By Cytonn Research Team, Mar 5, 2017
Fixed Income and Macro Economic Review: Yields on T-bills were relatively unchanged during the month, closing at 8.6%, 10.5% and 10.9%, from 8.7%, 10.5% and 10.9% for the 91, 182 and 364-day papers, respectively, at the end of January. Kenya?s inflation rate for the month of February increased to 9.0%, from 7.0% recorded in January, driven by an increase in food and fuel prices;
Equities: During the month of February, the equities market was on an upward trend with NASI, NSE 25 and NSE 20 gaining 2.2%, 4.0% and 7.2%, respectively, taking YTD performance to (6.3%), (7.5%) and (6.0%), respectively. A number of companies released earning results during the month, notably Kengen, BAT, Barclays Bank and Stanbic Holdings, all recording declines in core earnings per share by 18.6%, 14.9%, 12.3% and 9.9%, respectively. Consequently, for all the companies that have reported so far YTD, there has been a 1.6% decline in the market weighted average core earnings per share, for the non-financials, they were down by 2.5%, however, for the financials they were up 1.0%;
Private Equity: The month of February was active for fundraising activity skewed towards the technology sector, especially in Kenya. February also witnessed Detroit-based General Motors exit the Kenyan market by selling its 57.7% stake in General Motors East Africa to Japanese firm Isuzu Motors;
Real Estate: The real estate industry maintains high performance and activity across all segments, with increased development activity expected in low to middle income residential segments and the hospitality segment. Kenya continues to be the preferred business hub in the region, evidenced by PowerChina and Boeing International announcing plans to set up regional offices in Nairobi;
The month of February was characterized by high T-bill subscriptions, with the overall subscription rate increasing to 177.5%, from 68.5% in January. We noted that during the month, investor preference shifted away from the 91-day paper, which witnessed low levels of subscription, and was skewed towards the 182 and 364-day papers, which offered investors higher returns on a risk-adjusted basis. This was evidenced by the subscription rates for the 91, 182 and 364-day papers, which came in at 67.8%, 316.8% and 111.2%, compared to 95.3%, 69.5% and 44.9% the previous month, respectively. Yields on T-bills were relatively unchanged during the month of February, closing at 8.6%, 10.5% and 10.9%, from 8.7%, 10.5% and 10.9% for the 91, 182 and 364-day papers, respectively, at the end of January. The Central Bank (CBK) has remained disciplined in stabilizing interest rates in the auction market by rejecting bids that CBK considers above market, and we have seen the market respond to this, with the overall bids acceptance rate in February rising to 84.2%, compared to 66.1% in January.
Carrying forward the February trend, during the first week of March, T-bills were oversubscribed for the fifth week running, with overall subscription coming in at 209.5%, compared to 185.4% recorded the previous week, with the subscription rate on the 91 and 364-day papers increasing to 147.4% and 57.4%, from 96.2% and 17.7%, respectively, while that of the 182-day paper decreased slightly to 403.0%, from 412.5%, the previous week. Yields on the 91, 182 and 364-day T-bills remained relatively unchanged during the week, coming in at 8.6%, 10.5% and 10.9%, respectively. Given the possible upward pressures on interest rates, which are currently at low levels, we maintain our recommendation for investors to be biased towards short-term fixed income instruments.
The 91-day T-bill is currently trading below its 5-year average of 9.9%. The lower yield on the 91-day paper is mainly attributed to the low interest rates environment we have been experiencing, given the Central Bank (CBK) has remained disciplined in stabilizing interest rates in the auction market by rejecting bids that CBK considers above market. However, as indicated previously, despite the current low interest rates environment, there exists possible upward pressure on interest rates as (i) the government having only borrowed Kshs 123.5 bn, of the budgeted foreign borrowing, representing 26.7% of its foreign borrowing target of Kshs 462.3 bn, the balance of which it will most likely plug from the domestic market, and, (ii) the Kenya Revenue Authority (KRA) having already missed its first half of 2016/17 fiscal year revenue collection target by 3.2%, leading to increased borrowing to meet expenditure requirements.
