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Executive
Summary
Fixed
Income: Yields
on Treasury bills were on a downward trend with the 91-day, 182-day and
364-day papers coming in at 8.0%, 10.8% and 10.9% from 8.1%, 10.9% and 11.1%,
respectively. The Central Bank of Kenya (CBK) confirmed that the base rate
cited in the Banking (Amendment) Act, 2015 is the Central Bank Rate (CBR),
currently at 10.5%;
Equities: During the week, the Kenyan
equities market registered mixed performance with NASI and NSE 25 gaining by
0.1% and 0.4%, respectively, while NSE 20 declined marginally by 0.1%.
Insurance Regulatory Authority (IRA) released H1’2016 numbers for the
insurance industry showing that total gross insurance premiums registered a
year-on-year growth of 8.6%;
Private
Equity: Fundraising
activities witnessed in Africa have continued to drive private equity
activity in the region as CDC Group, the UK’s development finance
institution, allocated USD 20.0 mn to EuroMena III and USD 20.0 mn to
Atlantic Coast Regional Fund II (ACRF II) (ABI).
IRESS, a supplier of technology for financial markets is set to acquire INET
BFA for USD 10.5 mn by November 30th, 2016;
Real
Estate: Kenya
Tourism Board (KTB) launched a 6-month long market campaign across various
cities in India. The recently released “Knight Frank Prime Global
Cities Index” indicated that prices of luxury residential property
increased by 2.1% in Q2’2016 compared to a similar period in 2015;
Focus
of the Week: We
focus on the Cytonn H1’2016 Insurance report, analyzing
the current state and future outlook of the industry; and in our view, rank
the listed insurance firms based on their attractiveness and stability for
investment from a franchise value and from a future growth opportunity
perspective.
Weekly
Company Updates
Fixed
Income
During
the week, T-bills were oversubscribed with overall subscription decreasing to
175.7%, compared to 249.0% recorded the previous week. Subscription rates
decreased across all tenors with the 91-day, 182-day and 364-day papers
coming in at 225.0%, 125.7% and 192.7%, from 274.3%, 182.0% and 299.1%,
respectively, the previous week. The decline in subscription rates is
attributed to the net decline in liquidity of Kshs. 16.0 bn in the money
markets. From the subscriptions, it appears that investors are not too clear
on the direction of interest rates as both the short-term and the long-term
T-bills recorded higher levels of subscription than the medium-term T-bill.
Yields declined across all tenors with the 91, 182 and 364-day papers
decreasing to 8.0%, 10.8% and 10.9% from 8.1%, 10.9% and 11.1%, respectively,
the previous week.
The
91-day T-bill is currently trading below its 5-year average of 10.4%. The
downward trend for the 91-day paper is mainly attributed to: (i) the
enactment of the Banking (Amendment) Act, 2015, effectively lowering lending
rates chargeable by commercial banks, hence increasing demand for government
papers, and (ii) the government being ahead of its pro-rated domestic
borrowing target of Kshs 53.0 bn, having borrowed Kshs 67.4 bn, and currently
not under pressure to borrow.
In
line with the Securities Issuance Calendar, the Government issued 2 bonds: a
5-year bond (FXD 3/2016/5) and a reopened 20-year bond (FXD 1/2016/20)
looking to raise Kshs 25.0 bn for the purpose of budgetary support. Given (i)
the Government is not under pressure to finance the 2016/2017 budget, having
raised Kshs 67.4 bn against a pro-rated target of Kshs 53.0 bn, and (ii) the
enactment of the Banking (Amendment) Act, 2015 resulting in lower lending
rates by commercial banks and preference to lend to the less risky
government, we expect downward pressure on interest rates. Therefore, with
the secondary market trading at 13.6% and 14.8% for the 5-year and 20-year
bond, respectively, we are of the view
that investors should bid between 13.25% and 13.80% for the 5-year and
between 14.0% and 14.9% for the 20-year bond with more bids towards the
latter.
