Weekly Market Commentary

Politics

The inauguration of the former prime minister as the people’s president DID NOT appear to proceed as planned. The absence of his three co-principals including his deputy was expected but not in a manner whereby it was exclusively only their absence that was italicized. The exercise would not have gone on if the police had aggressively derailed the gathering of the crowd, teargassing youth and firing live bullets. Of course, there would be bodies at the morgue and the exercise would have been called off. However, the police were withdrawn from the venue in an abrupt reorientation of strategy. The National Police Service circulated a video on social media, showing a man captured on CCTV cameras aiming a firearm at a police vehicle with intent to fire on Tuesday before the NASA event began at Uhuru Park. At this point in time, viewers and readers should take alleged evidence and reports from BOTH SIDES with a grain of salt as propaganda and mind control is rampant in a politically charged environment.

The crackdown began slowly but surely. A television blackout on the three main free-to-air news channels initially set the tone, which was definitely a harsh tone. Next came the arrest of the lawyer who administered the illegal oath. After spending a night in prison, he was released on a bail of Kshs. 50,000. Imprisonment of ten years could be looming for the fella upon establishment of guilt.

After the Interior Cabinet Secretary Dr. Matiangi declared the NRM rebellion group outlawed, the organisation’s General (a title treasonous in itself) instructed ‘NRM soldiers’ to take down portraits of the legitimately elected president (please note the notion of legitimacy is relative) from all premises that they occupy, and replace the same with portraits of the people’s president (or perhaps we should say landscapes of the people’s president based on his vast command of supporters?). The self-styled general was soon after arrested and ferried to Kiambu County, a Jubilee stronghold. Despite a court order compelling his release on a bail of Kshs. 50,000, he has not yet been released. An antagonistic crowd has also been seen outside one of the cells, as he is moved from cell to cell within the county. Parallel to these arrests, which include a more minor arrest of an opposition MP who was questioned and later released, Opposition allied leaders have also seen their security and firearm licenses withdrawn. The State is also unwilling to be intimidated by court orders in its intimidation tactics, as it defies court mandates to reinstate arms licenses of Opposition leaders and reinstating live streaming of unbiased free-to-air television.

It looks like the State is not in a hurry and is building momentum towards the Grand Arrest. Unrest will follow this act of bravery by the State, if it occurs at all.

Economics

For the current financial year ending June 2018, about Kshs. 658 billion has been budgeted towards serving debt, which was estimated at Kshs. 4.55 trillion in December 2017, up from Kshs. 4.48 trillion in September. It is gauged that Kshs. 4.57 of every Kshs. 10 collected by the taxman will go towards servicing debt. The fact that a lot of short-term debt is being gobbled up and the budget deficit just keeps widening means that there will be a lot of repayment pressure on taxpayers. Moreover, utilization of debt for financing recurrent expenditure is an extremely unpleasant thing to contemplate.

The Central Bank of Kenya estimates the current account deficit at 6.2% of GDP in 2017, expected to narrow to 5.4% of GDP in 2018 due to lower food imports as rainfall stabilizes, lower imports in the second phase of the SGR, growth in diaspora remittances, tourism and exports.

The CBK foreign exchange reserves last stood at $7,009 million (4.7 months of import cover). These reserves together with precautionary arrangements with the IMF, equivalent to $1.5 billion, continue to provide an adequate buffer against short term shocks in the foreign exchange market.

Private sector credit growth came in at 2.4% in the 12 months to December 2017, slightly higher than the 2% in October 2017. Credit growth in manufacturing was 13%, in domestic trade it was 10.5%, while the real estate sector experienced a more modest 8.6% credit growth.

Economic growth averaged 4.7% in the first three quarters of 2017, compared to 5.7% in a similar period in 2016. The service sector remained the main source of growth, particularly MSMEs. The MPC Private Sector Market Perception Survey conducted in January 2018 showed an upsurge in optimism by the private sector for the economic prospects in 2018. More than 90% of respondents were optimistic about prospects for 2018, compared to 65% in November 2017.

According to Trading Economics, a macroeconomics data provider which has more than 20 million economic indicators for 196 countries:

Inflation rose 4.8 percent year-on-year in January of 2018, after a 4.5 percent gain in the previous month. Prices advanced at a faster pace after easing for five consecutive months, mostly due to food and housing and utilities. Inflation rate in Kenya averaged 10.06 percent from 2005 until 2018, reaching an all-time high of 31.50 percent in May of 2008 and a record low of 3.18 percent in October of 2010.

On a monthly basis, consumer prices rose 1.32 percent in January 2018, following a 0.54 percent increase in the previous month. Prices went up faster for food and non-alcoholic beverages (1.69 percent compared to 0.25 percent in December), namely because of the expiration of the maize subsidy. In addition, cost advanced further for housing and utilities (0.90 percent compared to 0.27 percent), mainly due to higher prices of house rents, kerosene and charcoal. In contrast, cost of transport slowed to 1.53 percent from 2.44 percent, perhaps due to competition.

