Weekly Market Commentary

Politics

Imagine a piece of paper. Draw two points on it with a distance x between those vectors. This distance would have to be covered to go from point A to point B in a straight line. Now imagine bending that paper inwards so as to overcome that distance, the dots becoming parallel to each other; an extra dimension being created by the ‘tunnel’. This is a wormhole. Politicians in the Republic of Kenya are attempting to get power through such a contrivance, whether it is through tweaking a free and fair process or fomenting violence, economic disruption and anarchy.

The Opposition coalition has gone ahead to engineer a plan where a bill proposing the formation of the People’s Assembly will be mooted in each county assembly. At least four counties, namely Siaya, Busia, Vihiga and Homa Bay counties, have passed a motion adopting the creation of what may be perceived as parallel satellite parliaments. Where the powerful coalition does not have the numbers in the county assembly, ‘the people’ will directly form these councils. This will be in addition to a National People’s Assembly. Among other aims, they will look at ways to amend the constitution with the underlying viewpoint of not recognizing the re-election of the incumbent President. In a speech late last week at the Centre for Strategic and International Studies (CSIS) in the USA, the leader of the Opposition proposed the inception of an interim government, with players from both of the main sides taking charge of governance. Established in Washington, D.C., over 50 years ago, CSIS is a bipartisan, non-profit policy research organization dedicated to providing strategic insights and policy solutions to help decision makers chart a course toward a better world. The former Prime Minister reiterated his position on both the Presidential elections, terming them ‘shams’ while also expressing his dyspepsia over the conduct of the Election Observers who had given the nullified August 8^th 2017 elections a clean bill of health.

An Opposition MP, who is a constitutional lawyer, has drafted a bill proposing the creation of two new republics; the People’s Republic of Kenya and the Central Republic of Kenya. The said document has been forwarded to the Independent Electoral and Boundaries Commission (IEBC) for review. He will then start collecting signatures from a million voters necessary to trigger a referendum. After approval from IEBC, the draft bill will be sent to 18 of the 47 counties the Opposition coalition control. If the majority of the county assemblies approve the said bill, it will be laid before Parliament for approval before a referendum is held. However, the referendum will proceed even without Parliament’s acquiescence. At least 20% of voters in half the counties must participate in the referendum for it to be approved. You can read more about this complex procedure in a brilliant article by The Star. The State’s blessing is unlikely forthcoming but a waft of foul air suggests the possibility of a long-drawn ding-dong.

The cases before the Supreme Court against the incumbent President’s reiterated ‘victory’ will be determined on 20^th November 2017. Will it be a black Monday in the stock market? The following grounds are among those that may be raised as key precipitators for a nullification:

1. The election did not take place in all the 290 constituencies, contrary to constitutional dictate
2. IEBC hired returning officers in an illegal manner, as asserted by the High Court (the ruling was later quashed by the Court of Appeal on the same day in a seemingly suspicious and ex-parte manner at a strange hour on a public holiday)
3. Inclusion of a bankrupt presidential candidate on the ballot papers
4. Failure to reconfigure all the KIEMS kits to accommodate all the Presidential candidates – the devices only had the names of the two main contenders in line with IEBC’s (mis)interpretation of the law in regard to a fresh election
5. Failure to send the results in the prescribed form of scanned copies of statutory forms simultaneously with text messages from the KIEMS kits
6. Contradictory statements from the electoral commission over voter turnout – Form 32A is a statutory document that a registered voter who is not able to be verified by the use of biometrics is required to fill – these are likely to be sampled in order to scrutinise the voter turnout figures seemingly beefed up by manual authentication
7. Failure to transmit voter turnout numbers by returning officers within the interval of two hours from 7am to 5PM as stipulated by the Election Act
8. The resignation of Roselyn Akombe and her damning letter condemning IEBC’s ineptitude in expedition of a free and fair election
9. The IEBC Chairman Wafula Chebukati’s statement within 24 hours of the above commissioner’s resignation, buttressing the allegations that the commission was not in a position to carry out free, fair and credible elections due to partisan commissioners
10. Violent demonstrations and intimidation of (non)voters
11. Last-minute relocation of polling stations due to violence
12. The lack of election observers reducing credibility – however, the widespread presence of election observers did not preclude the nullification of the August 8^th elections
13. Formal nominations did not precede gazettement of candidates
14. The continuance of the election without the slightest attention paid to the withdrawal of a leading presidential candidate
15. Two candidates had more time to campaign than the others due to IEBC’s incorrect exclusion of the minority candidates

Economics

The treasury of Kenya does not have funds to repay a loan of Kshs. 77 billion taken from a syndicate of banks in October 2015. They will be forced to issue a new Eurobond to repay the debt. The syndicated loan was due in October 2017, but the Government negotiated for its deferral up to April 2018. 10% of the creditors objected to the deferral, forcing the government to dish out money to repay those dissenting. With a ton of foreign currency loans already under the tightened belt of the obese government, the Kenya shilling is likely to be put under pressure; the Central Bank can only resort to selling dollars for so long. It has already become a regular thing this election year, once having the elevated position of being a last resort option.

