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February 2012
Analysts:
Addmore Chakurira Aobakwe Mokgethi Batanai Matsika Belvas Otieno
addmore.chakurira@imara.co aobakwe@capital.bw batanai.matsika@imara.co belvas.otieno@imara.co
Brian Mugabe Farai Vengesai Jimmy Mwambazi Nontando Sibanda Zunga
brian.mugabe@imara.co farai.vengesai@imara.co jmwambazi@stockbrokerszambia.com.zm nontando.zunga@imara.co
www.imara.co
Table of Contents
Executive Summary ...........................................................................................2
Botswana ...................................................................................................... 4
BRVM ........................................................................................................... 7
Ghana .......................................................................................................... 9
Kenya ......................................................................................................... 11
Malawi ........................................................................................................ 14
Mauritius ..................................................................................................... 17
Namibia ....................................................................................................... 19
Nigeria ........................................................................................................ 21
Rwanda ....................................................................................................... 24
Uganda ........................................................................................................ 25
Tanzania ...................................................................................................... 27
Zambia ........................................................................................................ 29
Zimbabwe .................................................................................................... 32
Imara Contact Details ...................................................................................... 35
Q2
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Various S&P indices relative to S&P Africa Frontier Index 2011
S&P 500 S&P Euro 350 S&P Bric 40
S&P Latin America 40 S&P Asia 50 S&P Africa Frontier
A subsidiary of the Imar
On a y-o-y basis, Botswanas economy grew by 12.4%
driven mainly by both the mining and non-mining sectors.
It against this back drop that total credit extended by
commercial banks increased to USD 3.64bn from 2.83bn
in the previous year, thus reflecting this recovery in
economic performance. The market was largely driven by
the banking sector during the year, but despite this, the
stock exchange ended the year with a negative return in
USD terms. However, in BWP terms, the stock exchange
recorded a positive return.
GDP figures for the 1
st
quarter ended June 2011 indicated
that, q-o-q, the economy contracted by 2.2%, mainly due to
lower output in the mining (-4.2%), financial and business
services (-6.1%) and general government sectors (-7.6%).
However, on a y-o-y basis, the economy grew by 6.4%,
reflecting recovery of both the mining and non-mining
sectors. Mining grew by 7.2%, while there was also strong
growth in agriculture (+10.9%), construction (+25.8%) and
transport and communication (+12.6%). The economy
picked up pace in the 2
nd
quarter, with GDP figures
indicating that the economy expanded by 12.4% compared
to the same period in 2010, while output was also higher
than in the first quarter of the year by 9.6%. Overall growth
was driven by continued recovery in the mining sector,
which grew by 23.7% y-o-y. But non-mining growth was also
robust at 7.4%, led by expansion in manufacturing (+11.8%),
water and electricity (+12.2%), construction (+28.3%) and
transport and communication (+12.5%). The World Bank
Report estimates that GDP growth for 2011 to December
will be 6.8%.
As mentioned, the banking sector was the main market
driver during 2011, as the four banks posted impressive
results amidst an uncertain trading environment
characterised by increasing competition from unlisted
entities. On average, the share price of the four banks
increased by 34.90% during 2011, making it the best
performing sector on the domestic board. Net interest
margins continued to grow although the main focus was on
cost containment rather than purely balance sheet and
margin growth. Impairments growth for most commercial
banks has slowed and this will encourage banks to advance
more credit especially to the business sectors of the
economy going forward.
BancABC continued on its retail expansion programme,
opening 4 branches during 2011 in country, with plans to
open a further 5 during 2012. Barclays revamped its
technological platform which has it put it on par with its
major competitors on the technological front. FNBB and
Stanchart focused on retail lending.
EQUITY RESEARCH
BOTSWANA
FEBRUARY 2012
2011 REVIEW AND 2012 OUTLOOK
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DCI relative to S&P Africa Frontier Index
DCI S&P Africa Frontier
Source: IAS/S&P
Company (BWP m) (USD m) % of Total
FNBB 6 742.53 911.59 22.08%
Barclays 5 879.91 794.96 19.25%
Letshego 3 017.20 407.93 9.88%
BI HL 2 754.49 372.41 9.02%
StanChart 2 723.89 368.27 8.92%
Sechaba 1 602.83 216.70 5.25%
NAP 1 329.67 179.77 4.35%
FurnMart 952.12 128.73 3.12%
Wilderness 900.90 121.80 2.95%
Engen 880.07 118.99 2.88%
Source: BSE
Top Ten Shares by Market Cap.
53%
9%
4%
5%
19%
10%
Market Cap. Composition
Banking
Property
Hotel
Brewery
Financials
Other
Just like the year 2010, the focal point for the WAEMU
region was Cote dIvoire, as the country emerged out of its
post-election chaos.
Efforts to reinvigorate Ivory Coasts economy after the
disputed November 2010 elections took off in earnest in 2011,
but the new President, Alassane Quattara, faced and continues
to face, a formidable task in re-building the nation. He faces
the twin challenge of hauling the conflict-crippled economy to
its feet whilst fostering reconciliation. Quattara must heal
ethnic divisions that were aggravated by the conflict. While his
government is making strides on both fronts, the political
environment remains strained. Inside the country, the forces
of former president Gbagbo have been all but defeated while
the remaining threat from Gbagbo loyalists comes principally
from forces that fled to Liberia (and to a lesser extent Ghana).
In July, and again in September 2011, raids from Liberia killed
several dozen people in the tense western region.
Nonetheless, the end of the post-electoral conflict has
provided an opportunity to push democratisation forward and
unify the country on the terms agreed in the March 2007 peace
deal. The interim unity government continues to function, and
both the incumbent regime and former rebels agree on the
need for economic reform in line with IMF and donor
recommendations.
Given the challenges experienced by Cote dIvoire during the
year, the latest World Bank estimates are that the countrys
real GDP shrank by 5.8%. However, a return to growth is
expected in 2012 and 2013, with forecast real GDP growth of
4.9% and 5.5% respectively.
GDP growth rates in the other WAEMU countries for 2011 were
as follows:
o Benin 3.4%
o Burkina Faso 5.8%
o Guinea Bissau -4.8%
o Mali 5.4%
o Niger 6.0%
o Senegal 4.2%
o Togo 3.7%
Reflecting the dominance of Cote dIvoires economy in the
regional body, is the fact that while the other seven member
states had decent to very good growth numbers, the negative
out turn from Cote dIvoire diluted the aggregate forecast for
the region in 2011 to just 1.9%, as per the IMFs last regional
economic outlook.
While some sectors such as agriculture had a good year on the
BRVM, the overall sentiment driven by Cote dIvoires travails
was negative, which saw the BRVM closing 2011 in the red.
EQUITY RESEARCH
BRVM
FEBRUARY 2012
2011 REVIEW AND 2012 OUTLOOK
Top 5 Gainers and Losers - 2011 Opening Closing % change % change
Company Price Price (LC) (USD)
BRVM-Composite 159.1 138.88 -12.71% -14.85%
SOGB 28 000 56 000 100.00% 95.09%
Servair 4 500 7 445 65.44% 61.38%
Sode 11 500 18 000 56.52% 52.68%
SAPH 27 000 40 000 48.15% 44.51%
Bernabe 19 345 25 500 31.82% 28.58%
Trituraf 1 600 1 000 -37.50% -39.03%
Unilever 60 000 38 000 -36.67% -38.22%
Safca 24 800 17 000 -31.45% -33.13%
Crown Siem 31 995 22 850 -28.58% -30.34%
Shell 18 000 12 960 -28.00% -29.77%
Source: BRVM
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BRVM Composite relative to S&P Africa Frontier Index
BRVM Composite S&P Africa Frontier
Source: IAS/S&P
Top 10 shares by market cap.
Company XOF (m) USD (m) % of Total
Sonatel 1 250 000 2 470.5 38.78%
Ecobank (ETI) 489 233 966.9 15.18%
SAPH 199 352 394.0 6.18%
Onatel 147 560 291.6 4.58%
Solibra 134 983 266.8 4.19%
SGBCI 121 333 239.8 3.76%
SOGB 120 970 239.1 3.75%
PALM-CI 115 945 229.2 3.60%
Unilever-CI 61 267 121.1 1.90%
SITAB 56 648 112.0 1.76%
Source: BRVM
7
Our top stocks for 2012 are as follows;
SAPH- The largest rubber company in Cote dIvoire, with total
production capacity of rubber of c98,000 tonnes; international
rubber prices have recovered; the risk of low rubber/tyre
demand has also lessened given that the rebuilding exercise in
Japan is expected to sustain rubber demand.
PALM CI- The bullish outlook on palm oil prices is likely to be
the main earnings driver.
SOGB- Engaged in the production of both rubber and palm oil,
SOGBs key strength is that it has more attractive margins
compared with its peers given that its earnings come mainly
from its own plantations.
SONATEL- Our BUY recommendation is endorsed by the
relative resilience of the sector in general, the healthy
dividend yield of 11.5%, and the operators diversified
revenue streams (across various geographies) underpinned
further by VAS as a new revenue stream.
Along with Cote dIvoires political and economic
challenges, a major setback for the BRVM remained the
relative lack of liquidity, with ETI and Sonatel dominating
stock activity by volume and value traded, respectively.
Looking at returns, the BRVM Composite declined 12.71%
in XOF terms and 14.85% in USD terms to close at 138.88
points. 14 counters closed the year in the black, against
25 in the red. The best performing sector was agriculture,
led by SOGB (+100%). Other major gainers were Servair
(+65.44%), Sode (+ 56.52%), SAPH (+48.15%) and Bernabe
(+31.82%), which saw significant appreciation.
Notable on the losers were Shell (-28.00%), Crown Siem
(-28.58%), Safca (-31.45%), Unilever (-36.67%) and
Trituraf (-37.50%). Sonatel remained the most capitalised
counter with 38.8% of the total, followed by ETI with
15.2% and SAPH with 6.2%. However, Sonatel weighed
negatively on the BRVM, as its stock fell 22.0% y-o-y. The
counter was the most traded by value, constituting
58.48%, well ahead of SAPH with 11.39%. Total value
traded for the year was USD 126.1m. Total volumes for
the year amounted to 18.1m shares, with ETI by far the
most active, contributing 90.09% of total volumes.
Market Review for 2011
Market Outlook for 2012
The World Bank predicts that Cote dIvoires economic
growth will rebound to 4.9% in 2012. This recovery in the
Cote dIvoire combined with solid growth in the rest of
the region (Togo with the lowest estimate of 4.0% and
Niger the highest at 8.5%) will see the WAEMU registering
growth of an estimated 6.6% in 2012.
Despite the launch of a reconciliation commission,
tensions may linger in Cote dIvoire. Some sections of
society strongly opposed Quattara (Gbagbo won 48.6% of
the vote in the election) as they view him as a stooge of
the French. There are also presidential elections set for
Guinea Bissau, Mali and Senegal in 2012. The latter has
already seen rising tensions, as the incumbent Abdoulaye
Wade seeks to run for a third term on a technicality. His
rivals say his participation breaches rules setting a two-
term limit, but Wade argues that his first term should
not be counted as limits were added after he had already
begun his time in power.
