Weekly Market Commentary (July 24 – 28, 2017)

This week volume dipped marginally with 151.9 million shares traded as compared to the previous week’s 170.5 million (-10.9%). However total turnover increased to Kshs. 4.5 billion from Kshs. 4.2 billion (+6.4%). This resulted from the main indices soaring like pre-election tensions. NSE 20 rose to 3,798.63 (+2.65%), the broad NASI to 161.18 (+3.79%) and the NSE 25 also shot up to 4,272.50 (+3.51%). All three indicators thus set new 52-week highs while the NASI, which is the market cap weighted index consisting of all the companies listed on the exchange, closed at a two-year high!

On August 8^th 2017, voters will be making a choice between re-electing the incumbent President and Vice President of the Jubilee Party or introducing a partnership of five individuals to the state’s coffers. The Jubilee administration has faced many challenges during its reign ranging from the September 2013 Westgate Shopping Mall terror attack to strikes from doctors, teachers and nurses all the way to a massive drought and the resulting food shortages. The Kenya Shilling has depreciated from Kshs. 85 for the dollar in 2013 to the recent all-time lows of Kshs. 104. Inflation recently hit a pocket sucking high of 11.7% in May and has found difficulty staying below 10% this year, due to regional drought and resulting food inflation. The markets were also performing extremely poorly before the recent bull-run, starting 2017 at the bottom with little to rely on for progress, with anchors such as the Banking Rate Cap Law weighing down banking counters. However, the Jubilee government achieved significant milestones during these trying times, with colossal investments in infrastructure such as the Standard Gauge Railway, roads, dams, electricity connectivity and the iTax system which has made paying taxes through the Kenya Revenue Authority portal, a walk in the park.

The opposition promises to bring down the cost of living by tackling the key components of food and rent, fighting corruption by barring government employees and their affiliates from doing business with the government, reducing wastage and thus bringing the debt burden to manageable levels and the usual blah blah blah about job creation. Creation of new positions to accommodate the aspiring president’s co-principals and significantly diluted decision making imposed by the necessity of consultation with the weaker candidates are some of the worries voters may have.

Telecommunications Sector

Safaricom Kshs. 24.50 (+5.38%) touched a new all-time high of Kshs. 25 before close on Friday 28^th July 2017. Heavy motion of 46,273,500 shares occurred. The telecommunications giant is set to launch its “Masoko” E-commerce portal in the weeks ahead to take on dominant players like Jumia and Kilimall. This will diversify its revenues even further, reducing the risk of competition chipping away at its bottom line. Investment analyst Aly-Khan Satchu has a price target of Kshs. 28.

Banking Sector

Equity Bank Kshs. 41.50 (+4.40%) led the banking sector volumes, moving 15,946,200 shares. It has a PE ratio of 9.47 against an industry average of 7.39, the highest in the sector except for the speculative National Bank. Equitel has targeted to hem in at least 1 million merchants through its EazzyPay service within the next two years, a key strategic pillar for Equity Bank’s digital banking strategy that was launched in late 2016. EazzyPay merchants are also able to receive payments from all other channels like Mpesa, Airtel money and Pesalink.

KCB Kshs. 41 (+3.14%) traded 10,081,100 shares. KCB Group has been feted as the Best Bank in Kenya and the Best Bank in Africa in Corporate and Social Responsibility during the 2017 Euromoney Awards for Excellence. Last year, KCB initiated the ambitious 2jiajiri programme, a job creation vehicle that focuses on alleviating youth unemployment. In addition to 2jiajiri, the lender also has the Mifugo ni Mali initiative which is a livestock value chain improvement programme in the Arid and Semi-Arid Counties. KCB Bank Kenya is poised to weather an increasingly challenging environment, riding an established domestic market position, strong capitalisation, sound liquidity position and support from its shareholders, Global Credit Rating Co. (GCR) has said. In its latest assessment of KCB Bank Kenya, the South African based agency has affirmed the lender’s long-term and short-term national scale ratings of AA(KE) and A1+(KE) respectively; with the outlook accorded as Stable—currently the highest for a Kenyan bank accorded by GCR.

Co-operative Bank Kshs. 15.40 (+3.01%) saw an exchange of 6,886,100 shares. The Bank runs three subsidiary companies, namely:

1. Kingdom Securities Limited, a stockbroking firm with the bank holding a controlling 60% stake;
2. Co-opTrust Investment Services Limited, the fund management subsidiary wholly-owned by the bank; and
3. Co-op Consultancy & Insurance Agency Limited (CCIA), the corporate finance, financial advisory and capacity-building subsidiary wholly-owned by the bank.

A price target of Kshs. 16.50 is not akin to walking on water.

