Cytonn Weekly #2/2017

By Cytonn Research Team, Jan 15, 2017

Cytonn Weekly

Executive Summary

Fixed Income: The money market remains tight, leading to the undersubscription of T-bills for the third week running, with overall subscription coming in at 74.9%, up from 60.8% recorded the previous week. The Indian Government has announced an agreement, following bilateral talks, that will see Kenya receive a USD 100.0 mn loan, to be channeled towards agriculture mechanization;

Equities: During the week, the Kenyan equities market was on a downward trend, with NASI, NSE 20 and NSE 25 losing 4.5%, 5.4% and 5.7%, respectively. The European Investment Bank (EIB) approved Kshs 27.0 bn of new lending towards Small and Medium Enterprises in the region;

Private Equity: French oil and gas company, Total, acquires a 21.6% stake from Tullow Oil?s exploration interests in the Lake Albert development in Uganda for an estimated USD 900mn. Toyota Tsusho has taken full control of DT Dobie and CICA Motors after they bought the remaining shares in their parent company, CFAO Group, for Kshs 5.4 bn;

Real Estate: Uchumi Supermarket risks losing part of their Kshs 2.4 bn worth of land to squatters;

Company Updates

  • On Monday, Cytonn Investments released their Business and Market Outlook 2017 Report, which projects Kenya?s 2017 GDP growth to come in between 5.4% - 5.7%, supported by government expenditure on infrastructure, recovery of the tourism sector and the continued growth of the construction sector. According to the report, GDP growth in 2017 is expected to be slower than 2016 given (i) the expectation of slow growth in the agricultural sector due to drought, expected to persist until mid-2017, (ii) the heightened political pressure, and (iii) the low private sector credit growth that was at6% in October 2016, from a high of 21.0% in August 2015. See report here
  • Our Investment Manager, Maurice Oduor, discussed Kenya?s economy, with a focus on economic growth, which is expected to come in between 5.4%-5.7%. Watch Maurice Oduor on KTN here
  • Our Head of Private Equity Real Estate, Shiv Arora, discussed Kenya?s Economy in an Election Year. Shiv projected that the year shall have stable growth due to the good monetary and fiscal planning that has been done in the past eight months. Watch Shiv on Citizen TV here
  • Our Investment Analyst, Caleb Mugendi, discussed the Cytonn Annual Market Outlook 2017 Watch Caleb Mugendi on CNBC here
  • Cytonn clients attended a wealth management training on financial planning. The training, which was facilitated by our Investment Manager Maurice Oduor, saw the participants trained on the essence of financial planning and receive tips on the same. See Event Note
  • We continue to see very strong interest in our Private Wealth Management training, which is at no cost, and held bi-weekly by Cytonn Private Wealth, but is open only to pre-screened participants. To register for the training kindly use this link: See training
  • For recent news about the company, see our news section here
  • In a bid to continue showcasing the real estate developments for Cytonn Investments, we shall be organising site visits every two weeks right after the Private Wealth Management trainings. If interested in attending the site visits, kindly email
    • The Alma, which is now 55.0% sold and has delivered an annualized return of 55.0% p.a. for investors who bought off-plan. See The Alma.
    • Amara Ridge is currently 100.0% sold. See Amara Ridge
  • We have 12 investment-ready projects, offering attractive development returns and buyer's targeted returns of around 25.0% p.a. See further details here: Summary of investment-ready projects
  • 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:
  • We continue to beef up the team with the ongoing hires: Careers at Cytonn

Fixed Income

During the week, T-bills were undersubscribed, with overall subscription coming in at 74.9%, compared to 60.8% recorded the previous week, on account of tight liquidity in the money market. Despite the low subscription rate, the government acceptance rate was low at 52.7%, compared to 89.8% the previous week. Subscription rates on the 91, 182 and 364-day papers came in at 86.2%, 93.7% and 48.7%, from 86.8%, 40.2% and 64.2%, respectively, the previous week. Yields on the 91, 182 and 364-day T-bills remained unchanged during the week, closing at 8.6%, 10.5% and 11.0%, respectively, as the government turned away expensive money, evidenced by the average bid rates for the 182-day and 364-day papers that came in at 10.6% and 11.1%, respectively. There has been a shift by investors on the subscription, with most investing in the 91-day and 182-day papers, an indication of the uncertainties in the interest rates environment. The 182-day paper continues to offer investors the best returns on a risk-adjusted basis and hence received the highest subscription level this week.