The Eurozone crisis also presents potential risks to the
WAEMU region, with the AfDB estimating that over 36%
of the regions exports are destined for Europe. Falling
demand could thus have a negative impact, although
given the CFAs Euro peg, a weakening Euro would to
some offset the fall in demand as WAEMU exports
became more competitive. Other major risks would be
around liquidity, given the dominance of foreign banks in
Benin, Burkina Faso, Cote dIvoire and Niger in
particular, and higher cost of borrowings on repriced
sovereign borrowing risk.
On the whole, given the lower base effects of GDP
growth in 2011, we expect company results and by
extension the BRVM to reflect the improved economic
conditions in the region and record a positive outturn in
2012.
Top picks for 2012
44.06%
24.78%
15.20%
7.94%
8.02%
Market Cap. Composition
Telecoms
Financial Services
Agro Processing
Food and Beverages
Others
Source: BRVM
10 Most active stocks by volume
Company Vol % of total
ETI 16,286,748 90.09%
Sonatel 272,293 1.51%
Palm 234,071 1.29%
SAPH 188,360 1.04%
SOGB 71,372 0.39%
SGB 37,282 0.21%
Filtisac 30,272 0.17%
CIE 15,909 0.09%
BOA CI 15,274 0.08%
BOA BN 14,638 0.08%
Source: BRVM
10 Most active stocks by value
Company Val (USDm) % of total
Sonatel 73.77 58.48%
SAPH 14.37 11.39%
Palm 7.13 5.65%
SOGB 6.69 5.30%
SGB 2.90 2.30%
Sitab 1.57 1.25%
ETI 1.53 1.21%
BOA BN 1.51 1.20%
Onatel 1.10 0.87%
BOA CI 0.96 0.76%
Source: BRVM
8
EQUITY RESEARCH
GHANA
FEBRUARY 2012
2011 REVIEW AND 2012 OUTLOOK
The rise of a Black Star. Ghana is not only making progress
in the game of soccer with its so called Black Stars
national team, but is also scoring goals on various other
fronts. Forecast by the World Bank to have had by far the
fastest growing economy in SSA and indeed, the world in
2011 at 13.6%, the country continues to exhibit a solid
macroeconomic performance.
Oil, of course, was the key driver of this GDP growth, and
thus as in 2010, was a key theme in the countrys economic
make up in 2011, as the country benefitted from the
commencement of oil exports. Given the discovery of new
oil at the Jubilee Oil fields, it is estimated the country will
account for approximately 1.6% of regional oil supply by
2015. State-controlled Ghana National Petroleum
Corporation (GNPC) currently operates in partnership with
various international oil companies (IOCs), including Tullow
Oil, Anadarko Petroleum and Kosmos Energy, in the
development of the Jubilee oil field, which should reach
plateau production of 120,000 bpd. The start-up of the
Jubilee oil field in December 2010 will transform the
country into a net exporter.
In line with the positive reviews that its democracy has
received, Ghana has taken early measures to manage its
fledgling oil industry and the receipts thereof. The
government and opposition parties in Parliament have
passed into law the Petroleum Revenue Management Act
(Act 815), which makes it possible for the government to
access the annual budget funding amount from oil proceeds
and, also makes room for setting up Stabilization and
Heritage Funds. Parliament has also passed the Petroleum
Commission Act to regulate activities of the use of
petroleum resources, with a goal of achieving optimal
resource exploitation while ensuring high health and
environmental standards.
Other positive economic news during the year included the
country achievingits lowest inflation rate since June 1992s
8.37%, when it recorded 8.39% in July.
Politically, the country was stable during the year, with the
fight to see who would lead the various parties in the 2012
presidential election done in the voting booth as it were.
Following successful August primaries by the ruling NDC,
incumbent President Mills successfully faced down a
leadership challenge by Nana Konadu Agyemang Rawlings,
the wife of Jerry Rawlings, former president and the
founder of the NDC.
Despite the general good news, Ghanas stock exchange had
a negative return for the year, with much of the oil
euphoria possibly having already been priced in (too
aggressively perhaps?) into the exchanges very strong
performance in 2010.
Source: IAS/S&P
Top 10 shares by market cap.
Company GHS (m) USD (m) % of Total
Tullow Oil Plc 28 019 16 421.6 59.19%
AngloGold Ashanti 12 963 7 597.4 27.38%
ETI 1 240 726.9 2.62%
Standard Chartered Ghana 886 519.0 1.87%
Ecobank Ghana Limited 727 426.2 1.54%
Golden Star Resources 702 411.7 1.48%
Ghana Commercial Bank 504 295.1 1.06%
Unilever (Ghana) 425 249.1 0.90%
Guinness Ghana Breweries 323 189.5 0.68%
Fanmilk Ghana 279 163.5 0.59%
Source: GSE
9
Market Review for 2011
The saying that trees do not always grow to the sky
may be true for the GSE in the year 2011. While the main
index gained 27.55% (USD terms) in 2010, it nose-dived
11.33% (USD terms) in 2011. The extent of the decline
can to some extent be attributed to a weaker currency,
given that the index lost 3.10% in local currency terms.
Overall, we attribute the lacklustre performance to
developments in the Eurozone that led to frontier market
redemption and less appetite for frontier market
equities, while the markets lack of liquidity also remains
a deterrent.
The main highlight on GSE, however, was the successful
listing of Tullow Oil, which had initially been slated for
late 2010. As a result, Tullow Oil now constitutes 59% of
the entire market capitalisation of USD 27.7bn, followed
by Anglo Gold Ashanti, which constitutes 27.7%. Given
that these are listed across various exchanges and foreign
owned, liquidity still remains a key constraint. The most
active stock by value-traded was Fan Milk Ghana, which
constituted 25.0%, followed by Ghana Commercial Bank
(19.12%) and Standard Chartered Bank (10.36%). In terms
of volume traded, the most active was CAL Bank, which
constituted 22%, followed by PBC (20%) and UT Bank
(8.85%).
The following are our top picks for the year 2012;
Guinness Ghana Breweries Limited (GGBL) - The brewer
recently raised GHS 70.0m through a rights offer; optimal
capital structure (with manageable debt levels) will afford
GGBL the flexibility to continue to grow its business in an
expanding economy; company plans to grow its market share
of the beer-market in Ghana by 9.0% over the next five years.
Fan Milk a producer of Fanyogo which is arguably Ghanas
most popular dairy product and also the producer of Fanice,
is likely to continue benefiting from consumer-driven
demand. Definitely one for the long term.
ETI We like the groups pan-African expansion drive which is
still ongoing, strong technology platform and strong alliances
with international banking groups. Its local subsidiary
Ecobank Ghana is also one to watch, with the holding
company having just purchased Trust Bank of Ghana, which
will be merged with Ecobank Ghana. Scale benefits should be
value accretive.
Market Outlook for 2012
The World Bank estimates real GDP growth of 9.0% in
2012 for Ghana. The 2010 Oil & Gas Journal (OGJ)
annual reserves and production survey attributes
660.0m bbl of proven oil reserves to the country.
Headline figures of revenue from the oil and gas sector
USD 1.97bn in 2011- look promising, as the offshore
Jubilee Field is yet to reach planned peak production,
which will make Ghana the sixth largest crude-oil
exporter in Africa. We therefore expect the oil-led
growth spurt to have positive spill-over effects to non-
oil sectors of the economy. Furthermore, as a leading
gold-producer, we expect the firm prices (cUSD
1,600/oz) to also fuel growth in the West African
nation. The net effect of these positive economic
drivers should ultimately be an increase in disposable
incomes, which will in turn drive the growth in
consumer demand.
Liquidity on the GSE is also set to improve on the back
of new listings on the bourse. The GSE has recently
signed an MoU with Fidelity Capital Partners Limited
(FCPL) in which the two organisations intend to work to
promote the growth and future listing of companies,
especially SMEs on the exchange. Under the MOU, the
exchange will be promoted to investee companies of
FCPL, thus enhancing the success of SME listings on the
GSE.
Ghanas mandatory government pension scheme which
entails an injection of cUSD 400.0m/annum on local
capital markets through privately managed funds is also
expected to boost efficiency and liquidity on the GSE
given that 25.0% of the funds will be invested in equities.
The new reform is part of a 2008 law that created a
pension plan aimed at boosting savings in the country.
Top Picks 2012
59.92%
28.89%
8.26%
2.25%
0.67%
Market Cap. Composition
Petroleum
Resources/Gold
Financial Services
Consumer Goods
Others
Source: GSE
10 most active stocks by volume
Company Vol (m) % of total
CAL Bank 52.08 22.29%
PBC 47.27 20.23%
UT Bank 20.67 8.85%
Fan Milk 14.59 6.24%
SIC Insurance 14.42 6.17%
ETI 14.34 6.14%
GCB 12.99 5.56%
Ayrton Drugs 11.10 4.75%
Enterprise Group 10.42 4.46%
Ghana Oil 9.28 3.97%
Source: GSE
10 most active stocks by value
Company Val (USD m) % of total
Fan Milk 24.72 25.02%
GCB 18.89 19.12%
SCB 10.23 10.36%
CAL Bank 9.18 9.29%
PBC 7.74 7.84%
Ecobank Ghana 5.01 5.07%
SIC Insurance 3.84 3.89%
UT Bank 3.61 3.65%
GGBL 2.92 2.96%
Unilever 2.70 2.73%
Source: GSE
10
A year in which deteriorating economic conditions led
to the NSE being the worst performer in SSA
In 2011, inflation soared from 4.50% in December 2010 to
a high of 19.72% in November 2011 before easing slightly
to 18.93% in December. This was mainly as a result of a
drought which led to food shortages and a rise in the
price of oil due to the Arab Spring earlier in the year.
The situation was further exacerbated by the Central
Banks reluctance to tighten monetary policy which led
to a plunge in the value of the Kenya shilling.
The shilling lost about a third of its value over the year
to October 2011, hitting a record low of 107:1 against
the USD. This plunge was originally as a result of the
Eurozone debt crisis which led to a flight from emerging
and frontier market currencies into the USD. It was
worsened by the Central Banks reluctance to raise
interest rates in light of rising inflation, arguing that the
causes were purely external.
As macroeconomic conditions looked set to deteriorate
further, the Central Bank belatedly embarked on an
aggressive series of interest rate hikes. This saw the
Central Bank Rate almost treble from 6.25% in
September 2011 to 18.00% at the end of November 2011.
This helped the shilling to recover to c83 against the
dollar by the end of the year with inflation seeming to
have peaked, as it eased for the first time in the year to
18.93% in December.
The deterioration of economic conditions as the year
went by was reflected in the downward trend of
quarterly GDP growth rates. In Q1 the economy grew at
4.9% (4.3% in Q1 2010). This rate slowed to 4.1% in Q2
2011 (4.6% in Q2 2010) and 3.6% in Q3 2011 (5.7% in Q3
2010). We expect GDP growth rate to have remained
subdued in Q4 2011 or even trended lower. In December,
the World Bank downgraded its 2011 annual GDP growth
forecast to 4.3% from 4.8%.
The Nairobi Stock Exchange went from hero in 2010 to
zero in 2011, as the slowing economy as well high fixed
income rates led to poor returns for the local bourse,
this despite a relatively stable political environment with
the fireworks expected come election time in 2013.
