africa 2010 outlook & strategy
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Refertoimportanttermsoruse,disclaimersanddisclosuresonbackpage.
Africa 2010 Outlook and StrategyInvestment Strategy
Equity research | Africa
A PROMISING YEAR FOR AFRICA
Despite the impact of the global recession and the financial crisis on African
economies and financial markets, we believe that the continent is better
positioned than many other regions in returning to high growth and
profitability.
Bankingsectortobenefitfromgrowthandincreasedfundingneed.TheAfrican banking sector is set to continue on its growth path that was
curtailed by the global financial crisis. The borrowing capacity of
individuals,corporates
and
governments
is
still
largely
intact.
Indeed, as
global banks look to curtail some of their business, the opportunity for
local banks seems to be even stronger. We believe that the Nigerian
bankingsectoroffersgoodvalueaftertheshakeupof2009. Ourtoppicks
are Access Bank, FBN and Diamond Bank (Zenith a Speculative BUY) in
Nigeria,andKCBandStandardCharteredinKenya.
Telecomssectorshowswavesofgrowth. Industryprofitabilityhascomeunderpressureasaresultofincreasedcompetitionbetweenexistingand
new market entrants. However, improving economies of scale, cost
innovation and new, potentially higher margin, lines of business (mobile
broadband) will prop up and in some case improve profitability. In
addition,
it
is
expected
that
new
operators
will
limit
initial
promotionalactivityoncetheyhaveaccumulatedsomemarketshare,andreturntoa
strategy of achieving sustainable average revenue per user (ARPU). Our
toppicksinthesectorareCeltelZambia,Sonatel,andMarocTelecom.
Brewing and beverages companies show attractive growth potential.Africa is the sixthlargest beer market in the world, yet it has low per
capita beer consumption. Rising income levels and urbanisation are
leading to increased per capita consumption and a growing consumer
base.Companiesareadoptingstrategiestoexploitthis,includingcapacity
expansion and distribution alliances across countries as well as rapidly
diversifying product portfolios. We are positive on Guinness Nigeria and
NigerianBreweriesduetotheirearningsgrowthprospects,strongbrand
loyaltyand
sustained
focus
on
premium
brands.
Underlying fundamentals in the cement sector still there. Despite theglobal economic slowdown, we still believe that the sector offers solid
longterm investment potential, underpinned by the significant
infrastructuredeficitandhousingshortfallonthecontinent.However,we
are cautious about the outlook over the medium term due to slowing
activity inkeyconstructionmarketsandmoredifficultaccess to finance,
coupled with expected surplus production capacities. As a result, we
expectpricingpressuretooccurinsome markets.Ourtoplargecappicks
inthesectorareBenueCementandLafargeWapco.Oursmallcappicks
includeEAPC,LafargeZambiaandAthiRiverMining.
18 JANUARY 2010
REAL GDP GROWTH RATE (% PA)
2
1
0
1
2
3
4
5
6
2 00 8 2 00 9 2 01 0 2 01 1 2 01 2 2 01 3
Afri ca World
Source:IMF
AA AFRICA INDEX (USD)
55
65
75
85
95
105
115
Ja n08 Jul08 Jan09 J ul09 Jan10
Source:AfricanAlliance
Analyst:
MaciekSzymanski
+27
11
214
8338
SzymanskiM@africanalliance.com
Analyst:
JaredJeffery+27112148376
JefferyJ@africanalliance.com
HeadofInternationalSalesandTrading:
RobBrownlee+27112148463
BrownleeR@africanalliance.com
AfricanAllianceResearchisavailabletoour
clientsathttp://research.africanalliance.com
orthroughBloomberg(AARD),
ThomsonReuters,Factset,TheMarket.com
andCapital
IQ.
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Africa 2010 Outlook and StrategyInvestment Strategy
TABLE OF CONTENTS
Macroeconomic overviewReview of 2009 42010 Macro outlook 5Equity market performance in 2009 7
Key marketsKenya 8
Nigeria 14
Other markets
Botswana 18
Egypt 20
Ghana 22
Lesotho 24
Malawi 26Mauritius 29
Morocco 31
Namibia 37
Rwanda 40
Tanzania 42
Tunisia 44
Uganda 48
Zambia 51
Zimbabwe 55
Notes 59
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Africa 2010 Outlook and StrategyInvestment Strategy
About this reportThis
report
provides
coverage
of
companies
listed
on
African
stock
exchanges.
Most
of
the
companies
covered
in
this
reportformpartofnormal,fulltime,coverageuniverse.Weprovideratingsforthesecompaniesonthebasisofdetailed
historicalfinancialanalysiscombinedwithtopdownforecasts.
Unlessotherwisenoted,financial information issourcedfromsubjectcompanyfilings,marketdata issourcedfromthe
relevantexchanges,andforecastsandanalysisarepreparedbyAfricanAllianceanalysts.
Wewouldliketoacknowledgeandthankourstockbrokingpartnersfortheirinputwitheconomicandcompanyanalysis
in their respective markets: CIM Stockbrokers (Mauritius), Integra Bourse (Morocco), IJG Securities (Namibia), Tunisie
Valeurs(Tunisia)andEFESecurities(Zimbabwe).
AfricanAlliancehastakencareinpreparingallinformationcontainedinthisreport,butdoesnotacceptliabilityforerrors
orout
of
date
information.
Allsharepricesareasat13January2010.
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Africa 2010 Outlook and StrategyMacroeconomic overview
REVIEW OF 2009
In
2008
Africa
entered
the
financial
crisis/global
recession
in
a
strongposition, having benefited in the lastdecade from debt forgiveness, larger
foreignexchangereserves (2008commoditiesboomandrecentstrongFDI
and portfolio inflows), economic and political reforms, improved
productivity as a result of the mobile phone revolution as well as more
responsiblefiscalandmonetarypolicies.Thishasallowed thecontinent to
escape toshacklesof loweconomicgrowth andachieveanannualgrowth
rateexceeding5%perannum.
Theinitialreactionstotheeventsoflate2008suggestedthatthecontinent
might escape the brunt of the excesses seen elsewhere in the developed
world:Africanfinancialmarketsbeingquitedisjointedfrom therestof the
world, bankingstill relyingondeposit takingand lowrisk loans,as wellas
decouplingtheories
which
suggested
that
Africas
shift
in
outlook
from
the
West to the East are likely to protect it to a large extend from developed
marketproblems.
However, this proved not to be so. Weaker demand from key export
markets,withdrawalordelayinforeigndirectandportfolioinvestment,fall
in taxation revenues (especially tradebased) and fall of the dollar (and
appreciation of African currencies) meant that African leaders had their
handsfullrespondingtotheincreasingneeds,andoftendesperation,ofthe
continentspoorandbusinessesalike.
Asaresult,Africaseconomicgrowthratefellfrom5.2%in2008to1.7%in
2009,according
to
the
IMF.
Nevertheless,
this
positive
growth
rate
was
one
of the highest regional growth rates in the world (notably only India and
China are expected to have grown faster in 2009, at 5.4% and 8.5%
respectively),withthedevelopedworldslumpingintorecession.
Howevertheaggregatefigurehidesthedisparitybetweencountries.South
Africa,thecontinentslargesteconomy,slumpedintoarecessionduringthe
year,havingrecordedacontractioninitseconomyestimatedbythe IMFat
some2.2%.Resourcedependentcountriesalsosawaslump inbothprices
and demand for their products: Botswanas real GDP is estimated to have
shrunkby10.3%astheshuttingdownofdiamondproductiontookitstollon
government revenues,exports andemployment.Nigeria,Angola, Namibia,
Swaziland
and
Senegal
were
also
strongly
impacted.
Overall,thegrowthrateshaveheldupwellasglobaldemandstabilisedand
started to recover. Countries like Zambia have weathered the storm quite
wellduetothecurrencyactingasashockabsorber;thekwachadepreciated
strongly when copper prices fell, but recovered most of the losses when
theybouncedbacksharplyin2009.
Judgingfromthisandotherexperiences,thisposesinterestingquestionsfor
thecontinentaboutthechoiceofeconomicpoliciesandthewaythatfuture
regionalintegrationislikelytobehandled.
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Africa 2010 Outlook and StrategyMacroeconomic overview
2010 MACRO OUTLOOK
Recovery
in
the
global
economy,
from
a
negative
1.1%
in
2009
to
3.1%
in2010, is expected to drive economic resurgence in Africa during the year.
IMFexpectstherealGDPgrowthratetoattain4%,acceleration fromaslow,
butpositive,1.7%lastyear.
Most of the economic powerhouses on the continent are expected to
registerahighergrowthratein2010thenlastyear:SouthAfricaisexpected
tobouncedbackfromtherecession lastyearandgrowby1.7%,Nigeriato
achievea5%growthrateonthebackofstrongerdomesticnonoileconomy
aswellasapotentialboost inoilproductionafteraceasefire in theNiger
Delta, Egypt to record a marginally higher growth rate (5%) after being
shieldedfrommostoftheimpactoftheglobalrecessionandKenyatofinally
startrecoveringfromtheaftereffectsofits2008postelectioncrisis.Among
the
top
economies,
onlyMorocco
is
expected
to
have
aslower
growth
in
2010(3.2%)thanin2009(5%).
Factors expected to influence African economic performance this year
include:
Globaleconomicconditions.Theeconomicenvironmentintherestofthe developed world will drive theAfrican export volumes as well as
foreignaidandinvestmentintotheregion.Somecountriesandmulti
lateral institutions have frontloaded aid meaning that less might be
availableinthenexttwotothreeyears,strainingfiscalbalances.
Commodity
prices.
Recovery
in
global
commodity
prices
has
beensupportive of African growth in 2H09. Improved export earnings will
aidbothfiscalrevenuesaswellascompanyprofitability.MostAfrican
countrieswillalsosettleforthecurrentlyhigh,butstableoilprice;this
refersbothtooilexporters(intermsofrevenues)aswellasimporters
thathavebeennegativelyimpactedthroughhighimportedinflation.
Weather pattern. Regions such as East Africa have been ravaged bydroughtinrecentmonths,quicklybeingreplacedbyfloods.Stable,and
adequate,rainfallwillgoalongwaytoallowagriculturetobethemain
growthgeneratorthisyearandthenext.
We
believe
that
currently
as
things
stand
the
prospects
for
the
above
factorsarefavourableandsupportiveof4%realGDPgrowthin2010.