The Cabinet Secretary for the National Treasury forecasts GDP growth of 5.1% in 2017 (Q1 2017 actual 4.7%, Q2 2017 actual 5.0%) with a fiscal deficit of 6.4% for the financial year 2017/18, down from 8.5% in the financial year 2016/17. The 2018 GDP forecast is between 6% and 7%.

October inflation came in at 5.72%, being the lowest monthly inflation reported this year. Average inflation in 2017 is 8.7% with the highest rate reported in April 2017, the latter being a whopping 11.7%!

Market Snapshot

Volume decreased to 97,200,700 shares from last week’s 120,443,300 shares (-19.3%). Weekly turnover came in at Kshs. 3.01 billion as compared to the antecedent week’s Kshs. 3.63 billion (-17%). All the main indices were beaten with a metal rod as the reality of a presently impending, purposefully impeding and potentially imploding Supreme Court case against the October 26^th 2017 Presidential election dawned on investors. The benchmark NSE 20 dipped to 3752.15 (-1.27%), the broad NASI took a step back to 160.97 (-2.15%) and the NSE 25 lost some strength, falling to 4232.01 (-1.64%). The week was heavy on foreign selling and light on foreign participation.

Telecommunications Sector

Safaricom Kshs. 24.50 (-3.92%) was PELTED WITH STONES; transmission of 47,436,000 shares took place. While those fighting the share price by migrating from the network are bound to be TEARGASSED by the poor network connectivity and mobile money penetration of the corporation’s competitors, the boycott of the company’s products by a leading political outfit is definitely making investors uneasy. Less growth in earnings than the half year 2016/17 was also reported in the earnings for the half year ended 30^th September 2017. This has been augmented by the prolonged and mysterious sick leave of stellar performing CEO Bob Collymore.

The new Fed Chair of the United States is Jerome Powell. December is known to result in a rate hike and the incoming leader is likely to enter ‘with a bang’. A hawkish Fed will strengthen the US dollar. Coupled with the current economic and political problems in Kenya, the Kenya Shilling could weaken. If the Supreme Court upholds the October 26^th repeat Presidential election, all these factors could increase foreign participation, seeing this foreign dominated counter rise again like a gallant warrior. A target of Kshs. 28 could still be achievable if the Lord smiles (sorry atheists).

Banking Sector

Co-operative Bank Kshs. 16.25 (-2.69%) dipped with the movement of 8,546,100 shares. The tier one lender reported less than bliss invoking Q3 2017 results. Here are some of the key highlights:

• Profit after tax was Kshs. 13.7b compared to Kshs. 15.2b in Q3 2016 (-9.9%)
• Cost to income ratio improved to 47.6% from 52.1% in a similar period
• The Bank has successfully moved 86% of customer transactions to alternative delivery channels particularly mobile banking, ATMs, internet and Co-op Kwa Jirani bank agency outlets
• Total assets came in at Kshs. 388.3b as v. Kshs. 354b in the quarter ended 30^th September 2016 (+9.7%)
• Total interest income took a 7.7% hit, arriving at Kshs. 29.9b, in contrast to Kshs. 32.3b reported in a similar period
• A join venture with the Government of South Sudan generated a profit of Kshs. 30m despite the young country’s challenging economic climate
• A unique model of retail banking through Sacco FOSA’s enabled the lender to provide wholesale financial services to over 560 FOSA outlets
• The Bank has issued over 1 million Saccolink cards
• EPS was down 24.5% to Kshs. 1.63 due to a bonus issue diluting distribution
• Gross NPLs spiked 69.5% to Kshs. 16.9b mainly due to delays in government salaries impacting check off loans as well as a slowdown in the construction sector

These earnings were fairly disappointing but not disheartening.

Equity Bank Kshs. 40 (-0.62%) moved 4,824,500 shares. KCB Kshs. 40.50 (-2.41%) traded 4,841,100 shares. External influences wrestled with the share price, despite stellar Q3 2017 earnings. Here are some of the key highlights:

• 86% of transactions took place outside the branch, up from 80% in a similar period – this included ATMs, agency banking, POS and mainly mobile banking platforms
• 15% Total Assets growth driven by Net Loans & Advances to Kshs. 644b from Kshs. 562b in the period ended 30^th September 2016
• Gross non-performing loans and advances came in at Kshs. 34.7b, in comparison to Kshs. 31.1b reported in Q3 2016 (+11.6%)
• Non-funded income to total income recorded 32.9% however net interest income was down only 1% to come in at Kshs. 35.67b
• Profit before tax grew 3% to Kshs. 22.4b while profit after tax increased 5% to Kshs. 15.1b

These were remarkable earnings.