EQUITY RESEARCH
KENYA
FEBRUARY 2012
2011 REVIEW AND 2012 OUTLOOK
Source: NSE
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NSE-20 S&P Africa Frontier
Source: NSE/S&P
11
1.05%
1.16%
36.52%
6.40%
7.97%
7.63%
3.31%
2.09%
20.15%
13.71%
Market Cap. Composition
Agriculture
Automobiles & Accessories
Banking
Commercial & Services
Construction & Allied
Energy & Petroleum
Insurance
Investment
Manufacturing & Allied
Telcommunication & Technology
Source: NSE
12
Kenya Commercial Bank - It is East Africas biggest bank
by assets with the most extensive branch network,
therefore best positioned to benefit from the regions
integration and economic growth prospects. It is also the
biggest mortgage provider in East Africa, a region with
relatively low mortgage uptake and a housing shortage.
Furthermore, its one of the cheapest in the sector on a
PER of 5.62x relative to a sector average of 7.22x. Its main
weakness has been its high cost to income ratio relative to
peers but having started a restructuring process following
the appointment of McKinsey to review its processes, we
expect the group to realise greater efficiencies.
Equity Bank The banks focus on the lower end of the
market has been a huge success leading it to be East
Africas most profitable bank as at 9M 11. It now seeks to
replicate its Kenyan model across East Africa. We believe
that microfinance still has huge potential in the region due
to the high number of unbanked people. Currently, trading
at a PER of 8.96x, were of the view that it offers an
attractive entry point into this fast growing sector.
KenolKobil A fast growing oil marketer present in Kenya,
Uganda, Tanzania, Rwanda, Zambia, Ethiopia, Burundi,
Zimbabwe and Mozambique. It exhibits further regional
ambitions and has been touted as a possible takeover
target by global oil marketers. Its main drawback remains
fuel price controls in its key Kenyan market although from
its latest results, it seems to be weathering this well. It
currently trades at a PER of 8.58x.
We expect to see the effects of the difficult economic
environment in 2011 reflected in upcoming company
results. For example, banks results are expected to
take a hit from the marking to market of their bond
portfolios and a rise in NPLs. However, we believe this
information is already priced in most banking counters.
Inflation is likely to ease gradually as food prices drop
and on the back of a stronger shilling. The Central Bank
is therefore likely to hold the CBR at elevated levels
with slow easing. Developments in the Eurozone are
also likely to play a role in the countrys economic
outlook. This is mainly due to the fact that more than
25% of Kenyas exports go to Europe.
Kenya is set to hold presidential elections later this
year or in early 2013. The contest is likely to be as
tight as the 2007 elections which plunged the country
into ethnic related chaos. Furthermore, two of the
frontrunners have cases pending at the International
Criminal Court, for their role in the 2007 post-election
violence. Some glimmer of hope to avoid a repeat of
the bedlam witnessed in the last election lies in the
adoption of a new constitution in 2010. This new set of
laws is meant to devolve some resources away from
central executive control to the grassroots. It may help
to ease any desire by the different ethnic groupings to
want one of their own to be in power.
On a more positive note, the NSE CEO, Peter Mwangi
has said that eight new listings are expected in 2012,
with three companies having already confirmed. The
demutualisation of the exchange is also in the offing
and is expected to improve transparency and corporate
governance. An alternative exchange for SMEs; Growth
Enterprise Market Segment (GEMS); is also expected to
be launched soon.
There is no doubt that the NSE currently provides
numerous buying opportunities having closed the year
2011 at a PER of 8.35x. However, we expect the
market to trade sideways mainly because the economy
is expected to remain under pressure for a significant
part of the year. Additionally, political risk will be
heightened by the upcoming elections with most
investors sitting on the side-lines. We believe that it
may be a good time for investors to start looking for
good entry points at the NSE, especially the closer we
get to elections, in readiness for a possible bull run in
2013.
Market Outlook for 2012 Top Picks for 2012
13
Top 5 Gainers and Losers Opening Closing % Change % Change
Company Price Price (LC) (USD)
DSI INDEX 3 923 4 238 8.05% 0.35%
OML 28 000 42 600 52.14% 41.30%
REAL 100 120 20.00% 11.45%
NICO 920 1 100 19.57% 11.04%
ILLOVO 11 000 13 000 18.18% 9.76%
BHL 640 700 9.38% 1.58%
NITL 1 600 1 600 0.00% -7.13%
MPICO 310 300 -3.23% -10.12%
NBS 1 100 1 000 -9.09% -15.57%
NMB 5 865 5 250 -10.49% -16.87%
SUNBIRD 890 700 -21.35% -26.96%
So ur c e: M SE
Top 10 shares by market cap.
Company MWK (m) USD (m)* % of Total**
Old Mutual 1 632 457.3 7 982.4 -
Illovo 92 747.8 453.5 41.77%
NBM 24 513.6 119.9 11.04%
Standard Bank 22 400.1 109.5 10.09%
PCL 21 646.0 105.8 9.75%
TNM 19 076.9 93.3 8.59%
FMB 16 353.8 80.0 7.36%
NICO 11 473.5 56.1 5.17%
NBS 5 207.4 25.5 2.35%
MPICO 3 447.1 16.9 1.55%
So ur c e: M SE
*OMIR
**Local Index
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DSI relative to S&P Africa Frontier Index
DSI S&P Africa Frontier
Source: IAS/S&P
The market retreated on negative sentiment and share
overhang
The MSE traded in negative territory, impacted indirectly by
the global financial crisis through foreign funds attempts to
exit the market as risk appetite declined leading to an
increase in redemption calls. Coinciding with Malawis foreign
exchange shortage and combined with the MSEs relatively
low liquidity, this meant sell orders remained outstanding,
creating a share overhang in most counters.
The total market cap declined 20.1% in US dollar terms.
The total market cap for the Malawi registered stocks
declined 20.1% to US$ 1.0bn using the OMIR* rate. Although
the market gained 8.05% in kwacha terms, real returns were
negatively impacted by the depreciation of the local
currency. Only eight domestic counters (from a total of 13)
registered positive returns in local currency terms.
Market activity was constrained during the year
Although both volume and value traded improved on 2010
figures, they remained generally depressed with average daily
value traded of USD 0.2m or a market turnover of
approximately 0.02%. The counters which were active
included TNM, NMB, Illovo, NITL and FMB.
Acute foreign exchange negatively impacted economic
growth
The Malawi economy slowed down on acute foreign exchange,
electricity and fuel shortages. This can be attributed to policy
profligacy and the fallout with donors who contribute
approximately 40% of the countrys national budget. Although
the RBM devalued the USD/MWK by 10% to 165 from 150 in
early August 2011, this failed to eliminate the forex shortages
as the devaluation remains insufficient and well below the
parallel market rate of approximately MWK 260 : USD 1. The
fuel shortage impacted negatively on most industries with the
agriculture, manufacturing and transport sectors the hardest
hit. Although the Minister of Finance expects growth of 6.9%
in 2011 and 6.6% in 2012, the IMF doubt these will be
achieved due to a number of structural constraints e.g. fuel
and electricity shortages. Manufacturing capacity utilisation
has slowed to approximately 60% from highs of above 70%
with the viability of most operations threatened. The World
Bank forecasts growth rates of 5.6% in 2011 and 5.0% for
2012.
*OMIR: Average exchange rate calculated during the
hyperinflationary era using the Old Mutual share price.
EQUITY RESEARCH
MALAWI
FEBRUARY 2012
2011 REVIEW & 2012 OUTLOOK
14
Currency shortages to persist
With the authorities arguing that a devaluation would
trigger inflation and hurt the poor, a substantial
devaluation is unlikely in the short-term or at least before
the harvest. However, we believe the benefits of a
devaluation far outweigh the negative repercussions
especially given that the devaluation could pave the way
for constructive dialogue between Malawi and the IMF as
well as other international lenders. Furthermore, the
liberalisation of the FX market is also part of the IMF
requirements. Foreign reserves are at low levels of
approximately USD 200.0m, equal to 1.5 months import
cover from 3.4. Given the looming BOP deficit combined
with escalating inflation, the MWK will remain under
duress.
Inflation likely to soar
With food prices accounting for 58% of the consumer price
index, weather conditions tend to influence the inflation
outcome. The current agricultural season has been
impacted by the reduced government inputs (especially
fertiliser which was cut to about a quarter) support due to
forex shortages. Inflationary pressures are still
predominantly driven by supply side factors, with food and
fuel price increases accounting for most of the upward
pressure. With no IMF funds to shore up the currency in the
short to medium term and start restoring both international
and local confidence, the pending BOP crisis will further
shake the currency and fuel inflation. On the ground
anecdotal evidence suggests the inflation figure is running
at closer to 20%. Although the currency is pegged at USD
165: MWK, imported goods are priced at the parallel rate.
In our view, the first quarter of 2012 is likely to be
characterised by skyrocketing consumer prices exacerbated
by the lower agriculture output. We expect the average
inflation rate for 2012 to be at least 15%.
Real assets well poised for upside
In light of the spiralling inflation and the continued
currency weakness we believe it is a matter of time before
investors move into real assets away from the negative
returns on the money market where yields for 91-day TBs
are around 7.0% versus official inflation of 8.1%. This might
eventually push the demand for equities whose valuations
remain surprisingly low in light of the continued currency
weakness. The case for equities is further strengthened by
the generally good dividend yields with a market average
dividend yield of about 5.0%. The MSE (excluding Old
Mutual) is only capitalised at MWK 1.2bn (approximately
USD 1.0bn using the OMIR). Ratings remain attractive in
relation to Sub-Saharan Africa peers, in our view.
Furthermore, the foreign exchange shortage is unlikely to
last into perpetuity, and once the share overhang has
cleared, stock prices are likely to rebound fairly quickly.
Market Outlook for 2012
10 most active stocks by volume
Company Vol (m) % of Total
TNM 1 446.27 90.96%
NBM 43.15 2.71%
FMB 29.73 1.87%
NITL 16.78 1.06%
MPICO 15.43 0.97%
NBS 11.83 0.74%
NICO 10.44 0.66%
Illovo 8.56 0.54%
REAL 4.44 0.28%
Standard Bank 1.39 0.09%
Source: MSE
10 most active stocks by value
Company Val (USD m) % of Total
TNM 16.56 36.27%
NBM 16.04 35.13%
Illovo 6.11 13.38%
NITL 1.67 3.65%
FMB 1.29 2.81%
PCL 0.98 2.15%
Standard Bank 0.91 1.99%
NBS 0.78 1.71%
NICO 0.78 1.70%
MPICO 0.30 0.66%
Source: MSE
31.78%
5.30%
1.23%
8.59%
1.55%
51.54%
Market Cap. Composition
BANKING
INSURANCE
TOURISM
TELECOMS
PROPERTY
MANUFACTURING
Source: MSE
15
Hist. T+1 T+2 Hist. T+1 T+2
FMB 650.0 8.6 6.7 5.3 2.0 1.7 1.4 BUY
MPICO 300.0 0.0 0.0 0.0 0.0 0.0 0.0 BUY
NBM 5,250.0 7.1 5.5 4.5 1.8 1.5 1.2 BUY
NBS 976.0 3.6 2.5 2.1 1.4 1.1 0.8 BUY
NICO 1,050.0 3.7 3.1 2.6 1.2 0.9 0.7 BUY
Press Corp. 18,000.0 4.1 2.9 1.9 0.8 0.6 0.5 BUY
Std. Bank 10,600 15 14 12 0.8 0.6 0.5 BUY
NBS 976 3.6 2.5 2.1 1.4 1.1 0.8 BUY
Source: MSE
Company Price
PER PBV
Recom.