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Africa 2010 Outlook and StrategyMacroeconomic overview
REAL GDP GROWTH (% PER ANNUM)
Region/country 2008 2009 2010 2011 2012 2013
NorthAfrica
Morocco 5.6 5.0 3.2 4.5 5.0 5.0
Tunisia 4.6 3.0 4.0 5.0 5.6 5.8
Egypt 7.2 4.7 5.0 5.0 5.5 6.0
WestAfrica
Nigeria 6.0 2.9 5.0 5.2 5.9 6.2
Ghana 7.3 4.5 5.0 22.5 7.1 5.3
Senegal 2.5 1.5 3.4 4.4 4.8 4.9
Coted'Ivoire 2.3 3.7 4.0 4.5 5.1 5.7
EastAfrica
Kenya 1.7 2.5 4.0 5.0 6.3 6.5
Uganda 9.0 7.0 6.0 6.8 7.0 7.0
Tanzania 7.4 5.0 5.6 6.7 7.5 7.5
Rwanda 11.2 5.6 5.8 5.9 6.1 6.1
SouthernAfrica
Angola 13.2 0.2 9.3 8.4 5.4 6.5
Botswana 2.9 10.3 4.1 8.5 13.8 8.9
Lesotho 3.5 1.0 3.1 4.8 4.8 4.6
Namibia 2.9 0.7 1.7 2.2 2.7 3.0
Malawi 9.7 5.9 4.6 3.2 3.2 3.2
Mauritius
6.6
2.1
2.0
4.7
4.2
4.2
Swaziland 2.4 0.4 2.6 3.1 2.6 2.5
Zambia 5.8 4.5 5.0 5.5 6.0 6.1
Zimbabwe 14.1 3.7 6.0 6.0 6.0 6.0
SouthAfrica 3.1 2.2 1.7 3.8 4.3 4.5
Africa 5.2 1.7 4.0 5.2 5.3 5.3
Brazil 5.1 0.7 3.5 3.5 3.5 3.7
Russia 5.6 7.5 1.5 3.0 3.7 4.2
India 7.3 5.4 6.4 7.3 7.6 8.0
China 9.0 8.5 9.0 9.7 9.8 9.8
UnitedStates 0.4 2.7 1.5 2.8 2.6 2.5
EuropeanUnion 1.0 4.2 0.5 1.8 2.3 2.4
Japan 0.7 5.4 1.7 2.4 2.3 2.0
World 3.0 1.1 3.1 4.2 4.4 4.6
Source:IMFOct2009WorldEconomicOutlook
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Africa 2010 Outlook and StrategyMacroeconomic overview
EQUITY MARKET PERFOMANCE IN 2009The firstquarterof2009wasredacross theboard,as the flight toquality(i.e. developed markets) was in the full swing. Africa, together with other
emerging markets bore the brunt of the flow of funds and local markets
wereseverelypunishedbyforeigninvestorsliquidatingpositions,withmost
ofthemarketsendingdeepinthered.
The situation improved in 2Q09 when some of the larger African markets
benefited from the changing sentiment (improved perception of emerging
marketscomparedtolowgrowthdevelopedmarkets):EGX30surged36%,
Nigeriagained25.3%,Morocco11%andSouthAfrica8.3%.MSCIFrontierex
SA gained 32%, compared to MSCI World index gain of 19.7% during the
period.Itwasinthisquarterthatmostofthegainsfor2009weremade.
Therestoftheyearwasmixed,withSouthAfricarecordingtwosuccessive
quarters of teen returns, Egypt followed up in 3Q09 with 18.6% return
beforelosing8.2%in4Q09,whilelossesinNigeriaacceleratedasaresultof
thelocalbankingcrisis(down33.8%fortheyear).
Index Country 1Q09 2Q09 3Q09 4Q09 2009
BSEDomestic Botswana 8.3 3.4 10.8 4.9 2.9
BRVMComposite CotedIvoire 16.3 3.4 6.1 2.4 25.9
EGX30 Egypt 8.8 36.0 18.6 8.2 35.1
Ghana
ALSI
Ghana
11.4
41.3 16.0
11.4
46.6Nairobi20 Kenya 20.3 17.5 8.8 8.1 7.8
MSEALSI Malawi 18.2 0.6 0.2 3.9 15.4
SEMDEXALSI Mauritius 9.4 32.2 16.8 0.3 40.4
MoroccoNewALSI Morocco 5.3 11.4 7.1 3.0 4.9
NamibiaLocal Namibia 1.5 0.5 3.1 0.1 2.0
NigeriaALSI Nigeria 36.9 35.3 17.9 5.6 33.8
SwaziALSI Swaziland 0.3 0.4 2.0 1.3 4.1
DSEALSI Tanzania 0.7 0.0 0.8 2.4 3.8
TunisALSI Tunisia 7.4 18.4 10.5 5.6 48.4
UgandaALSI Uganda 16.6 21.0 8.2 1.2 6.3
LuSEALSI Zambia 14.0 25.8 2.3 0.4 10.1
ZSEIndustrial Zimbabwe 32.3 128.0 2.4 10.4 41.6
FTSE/JSEALSI SouthAfrica 5.3 8.3 13.0 11.1 28.6
FTSE100 UnitedKingdom 11.5 8.2 20.8 5.4 22.1
Nikkei225 Japan 8.5 22.8 1.8 4.1 19.0
S&P500 UnitedStates 11.7 15.2 15.0 5.5 23.5
ShanghaiComposite China 30.3 24.7 6.1 17.9 80.0
MSCIWorld 12.5 19.7 16.9 3.7 27.0
MSCIFrontierexSA 19.4 32.3 1.8 5.1 3.1
MSCIEM 0.5 33.6 20.1 8.3 74.5
Source:AfricanAlliancedatabase
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Africa 2010 Outlook and StrategyKenya
ECONOMIC ACTIVITY REAL GDP GROWTH (% PA)
The
slow
recovery
in
Kenyan
economic
activity
continued
during
2009
as
theGDPgrowthrateacceleratedtoanestimated2.5%from1.7% in2008. If it
was not for adverse weather conditions that hampered agriculture and
electricity generation, the growth rate could have been closer to the 4%
mark. The IMF expects this growth rate to be achieved in 2010, and a
recoverytothepotentialgrowthrateofaround6%by2012.
Sectorswhichshowamarked improvement includehotelsandrestaurants
(recovering fromthedamagecausebythepostelectionviolence in2008),
as well as financial intermediation, real estate and renting, and business
services.Expansionary fiscalpolicyandincreasedinfrastructurespendaugur
wellforeconomicgrowthin2010andbeyond.
0
1
2
3
4
5
6
7
8
2000 2003 2006 2009 2012
Source:IMF
POLITICAL CLIMATEIn 2009 there was an uncomfortable truce due to the grand coalition
government making constructive policymaking all but impossible. Tussles
over President Kibakis appointment of Justice Ringera to the Kenya Anti
CorruptionCommittee(andhiseventualresignationunderpublicpressure)
andoverwhoshouldbeleaderofgovernmentbusinessinparliamentwere
hot topics during the year. Thus, a year that had started with promises of
constitutional reformandthebringingtobookofthoseresponsibleforthe
2008postelectionviolence,endedwithlittleprogressbeingmade.
Thelackofprogressinbringingjusticetothevictimsof2008promptedKofi
AnnantohandoveralistofperpetratorstotheInternationalCriminalCourt
(ICC)in
June.
The
ICCs
chief
prosecutor,
Luis
Moreno
Ocampo,
announced
that he would begin formal investigations into the violence in December
2009. Suspects could then be brought to trial at the Hague for crimes
against humanity. Both main parties reluctance to act on the issue has
broughtaccusationsofsupportforacultureofimpunity.
Constitutional reform,vitalforlongtermstabilityinthecountry,didstartto
moveintherightdirectioninthelate2009.Adraftconstitutionwrittenbya
Committee of Experts was released in November 2009. After public
comments,thedocumentwashandedtoaParliamentary SelectCommittee
for further revision and comment on 7 Jan 2010. The draft constitution
seeks to shift away from the current, presidentdominated, system toone
moreparliamentaryinnature,withaprimeministerwiththerealpoweras
headofgovernment.
MONETARY SECTOR CONSUMER INFLATION (% Y/Y)Despitethedroughtconditionsputtingupwardpressureonfoodprices,the
highbaseeffectresultedininflationslowlyfallingduringtheyear fromthe
near 30% level to high teens. Core inflation, however, fell below the
monetarypolicytargetof5%allowingthecentralbanktoadoptarelatively
loosemonetarypolicy.TheCentralBankofKenyakeptitsCentralBankRate
(CBR)unchangedforawhileat7.75%followingthreeconsecutivecutsfrom
8.50%inMarch;howeveritreducedtherateby75bpto7%inNovember.
0
5
10
15
20
25
30
35
Ja n08 Jul
08 Jan
09 Jul
09
Ari th me ti c Ge om et ri c
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Africa 2010 Outlook and StrategyKenya
Starting inOctober, the inflationmethodologyused by theKenyaNational
Bureauof
Statistics
was
also
changed
from
arithmetic
to
geometric
mean.
Thisimmediatelycausedtheinflationtofallfrom17.5%y/yinOctobertoa
revised figure of 6.6% y/y. Further revisions to the CPI calculation are
expected in February 2010 which will see the weighting for food decline
significantly.Thisshould lead to the inflationrate falling further.However,
therisingcostofpower,asthermalpowergenerationincreasesduetorising
demand,willcounterthisfall.
In other news affecting the financial sector, CBK licensed Credit Reference
BureauAfrica(CRBAfrica)asKenyasfirstcreditbureau.Twomorebureaus
arelikelytoreceivelicensesinthenearfuture.
FISCAL SECTORDuring2009thegovernment launchedaKES22.5bn(USD300m)economic
stimulus plan. Some of the new investment is being targeted at growing
foodproduction,mostlyviaconstructionof irrigationschemes. Inorder to
meet funding shortfalls, the government launched infrastructure bonds
raising KES 37bn for the exclusive use for infrastructure development. In
addition,Kenyaspowergenerationutility,Kengen,raisedKES25bnthrough
itsownbondoffering.
In1H10toDec09theKenyaRevenueAuthority(KRA)collectedKES260.8bn,
falling shy of the budget target by KES 1.3bn, but still 13% y/y. The KRA
hopes to raise KES 545.2bn for FY10, 13% higher than the KES 480.6bn
raisedin
the
FY09.
EXTERNAL RELATIONS KES/USD EXCHANGE RATEThe Kenyan shilling fell sharply in the early stages of the financial crisis as
foreigninvestorsliquidatedpositionsinthemoreliquidmarkets.Hencethe
currency wasalready weak (undervalued) at the beginningof 2009. In the
initial stages of the year the shilling managed to hold its own against the
USDdollararoundtheKES/USD80level;howeveritstartedtoappreciateas
normalityreturnedtothelocalmarketandtheUSdollarstartedtoweaken
againstmostglobalcurrencies.
