Kenya’s 2016 Half Year Market Wrap Up

Dear Market Participant,

We are now stepping into a new phase of the year, the remaining half, the known unknown, more or less from where we are, nothing seems to be moving in a systemic manner and adopting a random walk approach seems the best way. These are trying times, which requires sharpness lest you watch hard earned fortune vanish into the abyss.

Macro themes that have been and remain prevalent at present are:China’s slowing economic growth, the timeline relating to the rising interest rate cycle in the US and UK’s decision to leave the European Union.

Looking up the word ‘Panic’ from Jason Zweig’s ‘The Devils Financial Dictionary,’ he describes it as a ‘contagious fear that sweeps across a crowd, a market, or a planet, frightening multitudes of people into selling and leaving the rest wondering whether they should.’

In the 19th century panics came, like swarms of cicadas, roughly every 17 years: 1819, 1837, 1857, 1873, 1893, 1907. They became less frequent in the 20th century, then struck twice at the onset of the new millennium: in 2000 and in 2008-2009. Is 2016 such a year?

Well let’s look at the following charts:

According to Vitol Group the world’s largest independent oil-trading house, oil prices won’t rise much further over the next year and a half as demand growth slows and refiners will comfortably meet consumption

“We have a lot of oil in the system and it will take us considerable time to work that off.” – Ian Taylor

Since rallying from a 12-year low of $27.10 a barrel in January, Brent crude has been hovering around $50 a barrel for the last month and will probably end the year at those levels (Bloomberg).

Source: Stanley Druckenmiller (The EndGame Presentation)

Also Read; Buffett’s speech at Columbia Business School in 1984 “The Superinvestors of Graham & Doddsville”

Kenya Equity Markets

The NSE All Share Index has retreated from 145.5 points in January to 140.46 points as at 1^st July, down 3.5%. The benchmark NSE 20 Index which represents a composite of Kenyan blue chip companies took a  hit and fell by around 8.8% year-to-date.

In assessing the current situation we have stepped back and retrieved the 10 year NSE chart below which clearly expresses where we are. A classic bear market is when the market tumbles by over 20% in this case for the past 10 years we have experienced 3 such events: The most sever one was of 2008/9 where the NSE 20 Index fell by 52%, followed by 2011/12 period where it fell by 32% and currently we are deeply involved in one which began in 2015 to date, whereby the benchmark index has fallen down 33%.

Gainers

Looking at the data.xlsx, only a few gainers have emerged from January price levels as shown below:

Top Gainers

Source: (NSE, Kenyan WallStreet)

Longhorn

So far Longhorn Publishers has had the best year so far, up by over 24%. Longhorn began the year releasing their 2015 financials which were impressive recording a 70% jump in profit. Longhorn then stepped up and went into the markets for a capital raise through a rights issue which had a subscription rate of 101%. NSE Listed Centum Investment doubled its stake in Longhorn Publishers acquiring a majority 60%. Longhorn is currently in the process of buying a 74% of Law Africa Publishing Company pending approval from regulators.

Source: (FT)

Kenol Kobil

Kenol Kobil has had its fair share of the action in the markets. Volumes of over 119million have been moved since the year began. Kenol Kobil’s full year 2015 results were positive with profits before tax increasing by 68.6% to Ksh 3.4 Billion. The company disposed its shareholding in Kenol Tanzania, which operates 17 fuel stations, and in KenolKobil Congo SPRL, which owns a 4,000 cubic meter dry storage facility in Lubumbashi. The company is on track towards becoming fully deleveraged and expects 2016 to be virtually debt free. It will be interesting to see how the half year results will turn out.

Read: Kenol Kobil Company Analysis

We have been tracking institutional investors on this counter and managed to spot one who took up a buying position in March as shown in the chart below:

Source: (FT, FactSet)

Kenol Kobil emerged as the second best performing counter rallying by roughly 17% for the half year as shown below:

Source: (FT)

Sasini

In the Agricultural counters Sasini emerged as the only gainer YTD in the sector. Its share price is up by around 10%. As shown in the chart below:

Source: (FT)

To put this counter into a better perspective, it was one of the best stocks in 2015 and was up by almost 66% in 2015! What a year! Have a look at the 2015 to date chart below:

Source: (FT)

I&M Bank

I&M bounced by 9% in the period under review. We have termed this upward share price movement as the ‘CDC Group Connection.’ UK’s CDC Group Plc acquired about 10.68% stake of the lender which was held by German and French development finance institutions, DEG (6.25%) and Proparco (4.43%). The deal was estimated to be worth around KES 4.5Bn.

I&M Group has made acquisition in Giro Bank and Burbidge Capital.

I&M Group posted a 15.8% growth in net profit for the first three months of 2016.

Source: (FT)

Safaricom

Safaricom a regular outperformer year on year did not miss in the list of gainers in this half year musing. Safaricom is up by over 7% year to date. It was the highest mover in volume with a whopping 936.4 million shares exchanging investors’ hands. It touched an all-time high of KES 19.00/share in June.

Safaricom is an innovative telecoms company which has lured foreign investors on this counter from various parts of the world. It is one company that you would ideally not want to miss in your portfolio.