The interbank rate decreased by 20 bps to 7.5%, from 7.7% registered the previous week. The rate has been high since the jump in December, where it reached a high of 8.7% from 3.8% at the start of November. The volumes transacted have equally been high, averaging about Kshs 23.1 bn compared to Kshs 20.0 bn the previous week. Liquidity in the money market has been tight and last week there was a net liquidity reduction of Kshs 4.0 bn, which was driven by reduced reverse repo purchases and government payments that came in at Kshs 9.5 bn and Kshs 23.7 bn, respectively, from Kshs 18.6 bn and Kshs 30.9 bn the previous week, respectively. To further explain the tight liquidity position, there was (i) increased activity in the reverse repo market at a rate of 10.0%, and (ii) T-bill rediscounting worth Kshs 4.9 bn. Usually the T-bill rediscounting rate is punitive to investors as it is calculated at 3.0% higher than the prevailing interest rate. 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-Bills Rediscounts


Reverse Repo Maturities


Reverse Repo Purchases




Repos Maturities


T-Bills/T-Bonds Tap Sale


Total Liquidity Injection


Total Liquidity Withdrawal




Net Liquidity Reduction


The government has re-opened the 15-year bond it issued in 2007, in a bid to raise Kshs 30.0 bn for budgetary support, which will see investors participate up until 24th January 2017. We shall provide the bidding recommendation for this recently re-opened issue in our next report.

According to Bloomberg, the yield on the 10-year Eurobond remained unchanged from the previous week at 7.3%, whereas that of the 5-year Eurobond decreased week on week by 10 bps to 4.2%, down from 4.3% the previous week. Since the mid-January 2016 peak, yields on the Kenya Eurobonds have declined by 4.6% points and 2.3% points, respectively, for the 5-year and 10-year bond due to improving macroeconomic conditions. This is an indication that Kenya remains an attractive investment destination.

The Kenya Shilling depreciated marginally this week, losing 0.2% against the dollar to close the week at Kshs 103.9, from Kshs 103.8 the previous week, on account of heightened dollar demand from oil importers in anticipation that the shilling is expected to weaken further. We expect the shilling to come under pressure following the global strengthening of the dollar and the increasing world oil prices. On a year to date basis, the shilling has depreciated against the dollar, losing 1.4%. In recent months, we have seen the forex reserves reduce to USD 6.9 bn (equivalent to 4.55 months of import cover), from the USD 7.8 bn peak in October 2016 (equivalent to 5.20 months of import cover). The reserves level declined during the week to 4.55 months of import cover, from 4.62 months of import cover, the previous week, indicating that the Central Bank used reserves worth USD 114.0 mn to support the shilling this week. As stated in our Cytonn Weekly #45, this is worrying as the rate of decrease in the reserves could be an indication that the CBK is using a lot of reserves to support the shilling. However, it is important to note that if the reserve levels drop too low, the government can access the IMF credit facility, comprised of a USD 989.8 mn 24-month Stand-By Agreement (SBA) and USD 494.9 mn 24-month Stand-By Credit Facility (SCF), bringing the combined facility to USD 1.5 bn.

The Energy Regulatory Commission (ERC) has maintained the fuel levy in the month of January at Kshs 2.85 per Kilowatt hour, offering relief to electricity consumers given that electricity prices were expected to rise on account of the ongoing drought in various parts of the country. This was set to diminish the use of the cheaper hydroelectric power in favor of thermal means, but the move could prove to be the cushion needed to restrain any huge spike in electricity prices. This comes after a stalled energy bill that is before the Senate for consideration, which will allow the ERC to set up a national dispatch unit, that will aim to promote cheaper distribution of electricity to consumers. The government is also considering the option of converting a portion of the country?s coal deposits, where 400.0 mn tonnes were discovered in Kitui, into oil, in a bid to protect the economy from volatile global oil prices. However, the high initial costs of setting up a processing plant could prove to be a real challenge. Apart from the challenges brought about by the non-relenting drought, it is likely that the expected rise in global oil prices will continue to push energy prices upwards and hence spur cost-push inflation. As per our Cytonn Annual Market Outlook 2017, we maintain our view that the inflation rate will rise this year as compared to 2016, but average within the 2.5% - 7.5% government target.