Forexcurrencyinflowsarelikelytocontinuetobeunderpressuredueto the
higher cost of fuel imports and reduced Diaspora remittances, but we
expectthattheunitwillberangeboundatKES/USD7080duringtheyear.
60
65
70
75
80
85
Ja n08 Jul08 Jan09 Jul09 Jan10
Source:AfricanAlliancedatabase
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Africa 2010 Outlook and StrategyKenya
EQUITY MARKET OVERVIEW NSE 20 AND AA BANKS INDEXTheKenyanequitymarkethadadifficult2009,following2008duringwhichthe NSE 20 Index lost 35%. Last year was a story of four quarters: during
1Q09 the market was sold off strongly in tandem with other emerging
equity markets (32% off at the lowest point); the bounce that followed in
2Q09took themarketbackalmost to theopening levels.During3Q09the
highlevelofinflationaswellastheactivebondmarketattractedattention
away from the equity market. 4Q09 saw foreign buying in the industrial
sector(mainlytelecomsandutilities),butbankswereleftbehindstruggling
withincreasingnonperformingloansandassetgrowthslowingontheback
of difficult trading environment and pressure on disposable incomes. As a
result, the NSE 20 Index ended the year only 7.8% lower, with Safaricom
providingthemostsupport(26.4%gainduringtheyear).
40%
35%
30%25%
20%
15%
10%5%
0%
5%
Ja n Mar Ma y Jul Sep Nov
NSE20Index AABanks
Source:
African
Alliance
database
COMPANY EARNINGS1
NSE-LISTED COMPANY EARNINGSThe trading conditions during the year were difficult, but better than the
14.1%declineinearningsrecordedin2008.Thecementsectorshowedthe
highestprofitgrowth(estimatedat83%),whilethebankingsectorearnings
grewonlybyanestimated9.8%duringtheyear.Earningsinthebrewingand
telecoms sectors are both expected to have fallen in 2009, by 4.8% and
22.5%respectively.Weexpectthat2010willbeanimprovedyearformost
of the market sectors with banks, brewing and telecoms sectors growing
their earnings by 15.3%, 24% and 22.6% respectively. Only the cement
sectorisexpectedtosufferamarginalearningsdeclinein2010(1.1%).
AccordingtoNSEestimates,themarketendedtheyearonaPEof13.4x,up
from11.4xattheendof2008.
40
45
50
55
60
65
70
75
20 07 20 08 2 009 2 01 0 2 01 1
20
15
10
5
0
5
10
15
20
25Growthrate(%)(RHS)
Earnings(KESbn)
Source:AfricanAllianceestimates
1Financialanalysisisbasedoncompaniesundercoverage
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Africa 2010 Outlook and StrategyKenya
VALUATIONS
Dec10 Dec11 12m 24m Dec10 Dec11
FPE FPE PEG PEG FDY FDY
BanksandFinancial
BarclaysBankofKenyaLtd 10.5 9.1 1.77 1.05 5.2 7.2
CoopBank 9.0 7.7 0.50 0.55 2.4 3.2
DiamondTrustOfKenya 8.1 6.8 0.42 0.47 4.1 4.9
EquityBankLtd 11.6 8.6 0.81 0.53 3.3 4.1
HousingFinanceCoLtd 18.9 16.4 1.21 1.34 2.0 2.3
KenyaCommercialBankLtd 8.3 6.9 0.42 0.46 6.6 8.2
NICBankLtd 8.4 7.1 0.50 0.52 4.0 7.1
StandardCharteredBank 8.7 8.3 1.06 1.34 7.1 7.7
Brewing
and
Beverages
EastAfricanBreweriesLtd 12.3 10.6 0.69 0.84 6.4 7.5
Cement
AthiRiverMiningLtd 13.2 10.1 0.60 0.57 1.5 2.2
BamburiCementCoLtd 9.8 8.5 1.05 0.82 4.2 4.8
EAPortlandCementLtd 5.9 4.5 NA NA 3.9 6.7
TelecomsandIT
AccessKenya 14.0 8.6 0.47 0.38 3.8 6.3
SafaricomLtd 13.1 11.3 0.90 0.72 3.4 4.7
RECOMMENDATIONS
Prices(KES) Performance(%)
Sector/companyname 13Jan10 FairvalueUpside% Dec09 2009 Rating
BanksandFinancial
BarclaysBankofKenyaLtd 49. 25 48. 76 1.0 1.6 10.9 HOLD
CoopBank 9.25 8.59 7.1 0.6 15.6 HOLD
DiamondTrustOfKenya 72. 00 71. 98 0.0 4.5 2.2 HOLD
EquityBankLtd 14. 35 12. 34 14.0 6.7 18.5 SELL
HousingFinanceCoLtd 17. 70 11. 73 33.7 15.4 7.2 SELL
KenyaCommercialBankLtd 20. 75 24. 15 16.4 1.2 12.8 BUY
NICBank
Ltd
32. 25 29. 95
7.1 5.9
28.2 HOLD
StandardCharteredBank 157.00 166.81 6.2 9.5 0.6 BUY
BrewingandBeverages
EastAfricanBreweriesLtd 150.00 143.21 4.5 4.3 0.7 HOLD
Cement
AthiRiverMiningLtd 105.00 110.02 4.8 13.8 22.7 BUY
BamburiCementCoLtd 158.00 131.99 16.5 1.9 5.5 SELL
EAPortlandCementLtd 80.00 125.92 57.4 0.0 0.6 BUY
TelecomsandIT
AccessKenya 20. 50 19. 65 4.1 1.3 2.4 HOLD
Safaricom
Ltd
5.40 3.99
26.1
6.2 26.4 HOLD
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Africa 2010 Outlook and StrategyKenya
KENYA COMMERCIAL BANK (KCB) PRICE PERFORMANCE (KES)
While
KCB
has
good
organic
growth
opportunities
due
to
its
strong
presencein markets outside Kenya, its current key constraint is its low capital
adequacy ratio in 3Q09 (13.0%). This is being addressed via an intended
KES10bn bond issue in 1H10, which we believe will be successful. As a
result,weexpectitsPEandPBrelativeratings,whicharethelowestamong
the tier 1 Kenyan banks, to improve. We also expect a substantial
improvementin4Q09EPSowingtohighprovisioningthatoccurredin4Q08.
KCBscurrentrelativelowratingoffersvalue.40%
35%
30%
25%
20%
15%
10%
5%
0%
Ja n Ma r Ma y Jul Sep Nov
Source:AfricanAlliancedatabase
STANDARD CHARTERED BANK OF KENYA (SCBK) PRICE PERFORMANCE (KES)With 3Q09 performance above our expectations, we upgraded our
recommendation andrevivedourEPSestimatesupwards(KES16.52).While
3Q09showedthatstronggrowthin1H09deposits(29.4%y/y)andNIMwas
notsustainable,webelieveahigherearningsbasehasbeenestablished.We
expectSCBtoremainthemostcostefficientbankinthesector.Inaddition,
webelieveitsprovisioningtobethemostconservativeinthesector.Ahigh
forwarddividendyieldlimitsdownsidesharepricerisk.
25%
20%
15%
10%
5%
0%
5%
Ja n Ma r Ma y Jul Sep Nov
Source:AfricanAlliancedatabase
ATHI RIVER MINING (ARM) PRICE PERFORMANCE (KES)With impressive 1H09 performance, ARMs plans to expand cement
business todriverevenuegrowthcoupledwith itswellplacedcompetitive
advantagetoaddcapacityatsignificantlylowercostthanitspeers,allowsit
to run a higher margin business. Despite likely pricing pressure and low
forecast capacity utilization owing to more competition from external
markets,weexpectearningstogoupwithwellsupportedmarginsowingto
benefitsfromdiversifiedproductbaseandregionalmarketpresence.Overa
period of 3 years, we expect principal payments (due to high financial
gearingdebttoequityof+200%)toeasecashflowpressure.ARMremains
oneofourtoppicksonanattractiveforwardPEbasis.
40%
20%
0%
20%
40%
Ja n Ma r Ma y Jul Sep Nov
Source:AfricanAlliancedatabase
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Africa 2010 Outlook and StrategyKenya
EAST AFRICA PORTLAND CEMENT (EAPC) PRICE PERFORMANCE (KES)
Despite
margins
lagging
industry
players
owing
to
paying
premiums
forclinker imports and using fuel oil as its main energy source, we believe
bettercapacityutilisation,marginimprovementfromuseofcoalinthekiln,
efficientmillingcapacityandclinkerselfsufficiencytodrivefutureearnings
growth.Weexpectearningstonormalizefromthegaininassetrevaluation
inFY09.KeyriskstoEAPCsrevenuegrowthincludepricingpressuredueto
increased competition, delays in expansion projects, timely delivery of
importedclinkerandaccessibility toexternalmarkets.20%
15%
10%
5%
0%
5%
10%
Ja n Ma r Ma y Jul Sep Nov
Source:AfricanAlliancedatabase
EAST AFRICAN BREWERIES LIMITED (EABL) PRICE PERFORMANCE (KES)EABLremainsthe leadingbrewer inEastAfrica.DuringFY0509,estimated
salesvolumeregisteredaCAGRof16.7%,butEABLislosingshareinitskey
Kenyamarket(FY09:76.5%).WhileweexpectEABLtomaintainitsdominant
position, given its established distribution network and brand portfolio,
market share is expected to fall to 71% by FY14. To compensate, EABL is
increasing its presence in southern Sudan, eastern Congo, Rwanda and
Ethiopia, to capitalise on rising percapita incomes. We anticipate export
volumestoincreaseataCAGRof20.9%overFY0914,contributing9.8%to
total sales volumes in FY14 (5.3% in FY09). However, legal and regulatory
hurdlesinTanzaniaandEthiopiahavedelayedregionalexpansion.
We rate EABL a HOLD, however the counters exposure to the Kenyan
consumer market and good trading liquidity suggests that it should be
accumulatedifthesharepricefallsbelowKES140.
40%
30%
20%
10%
0%
10%
Ja n Ma r Ma y Jul Sep Nov
Source:African
Alliance
database
SAFARICOM PRICE PERFORMANCE (KES)Safaricomhassignificantupsidepotentialinitsvariousdatabusinesses(M
pesa, mobile broadband, etc), but this is offset by slowing growth in its
voicebusinessastheoverallmarketmatures.WeexpectFY010to increase
by 25.3% y/y. However, this growth is off a low base after a particularly
difficult FY09 (2H09 in particular), and FY10 EPS will still be slightly lower
thatrecordedinFY08.WeforecastcompoundannualEPSgrowthof19%pa
overthenextfiveyears.