The
Central Bank Weekly report revealed that the interbank rate declined by 60
bps to 3.4% from 4.0% the previous week despite a net liquidity reduction of
Kshs 16.0 bn. The liquidity reduction was as a result of T-bill primary
issues, payment of taxes by banks and reverse repo maturities of Kshs 26.6
bn, Kshs 20.5 bn, and Kshs 15.6 bn, respectively. The interbank rate is often
determined by the liquidity distributions within the banking sector as
opposed to the net liquidity position in the interbank market. Reverse repo
purchases during the week stood at Kshs 15.6 bn, an indication that some
banks still cannot access liquidity from their peers, and as such resolve to
get the same from the CBK. The reverse repo rate is expensive at 10.5%
compared to the interbank rate of 3.4%, a clear indication that the said
banks still have liquidity pressures and therefore have to pay a premium.
Below
is a summary of the money market activity during the week:
According
to Bloomberg, yields on the 5-year and 10-year Eurobond increased by 0.2% and
0.4% week on week to 4.6% and 7.2% from 4.4% and 6.9%, respectively the
previous week. This is attributed to foreign investors demanding a premium as
a result of the recent terrorist attack attempt in Mombasa, raising concerns
on the security situation in the country. Since the mid – January 2016 peak,
yields on Kenyan Eurobond have declined by 4.2% and 2.4% on account of
improving macroeconomic conditions. This is an indication that Kenya remains
an attractive investment destination. Last week, Ghana issued its USD 750.0
million Eurobond at a yield of 9.3% the sale being approximately 5.0x
oversubscribed, indicating that the timing is perfect to issue a Eurobond
given the low yields in the developed markets. Given the yield levels for
Kenya’s Eurobond, we think that now would be a good time for the government
to consider issuing a Eurobond given that: (i) Kshs 462.3 bn of the current
fiscal year’s budget is expected to come from foreign borrowing, (ii) the
2017 elections will possibly make foreign investors shy off, and (iii) the
possibility of a US Fed rate hike may drive investor focus away from emerging
and frontier markets to the safer US
market.
The
Kenya Shilling was stable against the dollar at Kshs 101.3, on account of
reduced dollar demand from firms in the import business and inflows from
commodity export firms. On a year to date basis, the shilling has appreciated
by 1.0% against the dollar. We expect the Central Bank to utilize the foreign
exchange reserve, which currently stands at 5.2 months of import cover, to
support the currency in case of adverse forex market movement.
Central
Bank of Kenya (CBK) confirmed that the base rate cited in the Banking (Amendment)
Act, 2015 is the Central Bank Rate (CBR), currently at 10.5%. This translates
to the lending rate being capped at 14.5%, 4.0 percentage points above the
CBR, and the deposit rate at 7.35%, 70.0% of the CBR. Clarity around the base
rate will enable the sector settle in with the new regulation and reduce
uncertainty among investors. As highlighted on our H1’2016 Banking Sector Report,
we are of the view that innovation and efficiency will be the key
differentiator between banks in this new regime.
Kenya
has suspended plans to cross-list its USD 2.0 bn Eurobond on the Nairobi
Securities Exchange (NSE) until foreign investors are allowed to trade in
shares and bonds directly without intervention by local stockbrokers. Despite
the introduction of a trading platform for foreign-currency-denominated
bonds, NSE has not implemented the Direct Market Access (DMA) facility where
investors will be able to place their buy/sell orders directly using the
stockbrokers’ infrastructure, a key reform necessary for the cross-listing of
the sovereign bond, currently trading on the Irish Stock Exchange (ISE). This
means that Kenyans cannot have access to the debt instrument. Cross listing
the Eurobond will increase the market-base and hence demand for Kenya’s
Eurobonds as more people, including Kenyans will be able to participate
easily in secondary market trade.