We think the current market pull offers some buying
opportunities for long-term investors. Nonetheless,
investing on the MSE is a long-term play given issues
with repatriation of currency for now, while there is the
devaluation risk to consider which can erode any gains
overnight.
However, earnings growth for most listed companies is
generally expected to be weaker given the economic
woes. Deposit growth for banks has generally been
slower and most account holders are multi-banked as
they chase facilities. Provisions for banks are set to
increase given the economic slowdown, with those with
significant exposures to tobacco, transport and
construction likely to be the hardest hit. For banks,
forex income has slowed and focus is on efficiency.
However, we believe listed banks will weather the
storm given the generally solid balance sheets and
stringent credit control.
Top Picks for 2012
In our view, companies that rely on local inputs
commanding a dominant market share do well going
forward, especially Press Corp and NICO.
The tourism sector has been negatively impacted by the
fuel shortages and the reduced donor activities which
affected the conferencing business. Furthermore, the
overvalued local currency means that Malawi is, relatively,
an expensive destination for international visitors.
Property companies should perform reasonably well and
MPICO can potentially surprise on the upside.
We expect companies with significant export earnings and
external links to perform strongly in light of the weak
currency especially Illovo and Old Mutual and to a lesser
extent Press Corp. Old Mutual with a large part of its
business external to Malawi will probably continue to
reflect the street value of its external holding. The
current Old Mutual price indicate an exchange rate of
about MWK 230 : USD1, implying investors can bring in Old
Mutual shares and invest in other counters that offer
significant upside.
16
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Semdex S&P Africa Frontier
Source: IAS/S&P
Source: SEM/CIM
Top 5 Gainers and Losers - 2011 Opening Closing % change % change
Company Price Price (LC) (USD)
Semdex 1 967.45 1 888.38 -4.02% 0.09%
Gamma Civic Ltd 297 398 34.01% 39.74%
Innodis Ltd 31.8 39.8 25.16% 30.52%
Vivo Energy Mauritius Ltd 137 161 17.52% 22.55%
MCFIndustry Ltd 38 43.3 13.95% 18.83%
Rogers & Co. Ltd 293 325 10.92% 15.67%
MSM 17.1 13.5 -21.05% -17.67%
United Docks 124 96 -22.58% -19.27%
Dale 20.5 15.8 -22.93% -19.63%
NMH 110 81.5 -25.91% -22.74%
Caudan 2.05 1.5 -26.83% -23.70%
Source: SEM/CIM
17
The Stock Exchange of Mauritius main board, the
Semdex, shed 4.02% in local currency terms to close at
1,888.38 points, while reflecting a flat return in USD
terms, as it put on a marginal 0.09%, thanks to the
currency strengthening against the dollar as at FY 2011.
The net result for the year was a disappointment after a
strong start to the year had seen the index hit a record
high of 2,113.61 points in May. Foreign investors were net
sellers to the tune of MUR 480m, inclusive of a 5.2%
disposal of shares in Rogers. Without that exceptional
sale, net outflows were MUR 117.0m.
Market capitalisation closed at USD 5.7bn, up 0.74% y-o-y,
while turnover increased by 32.99% to USD 499.1m.
Turnover by volume was 244.0m shares vs. 339.4m in
2010, a 28.11% decline. The market PER ended the year
at 11.29x, lower than 2010s 14.05x, while the dividend
yield was at 3.04% compared with 2.50% as at FY 2010.
There was one new listing on the exchange in 2011, with
Go Life International PCC being the first company to be
listed on the official market whose securities are traded
and settled in USD. The company is structured as a
protected cell company and is regulated by the Financial
Services Commission. It was established to effect the
acquisition of 45% of the equity shareholding of Go Life
Health Products Ltd (SA). Go Life (SA) is involved in the
nutraceutical market. The term nutraceuticals refers
to extracts of foods having a medicinal effect on human
health. Having listed at US10c per share, the company
reached a high of US16c before eventually closing at US9c
per share.
In sympathy with the concerns around the Eurozone, the
market has opened the year on a weak note, shedding
3.19% to the end of January 2012, with the Sem-7 down
2.66% as SBM and NMH in particular have started poorly.
Looking at the economy as a whole, the Central Statistics
Office expects GDP to grow by around 4.0% in 2012,
slightly lower than the 4.1% registered in 2011. Exclusive
of sugar, the growth rate would be 3.9% compared to
4.2% in 2011. The key tourism sector is expected to grow
by 3%, with tourist numbers which grew to 964,642
against a forecast 980,000 in 2011, expected to increase
to 1.01m in 2012 as the country continues to increase its
marketing efforts towards Asia.
The World Bank has the same estimate growth rate for
2011 of 4.1%, but is rather more negative on the outlook,
forecasting real GDP growth of 3.3% in USD terms for
2012, before recovering to 4.3% in 2013. The sooner the
Eurozone crisis is resolved, the better for Mauritius, but
given the relatively cautious GDP outlook, we think the
market will reflect the same chariness in 2012.
Market Review for 2011
Top picks for 2012
Market Outlook for 2012
MCB - Our preferred banking stock on the Mauritian
bourse; earnings growth expected to be fairly mundane
in 2012, but longer term fundamentals are sound;
Growth to be driven more by product diversification and
regional expansion.
LUX Island Resorts (formerly Naiade Resorts) The
tourism sector has lagged in terms of performance over
the past couple of years, saddled by poor demand from
its key European market as well as high indebtedness as
expansion capex was pursued just as the GFC hit in
2008; in our last sector report we had Lux as a hold, at
its then price of MUR 29 per share. It has since dropped
to MUR 23.20. While 2012 is likely to prove challenging
once more, we think long term investors should look to
accumulate shares at current levels.
Source: SEM/CIM
Source: SEM/CIM
43.75%
12.91%
8.25%
13.08%
12.77%
8.05%
0.95%
0.24%
Market Cap. Composition
Banks&Insurance
Commerce
Industry
Investments
Leisure&Hotels
Sugar
Transport
Forei gn
Source: SEM/CIM
10 most active stocks by volume
Company Vol % of total
MDIT 42 248 066 17.31%
ENL Land 25 987 774 10.65%
VIVO Energy 22 614 974 9.27%
MCB 21 222 117 8.70%
ENL Land (P) 18 342 422 7.52%
Caudan 15 839 346 6.49%
NMH 10 763 420 4.41%
SBM 9 021 668 3.70%
Lux Island Resorts 8 711 415 3.57%
Air Mauritius 8 629 606 3.54%
10 most active stocks by value
Company Val (USD) % of total
VIVO Energy 131 727 318 24.77%
MCB 131 169 237 24.66%
ENL Land 41 166 074 7.74%
NMH 38 740 928 7.28%
ENL Land (P) 30 055 299 5.65%
SBM 29 539 100 5.55%
Lux Island Resorts 9 166 238 1.72%
MDIT 8 610 886 1.62%
Air Mauritius 5 341 924 1.00%
Caudan 996 434 0.19%
18
EQUITY RESEARCH
NAMIBIA
FEBRUARY 2012
2011 REVIEW AND 2012 OUTLOOK
The next hot spot for oil exploration? In a positive
development for Namibia, the Ministry of Mines and Energy
announced last year that an estimated 11.0bn barrels in oil
reserves were found off Namibia's coast, with first
production planned within four years. The find could put
Namibia on par with neighbouring Angola, whose reserves
are estimated at around 13.0bn barrels and whose
production rivals Africa's top producer, Nigeria. These
potential crude oil resources will have a considerable
impact on the country.
Having a strongly mining biased economy, Namibia has
largely benefited from the boom in commodity prices and
GDP growth has been strong in the past five years (4.4% on
average). However, the reliance on mining (41% of goods
export earnings in 2010 and 9.0% of GDP) renders the
economy vulnerable to external shocks.
Like other countries in the region, Namibia has sought to
cash in on historically high commodity prices. In August
2011, the Namibian government decided not to implement
its plan to raise the corporate income tax rate for the non-
diamond mining sector from 37.5% to 44%, following
concern from the industry. The finance ministry has
instead proposed a formula-based surcharge to capture
additional mining revenue during better economic
periods. The government is also pushing through
parliament plans for the state-owned Epangelo Mining
Company to be assigned all mining and exploration rights
for strategic minerals, which include zinc, copper, coal,
uranium and gold, but not diamonds.
Amidst positive news was the potentially investor
unnerving situation involving Walmarts takeover Massmart
Holdings and its African operations, including Namibia. The
Namibian Supreme Court ruled on appeal that the decision
by competition authorities to impose conditions on
Walmart's purchase of Massmart, which has three local
subsidiaries, should stand, setting aside a High Court ruling
from earlier in the year that had scrapped the conditions
imposed by the Competition Commission. The ruling also
gives Trade and Industry Minister Hage Geingob a final say
over whether conditions attached to the deal by the
Competition Commission are adequate. As was the case
with South Africa, there are concerns that too many
conditions applied to such transactions interfere with the
free market and could dissuade FDI.
Politically, the country remained stable, no surprise really
given the massive dominance of President Hifikepunye
Pohamba and the ruling South West Africa Peoples
Organisation (SWAPO) party.
The local index seemed to take a cue from the positive
economic developments and was the third best performing
in SSA in 2011.
Top 5 Gainers and Losers - 2011 Opening Closing % change % change
Company Price Price (LC) (USD)
NSX - Local 172.72 221.19 28.06% 3.62%
Nictus 1.05 3.00 185.71% 131.18%
Nambrew 7.86 12.00 52.67% 23.53%
Shoprite 99.85 136.20 36.40% 10.37%
Old Mutual 12.98 17.06 31.43% 6.35%
Oceana Group 38.5 48.00 24.68% 0.88%
Paladin Energy 33.57 10.94 -67.41% -73.63%
Afrox 20.65 16.20 -21.55% -36.52%
Investec 55.98 44.07 -21.28% -36.30%
Anglo-American 345.43 296.40 -14.19% -30.57%
Standard Bank 107.55 99.25 -7.72% -25.33%
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NSX Local S&P Africa Frontier
Source: IAS/S&P
Source: NSX
Top 10 shares by market cap.