Safaricomssubscribernumbersstoodat14.5matendSeptember2009,up
almost9%fromMarch2009.WeexpectittoclosetheyeartoMarch2010
with subscriber numbers of approximately 15.3m (+14% y/y). Current
marketshareisaround78%andweexpectthistodeclinegraduallyoverthe
next five years due to continued competition, notably from the likes of
Orangewhohasnowemergedasacompetitorofsomereckoning.
We calculate average tariffs to have declined from around KES 21/min in
FY05 toaroundKES8.1/min inFY09,adeclineof61%.Weexpectaverage
tariffstodropfurthertoKES7/mininFY10FandsettleataroundKES6/min
over the forecast horizon. As a result, ARPU for FY10F is estimated at KES
358(14%y/y)andaroundtheKES350levelinsubsequentyears.
We calculate a 12month total return potential of 17.9%, which is in line
withSafaricomscostofequity,andthereforeratethestockaHOLD.
50%40%
30%
20%
10%
0%
10%
20%
30%
40%
Dec Feb Apr Jun Aug Oct
Source:AfricanAlliancedatabase
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Africa 2010 Outlook and StrategyNigeria
ECONOMIC ACTIVITY REAL GDP GROWTH (% PA)2010isexpectedtobringgreaterstabilitytoNigeriaseconomicandpoliticalsituation,yetthecountrystillfacesmanyuncertaintiesintheyearahead.A
higher average oil price and improved supply, due to the calming of the
conflict in the Niger Delta after the arms amnesty, should provide the
revenue needed to implement the planned fiscal expansion and fund vital
infrastructure developments (especially with regard to power generation).
However, political uncertainty surrounding President YarAduas ability to
govern, as well as the upcoming 2011 elections, could negatively affect
growthandscareoffforeigninvestors.
Real GDP growth was cut by half from 6% in 2008 to 2.9% in 2009, but is
expectedtorecovertoatleast5%in2010.Thenonoilsectorwasalsohard
hitin
2009,
with
its
growth
rate
slowing
to
an
estimated
4.5%
from
9%
in
2008.However,thereboundinoilpricesandgreaterstabilityinthebanking
sector (and thus a more stable naira and increasing credit to the private
sector),shouldseethenonoilsectorexperience improvedgrowthin2010.
Infact,accordingtothe IMF,Nigeriannonoilsectorweatheredtherecent
economiccrisisbetterthanmostintheotheroilproducingcountries.
0
5
10
15
20
25
2000 2003 2006 2009 2012
Source:IMF
POLITICAL CLIMATE CONSUMER INFLATION (% Y/Y)Politicaltensionsareexpected tocontinue in2010,as theneedtoreplace
YarAduaat theheadof thePeoplesDemocraticParty (PDP)aheadof the
2011 elections causes party members tojockey for positions. One of the
most pertinent questions will revolve around whether the election of a
Northernerto
the
head
of
the
PDP
will
affect
the
fragile
peace
that
has
been
establishedintheNigerDelta(theheartofthecountrysoilindustry).Peace
wasbroughttotheregionthroughaprotractedperiodofnegotiation,with
an arms amnesty and promises that oil revenues will benefit the local
community.0
2
4
6
8
10
12
14
16
Ja n08 Jul08 Ja n09 Jul09
MONETARY SECTOR M2 & PRIVATE CREDIT(% Y/Y)2H09 sawM2broad moneyandcredit to the private sector increaseonce
again, after stagnating between January and August. This increased
inflationary pressure towards the end of the year and should continue to
exertupwardpressureontheCPIaslongasthegovernmentcontinueswith
its
relaxed
monetary
policy.
The
governments
target
of
bringing
inflation
backtosingledigitswillconflictthisyearwiththeaimofkeepingthemarket
liquid and reducing fuel subsidies, thus we can expect inflation to remain
between1011%in2010.
Effortsto improvetheeffectivenessofmonetarypolicywillcontinuetobe
hamperedbytheunderdevelopedfinancialsystem,whichlimitstheofficial
interestratesfromaffectingavailabilityandpriceofcommercialcredit.Thus
faramuchbettertoolforcontrollinginflationhasbeentheexchangerate;
stablenairahaskeptimportedinflationfromescalating.
0
20
40
60
80
100
120
Ja n06 Jan07 Jan08 Jan09
M2 Privatecredit
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Africa 2010 Outlook and StrategyNigeria
FISCAL POLICY
The
proposed
2010
budget
is
strongly
expansionary,
with
spending
expectedtoincreasebyaround31.5%toNGN4.07trn,fromtheproposedNGN3.1trn
in 2009. Recurrent expenditure is set to increase to NGN 2trn, up from
NGN1.6trn in the 2009 budget, while capital expenditure is planed to
increase to NGN 1.37trn, from NGN 1.02trn in 2009. However, as with
previous years, it isunlikely that thegovernmentwillhave thecapacity to
spend the allocated funds. Moreover, the expenditure on infrastructure
developmentwillbeskewed towards importedgoodsandwillthushavea
negative affect on the current account and have a less direct impact on
domestic economic activity, despite governments claims to the contrary.
One factor that will incentivise greater expenditure is the upcoming 2011
election. The fiscal deficit is expected to breach the 3% target set in the
2007FiscalResponsibility Act,andreach4.8%ofGDP(NGN1.6trn)in2010.
The proposed budget assumes oil production of 2.1mbpd at USD 57 per
barrel, which is conservative given that the World Bank and EIU predict
international oil prices around USD 75 per barrel in 2010. Meanwhile, the
financing of the budget could be aided by the proposed USD500m bond
issue, which was previously shelved in 2009. The new Petroleum Industry
Billcouldalsomakemorerevenueavailabletofinancethebudget(although
thefinalimpactisuncertain).
EXTERNAL RELATIONS GROSS RESERVES (USD BN)With oil constituting over 90% of the countrys exports, the economys
external
sector
is
heavily
dependent
on
the
international
oil
price.
In
2010theeconomyshouldbenefitfrombothhigherinternationalprices(expected
to average around USD 75 per barrel) and increased production thanks to
the conflict in the Niger Delta moderating. OPECs 1.67mbpd quota will,
however, limit thecountrysability to take fulladvantageof thehigheroil
prices. Furthermore, there is always the risk that political instability will
resurface, especially that President YarAduas ability to govern has been
questionedandgeneralelectionsaresetfor2011.Importsarealsoexpected
to increaseasspendingpicksupas thegovernmentgearsup for the2011
election.Thecurrentaccount,however,shouldpostasurplus intheregion
of11%in2010.
40
45
50
55
60
65
Nov07 Nov08 Nov09
Shouldoilrevenuesnotbedisrupted,wecanexpectthenairatoremainina
narrowband
around
NGN/USD
150.
There
will
be
continued
pressure
on
the
government to keep the naira strong and on a managed float. This
sentiment,thoughcontrarytothereformsmanywouldprefer,ispreferred
becauseoftheimportdependentnatureoftheeconomyandtheeffectthat
anydepreciationwouldhaveontheNigerianconsumers.
NGN/USD EXCHANGE RATE
110
120
130
140
150
160
Ja n08 Jul08 Jan09 Jul09 Jan10
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Africa 2010 Outlook and StrategyNigeria
EQUITY MARKET OVERVIEW NSE 20 AND AA BANKS INDEXThe2009storyintheNigerianmarketwasmainlyaboutbanks.Firstly,theywerethedarlingsofforeign investorsduring2007and2008astheyraised
capital for localandAfricanexpansion.Secondly,whentheglobalfinancial
crisis hit in 2H08, the Nigerian banking sector was impacted by the
withdrawal of foreign credit lines and increasingly difficult operating local
environment. Lastly, the bad debts started to unravel during the year as
nonperforming loans in oil and gas, and margin loans on capital market
investmentsastheoverallmarketfellbyalmost40%during1H09.
Despite a relief rally late in 2Q09 that made up initial losses and even
registered a positive YTD performance, the sentiment turned increasingly
negative as the special audit into the health of the banking sector was
initiatedand
speculation
was
rife
about
the
state
of
individual
banks.
As
a
result,thebankingsector(40.2%)draggedtheAllShareIndex33.8%lower
fortheyear.
Industrial sectors fared better as both local and international investors
scampered for the safety of defensive stocks; the cement stocks gained
38.7%, brewing sector gained 20.6%, while consumer shares were
marginallyup(+1.4%).
60%
50%
40%
30%
20%
10%
0%
10%
Ja n Ma r Ma y Jul Sep Nov
NigseIndex AABanks
COMPANY EARNINGS2 NSE-LISTED COMPANY EARNINGSDuring 2009 the financial performance of the banking sector become
completelyopposite
of
that
of
the
industrial
sector,
which
both
cement
and
breweries sector earnings growing strongly during the period (56.8% and
20.4%gainsrespectively).Thebankingcountershadatorridtimeasspecial
provisions required by the central bank meant that their profit fell
significantly,withanumberofbanksreportinglargelosses,andevenbeing
technicallyinsolvent.
We forecast 245% growth in earnings for banks under coverage off a low
basein2009.Theindustrialcompaniesarelikelytorecordmorepedestrian,
andstablegrowthrates,withthecementearningsgrowthslowingdownto
27% in2010,whilethebrewingsectorearningsareexpectedtoaccelerate
somewhatto24%.