During the month of February, the Kenyan Government offered a 12-year amortized Infrastructure Bond (with an effective tenor of 8.8 years), at a coupon rate of 12.5%, to raise Kshs 30.0 bn for partial support of infrastructural projects in the roads, energy and water sectors. Yields for the bond came in at 13.6%, which was within our bidding recommendation of 13.5% and 14.3% as highlighted in our Cytonn Weekly #7/2017. The government ended up only accepting Kshs 6.0 bn from the total bids received worth Kshs 35.0 bn, translating to an acceptance rate of 17.1%. Government promptly moved to re-open the bond issue looking to raise the additional Kshs 24.0 bn through a tap sale. The tap sale, which was open to investors up until March 2nd 2017, saw investors participate at the weighted average rate of accepted bids in the initial auction of 13.6%, with subscriptions for the tap sale coming in at Kshs 8.1 bn, translating to a subscription rate of 33.5%. The low subscription witnessed in the bond issue, coupled with a decline in secondary bond market activity during the month of February, is an indication that investors are keeping short due to the uncertainty surrounding interest rates environment. Given that (i) the government has only borrowed Kshs 123.5 bn from the foreign market against its foreign borrowing target of Kshs 462.3 bn, and (ii) the Kenya Revenue Authority (KRA) has already missed its first half of 2016/17 fiscal year revenue collection target by 3.2%, and is expected to miss its overall revenue collection target of Kshs 1.5 tn for the current fiscal year, we expect the government to come under pressure to borrow from the domestic market to meet the high level of debt maturities, which may result in upward pressure on interest rates.
During the month, the money market saw a new liquidity withdrawal of Kshs 1.0 bn, despite a decline in the average interbank rate that closed at 4.6%, from 7.4% at the end of January. The reduction was a change from net liquidity injection of Kshs 53.8 bn in January, as a result of an increase in T-bill primary issue and Repos which came in at Kshs 95.7 bn and Kshs 75.1 bn, from Kshs 32.3 bn and Kshs 3.8 bn, respectively, last month. The interbank rate is often determined by the liquidity distributions within the banking sector as opposed to the net liquidity position in the interbank market.
Below is a summary of the money market activity during the month:
all values in Kshs bn, unless stated otherwise
February Monthly Liquidity Position ? Kenya
Term Auction Deposit Maturities
Transfer from Banks ? Taxes
T-bill (Primary issues)
Term Auction Deposit
Reverse Repo Maturities
Reverse Repo Purchases
OMO Tap Sales
Total Liquidity Injection
Total Liquidity Withdrawal
Net Liquidity Injection
As can be seen in the graphs below, the secondary bonds market recorded reduced activity, with turnover decreasing by 21.6% to Kshs 23.4 bn in the month of February, from Kshs 29.8 bn recorded in January, despite the yields on government securities remaining relatively flat during the month. The performance for the secondary bonds stood at 0.2% in February, as per the NSE FTSE Bond Index.
According to Bloomberg, the yield on the 5-year Eurobond increased by 10 bps to 4.3%, from 4.2% in January, whereas that on the 10-year Eurobond decreased by 30 bps to 7.1% from 7.4% the previous month. Since the mid-January 2016 peak, yields on the Kenya Eurobonds have declined by 4.5% points and 2.5% points, for the 5-year and 10-year Eurobonds, respectively, due to improving macroeconomic conditions. This is an indication that Kenya remains an attractive investment destination.
The Kenya Shilling appreciated against the US Dollar by 1.0% during the month to close at Kshs 102.9, from Kshs 103.9 in January. The strengthening of the shilling during the month was primarily driven by dollar inflows from offshore institutional investors and horticultural produce exporters this past week, with the Kenya Shilling gaining 0.8% w/w, to close at 102.7, from 103.6 the previous week. On a year to date basis, the shilling has depreciated against the dollar by 0.2%. In recent months, we have seen the forex reserves reduce to USD 7.0 bn (equivalent to 4.6 months of import cover), from a peak of USD 7.8 bn in October 2016 (equivalent to 5.2 months of import cover). The forex reserve level has now stabilised at 4.6 months of import cover, since December 2016, an indication of the confidence the Central Bank has with the current levels of the shilling.
