Weekly Market Commentary

Politics

The Supreme Court cases against the incumbent President’s re-election were starkly different from the virulent attack of a petition by the Opposition outfit’s brilliant lawyers that followed the nullified August 8^th 2017 general election. A number of developments during the hearings gave an indication of the direction that the Court was steering towards and this infused the markets with some positive sentiment as they occurred:

1. The Supreme Court ruled that no reference should be made to the National Super Alliance (NASA) which cannot be sustained as a respondent in the matter and will not participate in the presidential election petitions (as requested by the respondent President Kenyatta)
2. IEBC internal memos were expunged from the presidential petition as they were obtained illegally
3. The six-judge bench rejected the parties’ request for access to a revealing KPMG audit report, IEBC servers, ballot boxes, logs of KIEMS kits and SD cards
4. Access to a certified copy of the voter’s register was granted at the petitioner’s expense– the prohibitive cost of Kshs. 80 million made them opt for a soft copy instead
5. Paragraphs from documents filed out of time were expunged from the hearing

The lack of nominations preceding the gazettement of the presidential candidates is likely to be a key issue, however, it can be argued that the 60 days timeline for the fresh election that the Supreme Court stipulated would not have provided practicability for the discharge of fresh nominations. Failure to conduct the election in 25 constituencies and the prevailing violence also dismantled the appropriate environment for an election. While the constitution is silent on low voter turnout, this may become a conspectus of judicial precedent.

The withdrawal of the Opposition leader is indeed a perplexing facer as the judges kept asking President Kenyatta’s lawyer what would have happened if the High Court had not ruled to include all the candidates and the pull-out was from a two-horse race. The responding lawyer was quick to answer, in what seemed like an own goal, that the exercise should have been called off and fresh nominations would have ensued. What happens if the Supreme Court declares the High Court Justice Mativo’s decision per incuriam or vacated by the preceding need for fresh nominations following the Opposition’s disengagement?

THE ELECTION LAWS (AMENDMENT) ACT No. 34 of 2017 became a centre stage for contention. The petitioners pigeonholed the amendment “a deliberate attempt to curtail the court’s power in determining election disputes”. They argued that the controversial laws came into effect on 2^nd November and were inert during the October 26^th 2017 election, meaning that they should not be applied to the cases before the bench on the same election. There is actually judicial precedent supporting this matter. The Supreme Court at Nairobi in Appeal No. 2 of 2011 observed;

‘’As for non-criminal legislation, the general rule is that all statutes other than those which are merely declaratory or which relate only to matters of procedure or evidence are prima facie prospective and retrospective effect is not to be given to them unless by express word and necessary implication, it appears that this was the intention of the legislative.’’

Section 86A. (2) of the new election laws states that;

“The Commission shall not conduct fresh nominations for a fresh election pursuant to Article 140(3) of the Constitution.”

The next moves of the Opposition coalition are expected to be pernicious, no matter the outcome unveiled by the apex court. Among many options may be:

• Massive and destructive demonstrations
• Tax collected in their strongholds will be retained
• Blatant renunciation of the central government by virtue of conduct
• Governance to be exercised in consultation with the people, which will do wonders for loyalty and public approval

Economics

Kenya Association of Manufacturer’s (KAM) Manufacturing Barometer released in October 2017, depicts that despite there being a marginal surge in optimism, from 13% last quarter to 14% presently, 64% of manufacturers forecast zero or negative growth revenue for the next 6 months and 56% of them predict a decline in new orders for their businesses for the same period. Overall, the manufacturing sector registered only 2.3% growth rate in the second quarter of 2017, compared to a 5.3% growth same quarter in 2016.