0
50
100
150
200
250
300
350
400
2 00 7 2 00 8 2 00 9 2 01 0 2 01 1
100
50
0
50
100
150Growth
rate
(%)
(RHS)Earnings (NGNbn)
2Financialanalysisisbasedoncompaniesundercoverage
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Africa 2010 Outlook and StrategyNigeria
VALUATIONS
Dec10 Dec11 12m 24m Dec10 Dec11
FPE FPE PEG PEG FDY FDY
BanksandFinancial
AccessBank 6.8 6.0 0.1 NM 5.9 6.7
DiamondBank 7.1 6.0 0.1 0.2 5.6 6.6
FirstCityMonumentBank 7.0 5.8 0.1 0.2 5.7 6.8
FirstBankOfNig. 11.3 10.1 0.2 0.4 3.5 3.9
GuarantyTrustBank 8.6 7.7 0.2 0.4 4.7 5.2
StanbicIBTCBank 10.9 9.1 0.2 0.4 3.7 4.4
UBA 6.4 5.1 0.1 0.2 6.3 7.8
ZenithBank 8.7 7.4 0.1 0.3 4.6 5.4
BrewingandBeverages
GuinnessNigeria 8.9 7.4 0.3 0.4 8.5 10.2
NigerianBreweries 11.9 10.1 0.8 0.8 8.0 9.4
Cement
AshakaCement 8.8 7.2 2.1 0.7 2.8 3.2
BenueCementco 9.5 7.5 0.5 0.4 5.3 10.0
LafargeWAPCO 7.5 5.5 0.3 0.3 2.1 2.9
PEGratiosdoenotmakesensefor
Nigerianbanksduetotheseverely
depressedearningsin2009
RECOMMENDATIONS
Prices(KES) Performance(%)
Sector/companyname 13Jan10 FairvalueUpside% Dec09 2009 Rating
BanksandFinServices
AccessBank 7.90 10.96 38.7 12.4 7.5 BUY
DiamondBank 7.50 8.79 17.2 9.6 0.8 BUY
FirstCityMonumentBank 7.50 8.94 19.2 3.0 19.3 HOLD
FirstBankOfNig. 15. 14 17. 85 17.9 0.4 22.4 BUY
GuarantyTrustBank 16. 07 16. 99 5.7 1.4 50.2 HOLD
StanbicIBTCBank 7.50 6.94 7.5 4.8 31.5 SELL
UBA 11. 38 15. 95 40.2 2.7 17.9 HOLD
ZenithBank 15. 80 22. 31 41.2 4.1 7.3 SpecBUY
BrewingandBeverages
GuinnessNigeria 128.00 169.30 32.3 3.4 28.1 BUY
NigerianBreweries 58. 99 64. 38 9.1 1.0 29.8 BUY
Cement
AshakaCement 12.70 9.81 22.8 1.1 32.1 SELL
BenueCementco 48. 11 46. 35 3.7 0.0 138.9 BUY
LafargeWAPCO 30. 26 33. 41 10.4 6.0 17.6 BUY
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Africa 2010 Outlook and StrategyBotswana
ECONOMIC ACTIVITY REAL GDP GROWTH (% PA)
Botswana
has
long
been
praised
as
Africas
success
story,
and
rightly
sogiventhatthecountrywasabletogrowby8.9%annuallybetween1960and
2005(EIU).However,thislastyearhasseensomeoftheshinecomeoffthe
country as it became evident that the economys lack of diversification
(36.7%ofGDPin2008wasderivedfromminingand40%ofexportearnings
attributable to diamonds) makes it vulnerable to external demand shocks.
Theeconomy isexpectedtohavecontractedby10.3% in2009andshould
only rebound by around 4% in 2010. Diamond prices, however, are set to
improvein2010asglobaleconomicconditionsimprove.
Importantinfrastructureprojectsaresettobegininearnestin2010,suchas
the USD 1.6bn Morupule B Power Station, which should boost economic
activity. Coal and uranium mining projects should also attract further
investment.
The
tourism
sector
should
also
receive
a
boost
during
the
soccerWorldCupinSouthAfrica.
10
5
0
5
10
15
2000 2003 2006 2009 2012
Source:IMF
POLITICAL CLIMATEThe Botswana Democratic Party (BDP), led by Ian Kama, was handed yet
another clear mandate to govern when it won elections in October,
increasing itsmajority in thenationalassembly.Therunuptotheelection
saw infighting disrupt many parties, while competition between parties
remained low inwhatwasa foregoneconclusion.TheBDPhasruledsince
independence and it seems that not even Botswanas worst economic
performance to date was able to affect the partys popularity. We can
expectcontinuedpoliticalstabilityforthemediumterm.
MONETARY SECTOR INFLATION AND INTEREST RATE (%)Inflationdeclinedsteadilythrough2009,enteringsingledigitsonceagainin
May. This easing was enabled by the appreciation of the pula and the
general lowering of commodity prices since their highs of 2008. In
November2009 inflationdropped to its lowest level inoveradecade (5%
y/y),comfortablywithintheBankofBotswanas36%targetrange.Thiswas
mainly as a result of a high base in Nov 2008 caused by an alcohol levy
(indexupby16%)andtherecentstrengthofthepula.
Monetary policy was relaxed and the bank rate was cut consistently
throughout2009.Withtheinflationoutlookstablefor2010,wecanexpect
interestratestoremainataroundtheircurrentlevels.
0
5
10
15
20
Ja n08 Jul08 Jan09 Jul09
Inflation Primelendingrate
Source:BankofBotswana
FISCAL POLICYFiscalpolicyisexpectedtoremainconservativeastheoutlookfordiamond
exportrevenuesremainsuncertainandreceiptsfromtheSouthernAfrican
CustomsUnionareexpectedtobebelowexpectations.However,therewill
bepressurefortheBDPgovernmentto liveuptoitsdevelopmentelection
promisesandtheNationalDevelopmentPlan10(NDP10)issettocomeinto
effectinApril(afterbeingdelayedayearduetotheglobalfinancialcrisis).
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Africa 2010 Outlook and StrategyBotswana
EXTERNAL RELATIONS AND EXCHANGE RATE BWP/USD EXCHANGE RATE
The
pula,
determined
by
a
basket
of
currencies
dominated
by
the
rand,
isexpected to maintain its current strength for much of 2010. This will
dampentheexportearningsgainedthrougharecoveryindiamondpricesas
the global economy emerges from the recession. However, increased
production is expected to underpin the currencys strength and we can
expectthecurrentaccounttostrengthenin2010.
Debswana, the partnership between the Botswana government and
diamondminingcompanyDeBeers,hasindicatedthatitexpectsproduction
to rebound to 60% of its normal production (20m carats), up from 50%
(17.1mcarats) in2009.Fullcapacityproduction isprojectedtoreturnonly
in2012.
6.0
6.5
7.0
7.5
8.0
8.5
Ja n08 Jul08 Jan09 Jul09 Jan10
Source:AfricanAlliancedatabase
EQUITY MARKET OVERVIEW BSE DCI PERFORMANCE (BWP)TheBotswanamarketcameundersomesellingpressure in1H09,however
the market as a whole held up pretty well during the year, and the 2H09
recovery even allowed it to record a marginal gain (+2.9%). Most of the
positive performance came from the banking sector as gains in Barclays
Botswana (+5.9%), FNB Botswana (+25%) and Letshego (+21.6%)
outweighed losses on ABC Holding (67.8%) and Standard Chartered
(11.1%);thesectorasawholewasupby6.1%fortheyear.
Elsewhere, insurance stocks BIHL (+26.4%) and FSG (+43.6%) did well,
property stocks managed reasonable gains, but the industrial stocks were
generally lower: Sechaba dropped 15.2%, Chobe was down 32.3% and
Engenfell
13.7%.
15 %
10 %
5%
0%
5%
10 %
Ja n Ma r Ma y Jul Sep Nov
Source:AfricanAlliancedatabase
VALUATIONS
Dec10 Dec11 12m 24m Dec10 Dec11
FPE FPE PEG PEG FDY FDY
BanksandFinancial
BarclaysBotswana 10.9 8.2 1.2 0.6 3.8 5.1
FNBBotswana 13.5 10.8 1.0 0.8 3.7 6.2
Letshego 9.8 8.1 0.9 0.7 2.5 3.1
StanchartBotswana 11.7 10.7 0.7 0.9 8.5 9.4
WebelievethatBotswanabanksarethe
mostexpensiveinourpanAfricanbanks
universe.WehaveaSELL
recommendationonStanchartBotswana
andaHOLDonBarclaysBotswana,FNB
BotswanaandLetshego.
We
currently
do
not
cover
any
Botswana
companiesoutsidethebankingsector.
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Africa 2010 Outlook and StrategyEgypt
ECONOMIC ACTIVITY REAL GDP GROWTH (% PA)
The
global
recession
has
affected
Egypt
mainly
through
a
fall
in
revenuefrom the Suez Canal (decrease in global trade), foreign direct investment,
tourism,anddepressedstockmarketactivity.Largelyduetorecentreforms,
the financial sector has been resilient throughout the financial crisis. The
overallGDPgrowthisexpectedtohavedroppedonlyto4.7%in2009,from
7.2% in2008,an impressiveperformance for a large and tradedependent
economy.
The EIU is bullish for the year ahead and forecasts that GDP growth will
reboundto5.7%,whiletheIMFandWorldBankseethegrowthratefalling
for another year. These predictions are sensitive to the outlook for the
worldasawholeand thegovernmentsabilitytocapitaliseon itsstimulus
spending.
Positivefactorsincludeimprovingcommodityprices(significantlyforEgypt:
cotton and hydrocarbons), international trade picking up (leading to
improvedSuezCanalandtradeexciserevenue)andthecontinuationofan
expansionary fiscal policy. However, we have probably seen the end of
interest rate cuts as inflation has begun to climb higher once again.
Weighingup the positive international forecast with a tightening of
monetarypolicy,weexpectanimprovingGDPgrowthrateofslightlyabove
5%;inlinewithEgyptsMinistryofInvestmentspredictions.
0
2
4
6
8
2000 2003 2006 2009 2012
Source:IMF
POLITICAL CLIMATEEgyptspoliticsshouldheatupasparliamentaryelections,scheduledfor10
November2010,
come
near.
The
ruling
National
Democratic
Party
(NDP)
is
expectedtoremain inastrongposition.Theyearwillalsosee thestartof
campaigning for the 2011 presidential elections. Skirmishes between
securityforcesandactivists,canbeexpected.
It isstillamatterofspeculationastowhowillsucceedPresidentMubarak
(81 years old) who has been in power since 1981, however this could be
decided in early 2010. His eldest son, Gamal Mubarak, has been groomed
for the post, but this has been an unpopular decision, with many
uncomfortable with the idea of a nepotistic dynasty taking hold. Other
candidates include Nobel prize winners (for peace and chemistry
respectively) Mohamed ElBaradei and Ahmed Zewail, intelligence chief
Omar Suleiman, and Amr Moussa (current head of theArab League and a
formerforeignminister).Analystsagreethatthemostlikelyoutcomewillbe
forMubarakjuniortotakethepost.
MONETARY SECTOR AND POLICY CONSUMER INFLATION (% Y/Y)Thesteadydeclineinfoodandfuelpricessincetheirpeaksin2008aidedin
bringing inflation down to below 10% by June 2009. However, 4Q09 saw
inflationarypressuresmountduetorecoveringcommodityandfoodprices
(food has a 44% weighting in the Egyptian CPI basket). The upward
inflationary pressure was also a result of increased consumer demand
broughtaboutbyrepeatedinterestratecutsthroughouttheyear.