The inflation rate for the month of February increased by 200 bps to 9.0%, from 7.0% in January, above our projection of 7.9% - 8.2%. The rise was driven by (i) an increase in food prices, which rose 3.3% m/m, on account of the prevailing drought in the country, and (ii) an increase in transport prices, which rose 0.7% m/m, on account of increases in the pump prices of petrol and diesel. Below is a table with the notable changes during the month;
Key Changes on the Consumer Price Index (CPI) during the month of February
Broad Commodity Group
Price change m/m
Price change y/y
Food & Non-Alcoholic Beverages
Increase in the prices of vegetables, attributed to the prevailing drought
Increase in the pump prices of petrol and diesel
Increase in the cost of healthcare following the health crisis in the country
Housing, Water, Electricity, Gas and other Fuels
Increase in the cost of electricity, kerosene and house rents
Going forward, we expect upward inflationary pressures from (i) the food component of the CPI basket due to the persistent dry weather that is expected to carry on for the first half of the year, with depressed rainfall expected in the long rains season that comes in between March and May, (ii) the global recovery of oil prices spurring cost-push inflation, and (iii) the weakening shilling due to global strengthening of the dollar increasing the cost of imports. We expect upward inflationary pressures to persist in the first half of 2017, and average 8.1% over the course of the year, which is above the upper bound of the government target range of 2.5% - 7.5%, despite expectations that the food situation will improve in the second half of 2017.
During the month, the National Treasury released estimates for the 2017/18 budget, which continues to grow. The growth is however slower compared to the previous increases over the last five years, with a projected growth of 2.4%, compared to 52.9% over the last 5 years, translating to a compounded annual growth rate (CAGR) of 11.2%. According to the estimates, (i) total expenditure is expected to rise by 2.4% to Kshs 2.3 tn, from Kshs 2.2 tn in the 2016/2017 budget, (ii) total revenue collection is expected to rise by 12.5% to Kshs 1.7 tn, from Kshs 1.5 tn projected in the 2016/2017 budget, and (iii) income tax revenue (PAYE) is projected to rise by 16.5% to Kshs 400.5 bn, from Kshs 343.7 bn in the 2016/2017 budget. As highlighted in our Cytonn Weekly #7-2017, the expected 16.5% rise in income tax revenue seems ambitious, considering the number of lay-offs experienced in the banking, manufacturing, media industry & telecom sectors over the past year, coupled with slowing private sector credit growth, which stood at 4.3% in December 2016, compared to 18.0% in a similar period in 2015. While the expansionary fiscal policy is primed to see increased developments in the country with the realization of key infrastructural projects, the heightened domestic borrowing target, coupled with expected subdued revenue collection, is likely to put interest rates under pressure, impacting economic growth adversely.
During the month, the Kenya Bankers Association (KBA), established talks with the government on the withdrawal of interest rate caps, which has seen loans and deposits priced based on the Central Bank Rate (CBR), currently at 10.0%. The private sector credit growth has stagnated at 4.3% as at December 2016, a 16-month low attributed to the law that came into effect in August last year, locking out ?risky? borrowers from accessing funds. KBA is assessing the impact of the interest rate cap in the economy and will present the findings to the parliament for assessment and in support of change in the law. The International Monetary Fund (IMF) has recently warned Kenya on the adverse effects of the interest rate caps citing that it would hinder economic growth, which is forecasted to come in at 5.7% for the year 2016. As highlighted in our Cytonn Weekly #46, we do not expect the private sector credit to pick up if the interest rate cap law is retained and have an adverse impact on economic growth for the year, which is projected at 6.1% in 2017 as per the IMF. As detailed in our piece against the bill, the rate cap remains bad for the economy: Cytonn Weekly #34. However, we do not expect any kind of revision or amendment to the bill prior to the upcoming election given the populist nature of the topic.
The Government is ahead of its domestic borrowing for the current fiscal year having borrowed Kshs 187.3 bn against a target of Kshs 159.0 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 204.0 bn, implying that the government will fall behind its borrowing target. The government has only borrowed Kshs 123.5 bn, of the budgeted foreign borrowing, representing 26.7% of its foreign borrowing target of Kshs 462.3 bn, whereas Kenya Revenue Authority (KRA) has already missed its first half of 2016/17 fiscal year revenue collection target by 3.2%, and is expected to miss its overall revenue collection target of Kshs 1.5 tn for the current fiscal year. This creates uncertainty in the interest rate environment as the government might have to plug in the deficit by borrowing from the domestic market, a move that may exert upward pressure on interest rates, and result in longer term paper not offering investors the best returns on a risk-adjusted basis. It is due to this that we think it is prudent for investors to be biased towards short-term fixed income instruments.
