- Global economy: Slightly dampened outlook? Global GDP growth projections revised downwards by 30bps to 3.5% in 2015, and 3.7% in 2016 by the IMF.
- Sub Saharan Africa: impressive growth despite headwinds: Excluding South Africa, the region recorded an impressive 5.6% growth in 2014, coming second only to Emerging and Developing Asia at 6.5%.
- Going forward, we expect Sub Saharan Africa to be sustained by: Investment in infrastructure, increased agricultural output and growing service sectors.
- What is the expected impact on capital flows into Sub Saharan Africa? We expect private capital flows into Sub Saharan Africa to contract slightly in 2015, as FDI inflows remain flat, while portfolio and “other” inflows contract as global conditions gradually tighten and a “flight to safety” scenario is witnessed with US denominated assets.
The Darling That Is Kenya: Cautiously Optimistic (So much potential, quite a bit of baggage)
A Brief Look at the October-December 2014 ‘short-rains’ seasons
According to the Kenya Meteorological Department (KMD), rainfall in Kenya was near normal levels over most parts of the country during the October—December 2014 ‘short-rains’ season. However, there were certain regions of Kenya, for example areas in South Eastern Kenya, and more localised areas in Central and North Eastern regions of Kenya, which recorded depressed rainfall (i.e. >25% below long term averages).
Kenya is Sub- Saharan Africa’s largest tea exporter
Kenya is Sub-Saharan Africa’s leading tea exporter in addition to being among the world’s largest black tea producers. Within East Africa, Kenya is the key producer, accounting for 59.6% of total production in Africa on average over the past six years (2008-2013), well above its competitors, Uganda (8.7%), Tanzania (5.1%), Rwanda (3.6%) and Burundi (1.2%). There has been noteworthy growth in tea output, attributable to good weather as well as increase in total tea acreage, over the past decade recording a 6.3% 3 year CAGR. Total output has grown 37.2% over the past decade, from 324.0m Kgs in 2004 to 444.8m Kgs in 2014. In 2014, total tea acreage stood at 203,000 Ha (+2.2% y/y), with small holder farms at 128,600ha (+1.0% y/y) and estate farms accounting for 74,400ha (+4.3% y/y). In Kenya, tea is among the largest foreign exchange earners, accounting for 20.0% of the value of exports in 2014 equivalent to KES 94.0bn.
We maintain our ACCUMULATE recommendation on Safaricom with a Fair Value of KES 14.20, 8.1% above the current price. We estimate total return of 12.7% including our forecasted dividend of KES 0.60 for FY15F (a for-ward dividend yield of 4.6%). For FY15F, we forecast earnings to grow 31.7% y/y largely driven by growth in reve-nue on the back of additional subscribers and increased usage as costs remain stable. Safaricom’s revenue growth over the last 3 years has largely been driven by growing subscriber numbers. However, as subscriber growth be-gins to taper off and the quality and variety of products continue to rise, we believe that growth in the long term will be driven by increased usage. Safaricom trades at a forward P/E of 17.4x, EV/EBITDA of 7.2 and dividend yield of 4.6%. While this is compares unfavourably to the regional median P/E of 11.8x and EV/EBITDA of 6.3x, Sa-faricom’s M-PESA advantage and the expected growth in earnings and dividends justify the premium. Notably, Safaricom’s forward dividend yield of 4.6% is higher than the regional median of 3.3%.
NAIROBI SECURITIES EXCHANGE
We initiate coverage on the NAIROBI SECURITIES EXCHANGE (NSE) with a BUY recommendation and a target price of KES 14.30, 50.3% above the IPO price of KES 9.50. The Nairobi Securities Exchange’s total income has recorded 5 year CAGR of 35.5% driven by increased market turnover. In last 5 years, the company has moved from a loss after tax of KES 31.8m to a profit after tax of KES 262.2m. For FY14, we forecast earnings per share to grow 5.9% y/y to KES 1.43. The growth in earnings in 2014 is likely to be subdued due to the fact that the company reported a one-off gain of KES 120.0m in 2013 from a recovery of a bad debt. In the longer term, we believe that investments in IT infrastructure and systems will facilitate the creation of new products and the launch of the derivatives market will drive income growth in a cost effective manner. The Nairobi Securities Exchange will be the second exchange in Africa (after the Johannesburg Stock Exchange) to be listed and therefore provides unique exposure to the growth in African Frontier Markets. At the issue price of KES 9.50, the NSE has a forward P/E of 6.7x, P/B of 1.2x and dividend yield of 4.5% compared to the JSE’s P/E of 15.3, P/B of 3.8x and dividend yield of 3.5%.
“DIAMONDS ARE FOREVER”
We issue a Buy recommendation on Diamond Trust Bank (DTB) based on a 1 year target price of KES 264.00, representing 60.0% upside from the Rights Issue price of KES 165.00. Our positive sentiments are supported by sound balance sheet growth (3 year CAGR of 22.0% to FY16F), driven by sturdy loan book and customer deposit growth (3 year CAGR) of 22.7% and 21.4% to FY16F respectively. We expect sustained cost management meas-ures to drive stability in the cost-to-income ratio going forward, with a 3 year CTI average of 40.7% to FY16F. We expect this to translate to +12.0% y/y growth in EPS to KES 24.20 in FY14, owing to dilution from the Rights Issue. (+23.2% y/y EPS growth in FY14F, like for like comparison)
We retain our HOLD recommendation on EAST AFRICAN BREWERIES LIMITED (EA Breweries) with a target price of KES 315. This represents an 9.5% upside from its current price of KES 288. While the drop in Senator volumes is likely to result in subdued revenue growth in FY14, we forecast that an improvement in profit margins will result in a 13.5% y/y increase in EPS in FY14. Beyond FY14, we believe that the company’s investments in its supply chain, products and plants will result in sustainable profit growth. Our key concerns with EA Breweries relate to the company’s high leverage (debt/equity of 432.8% as at 1H14) and its relatively high share price valuation. Using cash flows generated from the improving financial and business performance, the company may pay down some of its KES 36.6bn debt. However, we believe that an equity injection may be required to pay down the remaining portion. Should the company successfully delever without issuing additional equity, we expect a significant in-crease in EPS (approximately KES 3.50 per share). At the current price levels, EA Breweries is trading at a forward P/E of 28.8x and EV/EBITDA of 13.9x. This compares unfavorably to African peers that are trading at an average P/E of 22.7x and EV/EBITDA of 9.1x.