Cytonn Weekly Update

By Shiv Arora, Oct 24, 2014

Cytonn Weekly

Kenya Market Update & Outlook

A rebasing of Kenya?s GDP showed actual Total Output to be KES 4.76 Trillion (an increase 25.3% from the previous 3.80 Trillion in 2013), elevating Kenya to a Top 10 African Country. A key finding from the rebasing was the increased significance that Real Estate will now be playing in the economy, contributing to 8.2% of Kenya?s GDP.

The Monetary Policy Committee left the base rate unchanged at 8.5% for the 8th session in a row. We feel that with the overall inflation rate below the Governments target of 7.5%, and also in Target on a Year-to-date basis, there is justification behind the argument that rates are where they should be, and also expect no further change in 2014. Kenya?s 91-day Treasury bill yield fell to 8.71%, as Investors preferred participating in the 11% Fixed Kenya Infrastructure Bond, which attracted bids of KES 38.8 Bn versus a KES 15 Bn goal, or a 159% over-subscription.

The Kenyan shilling was stable during the week at 89.35 to the USD, on the back of subdued Demand for the USD. We do however expect weakening of the Shilling next week due to substantial end-month USD from importers seeking to meet end-month payments.

The Inflation rate was at 6.6% in September 2014 down from 7.18% in Augusts. Between August and September 2014, the Food Price index increased by 0.58% due to the rise in the prices of several staple food commodities. Over the same period, Housing, Water, Electricity, Gas and Other Fuels? index, decreased by 0.52%. We expect Inflation to remain in in the single digits over the medium term due to notable falls in the cost of kerosene and electricity.

Stock Market Update

The Nairobi All Share Index closed the week at 159.2 Points, representing a 16.5% increase Year-To-Date. Gains in 2014 have largely been driven by foreign participation, where the aura of value stock drivers and aggressive corporate actions outweighed expensive fundamentals.

The Kenya Power & Lighting Company mentioned on Wednesday that they are cutting cost of connecting new homes to the power grid to KES 30,000, down to a third of the original, and adding an additional 5000 Megawatts to the grid. The news was well received by Investors, with the Stock closing 15% higher.

NIC Bank Kenya opened their KES 2.1 Billion rights issue on 23rd October, on the back of a KES 5 Bn bond issue in September. NIC is citing the need to shore up capital and fund near term expansion projects, which include diversification away from Corporate Banking, to a greater focus on Retail & SME?s.

East African Breweries Limited has cut staff costs by 15%, or KES 1 Billion, largely due to the retrenchment of 100 employees. The lower payroll costs, now at KES 4.7 Billion is expected to increase margins, which have been affected by large debt, and financing costs.

Real Estate Update

Overall rents in Kenya recorded their lowest rate of increase in September 2014 since 2011, at 0.4%. This pattern of flattening rents and rising sales prices is indicative of a housing market moving in to a renewed up-cycle, which is not underpinned by debt, hence alleviating fears of a bubble. The total returns on let properties are now at an average of 13%, compared with a return of 8.7% on 91-day Treasury Bills. Market activity in the lower to middle price bracket remains positive. Cytonn?s real estate focus is primarily on the middle-income market, with Commercial mixed-use developments, Suburban malls, three-star hotels and Masterplanned communities being the key sectors that we will be looking at.


Shiv Arora is an Investment Associate with Cytonn Investments

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'