Company NAD (m) USD (m) % of Total
Anglo-American plc 399 910 50 239 35.63%
Standard Bank Group 157 683 19 809 14.05%
Firstrand 117 720 14 789 10.49%
Old Mutual Plc 98 953 12 431 8.82%
Shoprite Holdings 74 022 9 299 6.59%
Nedbank Group Limited 73 577 9 243 6.56%
Sanlam Limited 60 585 7 611 5.40%
Truworths 33 888 4 257 3.02%
MMI Holdings Limited 25 673 3 225 2.29%
Barloworld Limited 17 385 2 184 1.55%
Source: NSX
19
GDP growth which has largely been propelled by
investment in mining is expected to average between
4.0% and 5.0% through to 2015. Growth in the mining
sector should continue in 2012 owing to significant
investments. Namibia was the worlds fourth largest
producer of uranium in 2010 after Kazakhstan, Canada
and Australia. Several new large-scale projects should
significantly increase production in the medium term.
We opine that Pohamba is likely to maintain SWAPOs
broadly pro-business policies to ensure Namibia
continues to attract sizeable FDI inflows, particularly
into the mining sector. FDI expanded 147% between
2005 and 2010 to USD 858.0m and inflows are set to
continue growing in 2012, with investments in uranium,
gold, manganese and marine phosphates projects and
associated industrial projects associated industrial
developments. We also expect external debt liabilities
to remain relatively modest with little risk of external
debt servicing problems.
Namibias outlook is closely tied to that of South Africa,
which may suffer from its relatively close connection to
the sputtering developed markets in Europe. Given the
fact that the NSX comprises mostly dual-listed shares
(FTSE or JSE/FTSE) and that the NAD is pegged, one-to-
one against the ZAR (under the CMA agreement),
prospects on the NSX overall are also hinged mainly on
global factors. With the JSE expected to have a strong
year given its performance thus far, we expect the NSX
to follow suit.
Market Outlook for 2012
Our recommended strategy for investors on the NSX would
be to focus on local equities;
We like FNB Namibia given its consistency in earnings
growth (CAGR of c13% over the past decade), a lucrative
dividend payout ratio of 40% that is often augmented by
special dividends (NAD 1.70 per share in FY 11), as well as
stable and consistent growth in valuation.
Nambrew is also unique in that is has penetrated regional
premium markets in countries such as South Africa and
Angola. Furthermore, it has managed to launch products in
the UK, Cameroon, Kenya and Uganda through a global
distribution, brewing and licensing agreement with Diageo
Plc for some of its brands. At a forward PER of 12.0x,
Nambrew definitely looks undemanding compared with its
peers in SSA. While the share price has galloped to historic
highs, we still see value in the stock.
Market Review for 2011
The NSX local index was one of the few indices that
ended the year on a positive footing. The index gained
28.06% in local currency terms and 3.62% in USD terms to
close the year at 221.19 points. On the other hand, the
NSX overall index lost 3.34% in local currency terms to
close at 838.42 points.
The key point, however, is the fact that the Namibian
Stock Exchange (NSX) comprises mostly JSE dual-listed
shares, with Anglo-American representing 36% of the
total market capitalisation. Other big constituents
include Standard Bank (14%), First Rand (10.5%), Old
Mutual plc (8.8%) and Shoprite Holdings (6.6%). The seven
listed local Namibian companies constitute less than 1.0%
of total market capitalisation. The NSX local index is
therefore less exposed to global market influences.
Furthermore, local stocks have largely benefited from
regulation forcing local asset managers to hold 35% of
their portfolios in domestic companies. Thus, the NSX
overall index tends to move in line with the JSE.
Looking at performances, the top gainers in 2011 were
Nictus (+185.71%), Nambrew (+52.67%), Shoprite
(+36.40%), Old Mutual (+31.43%) and Oceana (+24.68%).
Anchoring the losers were Standard Bank (-7.72%), Anglo
American (-14.19%), Investec (-21.28%), Afrox (-21.55%)
and Paladin Energy (-67.41%). Anglo American was the
most active in terms of value traded as it constituted
20.29% of the total, whilst Old Mutual was the most
active by volume, contributing 25.07% to the total.
Top Picks 2012
50.57%
35.63%
9.63%
1.55%
2.63%
Market Cap. Composition
Financials
Industrial Metals
Retailers
Industrials
Others
Source: NSX
10 most active stocks by volume
Company Vol (m) % of total
Old Mutual Plc 24.80 25.70%
Firstrand 16.16 16.74%
MMI Holdings Limited 15.14 15.69%
Bidvest Namibia Limited 5.66 5.87%
Afrox 4.99 5.17%
Investec Limited 4.97 5.15%
Sanlam Limited 4.44 4.60%
Standard Bank Group 3.79 3.92%
Barloworld Limited 2.81 2.91%
Anglo-American plc 2.08 2.15%
Source: NSX
10 most active stocks by value
Company Val (USD m) % of total
Anglo-American plc 92.53 20.29%
Standard Bank Group 52.16 11.44%
Old Mutual Plc 49.04 10.75%
Firstrand 44.68 9.80%
MMI Holdings Limited 35.50 7.78%
Investec Limited 34.34 7.53%
Nedbank Group Limited 28.80 6.31%
Barloworld Limited 26.86 5.89%
Sanlam Limited 17.37 3.81%
Truworths 16.67 3.65%
Source: NSX
20
Source: NSE
21
Source: NSE
Nig er ia
10 mos t acti v e s tock s by v alue
Company Val (US D m) % of total
Zeni th Bank 721.69 17.53%
Firs t Bank 477.74 11.61%
Guaranty Trus t Bank 446.48 10.85%
Ni g eri an Breweri es 239.70 5.82%
UBA 186.43 4.53%
Oando 169.31 4.11%
Acces s Bank 155.04 3.77%
Gui nnes s Ni g eri a 130.79 3.18%
Nes tle Ni g eri a 107.18 2.60%
Flour M i lls Ni g eri a 102.65 2.49%
Source: NSE
0.34%
0.98%
1.98%
30.64%
30.82%
0.52%
0.95%
29.27%
0.13%
3.33%
1.05%
Market Cap. Composition
Agriculture
Conglomerates
Const./Real Estate
Consumer Goods
Financial Services
Healthcare
ICT
Industrial Goods
Natural Resources
Oil & Gas
Services
Source: NSE
22
While we had thought politics would potentially be the
only caveat in our relatively bullish expectations for the
market in 2011 with the banks driving a recovery, the
reverse turned out to be the case, as the elections were a
success while the banking sector remained in the
doldrums.
In 2012, politics have already shown that it will be a
major factor, with Goodluck Jonathan having already had
to deal with a civil service strike related to his attempts
to remove the fuel levy (estimated cost USD 8bn a year)
as part of his reform agenda, while the militant group
Boko Haram, has escalated its attacks in the countrys
second city of Kano in the North, adding fire to the
tenuous political environment and by extension, investor
concerns.
The fuel levy issue seems to have been resolved, for now,
with a compromise that saw a 50% reduction in the fuel
levy, taking the price of petrol to NGN 97/l from NGN
65/l (full subsidy removal would have seen the price
shoot up to NGN 141/l).
With regards Boko Haram, Goodluck has vowed to hunt
down and crush the grouping, and will need to show a
strong hand to maintain a semblance of control and
order. This however, is likely to lead to increased attacks
by Boko Haram in response. While we don't expect this to
escalate to widespread civil strife/Muslim vs. Christian
violence, we think the situation will remain volatile in the
short to medium term.
Implications for the market of the above are that while
we see value on the NSE, particularly in the banks which
are now on a much more solid footing, investors are likely
to remain circumspect about the environment and this
will see the NSE oscillating around current levels. Any
continued delays in resolving the Eurozone issues will also
add to the risk aversion Nigerias internal problems may
create, which will further limit foreign investor
participation which is crucial to liquidity in a market in
which foreign investors contribute more than 70% to
market activity. Relatively high rates on the fixed income
side may also continue to see local investors reticent
about the equities market, as the effects of the fuel
increase on inflation are likely to see the CBN maintaining
a tight monetary policy.
Despite the immediate challenges facing Nigeria, the
longer term prospects for the economy and by extension
the market, remain positive. The World Bank in its
Global Economic Prospects January 2012 notes that
growth prospects for Nigeria remain robust, forecast at
7.1% and 7.4% for 2011 and 2012 respectively, driven
again, by the non-oil sector, primarily on the consumer
front. We expect consumer driven stocks to reflect this
growth in the future and would encourage investors to
look for value while the market is seemingly out of
favour.
Market Outlook for 2012
We continue to see plenty of value in the Nigerian
banking sector in particular, with ironically, its liquidity
counting against it as the primary exit for the risk off
trade. The wider consumer and infrastructure related
sectors should also remain on the radar screen. Our top
picks are the following:
Banking
Access Bank In our view likely to be the biggest
beneficiary of the sectors M & A activity. Well run bank,
middle market focus a differentiator.
ETI Oceanic acquisition to give it critical mass in
Nigeria, which is a huge positive; has also scaled up in
Ghana with Trust Bank acquisition; Nedbank alliance
could become more tangible if Nedbank exercises
convertible option and takes up equity.
First Bank Top tier bank, remains Nigerias largest by
most metrics, in a market where size is viewed as a sign
of safety and stability, while enabling it to consistently
write large ticket business.
GTB Impressive management team; technologically
driven growth strategy; strong presence in the corporate
market. Remains our favourite pick in the sector.
Zenith Bank Another of the tier 1 banks, well placed to
benefit from Nigerias growth. Very liquid, so room to
grow risk assets and profitability. Ex-Nigeria operations
profitable, should add further to profits going forward.
Consumer
Nigerian Breweries High current PER, but Nigerias per
capita beer consumption remains low at c7.0l pp
suggesting massive potential upside. Has consolidated its
position in the sector via acquisition.
Flour Mills Nigeria - Attractive valuation, arguably the
best value proposition among Nigerian consumer
companies; 50% of the Nigerian flour market share;
cement business set to contribute positively to the group.
PZ Cussons Benefiting from improved efficiency
following plant rehabilitation, diversified product mix
with white goods expected to underpin performance.
UACN Ideally placed to benefit from growing middle
class consumers; JV with Tiger Brands making solid
progress; actively pursuing franchise model.
Infrastructure
CCNN Speculative buy. The program to raise funds and
implement the expansion and energy source substitution
is now in motion; share price expected to recoup some of
its losses, while a gain in installed capacity share
indicates brighter business prospects post the expansion.
Top Picks for 2012
23
Rwanda fared better than its EAC peers in 2011 with the
RWF largely retaining its purchasing power and inflation
remaining in single digit territory. The 2011 GDP growth
outturn is expected at 8.8%, an improvement from
2010s 7.5%, although it is expected to slide to 7.6% in
2012. Better than expected growth from the
agricultural sector, underpinned by the government
sponsored Crop Intensification Program (CIP) was the
key driver in 2011 and we expected agriculture to play a
similar pivotal role in 2012.
While inflation rose and the RWF depreciated in 2011,
Rwanda was not impacted to the extent observed
amongst some of its EAC peers. The National Bank of
Rwanda (RNB), hiked its key repo rate in October from
6.0% to 6.5% in response to spiking y-o-y inflation which
rose from 0.2% in December 2010 to reach 8.3% in
December 2011. A region wide improvement in food
supply is however expected to ease inflationary
pressures in 2012, but for Rwanda, expectations are
that further monetary tightening will be required to
tame inflation.