The government is expected to resume its programme of cutting fuel
subsidies
in
2010,
despite
upcoming
elections;
this
should
add
furtherupwardpressuretoinflation.
0
5
10
15
20
25
Ja n08 Jul08 Jan09 Jul09
Source:CAPMAS
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Africa 2010 Outlook and StrategyEgypt
ThecentralbankannouncedinOctoberlastyearthatitwouldlaunchacore
consumerprice
index
in
January
2010.
This
development
should
see
foods
weightingintheCPIbasketreduced,buttherestof itsmakeuphasnotas
yetbeenmadepublic.Thelaunchofthenewindexindicatesthatthecentral
bankisapproachingamoreexplicitinflationtargetingregime,whichwould
make itsactionsmorepredictableandperhapsaddameasureofdiscipline
tofiscalpolicy.
Afterayearofcontinuously cuttinginterestrates,andwithinflationonthe
rise, it is likely that we have seen the end of the CBEs loose monetary
policy.Shouldinflationcontinuewithitsrisewecanexpectinterestratesto
risefrom2H10.
INTERNATIONAL RESERVES (USD BN)
30
31
32
33
34
35
36
Ja n08 Jul08 Jan09 Jul09
Source:CentralBankofEgypt
FISCAL POLICYGovernmentwillcontinuewithitsexpansionaryfiscalpolicyin2010,leading
toabudgetdeficitofbetween910%ofGDPinFY10;upfrom6.9%inFY09
and making governments deficit target of 3% by 2012 far less likely.
Previously, the government aimed to reduce the deficit by 1% per year
through measures including the scrapping/reducing of the fuel subsidy
(accordingtotheWordBankthiscurrentlystandsat5.5%ofGDPfordirect
subsidies); expanding VAT and implementing new property taxes (which
came into effect in 2009); and generating savings through better financial
management. Although the fiscal policy will remain expansionary in 2010,
wecanexpectgovernmenttobeginconsolidationmeasuresinthemedium
terminordertopromoteprivatesectorledgrowthandallayinvestorfears
overthe
financing
costs
of
the
governments
debt
and
risks
to
its
exchange
ratepeg.
Further pressure on the fiscus will come in the form of expenditure for
parliamentaryelectionstobeheldneartheendof2010.
EXTERNAL RELATIONS EGX/USD EXCHANGE RATEExports will remain below their 2008 level due to a continued lull in the
main export markets (US and the EU), but should improve on their 2009
performanceascommoditypricesstabiliseintheinternationalmarket.With
55%ofEgyptsexportrevenuefromoilandnaturalgas,thecountryshould
benefitasoilpriceshoverbetweenUSD7075perbarrel.
The Egyptian pound, pegged to a basket of currencies, is expected to
appreciate against the dollar, but marginally weaken against the euro. An
increase in Suez Canal receipts, improved tourism and higher remittances
should boost foreign reserves further and narrow the current account
deficit.
5.2
5.3
5.4
5.5
5.6
5.7
Ja n08 Jul08 Jan09 Jul09 Jan10
Source:AfricanAlliancedatabase
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Africa 2010 Outlook and StrategyGhana
ECONOMIC ACTIVITY REAL GDP GROWTH (% PA)
The
global
recession
impacted
Ghanas
economy
through
stressed
exportearnings,decliningremittancesandprivatecapitalinflows,anddifficultiesin
attracting foreign investment and donor support. Consequently, the IMF
projects Ghanas real GDP growth to have slowed to 4.5% in 2009 (from
7.3%in2008)andthatitwillstarttoacceleratemarginallyin2010(5.0%).
Thegovernments2010budgetaimstoreachanaveragegrowthrateof8%
between2010and2012.ThisshouldbeeasilyachievedastheIMFforecasts
Ghanaseconomytogrow22.5%inrealtermsin2011,primarilyduetothe
contributionofthenewoildiscoveries.Oilproduction isexpectedtoreach
120,000bpdby2010,whichwillincreaseto250,000bpdby2012.According
to IMF estimates, Ghana is likely to generate USD 1bn in oil revenues in
2011, which will provide a fillip to the countrys economy and national
incomewhen
production
begins.
0
5
10
15
20
25
2000 2003 2006 2009 2012
Source:IMF
POLITICAL CLIMATEThe2008electionssawapeacefulchangeofpowerbetweenthedominant
partiesforthesecondtimesincedemocracywasreintroducedin1992.The
peacefulnatureof thetransition,despitetheclosenessofthecontest,has
beeninterpretedbymanyasasignthatGhanaspoliticalsystemismaturing
andheadingtowardsdemocraticconsolidation.
The ruling NDC seems set to commit itself to the Medium Term
DevelopmentPolicy,which is theeconomicplandrawnupbytheNational
Planning Commission to replace the current Ghana Poverty Reduction
StrategyII(GPRS
II)
which
ended
in
December
2009.
Although
details
of
the
planaresketchyatpresent,asitisonlygoingtoberevealedtoparliament
in early 2010, it is unlikely that it will differ drastically with the plans that
haveprecededit.
MONETARY SECTOR CONSUMER INFLATION (% Y/Y)In 2009 inflation rose once again, partially due to higher government
spendingaheadofthe2008electionsandthesteeprise infoodandcrude
oilprices.BoGresponded to the inflationary threatby increasing thebank
rateevenfurther,to18.5%inFebruary2009.This,coupledwiththedecline
in international commodity prices, is expected to bring inflation down to
14.6%inDecember2009andtosingledigitsin2010,accordingtotheIMF.
However,theneedtoreininthefiscaldeficitwillmeanthegovernmentwill
need to cut its fuel subsidies, which, along with recovering commodity
prices on the international market, will put upward pressure on inflation.
Despitethisinflationissettomoderateoffitsrecenthighsandmayprovide
space for the BoG to further relax its monetary stance during the year
ahead.
0
5
10
15
20
25
Ja n08 Jul08 Jan09 Jul09
Source:StatisticsGhana
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Africa 2010 Outlook and StrategyGhana
FISCAL POLICY
The
government
budgeted
expenditure
of
GHS
9.8bn
in
2009,
with
sectorbudget allocations reaffirming the governments commitment to improve
thebusiness environment through infrastructure (roads,energy and water
sector)andhumanresourcedevelopment.About71.9%ofthebudgetwas
earmarkedforthehealth,education,transportandenergysectors.
The expansionary 2009 budget projected a deficit equivalent to 9.4% of
GDP, funded by net domestic financing of GHS1,392m and foreign
borrowing of GHS626m. The Ghana government aims to reduce the fiscal
deficit to 6% of the GDP in 2010, but this could constrain governments
capitalexpenditureplansandmayimpactdevelopmentprojects.
EXTERNAL RELATIONS GHS/USD EXCHANGE RATE
Theglobal
recession
in
2009
stressed
Ghanas
export
earnings,
remittances
and private capital inflows, and created difficulties in attracting foreign
investmentanddonorsupport.Forexamplein1H09,remittancestoprivate
individualsdeclinedtoUSD728.3mfromUSD822.8min1H08.
Asaresult,afterdepreciating31.5%againsttheUSdollar in2008,thenew
Ghanacedi lostanother18%byJuly2009,onlytorecoverslightlytowards
theendoftheyearonimprovedportfolioandtradeflows(down12.5%for
the year). Analysts predict that the worst of the depreciation is now over,
howeverthecurrencywillremainvulnerablein2010.0.9
1.0
1.1
1.2
1.3
1.4
1.5
1.6
Ja n08 Jul08 Jan09 Jul09 Jan10
Source:AfricanAlliancedatabase
EQUITY MARKET OVERVIEW GSE ALSI PERFORMANCE (GHS)Ghanas equity market was one of the worst performing markets in 2009
(46.6%) as foreign investors pulled out and liquidity driedup as local
demand was only available at lower levels. This situation persisted during
mostof1H09astheALSIended48%downbyendofJune.
As the global recovery started to take hold and riskaversion towards
emergingmarketssubsided,theGhanaianmarketreappearedontheradar
screenofdiscerning investors;during3Q09thebankingsectorgained23%
and Fanmilk gained 53.6% (after having lost 38% in 1H09) to be the only
counter to end the year in the green (+23.3%). This momentum waned
towardstheendoftheyear,buttradingactivityendedonarelativelyhigh.
60 %
50 %
40 %
30 %
20 %
10 %
0%
Ja n Ma r Ma y Jul Sep Nov
Source:AfricanAlliancedatabase
VALUATIONS
Dec10 Dec11 12m 24m Dec10 Dec11
FPE FPE PEG PEG FDY FDY
BanksandFinancialServ
EcobankGhana 10.7 8.3 0.8 0.6 6.2 8.0
StandardChartered 9.8 8.0 0.8 0.6 7.9 9.7
SGSSB 5.6 4.3 0.2 0.2 11.9 15.6
CalBank 3.6 2.5 0.4 0.2 9.2 13.3
BrewingandBeverages
GuinnessGhana
135.0 21.4
0.2
4.4 0.4 2.5
*Bankfinancialsbasedonmanagementforecasts
Ghanabanksareagrowthplay;not
cheaponPEbasis,butareonthelower
endofthespectrumonPEGbasis
EcobankGhanaandSCBareour
preferredchoicesinthebankingsector
duetoreasonableliquidity.CalBankis
outtoppickbasedonvaluationmatrices
WemaintainourSELLrecommendation
onGuinness
Ghana
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Africa 2010 Outlook and StrategyLesotho
ECONOMIC ACTIVITY REAL GDP GROWTH (% PA)
2009
saw
Lesothos
embattled
clothing
and
textile
industry,
the
largestmanufacturing subsector (around 18% of GDP), take further knocks as
demand in traditional export markets (US and EU) dropped and the loti
strengthened against major currencies; as a result, the sector shed over
4,000jobsbetween3Q08and2Q09.Theburgeoningdiamondindustryalso
began the year on a low note, with two mines having been temporarily
closedonaccountoftheeconomiccrisis.However,by2Q09bothdiamond
prices and exports have improved. Growth is expected to return in 2010
(3.1%)afterfallingbyanestimated1%in2009.2
0
2
4
6
8
10
2000 2003 2006 2009 2012
Source:IMF
POLITICAL CLIMATE
In
April
the
Prime
Minister
Bethuel
Pakalitha
Mosisili
survived
anassassinationattemptafteranattackonhishouse.Thegovernmentblamed
SouthAfricanandMozambicanmercenariesforthe incident,statingthat it
wasanattemptedcoup.