The government is ahead of its domestic borrowing
target for this fiscal year, 2016/2017, having borrowed Kshs 67.4 bn for the
current fiscal year against a target of Kshs 53.0 bn (assuming a
pro-rated borrowing throughout the year of Kshs 229.6 bn budgeted for the
full fiscal year). Interest rates, which had reversed trends due
to Government borrowing given the new fiscal year, characterized by an uptick
in inflation rates and tight liquidity in the money market, are currently
witnessing downward pressure owing to the enactment of The Banking (Amendment)
Act, 2015. It is due to this uncertainty that we advise investors to be
biased towards short to medium-term papers.
Equities
During
the week, the market registered mixed performance with NASI and NSE 25
gaining by 0.1% and 0.4%, respectively, while NSE 20 declined marginally by
0.1%, taking their YTD performances to (9.7%), (17.5%), and (20.7%) for NASI,
NSE 25 and NSE 20, respectively. Since the February 2015 peak, the market has
lost 25.9% and 41.7% for NASI and NSE 20, respectively. This week’s performance
was driven by gains in select stocks with EABL, Britam, Co-op and CFC Stanbic
rising by 7.6%, 4.4%, 3.0% and 2.6%, respectively, despite subdued
performance in some of the large cap stocks. Key losers during the week were
NIC Bank, KCB Group, ARM Cement, Bamburi and Equity Group shedding 7.2%,
7.1%, 6.4%, 3.6% and 2.9%, respectively.
Equities
turnover slumped 60.2% to close the week at Kshs 1.7 bn from Kshs 4.2 bn the
previous week. Foreign investors remained net buyers with net inflows
of USD 2.5 mn, compared to a net inflow of USD 2.2 mn recorded the previous
week, with foreign investor participation declining to 70.3% from 84.0% the
previous week. Equity Group was the top mover during the week accounting for
23.0% of market activity, with net foreign inflows of USD 2.1 mn. We maintain
our expectation of stronger earnings growth in 2016 compared to 2015,
supported by a favorable macroeconomic environment. However, the key risk is
the volatility in the banking sector that may depress earnings.
The
market is currently trading at a price to earnings ratio of 11.5x, versus a
historical average of 13.7x, with a dividend yield of 6.6% versus a
historical average of 3.4%. The charts below indicate the historical PE and
dividend yields of the market.
Centum
Investment, through its newly fully owned subsidiary, Greenblade Growers Ltd,
has acquired 120 acres of land in Ol Kalau, Nyandarua County for Kshs 89.0 mn
to venture into agriculture. Centum plans on producing exotic herbs and
vegetables for export to the European Union market with Netherlands as the
main market followed by the UK. Centum has recently added agriculture as one
of its key target sectors and seeks to expand and diversify further into crop
production. Agriculture contributed to 24.6% of the GDP in 2015 and remains
the largest contributor to the growth of the Kenyan Economy. We view this as
a positive move towards diversifying Centum’s revenue, however, it is not
clear whether the company has experience and capabilities in agriculture.
Visa
has partnered with Co-operative Bank, Family Bank, KCB Group, and NIC Bank to
deliver a new mobile payment system service (mVisa) to Kenyan consumers and
merchants. mVisa allows users to directly access all funds in their bank
accounts to pay merchants or individuals; users can send money to each
other’s accounts directly via mobile as well as pay for goods and services
without a point of sale machine regardless of the mobile provider being used.
mVisa will be available to both smartphones and feature phones, with the
potential to provide a mobile payment service to nearly all 38 million phone
users in Kenya. Consumers can also use the mVisa agents for domestic
remittances as well as to access their cash if there is no ATM machine
nearby. Our view is that the entry of mVisa into Kenya will continue to
support financial inclusion, which currently stands at 75.0%. However, local
mobile money platforms will face competitive pressures, particularly M-Pesa,
which could in turn suppress Safaricom’s margins.
Insurance
Regulatory Authority (IRA) H1’2016 report
IRA
released H1’2016 numbers for the insurance industry showing that total gross
insurance premiums registered a year-on-year growth of 8.6% to Kshs 106.0 bn
from Kshs 97.7 bn in H1’2015, compared to 15.3% increase a year earlier.
Key
highlights of the performance from H1’2015 to H1’2016 include;
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