The RWF, likewise, depreciated by a smaller margin
compared to EAC peers, opening the year at USD/RWF
584.40 and ending 2011 1.8% weaker at USD/RWF
594.95. Indications are that the RWF will remain
resilient in 2012, especially given improvements in local
food supply and the fact that it retained its lustre in the
face of significant headwinds in 2011.
The Rwanda Stock Exchange (RSE) officially commenced
operations in Q1 11 as Brasseries eLimonaderies du
Rwanda (Bralirwa), a government exit, debuted. Four
counters have since been listed with the second
domestic stock; Bank of Kigali (BoK) another
government exit, coming on board in H2 11 via an IPO.
Other listed counters are National Media Group and
KCB, both with primary listings in Kenya. The RSE is yet
to have an index, but, with the number of listed
companies increasing, we expect one to be created
soon.
Activity started slowly, but peaked progressively during
the year. A total of 118m shares worth USD 207m
changed hands with BoK accounting for half of the
volumes and BRALIRWA weighing in with 60.8% of
turnover. Domestic listings were the most liquid and we
expect the trend to be carried forward into 2012 with
activity improving as and when more local companies
list.
Rwanda has been among the top global performers on
the IFCs Doing Business report which should augur
well for FDI going forward. The country wants to
establish itself as a regional technology hub with the
completion of a 3,200km national fibre-optic backbone
testifying to that conviction. However, 2012 GDP growth
is expected to show a slowdown, with the World Bank
forecasting 7.6% for 2012 on the back of anticipated
anti-inflation monetary tightening. Further government
exits from companies such as MTN, CEMERWA and
Sonarwa are, nonetheless, expected to spur activity at
the RSE in 2012, should they occur. We do not expect
any significant changes in the trading trend; domestic
listings are expected to dominate with activity
progressively improving as the RSEs visibility increases.
BRALIRWA is the leading beer and sparkling beverages
producer in Rwanda and is 75% owned by the Heineken
Group. It has two subsidiaries, Bramin, a maize growing
company and Cogelgas, a company involved in methane
gas production. Rwandas per capita beer consumption
of 7.0l pp is way below the East African peers average
(Kenya 11l and Burundi 18l pp) and we believe that this
gap represents upside potential for Bralirwa.
EQUITY RESEARCH
RWANDA
FEBRUARY 2012
2011 REVIEW AND 2012 OUTLOOK
Gainers and losers - 2011 Opening Closing % Change % Change
Company Price Price (LC) (USD)
BRALI RWA 136 333 144.85% 140.20%
NMG 1 200 1 200 0.00% -1.90%
KCB 174 175 0.57% -1.33%
BOK 125 127 1.60% -0.33%
Rank by market cap. RWF (m) USD (m) % of Total
KCB 1 391 608 2 338.42 61.63%
National Media Group 501 522 842.75 22.21%
BRALI RWA 287 624 483.32 12.74%
Bank of Kigali 77 431 130.11 3.43%
Activity by volume Vol (m ) % of Total
Bank of Kigali 60.45 51.17%
BRALI RWA 57.67 48.82%
KCB 0.01 0.01%
NMG 0.00 0.00%
Activity by value Val (USD '000) % of Total
BRALI RWA 126 538 60.85%
Bank of Kigali 81 407 39.14%
KCB 22 0.01%
So ur c e:IA S/ RSE
Market Review for 2011
Market Review for 2011
Top Pick for 2012
24
Developments in the oil and gas sector dominated the
Ugandan landscape, notwithstanding the fact that
production was only expected to commence properly in
2012. The glaring regulatory deficiencies in the sector
and corruption allegations were topical in 2011 and look
set to remain so ahead of the commencement of full
production. Additionally Uganda held elections early in
the year in which the incumbent, Yoweri Museveni,
won. The results were disputed and sowed more seeds
of political tension that subsequently erupted into food
riots in Q2 11. Uganda has seen further organised
protests at the onset of 2012 as business operators
closed their shops to register their displeasure with the
rising cost of borrowing, while the main challenger in
the election, Dr Kizza Besigye, was barred from carrying
out demonstrations.
The 2011 GDP outturn is expected to be 6.3%, having
declined from 2010s 6.4%, with 2012 forecast to post
6.2% growth. 2011 had its fair share of challenges, with
significant headwinds emanating from spiralling
inflation and the depreciation of the UGX. Y-o-y
inflation closed 2010 at 3.10%, peaked at 30.4% in
October 2011 and ended the year showing signs of
relenting at 27.0%. The UGX on the other hand opened
the year at USD/UGX 2,288, sank to an all-time low of
USD/UGX 2,887 in October and recouped a huge chunk
of its losses to end the year at USD/UGX 2,359.
Food price shocks on the back of a crippling drought in
East Africa and rising energy prices occasioned by
political disturbances in the major oil supplying MENA
region, coupled with low hydro-electricity generation
capacity, were the key drivers. With agriculture
stuttering, exports for the largely agricultural economy
suffered. As a result, the BOP position worsened with
consensus forecasts pointing to a deficit of c12.1% in
2011. However, with oil inflows expected in 2012, we
expect the situation to turn quickly.
The Bank of Uganda (BoU) responded by adopting a
tightening monetary stance, progressively hiking the
bank rate from 13% in July to 23% in November 2011.
This, together with improved agricultural output on the
back of good rainfalls has been pivotal in propping up
the UGX and easing inflationary pressures. The BoUs
remedial strategies, however, brought about additional
hardships to ordinary citizens and further stoked the
flames of social unrest.
EQUITY RESEARCH
UGANDA
FEBRUARY 2012
2011 REVIEW AND 2012 OUTLOOK
Top 5 gainers and losers - 2011 Opening Closing % Change % Change
Company Price Price (LC) (USD)
USE ALSI 1 188.07 864.45 -27.24% -32.17%
DFCU 822 1 000 21.65% 13.40%
New Vision 580 700 20.69% 12.51%
BAT Uganda 1 740 1 960 12.64% 5.00%
National I nsurance Corporation 70 75 7.14% -0.12%
KCB Group 619 488 -21.16% -26.51%
Equity Bank Limited 762 488 -35.96% -40.30%
Bank of Baroda Uganda 504 230 -54.37% -57.46%
Kenya Airways 1 323 602 -54.50% -57.58%
Stanbic Bank Uganda 268 120 -55.22% -58.26%
Source: USE
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USE ALSI relative to S&P Africa Frontier Index
USE ALSI S&P Africa Frontier
Source: IAS/S&P
25
The stock market performed largely in line with
developments in the broader economy with the USE ALSI
shedding 27.24% to close the year at 862.45 points and
the USE LCI, likewise, giving up 39.01% from its
inception in February 2011 to end the year at 225.14
points. Capital shunned equities in favour of high
yielding government securities and the weak demand
sent share prices lower. Carry trades dominated fixed
income investments and were pivotal for the aggressive
appreciation of the UGX in Q4 11.
Total market capitalisation slipped from USD 5.6bn in
2010 to USD 4.5bn. This was, however, on the back of
improved activity as 268m shares worth USD 21.46m
changed hands, compared to 225m shares valued at USD
16.84m for 2010. The domestic listings market
capitalisation, on the other hand, slipped 2.68% to USD
0.82bn and moved 158m shares worth USD 14.38m.
Stanbic Bank Uganda (SBU) was the most active
counter, accounting for 72% of total volumes and more
than half of 2011s total turnover. Domestic listings
were the most liquid and we expect the same trend to
be carried forward into 2012. Corporate activity was
however low in 2011 with Centum Investments Company
being the sole addition via a cross listing and only two
companies undertaking capital calls.
On the domestic scene, headwinds that dragged
performance have shown clear signs of easing. The UGX
has largely recovered and we expect it to be broadly
stable in 2012, although the risk of instability remains
tied mainly to the price of oil. In the future, however,
we expect this risk to reduce as Uganda transforms from
an oil importer to an exporter. We expect inflation to
decline with the pace quickening in H2 2012 as high
base effects kick in. Electricity tariff hikes in January
2012, however, pose the greatest risk to our model. The
government expects to pass on a 45% hike to consumers
which we expect to have significant implications for
inflation, regardless of the fact that the country was
already facing acute power shortages with expensive
diesel powered generators used as backup power
sources.
Eurozone sovereign debt challenges on the other hand
occasioned lower foreign participation across SSA
markets, Uganda included. Consensus among analysts is
that a recession in the Eurozone is inevitable and that
the US Economy is going to post slower growth in 2012.
Africa, alongside other emerging economies is,
however, expected to more or less maintain its growth
tempo, all things being equal. Despite this, the picture
is thus not convincing regarding investors taking on risk
and hence we do not expect activity among foreign
investors to scale pre-Lehman levels.
Stanbic Bank Uganda: SBU is Ugandas biggest bank by
market capitalisation, branch network and balance
sheet. The bank is better poised than its listed peers to
benefit most from the anticipated oil boom. Ugandas
biggest bank operates 98 branches which are
complimented by more than 200 points of
representation (ATMS and POS terminals) and focuses on
personal, business, corporate and investment banking
services. SBU stands out because it shed more than half
of its value in 2011, driven we believe, largely by
expected mark to market losses on its bond portfolio.
With interest rates now expected to trend lower in line
with inflation, we expect this position to reverse and
the share price to recoup some of its losses.
10 most active stocks by volume
Company Vol ('000' ) % of T otal
Stanbic Bank Uganda 193 358.5 72.24
Uganda Clays Ltd. 28 057.5 10.48
Bank of Baroda Uganda 21 863.2 8.17
National I nsurance Corporation 11 270.2 4.21
Centum I nvestment 5 408.2 2.02
DFCU Ltd. 4 583.3 1.71
New Vision 2 937.4 1.10
BAT Uganda 166.5 0.06
Equity Bank Ltd. 2.1 0.00
KCB Group 1.9 0.00
So ur c e: USE/ IA S
10 most active stocks by value
Company Val (USD) % of T otal
Stanbic Bank Uganda 11 915 510 58.71
Bank of Baroda Uganda 3 300 653 16.26
DFCU Ltd. 1 785 283 8.80
Centum I nvestment 1 451 868 7.15
New Vision 959 521 4.73
Uganda Clays Ltd. 507 182 2.50
National I nsurance Corporation 299 122 1.47
BAT Uganda 74 261 0.37
Equity Bank Limited 647 0.00
KCB Group 533 0.00
So ur c e: USE/ IA S
51.52%
6.64%
0.91%
0.38%
37.91%
2.64%
Market Cap. Composition
Banking and Finance
Media
Tobacco
Industrial
Beverages
Commercial Services
Source: USE/IAS
Market Review for 2011
Market Outlook for 2012
Top Pick for 2012
26
Efforts by the Bank of Tanzania (BoT) to prop up the
depreciating TZS and bring down spiralling inflation
were the major highlights for Tanzania. Like some of its
EAC peers, Tanzania saw inflation soar to double digit
figures and the TZS hit all-time lows. Strategies
implemented have shown signs of success as inflationary
pressures have generally eased and the TZS recouped
some of its losses. The country is undertaking
unprecedented infrastructure investments especially in
housing and roads with more planned for the energy
sector. On the political front, Tanzania has commenced
on a constitution making process that has since proved
to be divisive and looks set to shake the countrys
hitherto stable political climate.