National Bank Kshs. 10 (-8.26%) took a good beating, albeit on thin volume, as its half year results emerged. Profit before tax declined by 41% from Sh 439 Million to Sh 257 Million. On the positive:

1. There was a massive reduction of 86% in Loan Loss Provision from Sh 1.6 Billion to Sh 235.3 Million.
2. Customer deposits increased by 3.4% to Sh 98.79 Billion.
3. Liquidity ratio improved to 35% from 25.7%

On the back of the KCB takeover bid, it’s looking like a good buy.

Commercial and Services Sector

Uchumi Kshs. 3.80 (+20.63%) saw significant traffic and closed a bright shade of green. If you would have bought 1,000,000 shares at Kshs. 2.20, you would have turned a gross profit of Kshs. 1,600,000.

The loss-making clothing retailer Deacons Kshs. 3.90 (+9.86%) firmed substantially on thin volume after news emerged of Centum eyeing a 5.53% stake in the company. It posted an operating loss of Ksh 385 Million in financial year ending 31 December 2016 compared to an operating profit of Ksh 141.6 Million made in 2015.

Kenya Airways Kshs. 4.20 (-14.29%) took a nose dive on heavy volume of 1,619,000 shares. The descent continues after a July 16^th notice of extraordinary general meeting was published. The meeting itself will be held on Monday, 7^th August 2017, a day before the general elections. This will prevent voters from regions outside Nairobi from attending. The propositions are as follows:

1. Each ordinary share of Kshs. 5 each nominal value be divided into one interim share of Kshs. 0.25 each nominal value (same rights and restrictions) and nineteen deferred shares of Kshs. 0.25 each nominal value. The latter are technically impotent and worthless and merely a formality to facilitate the split in nominal value.
2. Four interim shares of Kshs 0.25 each will be consolidated into one ordinary share of Kshs. 1 each.
3. Facilitate rights issue of total nominal value of Kshs. 1.5 billion to existing minority shareholders
4. The transaction seeks to cut Kenya Airways’ debt by approximately KES 50.0 Billion (KES 27.3Bn owned by the government and KES 22.7Bn by certain banks) and revert its negative equity of KES 44.0 Billion to positive equity of KES 11.8 Billion.

As if that bad news is not enough, a B-737-800 aircraft worth Kshs. 10 billion was damaged by a tow truck on July 23^rd 2017. The incident will obviously impact the troubled airline’s operations as insurance company’s often take their time in paying claims.

But wait! There is even more bad news! On July 29^th and 30^th, the Pride of Africa faced flight delays and cancellations due to flight crew constraints. Disgruntled customers were stranded for several hours. A strike was not mentioned. Expect the share price to fall further.

Energy and Petroluem

KPLC Kshs. 8.50 (+3.66%) transmitted 9,725,200 shares. The PE ratio is currently 2.20. While the overall dividend is Kshs. 0.50, with the yield currently at 5.88%, no interim dividend was declared for the HY ended 31^st December 2016 vs. an interim dividend of Kshs. 0.20 for the HY 2015. It is hoped that the dividend yield is maintained with a final dividend of Kshs. 0.50 to cover the lack of an interim dividend as the utility company is not sentimentally priced.

Kengen Kshs. 8.15 (4.49%) generated heavy interest from investors as it rebounded with sufficient steam. The electricity generator last declared a dividend of Kshs. 0.65 for the FY ended 30^th June 2015. This has been nagging shareholders ever since and declaration of a dividend is bound to affect the share price for the better.

Insurance Sector

CIC Insurance Kshs. 4.85 (-2.02%) saw the barter of 1,090,500 shares. The country’s leading micro-insurer reported a 28% increase in profit before tax to Kshs. 430 million from Kshs. 335 million in a similar period. This came as a result of a healthier medical insurance business; increased premiums and better aversion of fraud. NSE securities also recovered with investment and other income increasing by 53.5% to Kshs. 1.98 billion from Kshs. 1.29 billion.

Manufacturing Sector

East African Breweries Kshs. 264 (+3.94%) climbed after passing around 2,703.200 shares. The spirits manufacturer posted good financial results for the year ended 30th June 2017. Profit before tax from continuing operations decreased by 2% from Kshs. 13.6 billion to Kshs. 13.3 billion. Profit after tax from continuing operations increased by 6% to Kshs. 8.5 billion from Kshs. 8 billion. This was on the back of a lower income tax charge. However, profit for the year decreased by 17% to Kshs. 8.5 billion from Kshs. 10.3 billion, because in the FY ended 30^th June 2016, there was a one off extraordinary gain of Kshs. 2.3 billion, which would be unreasonable to expect again since we are dealing with a manufacturer and not a holding company like Centum. A toast to the upward trend.

@MihrThakar