According to the Treasury Secretary Principal, Kamau Thugge, the Government has initiated plans to raise USD 1.1 bn through syndicated loans as part of the budget financing for this fiscal year. The proceeds shall comprise of (i) USD 250.0 mn secured from PTA Bank, the financial arm of COMESA, and (ii) USD 800.0 mn expected to come in from international banks yet to be disclosed. The proceeds are also expected to assist the government in boosting its foreign reserves, and in the process, bring stability to the shilling. Further to this, the Indian Government has announced an agreement, following bilateral talks, that will see Kenya receive credit worth USD 100.0 mn, whose proceeds shall be channeled towards the agriculture sector, targeting mechanization. However, given the two sets of the dollar denominated credit, the country?s overall debt continues to grow following this recent development. As noted in our Cytonn Weekly #51, the trend in Kenya?s debt position is concerning and will only add to the country?s rising debt burden currently at 50.3% of GDP, from about 40.0%, 3-years ago, already above the IMF recommendation of 50.0% of debt to GDP for frontier markets. Given that we expect the Shilling to come under pressure, raising more dollar denominated debt will only add to our debt servicing burden.

Government is ahead of its domestic borrowing for this fiscal year having borrowed Kshs 164.0 bn for the current fiscal year against a target of Kshs 128.0 bn (assuming a pro-rated borrowing throughout the financial year of Kshs 229.6 bn budgeted for the full financial year). It is important to note, however, that the government is in the process of revising its domestic borrowing target upwards to Kshs 294.6 bn, which will take the pro-rated borrowing target to Kshs 164.3 bn, meaning that the government will slightly fall behind its borrowing target. Interest rates, which had reversed trends due to the enactment of the Banking (Amendment) Act, 2015, appear to have bottomed out in July and we expect them to persist at the current levels, having risen slightly over the last few months. However, there is uncertainty in the interest rate environment as the government might have to plug in the deficit likely to arise from revenue collection and foreign borrowing, from the domestic market, which might exert upward pressure on interest rates. It is due to this that we think it is prudent for investors to be biased towards short-term fixed income instruments.


During the week, the Kenyan equities market was on a downward trend, with NASI, NSE 20 and NSE 25 losing 4.5%, 5.4% and 5.7%, respectively, taking their YTD performances to (7.0%), (6.8%) and (8.5%), respectively. Performance was driven by losses in the top large cap stocks, namely Equity Group, EABL, KCB and Safaricom, which lost 10.4%, 6.1%, 4.5% and 3.5%, respectively. Since the February 2015 peak, the market has lost 46.0% and 30.2% for NSE 20 and NASI, respectively.

Equities turnover increased by 1.3% to close the week at USD 26.9 mn, from USD 26.6 mn the previous week. Foreign investors were net buyers with net inflows of USD 2.5 mn, a decline of 55.2% compared to a net inflow of USD 5.6 mn recorded the previous week, with foreign investor participation increasing to 86.1%, from 77.9% recorded the previous week. Safaricom and EABL were the top movers for the week, jointly accounting for 75.0% of market activity. We expect the Kenya equities market to be flat in 2017, driven by neutral investor sentiment on the coming general elections and the rate hike cycle in the US, as corporate earnings growth slows in Kenya.

The market is currently trading at a price to earnings ratio of 9.8x, versus a historical average of 13.5x, with a dividend yield of 7.1% versus a historical average of 3.6%. The charts below indicate the historical P/E and dividend yields of the market.


The European Investment Bank (EIB) has approved Kshs 27.0 bn of new lending towards Small and Medium Enterprises (SMEs) in the East African region, an increase from the Kshs 10.0 bn the EIB disbursed last year. This will be disbursed through a Kshs 21.2 bn credit line with Equity Group, I&M Holdings and Bank of Africa. The fund will give priority to agricultural investments in Kenya and the East African region, in a bid to promote food security and create jobs. The International Finance Corporation (IFC) estimates that SMEs in Kenya have an annual credit gap of over Kshs. 630.0 bn, which affects their ability to compete with bigger businesses. Kenya?s small business sector contributes approximately 38.8% to Kenya?s GDP, and the recent capping of interest rates has further reduced the already slow growth in private sector credit growth, which was at 4.6% in October 2016 from a high of 21.0% in August 2015, further limiting SME access to funding. Going forward, entrepreneurs, especially in the agricultural sector, will be able to access loans, thus providing an injection of much-needed funding into the SME sector. This engagement is recognition of the role of lending as an efficient way for small business to access finance, and an important channel to stimulate the economy.