The 2011 GDP growth outturn is expected at 6.4% and
the World Bank forecasts 6.7% for 2012. The country
faces significant structural issues that have retarded
economic growth, the major one being a massive
infrastructure deficit, particularly in housing, roads,
railways and power generation. We expect that
investments in an effort to plug this gap will underpin
growth in 2012 and beyond.
Inflation (y-o-y) opened the year at 4.2% and reached
19.2% in December 2011, and while we believe the rate
is yet to peak, a strengthening currency and improving
food supply suggest that the top is near. The TZS on the
other hand opened the year at USD/TZS 1,450, slipped
to a low of USD/TZS 1,749 in November 2011 and closed
the year at USD/TZS 1,572 having appreciated
remarkably from the November lows. The drivers
remain the same; the food price shocks that wreaked
havoc in East Africa and a burgeoning energy bill
emanating from higher oil prices and exacerbated by
low electricity generation capacity in the region.
The BoT adopted a tighter monetary policy, hiking the
minimum reserve ratio from 20% to 30% in a bid to mop-
up liquidity. Additionally, the BoT lowered the foreign
exchange net open position limit for banks from 20% to
10% in a bid to discourageholding speculative positions.
Positive results have subsequently been achieved on the
currency front, but y-o-y inflation remains stubborn. We
expect further monetary tightening as Tanzania fights
inflation which should maintain the drag on economic
activity.
S
EQUITY RESEARCH
TANZANIA
FEBRUARY 2012
2011 REVIEW AND 2012 OUTLOOK
Top 5 gainers and losers - 2011 Opening Closing % Change % Change
Company Price Price (LC) (USD)
DSEI 1 163.89 1 303.23 11.97% 5.14%
Dar Es Salaam Community Bank 280 640 128.57% 143.43%
CRDB Bank 115 172.5 50.00% 59.75%
Tanzania Cigarette Company 2 220 3 140 41.44% 50.64%
Swissport Tanzania 600 820 36.67% 45.55%
Nation Microfinance Bank 660 850 28.79% 37.16%
Kenya Airways 1 300 1 020 -21.54% -16.44%
TATEPA 490 265 -45.92% -42.40%
So ur c e: DSE/ IA S
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DSEI vs S&P Africa Frontier Index
DSEI S&P Africa Frontier
Source: IAS/S&P
27
The DSEI closed 11.97% firmer at 1,303.23 points with a
total of 131.64m shares worth USD 31.98m changing
hands in 2011. NMB dominated, accounting for 35.80%
of volumes, while CRDB Bank weighed in with 65.61% of
turnover. Banks had a good year with three making it to
the top five and Dar-es-Salaam Community Bank topping
the charts for 2011.
2011 saw Nation Media Group of Kenya and African
Barrick Gold, a United Kingdom domiciled gold miner
with assets in various African countries, cross listing on
the DSE. Additionally Precision Air Services, Tanzanias
foremost carrier which is partly owned by Kenyan
Airways,undertook an IPO. On the other Hand, National
Investment Company was delisted and the DSE closed
the year with seventeen listed counters.
The year began with the government introducing
reforms in the energy sector and we believe this,
together with the drafting of the new constitution, will
be 2012s topical issues. Infrastructure projects, in
particular road construction, (funded by a USD 250m
syndicated bank loan), will also stand out and help
underpin growth which otherwise should be dragged
down by the tight monetary regime. Additionally,
Tanzania has plans to issue a sovereign USD 500m Euro
bond to fund infrastructure development and we expect
the process that generally stalled in 2011 to reach a
conclusion in 2012.
Public investment in power generation is receiving a lot
of air play especially from legislators who have become
more vocal. Tanzania has been relying on more
expensive emergency power plans, a reality that will
sadly remain with the country for the rest of 2012. Two
long term projects however stand out; a USD 684m
Chinese sponsored gas fired plant at Mnazi Bay and a
USD 3bn coal fired plant at Mchuchuma, with a
combined capacity of 1,000MW. Both projects can only
bring relief in the long term, but for now, Tanzania will
continue to rely on expensive options which have the
potential of sustaining inflationary pressures.
We do not expect a significant shift in historic trading
patterns in 2012. Domestic listings are expected to
continue dominating and the market is expected to
register yet another positive year.The regulatory limit
to foreign ownership of DSE listed shares has kept
foreign participation low and hence the market rarely
reflects international trends. Tanzania allows only 60%
foreign ownership in DSE listed stocks. The country is
however looking at undertaking reforms that will see
the restrictions fall away. This is being promoted at the
EAC level and there is a strong possibility that the
mooted regional stock exchange will emerge with time.
Tanga Cement 62.30% owned by Holcim; 1.25mtpa
installed capacity and 34% of Tanzania cement market;
relatively among the cheapest cement stocks in SSA.
Twiga Cement - 69% owned by Heidelberg Cement. The
company has 1.4mtpa installed capacity and 42% of Dar-
es-Salaam market. Like Tanga, foreign ownership limit
is the biggest value trap and we expect the price to
firm once shareholder restrictions are lifted.
Tanzania Breweries Limited - Tanzanias foremost
brewer; we expect changing consumer dynamics due to
rapid urbanisation, a growing population and increasing
disposable incomes to underpin performance.
Market Outlook for 2012
Stock Picks for 2012
Market Review for 2011 10 Most active stocks by volume
Company Vol (m) % of total
CRDB Bank 86.36 65.61%
NMB 22.79 17.31%
TATEPA 9.75 7.41%
DCB 6.66 5.06%
Tanzania Cigarette 2.13 1.62%
Twiga 1.73 1.31%
TBL 1.10 0.84%
Swissport 0.48 0.36%
Tanga Cement 0.46 0.35%
Tol Gases 0.14 0.11%
So ur c e: DSE
5.15%
16.53%
2.83%
4.54%
20.13%
46.62%
4.21%
Market Cap. Composition
Commercial Services
Beverages
Manufacturing
Construction and allied
Banking and Financial Services
Mining
Media
Source: IAS
28
0.5
0.6
0.7
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LuSE ALSI relative to S&P Africa Frontier Index
LuSE ALSI S&P Africa Frontier
Source: IAS/S&P
29
Following global uncertainty and reduced demand, copper
prices declined from circa USD 9,147/tonne in December
2010 to circa USD 7,568/tonne, representing a 17%
decline. Copper production for the 11 months to
November 2011 was 789m MT versus 779m MT over the 11
months to November 2010 representing a minor increase
of 1.3%. The Zambian Kwacha depreciated against the US
Dollar by 10% from ZMK 4,640.56/USD to ZMK
5,117.04/USD in 2011. CPI inflation increased slower in
2011 with year-end CPI of 7.4% versus 7.7% y-o-y in 2010.
Food inflation accounted for 1.9% of the 7.4% growth in
CPI inflation, and had a weight of approximately 50%.
Interest rate yields on 91-day treasury bills closed 2011 at
7.1% versus 7.7% in 2010. Save for the 0.6% drop in 91-day
t-bill rates, yields across the maturity spectrum over the
year increased from the 182-day t-bill (by 1.2% to 9.53%)
to the 15-year bond (by 0.7% to 16.2%). Weighted average
base-lending rates by commercial banks reduced further
in the year from 19.2% in January 2011 to 17% in
December 2011.
The LuSE All-Share Index closed 2011 at 4,040.35 points
versus 3,322.47 points in 2011, representing a 21.61%
increase y-o-y in Kwacha terms and 15.79% y-o-y in USD
terms. Turnover declined by 20% to ZMK 775bn in 2011
versus ZMK 962bn in 2010. Similar to the case with Zain in
2010, a significant portion of the turnover was due to the
transfer of ownership of BP Zambia shares to Puma
Energy Zambia, following the acquisition of BP Africa by
Puma Energy Holdings Limited. Trades in Puma accounted
for 57% of turnover on the LuSE, whilst trades in Zambeef
accounted for 20%, which included capital raised from its
rights offer during the year. Domestic activity accounted
for 81% and 74% of total turnover and volumes traded
respectively, with the balance accounted for by foreign
investment. The LuSE recorded a net inflow of USD 13.5m
in Foreign Portfolio Investment (FPI), an improvement
from the USD 10m outflow in 2010 (excluding the Celtel
transaction).
The LuSE saw its fair share of corporate actions with
Investrust Bank, Zambeef and Zambian Breweries looking
to the capital markets to raise ZMK 31.6bn (USD 6m), USD
55m, and ZMK 351bn (USD 60m) respectively via rights
offers, all for the purposes of expansion. During the year,
First Quantum Minerals, listed on the Toronto Stock
Exchange, sought to place USD 50m in Zambian
Depository Receipts (ZDRs), the first ZDRs on the
exchange, at least indicating some headway towards
getting domestic mining companies listed given the
industrys core positioning in the Zambian economy.
The market was driven by healthy price appreciation in
market heavyweights, notably Standard Chartered
(increased demand following bonus-issue); Zanaco,
Lafarge, Bata and CEC on strong H1 2011 numbers and
Puma, the best performing company, on strong H1 results
and mandatory offer prospects. African Explosives rally
was triggered by its second dividend payment, negating
the fact that it posted weaker y-o-y H1 2011 results.
Market Review for 2011 Despite volatility during the year, the LuSE ended as
the best performing SSA exchange in 2011. The closing
average PER and PBV on the LuSE in 2011 were 19.9x
and 6.5x respectively, versus 11.8x and 3.9x in 2010.
Company Vol (m) % of Total
Puma Energy Zambia 380.57 33.1%
Investrust Bank 284.45 24.8%
Standard Chartered Bank 246.31 21.5%
Zambeef 52.15 4.5%
Zambia Sugar 47.98 4.2%
Cavmont Capital Holdings 44.64 3.9%
ZANACO 34.55 3.0%
Copperbelt Energy Corporation 33.19 2.9%
Bata Shoe 5.05 0.4%
Investrust Bank Rights 3.82 0.3%
Source: LuSE
10 most active stocks by volume
5.42%
7.76%
1.42%
0.13%
2.22%
7.44%
1.16%
0.27%
66.71%
7.48%
Market Cap. Composition
Agri-business
Banking
Energy
Hospitality
Investments
Manufacturing
Oil Marketing
Property
Retail Trading
Telecommunications
30
The outlook for Zambia in 2012 is arguably more sensitive
to government policy than it has been over the last few
years. The primary reason for this, particularly with
respect to FPI on the LuSE, is that how external investors
perceive government policy, which tends to rank high up
in the list of significant country-risk factors for African
countries in particular, will impact on FPI.
With the campaign promise of making significant and
progressive changes to the benefit of Zambians within 90-
days, the Patriotic Front has since made quite a few
changes, notably including:
Commissions of enquiry into recent government
transactions including the aforementioned
Finance Bank, as well as Zamtel
Doubling the mineral royalties tax
An increase in tax exempt income from ZMK 1m
per month to ZMK 2m per mth
Increasing in maximum PAYE threshold from ZMK
4.2m/mth to ZMK 5.7m/mth
And more recently
Introduction of a tiered minimum capital
requirement structure
Increase in the minimum capital requirement
from ZMK 12bn to ZMK 104bn for local banks
and ZMK 520bn for foreign banks
On the back of these developments, and the expected
volatility on the world market, we expect volatility on
the LuSE to continue through Q1 of 2012 and into Q2.