During the month of February, the equities market was on an upward trend with NASI, NSE 25 and NSE 20 gaining 2.2%, 4.0% and 7.2%, respectively, taking their YTD performances to (6.3%), (7.5%) and (6.0%), respectively. The equities market performance during the month was driven by gains in large caps led by NIC Bank, Standard Chartered, Kengen and Barclays, which gained 44.6%, 24.2%, 17.3% and 17.2%, respectively. The market decline YTD can be attributed to: (i) uncertainty surrounding the upcoming August general elections as investors take a wait-and-see approach, and (ii) the decline in the price of banking stocks due to anticipated low earnings due to low interest income as a result of the Banking (Amendment) Act, 2015, which stipulates the loan and deposit pricing frameworks for banks. Since the February 2015 peak, the market has lost 45.6% and 29.6% for the NSE 20 and NASI, respectively.
Equities turnover increased by 4.5% during the month to USD 121.3 mn from USD 116.0 mn in January 2017. Foreign investors were net buyers for this month but the net inflows declined by 74.2% to USD 4.0 mn, compared to net inflows of USD 15.6 mn witnessed in January 2017.
The market is currently trading at a price to earnings (PE) 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 PE and dividend yields of the market.
The earnings season has kicked off with some firms announcing their financial results for H1?2017 and FY?2016. Out of 9 companies that have released their financials from January to date, 3 have had an increase in earnings per share while 6 have registered a decrease. The 3 companies that registered an increase are Kenya Power and Lighting Company (KPLC), Sanlam and EABL, while the 6 that registered a decrease are Stanbic, Barclays, BAT, Kengen, Mumias and Uchumi. Key to note, Uchumi recorded a reduction in its loss per share. Of special interest are banks, which are scheduled to release earnings after the first quarter of operation with the interest rate cap, which is projected to significantly decrease their interest earnings. In anticipation, some banks have already laid off staff and closed branches in a bid to cut down on operating expenses.
During the month, we had a number of earnings releases, as covered in our Cytonn Weekly Reports, namely:
SUMMARY OF EARNINGS GROWTH FOR FINANCIALS AND NON-FINANCIALS YTD
Market Cap (Kshs bn)
Market Weighted Average
Market Weighted Average
According to the Central Bank of Kenya (CBK), the total volume of cash transacted in 2016 on mobile money transfer platforms grew by 15.8% to Kshs 3.4 tn from Kshs 2.8 tn in the previous year. This was as a result of an increase in the number of mobile phone lending apps, which in turn led to an increase in loans given out within the country, due to reduced loan disbursement processes such as credit vetting, provision of collateral and filling of paperwork, as compared to traditional loans. Bank backed apps include KCB M-Pesa, M-Shwari, Equitel and M-Co-op Cash, while popular standalone apps include Mambo Mobile, Branch, Tala and Saida. The mobile phone apps are also set to face increased competition with the implementation of the Pesa-link platform, which will enable the real time transfer of funds from one bank account to another. We are of the view that with the implementation of the platform, there will be increased efficiency in money transfer and therefore mobile phone service providers will face increased competition from the banks.
Below is our equities recommendation table. Key changes from our previous recommendation are:
all prices in Kshs unless stated
Price as at 31/01/17
Price as at 28/02/17
*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 are "positive" for investors with long-term investments horizon.
During the month of February, acquisitions in Africa?s private equity space continued to gather pace, evidenced by the entrance and increased activity of large U.S. based commercial private equity players such as Carlyle and TPG. A number of companies also reported closed fundraising rounds for their expansion.
Detroit-based General Motors has exited the Kenyan market after the successful sale of its 57.7% stake in General Motors East Africa (GMEA) to Japanese firm Isuzu Motors for an undisclosed amount. The transaction will see the motor dealer rebrand to Isuzu East Africa. This acquisition is critical as Isuzu Trucks and buses account for 95.6% of GMEA?s total sales in East Africa. The sale will enable Isuzu to implement its strategy of expanding the production and sale of its commercial vehicles. Other shareholders include ICDC (20.0%), Centum Investments (17.8%) and Itochu Corporation (4.5%).
Private equity investment activity in Africa has continued to improve, as evidenced by the increase in the number of fundraising and acquisitions in the region. 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.
In 2017, the real estate market has witnessed increased activity despite fears that the industry will slow down owing to the upcoming general elections. Earlier in the month, the World Bank ranked the economic value of real estate in the major cities of the East African countries with exception of Burundi and Uganda. In the report, Dar-es Salaam was ranked at the top with its real estate value estimated to be worth Kshs 1.2 tn followed by Nairobi at Kshs 927.0 bn. Addis Ababa and Kigali followed in 3rd and 4th with values of Kshs 618 bn and Kshs 206 bn, respectively. The report sited that land fragmentation and weak property rights were the major challenges facing the sector in the region. This results in limited scale of developments within the cities, rendering it costly to lay down support services and infrastructure.