In Kenya, the CfC Stanbic Bank Purchasing Managers’ Index measures the performance of agriculture, mining, manufacturing, services, construction and retail sectors and is derived from a survey of 400 companies. The Manufacturing Purchasing Managers Index is based on five individual indexes with the following weights: New Orders (30 percent), Output (25 percent), Employment (20 percent), Suppliers’ Delivery Times (15 percent) and Stock of Items Purchased (10 percent), with the Delivery Times index inverted so that it moves in a comparable direction. A reading above 50 indicates an expansion of activity compared to the previous month; below 50 represents a contraction; while 50 indicates no change. The Stanbic Bank Kenya PMI dropped sharply to 34.4 in October of 2017 from 40.9 in September. The reading pointed to a record contraction in private sector activity amid political instability. Output fell further for the sixth straight month due to political instability and poor economic conditions. In addition, new orders and employment declined.

Market Snapshot

Volume rose to 113,463,700 shares as compared to 97,200,700 shares traded in the previous week (+16.7%). Turnover logged Kshs. 3,471,956,244 as juxtaposed with Kshs. 3,012,516,582 registered in the antecedent week (+15.3%). The main indices closed with a mixed message. The NSE 20 recorded 3730.15 (-0.59%), the broad NASI jolted up to 163.13 (+1.34%) while the NSE 25 edged up to 4251.32 (+0.46%).     

On Friday 17^th November 2017, foreign investor participation stood at 55.4%, compared to Thursday’s 46.8%, accounting for 65.1% of total buying and 45.8% of total selling, with a market turnover of Kshs. 627m.

Telecommunications Sector

Safaricom Kshs. 25.50 (+4.08%) experienced the teleportation of 57,062,200 shares. The stock touched Kshs. 26 in the week’s closing session.

Banking Sector

Co-operative Bank Kshs. 16.05 (-1.23%) moved 14,725,900 shares to lead the sector movers. Accompanying the Q3 2017 results was the following commentary (with our notes in brackets): “A successful universal banking model and the implementation of sales force effectiveness has seen the Group serve 6.8m account holders (last year 6.1m +11.5%) across all sectors, supported by a multi-channel strategy that includes 149 branches (last year 145 branches +2.8%), over 10,000 Co-op Kwa Jirani Banking Agents (last year 8,765 +14%) and over 580 ATMs (last year 570 ATMs +1.8%). The all-telco Mco-op Cash Mobile Wallet has continued to play a pivotal role in the growth of non-funded income with over 3.46m customers (last year 3.03m +14%).”

KCB Kshs. 41 (+1.23%) traded 13,076,700 shares. In Q3 2017, mobile loan disbursement came in at Kshs. 20.3Bke, while it stood at Kshs. 9.1b in Q3 2016 (+123%). Ease of access makes it more attractive to borrow money for customers. NPLs came in at 8%, against an industry average of 10.7%.

Equity Bank Kshs. 40.75 (+1.88%) witnessed the transfer of 5,906,700 shares. The Banker’s 2017 Top 1000 World Banks ranked Equity Bank at position 11 on Return on Assets; position 37 on Soundness (Capital Assets Ratio) and position 45 on Profits on Capital. A Geopoll survey ranked Equity Bank as the Most Preferred Lender in Kenya with the highest scale in Africa followed by Capitec of South Africa and GT Bank of Nigeria.

DTB Kshs. 187 (-1.06%) experienced new buyers served 236,600 shares. Here are some key highlights:

• Profit before tax was recorded at Kshs. 7.5b as compared to Kshs. 7.8b in a similar period ( -3.8%)
• EPS came in at Kshs. 17.42, in contrast to Kshs. 18.4 posted in Q3 2016 (-5.3%)
• Gross non-performing loans and advances soared to Kshs. 16.6b in remarkable dissimilitude to Kshs. 7.8b as at 30^th September 2016 (+112.8%)
• Total non-interest income was 21% of total operating income while it had marked 20% of the same in a similar period – a marginal, almost negligible increase

Standard Chartered Kshs. 218 (-3.96%) saw 73,600 shares exchange hands. Its Q3 2017 results were far lighter in comparison to peers. Some of the key revelations were as follows:

