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Recent Topicals

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Kenya’s Interest Rate Outlook

Mar 20, 2016

In our Cytonn Weekly Report #42 (2015), we analyzed the interest rate environment and what was driving the rapid upward trend that we witnessed in Q3’2015. A lot has transpired since then, and the interest rates have declined to levels witnessed at a similar period last year. The aim of this piece is to first give a background of the challenges witnessed in Q3’2015, review the drivers of the high interest rate environment, understand the underlying factors driving the interest rate environment currently, and finally end with what we believe will transpire in the near future.2015 RecapThe interest rate environment in Kenya witnessed volatility in the last calendar year, with a sharp increase in rates highlighting the challenging economic environment. This was evidenced by the 91-day Treasury bill rising from 8.6% in December 2014, to peak at 22.5% in October 2015. This high int...

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Corporate Governance in Kenya

Mar 13, 2016

This week the Capital Markets Authority published the “Code of Corporate Governance Practices” for public listed companies in Kenya, which were Gazetted on 4th March, 2016. The new Corporate Governance Code replaces the Guidelines on Corporate Governance, and listed companies will have a transition period of one year from the date of gazettement to come into compliance.The new code of governance is based on “apply or explain” principle, a paradigm shift from the “comply or explain” approach of their previous guidelines, which have been in place since 2002. The “comply or explain” approach lets individual companies to decide whether to follow set codes or not but the “apply or explain” approach requires companies to actually follow the set out corporate governance codes.Corporate governance is founded on the pillars that businesses have to practice accountability to stakeholders, fairness, have transparency in business activities and exhibit...

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Ruaka Investment Opportunity

Feb 28, 2016

Cytonn Report #6 focused on Nairobi household settlement characteristics in the satellite towns around Nairobi. We saw people in the satellite towns take on average 3 years or less to buy land, build and settle down. Given Cytonn’s key focus towards providing middle income housing, this week we focus on Ruaka, which is an attractive real estate investment satellite town. The town is close to Nairobi and has two prime commercial retail developments within its vicinity – Two Rivers and the Rosslyn Riviera mall. Research by our Real Estate team shows that Ruaka developments deliver an average rental yield of 5.1% p.a. and potential total returns of more than 21% p.a. Following our market research on Ruaka in August 2015, highlighted in Cytonn Report #34, a supplementary study was conducted to reaffirm on the performance...

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Nairobi Satellite Towns Settlement Characteristics

Feb 14, 2016

The real estate sector continues to gain a lot of prominence in the economy contributing about 8% of the Kenyan GDP. In 2015, the real estate sector recorded an annual growth rate of 14%, the highest in the country. We have also seen a lot of global cement companies seeking to set shop in Kenya, with the most recent one being India based UltraTech Cement seeking to buy a stake in ARM. The growth in the sector can be attributed to increased demand for residential property with most realtors shifting focus to development of apartments, villas, maisonettes and bungalows in areas around Nairobi and other major town. The key drivers for real estate developments have been: Infrastructural developments in the country The growth in the middle class Population growth High rate of urbanizationAt an approximated average annual housing deficit of 200,000 units, Nairobi is an attractive market for residential developments. However, owing to the...

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Probable direction of Equities in 2016

Feb 7, 2016

Given the weak start in Kenyan equities market in 2016, with NASI, NSE 20 and NSE 25 losing 6.1%, 6.6% and 6.1%, respectively, in January, the purpose of this Focus Note is to try and figure out the probable direction of the Kenya equity markets going forward. We use the Last 7-years market valuation chart below as the basis of our discussion.Since the February 2015 peak, the stock market valuation, as measured by price to earnings ratio (“PE”), has been on a decline for an entire 12-months – peaking at a 17.0x PE in February 2015 and declining steadily over the last 12-months to the current PE at 12.4x. The question then is, when and where is the valuation likely to trough and reach the bottom?To try and understand where valuations are likely to trough, we reviewed the last peak to trough cycle, which was the period from August 2010 to January 2012, duration of 17 months. As of August 2010, markets were valued at peak valuation of about 20x PE, then v...

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