Consumer Price Index CPI in Kenya increased to 185.47 Index Points in January from 183.05 Index Points in December of 2017. Consumer Price Index CPI in Kenya averaged 140.91 Index Points from 2009 until 2018, reaching an all time high of 187.64 Index Points in May of 2017 and a record low of 99 Index Points in January of 2009. CPI measures changes in the prices paid by consumers for a basket of goods and services. This is not a good sign in a country where most of the population is earning Kshs. 25,000 or less.

Market Snapshot

A total of 106,032,500 shares exchanged hands with turnover ticking to Kshs. 3,115,086,914 with 5,128 deals taking place during the week.

NSE 20 edged up to 3758.18 (+0.81%), the broad NASI was constant at 181.69 (0.00%), back to resistance – an all time high to be surpassed; NSE 25 bobbed up to 4544.76 (+0.67%).

Telecommunications Sector

Safaricom Kshs. 29.75 (-0.83%) experienced the transmission of 40,022,000 shares. Investors often take time to get used to the fact that ‘the big dip’ is not coming and previous highs will now be the current lows.

Safaricom and Airtel have agreed to pilot a mobile wallet which will allow users to seamlessly send and receive money across networks in real time, in contrast to the current system which only allows cashing money received from an alien network. Rival networks will have to increase the number of agents to meaningfully affect the power of Safaricom’s market penetration. Safaricom currently has over 130,000 Mpesa agents.

Over the past 5 financial years, Mpesa revenue has grown by about 21.6% per financial period on average. Interoperability of the money transfer service may require the telecommunications giant to reduce its rates to match those of its cheaper competitors, thus taking a toll on revenue. On the bright side, it will allow the NSE listed company to tap into its competitor’s traffic.

Banking Sector

Barclays Kshs. 10.70 (+1.90%) traded 20,669,700 shares. My target is Kshs. 12.25. Equity Kshs. 43.75 (+0.57%) moved 11,533,600 shares while KCB Kshs. 45.75 (+4.57%) saw new buyers served 5,877,700 shares.

DTB Kshs. 205 (+1.49%) experienced the exchange of 63,300 shares. Its Q3 2017 results gave a number of indicators on the way forward:

  • Profit before tax dropped to Kshs. 7.53b from Kshs. 7.81b in Q3 2016 (-3.6%)
  • EPS came in at Kshs. 17.42 v. Kshs. 18.45 (-5.6%), the effects of lower current tax cancelled by the lack of a deferred tax advantage
  • While total interest income grew by 0.76%, higher interest expenses on customer deposits led to a 1.4% dip in net interest income to Kshs. 14.48b.
  • Total non-interest income as a % of total operating income was recorded as 21.2% compared to 20.2% for the 9 months to 30th September 2016
  • Operating expenses increased to Kshs. 10.85b from Kshs. 10.59b (+2.46%)
  • Loan loss provision went down by a very conservative 19.4% as interest income from government securities soared 27.9% – this was despite total non-performing loans and advances spiking 120% to Kshs. 14.1b. Banks with greater NPLs will be highly exposed to the iron fisted IFRS 9 and this will not be greeted with lenience by the iron-fisted KRA, further depleting the bottom line
  • Net loans and advances to customers grew to Kshs. 196.3b (+8.1%)

Operating profit margin (OPM) is calculated as follows:

(Net interest income – operating expenses)/total interest income

This came in at 14.1% v. 16.1% in the previous period and indicates that the bank is being squeezed slightly.

Cost to income ratio is calculated as follows:

Operating expenses/(net interest income + non-interest income)

This was 59.1% in the 9 months ended 30th September 2017 as compared to 57.6% in a similar period, indicating the need for further control of overhead expenditure. Most modern banks have a large proportion of overheads with direct costs forming a very small proportion of total expenses. However, with the advent of advanced overhead costing measures such as Activity Based Costing, previously arbitrarily costed general overheads are also divided into specific cost incidences where each cost incident represents a transaction.

The PE ratio on the counter is currently at 8.87

Commercial and Services

KQ Kshs. 15.60 (-4.29%) experienced some turbulence with the occurrence of 139,500 shares exchanging hands. Heavy demand is not materializing, nor are sellers capitulating. However, the downside risk is much greater on this counter. The National Carrier is looking at fuel hedging contracts, once again. This may be of two types:

  1. A futures contract where a fixed price of fuel is agreed upon and the predetermined rate is payable even if the future price increases – this exposes the utiliser of the instrument to enormous risk by forcing it to buy fuel at a higher price if the market rate falls
  2. A fuel call option gives the company a right, but not the obligation to buy fuel at a predetermined rate in exchange for a premium paid in advance – such a premium can have a negative effect on an already squeezed operating profit if the option is not utilised

Uchumi Kshs. 3.40 (-2.86%) dipped with the barter of 190,000 shares. The fear of a capital restructuring exercise is fairly reminiscent of the horror Kenya Airways’ shareholders woke up to, upon completion of the troubled airline’s very own balance sheet surgery. Uchumi gave a handsome return of 16.46% in 2017.