• Q3 net profit was down to Kshs. 4.7b from Kshs. 7.7b in the previous period (-38%)
• Loan impairment grew to Kshs. 17b (+105%).
• A profit warning accompanied the results, meaning profits are expected to be lower by at-least 25% in the full year 2017

Commercial and Services

Kenya Airways Kshs. 5.30 (-6.19%) experienced 1,059,100 shares fly through the market. The shares will not be traded from 15^th to 28^th November to facilitate a share split and consolidation. The Government of Kenya will increase its ownership in the troubled lender to 48.9% from 29.8%. 11 banks, through a special purpose vehicle known as KQ Lenders Co will own 38.1% of the national carrier, after conversion of their debts forwarded. Total payables of Kshs. 44.2b were converted into equity, diluting existing shareholder’s stakes by about 95%.

KLM will own only 7.8% of the company, diluted significantly from its previous position of exerting control on the board by virtue of a 26.7% stake. The Dutch carrier may raise its stake to 13% if it decides to inject an additional Kshs. 5.1b. Other investors, including the International Finance Corporation (IFC) will hold 5.2% post the deeply dilutive exercise from a healthy 43.7%.

Its half year 2017 results were released on 17^th November 2017. Below are some of the key highlights:

• Cabin Factor up 5.4% to 76.9% – this is a capacity utilization measure
• 7% increase in Intra-Africa Traffic
• Passenger numbers grew only 3.3% to 2.3M
• Revenue Per Kilometer grew by 6% – this is calculated by multiplying the revenue paying passengers on board by the distance traveled
• Operating profit of KSh 1,443 million. 52% increase, from KSh 949 million
• Loss after tax KSh 3.8 billion. 20.5% decrease from KSh 4.8 billion
• Overheads down by 8.9%
• Fleet cost down by 21.9%
• Loss per share Kshs. 2.54 v. Kshs. 3.20 in a similar period

Uchumi Kshs. 3.60 (+1.41%) saw the barter of 222,200 shares. Its full year results for the year ended 30^th June 2017 recorded an emboldening decrease in the loss position due to improved cost management. Loss after tax came in at Kshs. 1.7b v. Kshs. 2.8b. However, revenue dropped sharply to Kshs. 2.6b from Kshs. 6.4b in a similar period (-59%). The government is expected to release a shareholder loan of Kshs. 700m to the supermarket chain. The auditor gave a qualified opinion as the management exercised significant judgement on a number of key audit matters such as impairment of receivables, contingent liabilities and valuation of investment property. The effects on comparability with the previous financial year were significant due to loss of control of business in the Uganda and Tanzania subsidiaries as well as asset write offs.

Genghis Capital Ltd. made a number of alarming observations:

• The retailer recorded negative cash flow of Kshs. -1.1b from positive cash flow of Kshs. 8.6m in the year ended 30^th June 2016
• 1% (Kshs. 6.7b) of its total liabilities are due within a year presenting potential working capital and liquidity issues
• The equity position deteriorated to Kshs. -3.4b from Kshs. -2.1b in a similar period – assuming recapitalization will bring up the position to zero equity, Uchumi will have to issue 981.1m shares at an assumed market price of Kshs. 3.45, diluting existing shareholders 3.7 times and leaving a residual theoretical share price of Kshs. 0.94

Nairobi Business Ventures (not Nairobi Business Community) Kshs. 3.10 (+16.98%) continued its rally upward, defying all logic; motion of 412,300 shares occurred.

