those affected to feel vulnerable in some way, we ask ourselves, will it really have the negative effect on investment that it perceives to have? 

Tourism is always the sector that bears the brunt of the insecurity impact, and this is no different in Kenya. Tourism generated Kshs 90 billion in earnings in 2014, contributes to 11.4% of GDP and is the key foreign exchange currency earner alongside Horticulture. The attacks have caused fresh travel advisories issued against Kenya by the US, Britain, France, and Australia, which could cause a 1.0% reduction in GDP growth as tourists shy away from Kenya. 

In addition, there is the perception that Kenya?s position as a regional and communication hub for Africa will suffer a setback as security concerns bog down global firms, which then shun the country. This would cause large loss of innovation in the market, as well as closing potential job avenues, both factors that hamper investment into Kenya.

However, we do not view the insecurity as a risk to investing in Kenya, and dampening the returns that can be accessed in the market. Kenya is one of the last markets where investors can consistently access GDP growth of 6% - 8% per annum over the next decade. Various Private Equity firms and Global Conglomerates looking to put their capital to work in Kenya can attest to this growth potential. Most recently, multinational chewing gum manufacturer Wrigley Company has broken ground for a new Ksh 5.8 billion factory in Mavoko, Machakos, as it aims to double its production capacity and cement its leading position in the market.

Travel & Tourism investment in 2013 was Kshs 55.8 billion, or 7.6% of total investment and is expected to rise by 5.4% per annum over the next ten years to Kshs 96.2 billion in 2024, showing that investors are not shying away due to insecurity. In addition, Kenya has a very young population, 42.1% is below the age of 14 and 32.8% of the population is between the ages of 25 and 54, with a median age of 19 years. This large portion of the population is only now entering the working force and gaining the ability to potentially invest in the Kenyan Economy, grow consumption expenditure and provide a whole new market for investors focused on servicing them in sectors such as middle-income housing real estate. 

The real estate market has also shown resilience to the insecurity in Kenya. Global real estate markets have entered bubble territory or collapsed in recent years, yet the Kenyan market has remained strong, driven by demand from the lower to middle income segment. In particular, land prices have risen by 535% over the last seven years, driven by high demand and a more expansive infrastructure scheme, which has increased accessibility countrywide, as well as allowed investors to make returns of 24% per annum over the last 5 years. 

With the attractive returns, a limited supply of housing, and a growing and more educated population, the Kenyan economy has many and diversified investment opportunities to propel its growth. Hence, in our view, the terrorist attacks will cause sporadic disruptions and uncertainty in the short-term, but the insecurity challenges will not derail investment from coming to Kenya, with the positive economic drivers outshining the challenges. However, we make the big assumption that the government will quickly, aggressively and, most important, appropriately, act to contain insecurity so that acts of terrorism such as those in Mandera and Garissa do not become the norm. 


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