Energy and Petroleum

KenolKobil Kshs. 14.80 (+0.34%) experienced the flow of 7,274,000 shares. The oil marketer has experienced phenomenal growth in earnings per share over the past three financial year ends, with 2014 yielding a mind-blowing growth of 94.73% in EPS, 2015 logging 85.14% and 2016 diarising a more modest 19.71%. Over the past three years, dividend has also been spiked every financial year with 2014 bringing a 100% increase to 20 cents per share, 2015 serving a 75% escalation to 35 cents a share and 2016 presenting DPS of 45 cents which was not far off from representing a 30% increase in the metric. No doubt a slowdown in growth has occurred but maturity often requires time to attain its footing before expansion creates the next phase of mind boggling value thickening. For this, ApexAfrica Capital Ltd. suggests the possibility of a strategic investor injecting more capital; the new shares being issued at a premium and a massive valuation upsurge taking place. The share price has been fairly stagnant but patience is a key virtue for intelligent investors.

Kenya Power Kshs. 8.70 (+1.75%) experienced the teleportation of 812,600 shares. With backlash over disputed billing and alleged exploitation of consumers swamping the share price, it is not yet poised for strong moves upwards. However, the increase in volume (last week 6,419,900 shares exchanged hands) is an indication of confidence by new investors as well as panic selling by old shareholders. In 2017, it delivered modest returns of just 11.66% with stellar returns between the extremes of Kshs. 6 and Kshs. 12 which both fell during the year.

Kengen Kshs. 8.35 (-0.60%) traded 933,600 shares. This is a must have counter for long term value investors. The full year ended 30th June 2017 diluted EPS leaped 26.9% to Kshs. 1.37 from Kshs. 1.08, in the power generator’s first financial period after investment by South Africa’s Public Investments Corporation (PIC). It is not clear whether the pension fund has raised its stake beyond the 10% by arm’s length purchases on the share market. Dips and inertia are buying opportunities.

Insurance

CIC Kshs. 5.60 (-1.75%) moved 1,954,200 shares while the profit warning laden Britam Kshs. 13.15 (+0.38%) saw new buyers lay claim over 843,400 shares.

Investment and Investment Services

NSE Kshs. 20.75 (+2.47%) experienced 1,130,500 of its shares move meaningfully through the board. Investors may be tempted to buy this stock due to increasing volumes on the overall market. In 2017, the return of 34.47% that shareholders were gifted with is definitely worth looking at seriously.

Centum Kshs. 46 (0.00%) experienced shareholders holding the share let go of 582,600 shares.  It bestowed a return of 18.24% last year. The increasing foreign interest in the share is bullish for the share price; undervalued stocks are best bets in times of political and economic distress.

Agricultural Sector

Sasini Kshs. 26.50 (+0.95%) traded 62,700 shares. The multiproduct, multilocational leading public agribusiness posted fairly encouraging results for the full year ended 30th September 2017. Here are some highlights:

  • The Group posted a profit after tax of Kshs 339.4 million for the year compared to a restated profit of Kshs 576.9 million in the prior year (-41.2%). This year’s profit included a gain of Kshs 16.9 million (prior year Kshs 422.7 million) on the disposal of an investment.
  • The changes in fair values of biological assets increased in the year to Kshs 81.7 million (prior year restated loss of Kshs 177.9 million) as a result of the implementation of the changes in the IAS 41- Agriculture and IAS 16- Property, Plant and Equipment. Sasini has elected to measure bearer plants at cost.
  • Despite the effects of the severe weather conditions in the early part of the year, there was an improvement in tea production to 11.2 million kgs against the production for the prior year of 11.1 million kgs
  • Coffee production was 851 tons compared to 944 tons in the previous year
  • The dairy sector was also affected by the drought but remained marginally profitable during the financial year.
  • Earnings per share came in at Kshs. 1.52, against Kshs. 2.58 restated in the full year ended 30th September 2016
  • After an interim dividend of Kshs. 0.25, a final dividend of Kshs. 0.75 will be paid (books closure 6th February 2018; payment 21st February 2018.)

Manufacturing and Allied

Mumias Kshs. 1 (-4.76%) saw the freefall of 4,498,500 shares. In an exclusive article by the Daily Nation, the troubled sugar miller’s half year ended 31st December 2017 results were revealed: Loss after tax dropped 33% to Kshs. 1.95b

  • Expenses reduced by Kshs. 890m to Kshs. 1.45b
  • Revenue halved due to the prolonged closure and was diarised as only Kshs. 680.5m juxtaposed with Kshs. 1.52b in a similar period (-55%)

@MihrThakar

Sources: National Police Service, Standard Digital, Central Bank of Kenya, Trading Economics, Daily Nation, Equity Master, Business Daily, Daily Nation, The Star Kenya, Sasini