Nonetheless, we expect the following to be key growth
factors:
Mining barring a further decline in commodity
prices through 2012, we expect increased mining
activity overall, and higher royalties revenues to
contribute more to GDP
Agriculture remains government priority,
continues to attract local/foreign investment
Construction commercial property development,
and the construction of power stations
Export companies further dollar strength will
aid export oriented companies, particularly
those exporting primarily to SSA and Asia
The primary risk factors in 2012 will be any significant
changes in government policy; downward pressure on
copper prices and the resultant lower or flat copper
production on a per-mine basis; exchange rate volatility;
and weak external demand for Zambian exports despite a
weak Kwacha. All in all though we expect the
expansionary budget to be market positive, with the
retail sector in particular set to benefit.
In terms of corporate actions, Farmers House received
shareholder approval on 27 January 2012 to complete its
acquisition of Arcades for circa USD 25m, whilst Puma
Energy Zambia will be looking to make a mandatory offer
to minorities. It remains to be seen whether the much
awaited and often delayed listing of Vedantas Zambian
operation KCM on the LSE and LuSE will occur in 2012.
Despite the uncertainty shrouding 2012, we still think
there is value on the LuSE, especially on a medium-term
basis, despite the higher relative valuations at the end of
2011 compared with 2010. For 2012, we like:
Zambia Sugar bet on better net profit margins
following debt restructuring and reversion to
historical payout levels of circa 70% in the
medium-term.
Lafarge Cement Zambia remains dominant
industry player, with Dangote construction still
awaiting. Bet on higher cash payout coupled with
modest volume growth owing to regional growth.
Zambian Breweries new expansion project on
the Copperbelt is a worthwhile long-term bet
no dividends foreseen in the near future though.
National Breweries on higher demand from
higher disposable income from the poorest owing
to budget relaxation on lowest income tax
bracket.
British American Tobacco higher domestic
demand + higher divi-payouts.
Also, look out for the following companies:
AEL Zambia more demand versus erratic
margins.
Copperbelt Energy Corporation Zambia or
Nigeria?
Zambeef ramifications of colossal tax
assessment.
Certainly all the banks! who will survive?
Top Picks for 2012 Market Outlook for 2012
31
Top 10 Gainers and Losers - 2011 Opening Closing % Change
Company Price Price USD
ZSE Industrial Index 151.27 145.86 -3.58%
Fidelity 2.00 16.00 700.00%
Pelhams 0.15 0.85 466.67%
TN Holdings 0.77 3.99 418.18%
CAFCA 17.00 67.00 294.12%
Truworths 3.40 9.50 179.41%
Bindura 13.00 2.50 -80.77%
Rio Zim 190.00 35.00 -81.58%
Star Africa 7.00 1.00 -85.71%
Chemco 45.00 3.00 -93.33%
ZECO 0.15 0.01 -93.33%
Source: ZSE/IES
Top 10 shares by market cap.
Company LC (m) USD (m) % of total
Delta 829.4 829.4 20.82%
Econet 677.7 677.7 17.01%
Innscor 295.2 295.2 7.41%
Hippo 222.0 222.0 5.57%
SeedCo 212.3 212.3 5.33%
OK Zimbabwe 102.1 102.1 2.56%
AI CO 101.0 101.0 2.54%
CBZH 95.8 95.8 2.40%
Barclays 90.4 90.4 2.27%
Old Mutual 87.9 87.9 2.21%
So ur c e: ZSE/ IES
0.60
0.70
0.80
0.90
1.00
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ZSE Ind. relative to S&P Africa Frontier Index
ZSE Industrial S&P African Frontier Index
The unstable geopolitical environment in the Middle East and
North Africa led to increased risk aversion and together with the
Eurozone debt crisis led to a reduction in the total funds being
availed for investments in perceived riskier emerging markets.
Interestingly however, foreigners were net buyers on the ZSE in
2011 and accounted for 71% of average daily turnover. Constraints
within the country including the scarce liquidity and unclear
policies around economic empowerment and indigenisation,
however, limited the growth of the indices as the Industrial index
eased 3.58% while the Mining Index slumped 49.8%. Consequently,
the market retreated although on thin volumes in normal trade as
daily average value traded amounted to approximately USD 1.9m,
representing an average market turnover of a mere 0.04%.
Although the prices of most heavyweight counters remained fairly
steady, AICO, which went up a marginal 5.6%, Econet down 16.1%,
Barclays down 53% and Meikles down 64%, disappointed. Most of
the smaller cap counters, however, recorded stronger returns and
topped the movers. The bottom laggards for 2011 were generally
characterised by massive undercapitalisation, unsustainable
gearing levels and poor management and boards of directors.
Generally, investor sentiment remains low as uncertainty about
the macroeconomic aspects remains. The downward spiral on the
Zimbabwean Stock Exchange has been mirroring international
markets, as the lack of progress in dealing with sovereign debt
issues especially in Europe has reduced investor confidence in
emerging and frontier market equities.
Bank asset quality a major concern
The use of multiple currencies in the economy is still in play with
the United States dollar, South African Rand, and Botswana Pula
being the dominant currencies. Although there has been talk of
bringing back the ZWD, relevant authorities have confirmed that
the multi-currency system will remain in use for the foreseeable
future. As at 30 November 2011, consolidated deposits (net of
interbank deposits) were estimated at USD 3.2bn up 41.7% from
30 November 2010. Lending to the private sector grew by 84.3% to
USD 2.9bn in November 2011. As a result of the growth in the
deposit base and expanded credit, the loan to deposit ratio
(excluding offshore lines of credit) increased from 61.9% in
December 2010 to over 71.7% by end of December 2011. We
premise that the overall under-capitalisation of most banks
remains a challenge especially when non-performing loans are
taken into account. In our view, most of the lending decisions have
been based on the size of the collateral being offered and
relationships rather than cashflow. Good information is also scarce
in the absence of a national credit bureau. Furthermore, the value
of the collateral, which is real estate in most cases, tends to be
overstated and inevitably harder to realise if the need arise. This
has allowed the official NPLs numbers to be low. In our view, most
banks are sitting on a significant unknown quantity of NPLs and
these continue to grow.
EQUITY RESEARCH
ZIMBABWE
FEBRUARY 2012
2011 REVIEW & 2012 OUTLOOK
Source: IES/S&P
32
Cash budgeting has been maintained
According to the 2012 MoF budget, revenue is estimated at
USD 4.0bn with tax and non-tax revenue of USD 3.4bn and
diamond revenue estimated at USD 600.0m. The Minister
maintained the cash budgeting framework with recurrent
expenditure projected at USD 3.2bn (80% of budget). Vote
of credit is estimated at USD 500.0m. The diamond receipts
are budgeted to go towards selected infrastructure and
other expenditures.
Economy is expected to remain on a growth path
GDP has been on the rise, growing by 5.7% in 2009, 8.1% in
2010 to an estimated 9.3% in 2011 and is projected to grow
by 9.4% in 2012. Major propellers of economic growth have
been the mining and agricultural sectors. The Ministry of
Finance (MoF) estimates that the mining sector (projected
to grow by 15.9%) will remain the major driving force of the
economy. The sector is expected to benefit from firm
international commodity prices, strategies to lower
electricity supply interruptions and additional private
capital injections.
Nonetheless, the IMF has highlighted the following as
possible downside risks:
Political disturbances
Export price declines
Higher-than-anticipated increases in imported food
and fuel prices
Unfavourable weather
Reversals of capital inflows
Banking system instability.
Early election unlikely in 2012
Although there are divergent statements relating to the
possibility of elections in 2012 from the main political
parties, we believe it is unlikely that elections will
materialise in 2012 although the electioneering will be
heightened. However holding early elections might be
impossible due to certain prerequisites that first have to be
fulfilled including political, media and electoral reforms.
Furthermore, the term of the current legislature expires in
2013 after its five year term runs out and cutting short its
term might see increased financial liabilities for the
government and increased intra-party in-fighting.
While the crystal ball is difficult to read at this juncture
given the uncertainties, we believe that ZSE valuations are
generally attractive. In our view, the ZSE still carries good
long-term growth potential given the economys strong
growth prospects, albeit off a low base. Nonetheless, the
economy remains hugely undercapitalised with most
companies still saddled with heavy and expensive
borrowings. Volatility is likely to stay high until the local
uncertainties clear and the Eurozone and US financial crisis
stabilise.
Market Outlook for 2012
10 most active stocks by volume
Company Vol (m) % of Total
Pelhams 587.55 12.71%
RTG 333.07 7.20%
Dawn Properties 252.23 5.45%
Pearl Properties 239.73 5.18%
Steelnet 226.67 4.90%
African Sun 187.87 4.06%
NMB 169.82 3.67%
Celsys 144.03 3.11%
ART ZDR 139.88 3.03%
MASH 139.19 3.01%
Source: ZSE/ IES
10 most active stocks by value
Company Val (USD m) % of Total
Econet 104.66 22.38%
Delta 77.62 16.60%
Innscor 25.21 5.39%
ABC 23.11 4.94%
AICO 22.45 4.80%
Meikles 19.35 4.14%
SeedCo 18.68 3.99%
Dairibord 15.55 3.32%
CBZH 12.43 2.66%
Hippo 11.59 2.48%
Source: ZSE/ IES
30.23%
17.24%
14.81%
9.34%
4.98%
4.80%
4.37%
3.47%
3.35% 2.90%
2.19%
0.93%
1.39%
Market Cap.Composition
Beverages, Hotels and
Leisure
Technology
Agricultural
Financial
Food
Building and Allied
Retail stores
Source: ZSE/ IES
33
The ZSE is well-poised for upside, longer-term
Market capitalisation to GDP is 39% against a regional
average of 51%. We believe that the ZSE offers
significant upside potential, off a low base for those who
do not leave their entry too late. The prospects of
continued good earnings growth will provide further
upside potential from current levels.
Given the demand for infrastructure reconstruction we
believe that construction companies are well poised to
take advantage of the opportunities and counters likely to
benefit include Lafarge, M&R and Turnall.
Although disposable incomes will remain low, we expect a
gradual improvement enhanced by the recovery in
agriculture and mining sectors. However, it should be
noted that the countrys agricultural production remains
susceptible to the vagaries of the weather as no
meaningful investment has been made in irrigation post
the land reform exercise. Consumer stocks and agro
processors should thus continue to perform well
especially the likes of Colcom, Delta, Econet, Innscor,
National Foods and OK Zimbabwe.
Top Picks for 2012
In our view, the financial sector provides speculative
opportunities as we are wary about the growth of NPLs, the
general under provisioning by most banks and weak
capitalisation levels. Our picks in the financials would be
Barclays for long-term while CBZH and NMBZ Holdings offer
speculative opportunities.
For our top picks, we are not sector specific and recommend
investors adopt a bottom up strategy. There are attractive
opportunities to buy rapidly growing, monopolistic, well
managed companies and strong cash generating companies
such as AICO, BATZ, Dairibord, Delta, Econet, Innscor,
M&R, OK Zimbabwe, Padenga and Seed Co.
34
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