NIC Kshs. 38 (-0.65%) traded 2,699,600 shares. The lender’s half year results for 2017 revealed a dip in profit before tax and exceptional items to Kshs. 2.9b as compared to Kshs. 3.2b in the foregoing half year (-9.3%). EPS declined in tandem to Kshs. 3.17 from Kshs. 3.60 for the period ended 30^th September 2016 (-11.9%).

Commercial and Services

Kenya Airways Kshs. 5.65 (-8.13%) experienced 2,293,600 shares fly through the market, reversing course as reality dawned on investors that the upcoming massive dilution, via capital restructuring is expected to be completed as early as this month. In a surprising move analogous to force feeding, the Employment and Labour Relations Court reinstated the national carrier’s Finance Director, who the airline had sacked after suffering from a massive loss of Kshs. 26b. He was sacked in mid-January 2017 due to ‘underperformance and insubordination’. However, the aviation corporation denied him entry by sending the bloke on a 21-day compulsory leave. If not admitted, his severance package could be north of Kshs. 100m.

The speculative Nairobi Business Ventures Kshs. 2.65 (+8.16%) continued its journey upwards with the transfer of 282,300 shares. It is likely to correct. Uchumi Kshs. 3.55 (-1.39%) saw the barter of 539,100 shares. The troubled supermarket will release its earnings on the 15^th of November. Supercalifragilisticexpialidocious earnings combined with the upcoming capital injection of Kshs. 3.5b could see the counter rally.

Energy and Petroleum

KenolKobil Kshs. 15 (0.00%) was flat as the flow of 8,191,300 shares took place. Kengen Kshs. 8.45 (-6.11%) experienced the conveyance of 3,787,600 shares. Entry at Kshs. 8 and exit at Kshs. 9 could be a good strategy. KPLC Kshs. 10.80 (-0.46%) saw 558,400 shares exchange hands. The electricity distributor was recently asked by the courts to pay the Nairobi County Kshs. 605m for way-leave and pole charges. The monopoly corporation had argued that the said charges were to be borne exclusively by the National Government. It has often suffered from delayed arrears from County Governments who seem to have an aversion to coughing up debts. The company signed two financing agreements with the African Development Bank and the World Bank for two additional phases of the Last Mile Connectivity Project. Over 600,000 customers will be connected to the grid. The CEO Ken Tarus aims at connecting 1.5m customers this financial year. My long-term target is Kshs. 18 but the temptation to take profits is likely to surface repeatedly during the period of waiting.

Insurance

Liberty Kenya Holdings Kshs. 12 (0.00%) traded 1,418,100 shares. The 52-week range is Kshs. 8.90-15. CIC Kshs. 5.60 (-0.88%) saw new buyers lay claim over 1,031,900 shares while Britam Kshs. 14.20 (-3.73%) moved 190,400 shares. Britam shareholders approved the acquisition of a 14.3% stake in the company by AfricInvest. The private equity fund will inject Kshs. 5.7b to buy 360,888,281 new ordinary shares at Kshs. 15.85. The transaction is expected to be completed in the first quarter of 2018, subject to approval from the Capital Markets Authority. This came after a similar investment of Kshs. 3.6b from the International Finance Corporation. Around 25% of the company will thus be controlled by new investors, diluting existing investors.

Investment and Investment Services

Centum Kshs. 42.50 (+4.29%) experienced investors holding the share let go of 840,900 shares. The holding company is a good safe haven in times of political uncertainty and fiscal risk as the book value is a storey over Kshs. 60; current EPS levels at around 25% of the share price, being a well-endowed theoretical return. NSE Kshs. 19.70 (0.00%) saw 135,200 shares move meaningfully through the board. The PE ratio is 27.75.

Manufacturing and Allied

Carbacid Kshs. 13.15 (+1.15%) moved 224,300 shares. East Africa’s leading producer of natural, food grade, compressed carbon dioxide released its full year earnings for the year ended 31^st July 2017. Profit before tax stood at Kshs. 456.7m in comparison to Kshs. 547.7m reported in a similar period (-16.6%). EPS declined 6.1% to Kshs. 1.38 from Kshs. 1.47. This came as a result of a 29% plunge in turnover, a 10% decrease in other income and an 18% dip in finance and other income.

Mumias Kshs. 1.10 (-4.35%) saw 1,237,800 shares sift through investor’s hands. The factory reopened last month after a five-month closure. Poor earnings are expected by end of this month.

@MihrThakar

Sources: Daily Nation, CSIS, The Star, Citizen Digital, Business Daily, @HKRotich, Cooperative Bank, KCB, Rich Management, ApexAfrica Capital Ltd, Capital FM, The Standard, @Britam, Carbacid, The Guardian