Political wrangling over parliamentary seat allocations after the 2007
elections came to a head in July, when SADC mediator, former Botswana
president Ketumile Masire, walked out on the talks. He stated that the
Lesotho government was to blame for obstructing the mediation process
andthatthejudiciaryhadfailedinitsdutybyrefusingtoruleonthevalidity
oftheelectionresults,claimingthatitwasbeyondtheirjurisdiction.
MONETARY SECTOR CONSUMER INFLATION (% Y/Y)Inflationdroppedoffitshighbase,broughtaboutbythefuelandfoodcrises
in 2008, as commodity prices moderated. The slackening of demand for
imported goods and the strengthening of the loti also aided in bringing
inflation under control. Despite the difficult global conditions, Lesotho has
managedtomaintainafavourablebalanceofpaymentsandcouldboastnet
international reserves of over USD 1bn at the end of October (well above
thecentralbanksUSD500550mtarget).0
2
4
6
8
10
12
14
Ja n08 Jul08 Ja n09 Jul09
Source:LesothoBureauofStatistics
FISCAL SECTORGovernmentexpenditurewaslowerthanplannedinthefirsthalfoftheyear
duetotechnical issuesplaguingthe implementation ofthenew Integrated
FinancialManagement InformationSystem(IFMIS).This ledtoa42.2%q/q
decline in government expenditure in the second quarter. Revenue,
however, is set to decline markedly due to a shortfall in SACU receipts
brought about by a decline in trade and possible restructuring in the
revenue sharing formula. Lesotho is heavily reliant on these receipts that
makeupover50%ofgovernmentrevenues.
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Africa 2010 Outlook and StrategyLesotho
EXTERNAL RELATIONS LSL/USD EXCHANGE RATE
The
strengthening
loti
has
had
a
dual
role
in
2009:
Its
negative
effects
werefelt in the manufacturing sector, blunting Lesothos competitiveness in
tough global conditions. However, with regards to inflation, the
strengtheningcurrencyhasaided inmaking importsrelativelycheaperand
helpedtomaintainthelevelofnetinternational reserves.Weexpecttheloti
tomaintainitscurrentstrengthformuchof2010.
6
7
8
9
10
11
12
Ja n08 Jul08 Ja n09 Jul09 Ja n10
Source:AfricanAlliancedatabase
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Africa 2010 Outlook and StrategyMalawi
ECONOMIC ACTIVITY REAL GDP GROWTH (% PA)
Economic
growth
in
Malawi
has
been
impressive
under
President
Bingu
waMutharikasstewardship(since2004),butremainsdependentonagriculture
(35% of GDP, 80% of exports), which in turn is influenced by weather
patterns and global prices. The government projects economic growth of
7.9% in FY10 to June, driven by a good harvest, uranium production and
growth in telecommunications sector; this figure appears to be optimistic
given the current international environment. IMF estimates for real GDP
growthin2010islower,at4.6%,asthereisariskoflowerthannormalrain
duringthecomingmonths(the InternationalResearch InstituteforClimate
and Society projects a 5060% likelihood of lower than normal rains
betweenJanuaryandMarch2010).Theunavailability offoreignexchangeis
anotherneartermrisk.
5
0
5
10
2000 2003 2006 2009 2012
Source:IMF
POLITICAL CLIMATEIn May 2009 Malawians went to the polls and reelected President
Mutharikasinanelectionthatisnotableforbreakingearlierregionalvoting
patternsandbringingtopoweranewparty,theDemocraticPeoplesParty
(DPP). The DPP was also able to secure a majority in parliament, thus
assuringthatpolicymakingwillnotbehamstrungaswasintherecentpast.
Mutharikas second tenure has been characterised by developmental
policiesthatmadehimpopularduringthefirstterm.However,hisrhetoric
against lending institutions, foreigners, and forex dealers is a cause for
concern. The recent forex and fuel shortages have dented his popularity
somewhatandledtoscathingcriticisminthepress.
MONETARY SECTOR CONSUMER INFLATION (% Y/Y)By the end of 2009 the consumer inflation, which is dominated by food
(weighting of 60%), eased closer to its target range of less than 7%, after
averaging8.5%forthefirstelevenmonths.Theoutlookfor2010inflationis
ratheruncertainandwilldependondevelopments in thecurrencymarket
and agricultural sector, as well as the effects of electricity tariff hikes on
consumerprices(theMalawiEnergyRegulatoryAuthorityapprovedEscoms
proposal to increase electricity tariffs by 56% over the next four years in
order to improveservices).However, theeffectsof theelectricity increase
maybesubduedascurrentlyonly8%ofhouseholdsareelectrified. 6
7
8
9
10
11
Ja n08 Jul08 Jan09 Jul09
Source:National
Statistical
Office
of
Malawi
FISCAL SECTORThe government has budgeted for revenues and grants of MWK 244bn in
FY10toJune,a9% increaseontherevisedfigure forFY09.Around33%of
this (MWK 81bn) is expected to come from grants; there remains the
questionofwhethersupportwillbeasforthcomingintheyearaheaddueto
thefrontloadingofdisbursementsbymajordonors.
Expenditure is projected to increase by only 2% on FY09, or MWK 257bn.
However,thepreviousyearsexpenditureinvolvedanumberoflarge,once
off items, thus there is more room for priority expenditure in the current
budget.Thegovernmentexpectsthefiscaldeficittodeclineto1.6%ofGDP
in
the
current
year.
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Africa 2010 Outlook and StrategyMalawi
EXTERNAL RELATIONS AND EXCHANGE RATE
In
2009
tobacco,
a
key
export,
sales
volume
increased
by
19%
y/y,
but
lowpricescausedbytheglobalrecessionandoverproductionmeantthatexport
salesdeclinedby9%y/y(2009:MWK61bn).ConsequentlyMalawisforeign
reserveswerelowthroughout2009,afterbeingdepletedbyrecordfueland
fertiliserimportsin2008.ByNovember2009,grossofficialforeignreserves
haddeclinedtoUSD197.3m(1.5monthsofimportcover).
The low foreign reserves forced the government to abandon its fouryear
currencypegof MWK/USD140, and to allow thekwacha to float withina
narrowband(MWK/USD139143).Amanageddepreciationwouldimprove
monetarystabilityandincreaseinvestorconfidence,butwouldatthesame
timeincreaselocalpricesoffertiliserandfuelandnegativelyaffectMalawis
currentaccountbalance.
WhiletheopeningofauraniummineinKarongabyAustralianfirmPaladin
promises to reduce cropdriven seasonality in foreign currency flows, the
black market rate, currently at around MWK/USD 190, suggests that the
kwachacoulddepreciatein2010.
EQUITY MARKET OVERVIEW MALAWI ALL SHARE INDEX (MWK)Malawi, as one of the smallest and least liquid markets in Africa, was
particularly hard hit by the impact of the global financial crisis; foreign
investors found themselvesunable to liquidatemanypositionsdue to lack
oflocal
demand
as
well
as
foreign
currency
restrictions.
As
aresult
in
1Q09
the All Share Index fell sharply (18.2%) as shares fell often on very small
volumes traded. For the remainder of the year the market was rather
stagnant,onlyrecoveringsomewhattowardtheendoftheyear,upby3.9%
in 4Q09 on strong buying in Standard Bank Malawi (+23.5% in 4Q09) and
PressCorporation(+25.4%).
StandardBankMalawiwastheonlyshareinthegreenattheendoftheyear
(+8.2%). TNM was particularly hit early in the year when the share price
dropped back to the IPO level of MWK 2.00. Other banks also saw some
trading,butweremostlydown:NBSendedtheyear3.5% lower,NBMwas
down7.8%andFMBfellby16.7%.Curiously,bothNBSandNBMwerequite
activetradersbuttheirsharepricesremainedflatafter31March2009.
25 %
20 %
15 %
10 %
5%
0%
Ja n Ma r Ma y Jul Sep Nov
Source:AfricanAlliancedatabase
STANDARD BANK MALAWI PRICE PERFORMANCE (MWK)Lowestsharerating,goodfundamentals.StandardMalawicontinuestoreap
thebenefitsfromitsmajorshareholder(StandardBankSA)intermsofnew
productintroduction,costreductionandriskmanagement.Thisbodeswell
for revenue growth, cost efficiency and confidence in asset quality. High
loan book exposure to agriculture not considered a threat as majority of
exposure is to tobacco and tea which are drought resilient. Current low
relativeratingprovidesattractiveentry.
20 %
15 %
10 %
5%
0%
5%
10 %
Ja n Ma r Ma y Jul Sep Nov
Source:AfricanAlliancedatabase
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Africa 2010 Outlook and StrategyMalawi
NATIONAL BANK OF MALAWI (NBM) PRICE PERFORMANCE (MWK)
Sector
stalwart
but
earnings
to
underperform.
NBM's
profits
have
benefitedfromnetimpairmentwritebacksamountingtoMWK1.22pershareoverits
past two financial years. In view of its low NPL cover ratio (40%), further
writebacksbeyondFY09areunlikelytobesustainable.Areversiontomore
"normalised" impairment charges will most likely result in NBM's earnings
underperformingthesectoroverourforecastperiod.
10 %
8%
6%
4%
2%
0%
Ja n Ma r Ma y Jul Sep Nov
Source:AfricanAlliancedatabase
VALUATIONS
Dec10 Dec11 12m 24m Dec10 Dec11
FPE FPE PEG PEG FDY FDY
BanksandFinancialServ
StandardBank 5.3 4.4 0.3 0.3 6.9 9.0
NBS 5.3 4.6 0.3 0.3 6.3 7.3
NBM 5.6 4.7 0.4 0.4 8.5 10.1
FMBMalawi 15.6 12.5 0.9 0.8 3.2 4.0
OurpreferredbankinMalawiisStandard
Bank,butsharepriceincreasein4Q09
hastakenawaymostoftheupside.
WerateNBSandNBMasHOLD,while
FBMasSELL.
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Africa 2010 Outlook and StrategyMauritius
ECONOMIC ACTIVITY REAL GDP GROWTH (% PA)
Mauritius,
which
has
never
technically
been
in
recession,
has
nevertheless
noticed a slowdown in certain key sectors such as the tourism and
manufacturing sector. The tourism sector faced a reduction in tourists
arrivals of 9.3% over 1H09, and revenue for the industry fell by 18%. We
expect the industry to have seen signs of recovery by 4Q09. Overall, we
expecttheindustrytocontractby8.8%toreach930,456arrivals.Whilethe
revenuegeneratedisnotexpectedtobeaslowasthedropinarrivals,given
theweakeningoftheMURthathaslostsome18%overthepastoneyear.