Equity Group has reduced the tenor of its mobile phone based loans, preferring smaller denominated and shorter term credit. Borrowers who could previously get multiples of their average monthly cash inflows payable in 2 ? 12 months are now restricted to getting a fraction of their cash inflows, payable within a month. This move by Equity Group is an outcome of the enactment of the Banking (Amendment) Act, 2015, which outlines the loan pricing framework, thus making it difficult for commercial banks to fit SMEs and other credit consumers within the current pricing framework. The pricing framework is capped at 4.0% points above the Central Bank Rate (CBR), which is currently at 10.0%, effectively capping the lending rates at 14.0%. As highlighted in our Cytonn Monthly- October 2016, Equity Bank disburses 84.0% of the total number of loans through their digital platform, equal to 8% of their total loan volume. However, following this recent development in the banking sector, loan growth is expected to slow as supply is constrained due to risk, while the allocation to government securities will increase, as government securities are less risky. The Banking Act effectively locks out any borrowers whose credit pricing is above the statutory lending price cap, currently at 14.0%.

Kenya Airways is set to lay off 38 employees in line with its plan to reduce staff costs by an estimated Kshs 2 bn annually, from staff costs of Kshs 15.7 bn as of March 2016, to enhance productivity and efficiency gains. The first phase of layoffs took place in July 2016, during which 80 workers were let go. Kenya Airways has been reporting poor results over the recent past having posted a loss of Kshs 4.7 bn before tax for the half year ending September 2016. The airline thus embarked on a turnaround strategy dubbed Operation Pride, which focuses on three aspects; (i) closing the profitability gap, (ii) improving the business model, and (iii) optimizing on capital. We also witnessed Mr. Michael Joseph being appointed as the new Board Chairperson last year, while Mr. Mbuvi Ngunze leaves the office of the Chief Executive Officer this year. The boardroom changes in the company had a positive impact, having resolved an engineers? strike in less than 24 hours. The layoffs will result to cost containment thus help in closing the airline?s profitability gap, in line with its turnaround strategy ?Operation pride?, as highlighted in our Cytonn Weekly #49. However, Kenya Airways still has to improve on its operations, as it fell two positions to sixth in ranking of Middle East and Africa region airlines in 2016 in international ratings of punctuality, having arrived punctually 66.7% of the time in 2016 compared to 74.1% in 2015.

Below is our equities recommendation table.

all prices in Kshs unless stated




Price as at 06/01/17

Price as at 13/01/17

w/w Change

YTD Change

Target Price*

Dividend Yield

Upside/ (Downside)**













Bamburi Cement










KCB Group***










Stanbic Holdings






























Kenya Re










HF Group










Equity Group










CIC Insurance




















Sanlam Kenya










Co-op Bank










I&M Holdings






























Jubilee Insurance

















































*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

Private Equity

Japanese multinational Toyota Tsusho has taken full control of Kenyan motor vehicle dealers DT Dobie and CICA Motors after buying all the shares from their parent company, CFAO Group. DT Dobie is the authorized dealer of (i) Mercedes Benz passenger cars and trucks, (ii) Volkswagen passenger and commercial vehicles, (iii) Jeeps, and (iv) Greatwall Pickups; and CICA Motors is the exclusive Kenyan distributor for two globally renowned brands: Hyundai Motors Commercial Vehicles and SYM motorcycles. Toyota Tsusho is the global trading arm of the Toyota group. CFAO Group, which was listed on the Euronext Paris stock exchange, was last valued at USD 2.5 bn, and will be delisted following its acquisition. Toyota acquired a 97.8% stake in CFAO in December 2012 for USD 2.3 bn (Kshs 243.7bn), at a valuation of 18.9x P/E, and last month bought the remaining 2.2% for USD 54 mn (Kshs 5.4bn) at a valuation of 23.6x P/E, which represents a discount of 44.5% to the market average of 34.1x P/E. The buyout of DT Dobie and CICA adds to its full ownership of Toyota Kenya, with Toyota Tsusho now controlling a total market share of 24.5% in Kenya?s new vehicle market, second behind leaders General Motors East Africa, who have a market share of 34.5%. Toyota, DT Dobie and CICA now have seven franchises combined, including rights to distribute Mercedes Benz, Volkswagen, Jeep and Hino. This makes the combined operation one of the most diversified alongside CMC Holdings, which deals in Ford, Suzuki, Maruti, MAN and UD among others.

The acquisition of CFAO is aimed at helping Toyota expand its footprint in Africa?s automotive distribution business. This PE investment is driven by:

  1. Policies that promote local content that is being instituted by countries like Nigeria and Kenya: These policies have resulted in restrictions on imports of second-hand vehicles as well tariffs on new vehicles. This is evidenced by the acquisition of Volkswagen franchise by DT Dobie from CMC Holdings, as the Volkswagen franchise recently got a boost after the government committed to buying 300 of the Polo Vivo cars annually as they roll out of the Thika-based assembly firm KVM,
  2. The expanding transport corridor projects in East Africa: The improvement of East Africa?s transport network is expected to reveal greater logistics opportunities and increase the demand for commercial vehicles,
  3. Growing demand for passenger cars in Sub-Saharan Africa: The demand for passenger and luxury cars is driven by increased levels of disposable income, improved road conditions and a young, vibrant population seeking increased mobility.