Construction and Allied

ARM Kshs. 13.25 (-7.34%) saw 450,100 shares exchange hands. Genghis Capital recently halted coverage of the cement manufacturer. The leading investment bank cited the following concerns:

• FY16A revenue declined by 13% to KES 12.82Bn against a projected -5% drop in FY16F.
• H17 revenue dipped by 19.8% y/y to KES 5.35Bn and revenues in FY17E are expected to drop by 22%.
• Cement prices in Tanzania have been declining from competitive forces (current levels of USD 60-66 per tonne from USD 105 in 2016). Tanzania business accounted for 29.3% of total sales and income in FY16A and contributed 65% of the loss before tax.
• Other challenges to production in Tanzania are the ban on coal imports and unreliable electricity supply
• EBITDA margin declined to 4.9% in 1H17 from 24.1% in 1H16 (25.4% in 1H15); reflecting challenges with cost of production and low capacity utilization levels.
• The non-cement business generated revenue of KES 2.4Bn in FY16 and assuming a 2.1% net income margin (the highest between FY11 and FY15), this translates to earnings of KES 50.4Mn. Applying a sector median P/E of between 13.8x- 17.3x, sale proceeds from the unit are estimated to be in the range of KES 695.5Mn – 872.92Mn.

The Trading Participant of the Nairobi Securities Exchange gave the following recommendation to the company: “…for profitability, the business has to focus on increasing volumes in the Kenyan unit, improve factory efficiencies and raw material costs (gross margin has been falling from an average of 28.3% to FY16 15% vis-a vis Bamburi Cement at 35%). Additionally, the business strategy in Tanzania could be reviewed as it has accumulated losses of KES 5.6Bn since 2011 despite receiving an accumulated capital expenditure of KES 18.60Bn in the same period.”

Energy and Petroleum

Kengen Kshs. 8.60 (+1.78%) experienced the transmission of 1,255,600 shares. The electricity generator is planning to set up a subsidiary offering consultancy and expert services in power generation and selling steam among other services.

KenolKobil Kshs. 14.90 (-0.67%) witnessed the flow of 1,087,100 shares. Oil prices have recently been rallying due to OPEC production cuts, unrest in the middle east and a belligerent Crown Prince in Saudi Arabia who seems to be bent on starting a war with Iran. Brent Oil Futures have spiked from $44.80 on 22^nd June 2017 to $62.73 on 17^th November 2017 (+40%). Its American counterpart, WTI Futures surged from $42.19 on 21^st June 2017 to $56.71 on 17^th November 2017 (+34%). A single source tender whereby a single importer supplies all the oil needed in a month in a regulated and predictable manner protects oil marketers from shocks in oil prices. This cushions parties from high oil prices caused by inefficiencies in the import process. Oil marketers have thus opposed the scrapping of the Open Tender System (OTS). With increasing fuel prices, inelastic demand may soon show some signs of breakage when for e.g. Consumers prefer to walk then drive, but the effect is not expected to be extremely detrimental as industry must adapt and the latter are the main drivers of oil demand.

KPLC Kshs. 10.75 (-0.46%) traded 395,400 shares. A Bill that seeks to end Kenya Power’s monopoly has been re-submitted for debate in Parliament. Legislators want to allow licensing of other electricity distributor’s and retailers. However, the Energy Principal Secretary Joseph Njoroge said that the electricity retail market cannot be opened up in the short term due to lack of a suitable regulatory framework and underdeveloped transmission network. Redundancy of KPLC’s monopoly will force it to default on its quotas for mandatory purchase of power from generators such as Kengen, exposing it to hefty fines. This is a real risk to the electricity distributor as the imminent legislation is bound to shock shareholders in the next 5 years.

Insurance

CIC Kshs. 5.55 (-0.89%) saw new buyers lay claim over 1,872,700 shares while Britam Kshs. 14.50 (+2.11%) recovered with 1,580,900 shares exchanging hands.

Investment and Investment Services

Centum Kshs. 42 (-1.18%) experienced those holding stakes in the Group let go of 539,000 shares while NSE Kshs. 19.60 (-0.51%) lagged slightly albeit on thin volume.

@MihrThakar

Sources: 5^th Estate, Citizen TV Kenya, The Star Kenya, Mwakilishi.com, Standard Digital, Kenya Law, KAM, Daily Nation, Trading Economics, @NSEInvestors, Co-operative Bank, KCB, Equity Bank, @wazua, Business Daily, @Genghiscapital, Genghis Capital, Investing.com,