Have a look at the maxed out Safaricom chart below:

Source: (FT)

Safaricom’s top Institutional investors are:

• Fidelity Management & Research Co.
• Genesis Investment Management LLP
• Norges Bank Investment Management
• Schroder Investment Management
• Morgan Stanley Investment Management
• Wasatch Advisors
• State Board of Administration of Florida Retirement System
• Van Eck Associates Corp
• Parametric Portfolio Associates
• Aberdeen Asset Managers

Losers

Losers dominated the period under review with double digit percentage losses. Here are the top 10 losers for the first half of the year:

Source: (NSE, Kenyan WallStreet)

Uchumi Supermarkets

Uchumi supermarkets is a counter that received the worst beating so far. It is down by 71%, shareholders for sure are not happy about this. Uchumi touched an all-time low of KES 2.70 set on 23^rd June.

In order to understand the current situation at Uchumi it is vital you take a look at their financials, it speaks it all. Uchumi made a pre-tax loss of Kshs 1 Billion in the half-year ended December 2015. In our view a serious restructuring needs to take place.

Source: (FT)

Home Afrika

Home Afrika is on a race to zero as shown below. It touched an all-time low of KES 1.20 per share earlier this week (5^th July).

Source: (FT)

TransCentury

TransCentury has been having a rough half year, they had an immediate outstanding debt of $75M to pay to its bondholders which was not met, however, they came to an agreement with the bond holders for a 6 month extension in March and the amount was drawn down to $40 million.

TransCentury in the period received a $20 million investment from a U.S.-based company (Kuramo Capital).

Recently Afreximbank has taken over KES 15 Billion of TransCentury’s loans.

In the markets TransCentury touched an all-time low of KES 4.35 set on Apr 28, 2016.

Source: (FT)

Fixed Income Market

In the bond market a total number of 3,045 deals were executed during the half year. Total bond market turnover stood at KES 265.9 Billion. From the table below March and June were busy and the spike in turnover may be attributed due to bonds auctioned during those periods.

Source: (NSE, Kenyan WallStreet)

African Deals

In the deal space Nigeria received the largest amount of capital standing at $499.1 million, followed by South Africa receiving $459.1 million.

In the East African space Kenya investments worth $43.8 Million were made followed closely by Ethiopia at $ 42 Million as shown in the info-graph below:

Source: Stratlink Global

Sector wise investments in the retail segment dominated with a weighting of 27.8% as shown below:

Source: Stratlink Global

Kenyan Economic Indicators

GDP Growth

Kenya’s Q1 GDP growth rate expanded by 5.9% year on year compared to a 4.9% and 6.2% growth in Q1 2015 and Q4 2015 respectively. Growth was primarily driven by accommodation and food services (+12%), Agriculture, forestry and fishing (+4.8%), transport and storage (+8.4%) and mining and quarrying (+6.9%).

The agricultural sector was boosted by favorable climatic conditions leading to improved tea production. Improved international prices led the value of exports of coffee and tea to increase by 7.6% and 24.5% respectively.

Growth in the construction sector slowed down to 9.9% from 12.6% in 1Q15.

Source: (KNBS, Kenyan WallStreet)

Inflation

Kenya’s Inflation rose to 5.8% in June from 5.0% in April.

Source: (KNBS, Kenyan WallStreet)

Interest Rates

In May Kenya’s Central Bank unexpectedly cut its benchmark lending rate for the first time since April 2013 by 100 basis points (1%) to 10.5% from the previous 11.50%.

The next Monetary Policy Committee will be held on July 25 and set its benchmark lending rate.

Source: (Central Bank of Kenya, Kenyan WallStreet)

Q1 2016 Banking Sector Summary

Kenya’s banking sector registered an upward trend in performance in the first quarter of 2016. Net assets and pre-tax profits increased by 2.3 percent and 51.5 percent, respectively in the quarter ending March 2016.

Public Debt

Kenya’s public and publicly guaranteed debt increased by 4.9 percent during the third quarter of the FY 2015/16, with domestic debt accounting for much of the increase. The government’s external debt also hit an all time high of KES 1.67 Trillion as shown in the chart below.

Loans and Advances

Gross loans recorded a growth of 2.58 percent from KSh 2,165.33 billion in December 2015 to KSh 2,221.2 billion in March 2016. The increase in the loan book was contributed by four economic sectors; real estate, trade, building and construction and agriculture. Trade and real estate sectors recorded the highest increase in demand for credit with increases of KSh 25.6 million or 42 percent and KSh 21.3 million or 22 percent, respectively. The sector distribution of loans as at 31st March 2016 is shown in Chart below.

Conclusion

The first half of the year has not been great in the Kenyan Stock Market, which leaves an investor seeking safe haven assets i.e. bonds and precious commodities, however, on the flipside valuations have come down and if you are a cherry picker you won’t miss one.

As we progress in the remaining half of the year we wish our readers great out-performance in their portfolios despite a weak global outlook and remember ‘Never let a good crisis go to waste.’

Sources: (Bloomberg, Financial Times, Nairobi Securities Exchange, Jason Zweig, The EndGame Presnetation, KNBS, Kenyan WallStreet, Stratlink Global)

Disclaimer: The contents of this website have been prepared to provide you with general information only. In preparing the information, we have not taken into account your objectives, financial situation or needs. The information contained herein has been obtained from sources that we believe to be reliable, but its accuracy and completeness are not guaranteed. Any liability whatsoever is disclaimed.