Thefinancialserviceshavebeenmoreresilient;theglobalbusinesssegment
isexpectedtoremainbuoyantdespitenoticingacutbackinthenumberof
new registered offshore companies. However, the sector could feel some
pressureshouldtheworldeconomytake longer torecoverfrom thecrisis.
The
banking
sector
continues
to
perform
well
driven
by
the
optimism
aroundtheeconomywhich isexpectedtohavegrownbyatleast2.8% last
year.
0
1
2
3
4
5
6
7
8
2000 2003 2006 2009 2012
Source:IMF
POLITICAL CLIMATEMauritius is ademocratic republic where elections are held every 5 years.
The country which has a population of nearly 3m is politically very stable.
According to the Ibrahim Index of Corporate Governance, Mauritius is
consideredasthebestgovernedcountryinAfrica.
ThePresident,whoistheHeadoftheState,andthePrimeMinisterwhois
the Head of Government, have absolute power in their hands. The Prime
Ministeriselectedatthegeneralelections,whilethePresidentiselectedby
theNationalAssemblyfora5yearmandate.TheNationalAssemblyhas70
members of which 62 are elected for a five year term and 8 additional
membersareappointedfromalistofunsuccessfulcandidatesunderabest
losersystem.
MONETARY POLICY CONSUMER INFLATION (% Y/Y)AtitslastMPCmeetingon22Sep2009,thecentralbankkeptthereporate
unchangedat5.75%,duetolowinflationratewhichhasfallentowards0%
bytheendoflastyear,beforeboundingbackslightly.Howeverthemassive
fiscalandmonetarypolicies implementedsincethestartofthecrisiscould
resultininflationarypressuresassoonastheeconomyrecovers.Weexpect
that the repo rate would be maintained at its current level for the next 6
months.
The reduction in interestrates has reduced the gapbetween the dividend
yieldandthebankrate.Thiscreatedfurtherenthusiasmforthemarketwith
thefavouredstocksremainingthebanksandthehotels.
0
24
6
8
10
12
14
Jan 08 Jul08 Jan09 Jul09
Source:CentralOfficeofStatistics
FISCAL POLICYThebudgetdeficitreached3.5%ofGDPforthe6monthsendingDecember
2009 which is reasonable taking into account the massive fiscal measures
providedby thestimuluspackageand theMay2009budget. InDecember
2008, the government provided a stimulus package of MUR 10.4bn
representing 4.4% of GDP to help support export oriented sectors. We
expect thebudgetdeficit toclimbfurther in2010drivenbythenumerous
publicinfrastructure
projects
to
be
deployed
all
around
the
island,
together
withtherenovationoftheairportandthecompletionofthecruiseterminal.
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Africa 2010 Outlook and StrategyMauritius
EXCHANGE RATE MUR/USD EXCHANGE RATE
During
the
crisis,
the
rupee
has
shown
some
volatility
against
the
majorcurrencies,namely theUSdollar, theeuroand the poundsterling.TheUS
dollarwhichappreciatedsharplyagainst theRupee (22%)over theperiod
September2008 toMarch2009,has thereafterbeenonadeclining trend.
The depreciationof the dollar resulted mainly from the recovery ofglobal
marketswhichpushedinvestorsawayfromthegreenback.
Therupeewhichhasbeenweakeningagainsttheeurosincethestartofthe
crisis, eventually gained some grounds over the last two months of 2009.
Relativetothepoundtherupeecontinuestoremainstrongandweexpect
thistoremainassuchatleastover1Q10.
25
27
29
31
33
35
Jan 08 Jul08 Jan09 Jul09 Jan10
Source:AfricanAlliancedatabase
EQUITY MARKET OVERVIEW SEMDEX ALSI PERFORMANCE (MUR)Mauritiusexperiencedabumpyfirstfewmonthswhenthemarketlostjust
over 20%, yet it was very quick to recover, in line with other emerging
markets,andthealmostunbrokeneightmonthrallypulleduptheALSIby
47% (year to October), before profit taking started to take its toll in the
closing months of the year. The strong upward move during the year was
underpinnedbythethreemainsectors,namelybanksandfinancialservices
(+29.6%),hotelsandleisure(+63%)andagriculture(+53.5%).
Among the heavyweight stocks that performed well, were the usual
suspects:MCB(+17.7%)andSBM(+56.9%)amongthebanks,NewMauritius
Hotels
(+67.5%)
and
Sun
Resotrs
(+64.3%)
in
the
hotel
sector,
as
well
as
Harel Freres (+69.3%) and Omnican (+25.8%) among the agricultural
counters.IrelandBlythwastheonlysizeablecompanytoendtheyearinthe
red(10%).
30 %
20 %
10 %
0%
10 %
20 %
30 %
40 %
50 %
60 %
Ja n Ma r Ma y Jul Sep Nov
Source:African
Alliance
database
MAURITIUS COMMERCIAL BANK (MCB) PRICE PERFORMANCE (MUR)Thelargestbankremainswellpoisedtofacecurrentchallengesaroundthe
differentsectorsoftheeconomyresultingfromtheaftermatheffectsofthe
crisis. Despite increased competition, we expect MCB to maintain its 40%
marketshareovertheyearstocome.Theonlywayforthebanktoexpand
locally isby thecrosssellingofproducts through itsdifferententities.The
long term strategy of MCB is to consolidate local market share, while at
same
time
diversifying
its
revenue
stream
away
from
banking
activities.
Thegroupalsocontinuestoexpandintheregion.
Afterhavingregistereddoubledigitgrowth(exclusiveofexceptional items)
over the last few years, we expect growth for this financial year to be
contained within a single digit on account of the crisis and its resulting
effectsontheeconomy.Overallearningsfortheyearareexpectedtogrow
by9%.Atitscurrentprice,MCBistradingonanexpecteddividendyieldof
4%.
40 %
30 %
20 %
10 %
0%
10 %
20 %
30 %
Ja n Ma r Ma y Jul Sep Nov
Source:AfricanAlliancedatabase
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Africa 2010 Outlook and StrategyMauritius
STATE BANK OF MAURITIUS (SBM) PRICE PERFORMANCE (MUR)
SBM
posted
a
remarkable
performance
over
the
last
financial
year,
achievedon the back of solid banking operations which compensated for the
reduction in dividends received from Mauritius Telecom. The banking
groupsconservativeapproachtowards its loanhasresulted inareduction
inthenetNPLbelow0.5%forFY09.Thestrategyistogrow intoafinancial
services centre through theprovision of banking and nonbanking services
suchwealth&assetmanagementandinsuranceservices.Thebankhasalso
recentlybeenactive intherecruitmentofanumberofqualifiedpersonnel
tocatertothenewenlargedvisionofthegroup.StateBankwillmakeuseof
itshighqualityITplatformtodevelopthosenewbanking andotherfinancial
servicesproduct.
We forecast earnings for the year to grow by 8.5%, based on a constant
dividend
income
of
around
MUR
220m
from
MT.
The
percentage
contributionofnoninterestincometototaloperatingincomeisexpectedto
crossthe40%levelasthegroupcontinuestodiversifyitsrevenuebase.At
the current trading price, the stock offers a prospective dividend yield of
3.7%(3.5%historical),andistradingonaforwardPEratioof9.5x.
40 %
20 %
0%
20 %
40 %
60 %
80 %
Ja n Ma r Ma y Jul Sep Nov
Source:AfricanAlliancedatabase
NEW MAURITIUS HOTELS (NMH) PRICE PERFORMANCE (MUR)Despitethedifficulttimesfacingthetourismindustryformuchoflastyear,
NMH has maintained good occupancy rates without having recourse to
majordiscountingincomparisontootherhotelgroups.Thishasallowedthe
hotel group to pursue its development projects both inland and in the
region,namely
in
Morocco
and
Seychelles,
while
maintaining
alow
debt
to
equityratio,whichisexpectedtoremainbelow50%.
We recommend investors to accumulate the stock on weakness as a
mediumto longterm investment.Atthecurrentprice,thestock istrading
onaforwardPEratioof14xandanexpecteddividendyieldof3.8%.
40 %
20 %
0%
20 %40 %
60 %
80 %
100%
Ja n Ma r Ma y Jul Sep Nov
Source:AfricanAlliancedatabase
PHOENIX BEVERAGES LIMITED (PBL) PRICE PERFORMANCE (MUR)Overthelastfewyearsthegrouphasbeenactivelylookingforopportunities
outsideMauritius.ThesettingupofthebreweryinMadagascargoesalong
with the groups strategy to further externalise the Phoenix brand in the
region and beyond. Since 2006,PBL has restructured its activities to focus
solelyon itscorebusinessandhasthusdisposedoffnoncoreassetswhich
hasenabledareduction inthegearingandallowedtherecentfinancingof
theMadagascarproject.
Atthecurrentprice,thestockistradingonahistoricaldividendyield4.1%,
anda30%premiumtoitsbookvalue.
0%
10%
20%
30%
40%
50%
60%
70%
Jan Mar May Jul Sep Nov
Source:AfricanAlliancedatabase
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VALUATIONS
Mcap Price PEratio PBV DivYield ROE
MURm MUR x x % %
BanksandFinancialServices
MCB(Jun10) 37,959 141 7.7 1.6 4.0 22
StateBankMauritius(Jun10) 26,329 81 9.5 1.5 3.7 16
BrewingandBeverages
PhoenixBeverages(Jun09) 2,632 160 10.6 1.3 4.1 25
Hotelsandleisure
NewMauritiusHotels(Sep10) 22,276 138 14.0 1.9 3.8 14
CIMStockbrokersratesbothMCBand
SBMaspreferredfinancialstocks,and
MHandPhoenixBeveragesaspreferred
industrials.
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Africa 2010 Outlook and StrategyMorocco
ECONOMIC ACTIVITY REAL GDP GROWTH (% PA)
Moroccos
recent
macroeconomic
reforms,
low
exposure
to
international
financial markets andabumper cerealharvest have allaided inmitigating
theeffects of the global recession on thecountry. However, with its main
export partner, Europe,deeply affected by the economic slowdown, there
has beendeterioration in the countrys external position (the trade deficit
has widened, putting pressure on the BoP). Europes continued economic
hardships also affect Morocco through a decrease in remittances (2.5m
MoroccansareworkinginEurope)andafallintourismrevenue.
Real GDP growth rate has fallen from5.6% in 2008 to an estimated5% in
2009,andshouldfallfurthertoaround3.2%in2010.TheIMFprojectsthat
therealnonagriculturalGDPgrowthin2009stoodat2.5%;anditpredicts
that with conditions in Europe improving this year, nonagricultural GDP
growth
could
rise
to
4%.
Agriculture,
which
represents
15%
of
GDP
and
around42%ofemploy
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