The performance of the industry under the various thematic groups has been discussed below:
In the last 5-years or so, the commercial office market has witnessed a paradigm shift with developers preferring other commercial districts such as Upperhill, Westlands & Kilimani to the Central Business District (CBD). This is a response to the traffic congestion and inadequate parking that characterizes the CBD. Developers in the CBD have resorted into converting their buildings to retail spaces in the lower floors and small offices in the upper floors. This is because the retail tenants will tap into the high human traffic given that the CBD still plays host to major transport terminuses. Unlike major corporations which opt to be based outside of the CBD due to the above-mentioned challenges, start-up SMEs do not require much office space and can still manage to run from the CBD. Some of the major activities that shaped this theme in the past month include:
Nairobi continues to experience increased investment in the real estate sector going by the official data from the City Hall with regards to building approvals. The data indicates the approvals for new office blocks and homes in Nairobi grew from Kshs 242 bn in 2015 to Kshs 314.2 bn in 2016 owing to investors citing ever increasing returns in the sector, as rising rents drove investors to real estate. This is a 29.7% rise, which is higher than what was recorded between 2014 and 2015, at 6.6%. Residential property accounts for 60% of these approvals with the remaining 40% being taken up by commercial space.
Amid concerns that there might be an oversupply of commercial retail spaces in the city, the sub-sector has continued to attract occupancy levels averaging 80% and upwards, with annual yields averaging 10%. This translates to an opportunity in the sector which can be illustrated through a trend of developers opting for neighborhood malls in suburbs such as Kilimani, Karen and estates along Thika road.
Commercial office space has a shortage of Grade A offices, which account for less than 10% of the total office supply as at 2016. Multinationals such as the ones mentioned above are the target market for such offices, hence this presents itself as an opportunity for developers in this subsector. Grade A office spaces have the best returns with average yields of 10.4%, against 9.4% and 8.5% for Grade B and C offices respectively, with average market occupancies of over 85% across all office grades, as highlighted in the Cytonn Office Report 2016.
Investors have increased their efforts towards providing housing, especially to the lower income segment of the market. The looming gap is as a result of majority of the investors providing housing for the mid and high-end income groups, leaving out the lower income segment. Key activities in this theme in February 2017 include:
In 2016, residential property recorded an increase in prices for detached units & low density suburbs at 11.3%, whereas prices for residential property in satellite towns increased by 8.6% over the same period. Rental prices on the other hand increased by 4.0% in 2016 according to the Hass Consult House Price Index for Q4?16. This affirms the continued demand for residential housing in Nairobi, which is approximated to be 200,000 housing units annually.
Efforts have been made by both the private and public sectors to revamp the tourism industry in the country. These efforts are geared towards diversifying from beach tourism to domestic and Meeting Incentives Conferences and Exhibitions (MICE) tourism. In February, key activities in the hospitality sector included:
Despite the relatively poor performance of the tourism industry, especially between 2011 & 2015, business tourism performance still stands out, as evidenced by an average increase of local and international delegates at 12.1% over the same period. Domestic tourism has continued to boost the sector in the wake of insecurity and travel advisories issued against the country, evidenced by the Mt. Kenya region being the 2nd best performer in 2016, after the Maasai Mara region, for 5-star hotels, recording a TRevPar of USD 221 and USD 270 respectively. These findings are documented in the Cytonn Hospitality Report 2016, released in October last year. We expect that there will be continued spending in hotels this year especially prior to the election period.
Land prices within the Nairobi Metropolis have continued to be on an upward trend, backed by improved infrastructure and urban population growth. According to the Hass Consult Land Index Q4?16, land prices increased by an average of 5.1% and 21.8% in 2016, across the suburbs and satellite towns, respectively.
Over the month, activity in the land sector has been characterized by transactions on large tracts of land outside Nairobi and some legal tussles. This can be witnessed in some of the sector?s events in February 2017 as shown below:
Overall, the real estate industry is expected to maintain high performance across all sectors, with increased development activity expected in low to middle income residential segments and business hotels. Development activity is expected to slow down in commercial spaces and land development as developers adopt the wait and see strategy, picking up after the general elections.
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.