On the energy front, French oil and gas company, Total, will acquire a stake of 21.6% from Tullow Oil?s exploration interests in the Lake Albert development in Uganda for an estimated USD 900mn. Total will pay an initial USD 100 mn in cash, with another USD 100 mn split equally when the project gets sanctioned and when it first starts pumping oil, while the remaining USD 700 mn will be used by Tullow as deferred consideration to fund its share of the costs. The deal leaves Total with a 54.9% stake in the project and Tullow with 11.8%. The increased share in the Lake Albert project will bring substantial value to Total and also fits with their strategy of acquiring resources with significant upside potential at an exploration cost of less than USD 3 per barrel. Uganda has an estimated 1.7 billion barrels of recoverable oil at fields in the Lake Albert basin that the government expects Tullow, Total and China?s Cnooc to start pumping by 2021. The government has estimated it will receive USD 43 bn of revenue from the resource over 25-years, as the Lake Albert development will pump about 230,000 barrels a day when it reaches full production. The revenues realized from the exploration will be dedicated to infrastructural developments in terms of electricity, railway development, roads, human resource and scientific innovations.

Uganda?s oil and gas industry will continue to attract investors owing to (i) an 85% drilling success rate, (ii) enabling policies, legal and institutional frameworks, including the setting up of the Petroleum Authority of Uganda to oversee the whole sector, are all finally in place and the pace for building this infrastructure is expected to pick up this year as the government seems determined to beat the 2020 timeline for starting oil production and building a refinery, (iii) reduced explorations costs due to VAT exemption on exploration equipment, and (iv) very low exploration costs of less than a dollar per barrel compared to the world average of USD 5 - USD 25 per barrel owing to the VAT exemptions.

Private equity investment activity in Africa has continued to improve, as evidenced by the increase in the number of deals and deal volumes in the region. In East Africa, preference this week has been skewed towards the automotive and energy industries. 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) strong economic growth projections, compared to global markets.

Real Estate

During the week, there were further developments on the court case for the disputed 20-acre parcel in Kasarani area belonging to Uchumi Supermarkets. The retail chain accused a self-help group by the name Njathaini Electricity Project of trying to acquire the parcel valued at Kshs 2.4 bn as at June 2016, through adverse possession. The self-help group claimed to be squatters on the parcel legally registered to Kasarani Mall Limited for over 30-years. The contentious issue is deciding which court order prevails, whereby a court order issued in 2011 had directed the squatters to be barred from accessing the property. However, in December last year, a court order was given preventing Uchumi from accessing the land on the basis that the self-help group had been on the land for more than 12-years.

By law, adverse possession is a legal right through which a person can legally acquire for free property they have, without interruption from registered owners, occupied continuously for 12-years without interruption by the registered owners of land. The conditions to this is proving beyond reasonable doubt that:

  1. The possessors entered the property without legal title,
  2. The registered land owner must have been aware and most importantly,
  3. The legal owner did not interrupt their stay over the 12-years.

This is by the Law of Limitations Act and ignorance of law is never an excuse and limitation. Going by this, there is a high probability that land grabbers prey on peoples? land especially if the registered owners don?t live on it. Persons in the diaspora and those with vast parcels of land may fall victim to this. Fortunately, this can always be resolved by the registered owner filing for legal suits before the expiry of the 12-years seeking the eviction of the trespassers. The most assured way to avoid such encroachment is to ensure that (i) land is always secured by boundaries, and (ii) continuous presence of a guard or caretaker on the land.

Our outlook for real estate remains positive in 2017, driven by the high returns being earned in the sector, the huge housing deficit, increased financing and infrastructural developments in the country, and largely in the Nairobi Metropolitan Area. Investors will however have to be cautious in their investments, ensuring that proper research and due diligence is done before investing and matching the right products to the right market to boost uptake and ensure they earn the high returns in the sector.

Disclaimer: The views expressed in this publication, are those of the writers where particulars are not warranted. This publication, which is in compliance with Section 2 of the Capital Markets Authority Act Cap 485A, is meant for general information only, and is not a warranty, representation, advice or solicitation of any nature. Readers are advised in all circumstances to seek the advice of a registered investment advisor.