Sub-Saharan Africa Stock Markets 2010 Review & 2011 ... - Imara

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EQUITY RESEARCH MALAWI FEBRUARY 2011 2010 REVIEW AND 2011 OUTLOOK An Overview of 2010 A disappointing 2010 as the S&P Africa Frontier Market Index outperformed the DSI. The year 2010 was not exciting at all on the MSE, given that the market fell to historic lows during the first half of the year. However, it was on a recovery course in the second half of 2010 as it registered a positive and steady growth in Q3 2010 and Q4 2010. In terms of trading activity, the market registered low trading volumes and value in 2010 compared to the year 2009. In 2010, a total of 241,957,941 shares were transacted at a total turnover of USD 12.36m while in 2009, the market transacted a total of 592,420,289 shares at a total turnover of USD 20.31m. This reflects a decrease in volume by 59.16 % and by 35.26% in terms of value. On a year to year basis, the DSI (that measures the average price movement of only domestic counters) yielded a return of -4.03% from 4,087.19 points to 3,922.61 points. The lowest point was registered in May when the DSI was at 3,836.36 points. The MASI declined from 5,154.95 points registered at the start of January 2010 to 4,953.09 points registered as at 31 December, 2010, giving a return of - 3.92% against a return on investment of -15.37 % registered in 2009. H1 2010 was more eventful. The MSE registered a strong and steady growth in the H1 2010 as it transacted a total of 137,449,019 shares at total turnover of (USD 7.96m) against 104,508,922 shares at a total consideration of USD 4.40m) traded in H2:2010. Market Capitalisation dragged down by weaker share prices. The total market capitalisation for the MSE decreased from USD 1.38m to USD 1.37m on the back of a decrease in the share prices of some of the traded stocks such as Real Insurance, FMB, TNM, NBS and NBM which registered price decreases during the review period. Real Insurance led the decliners, as it lost 56.52% during the year. Market liquidity also worsened in 2010. Generally, the main constraints with regards to frontier market investing relates to market liquidity. The MSE largely remains an illiquid market given the low turnover numbers. The turnover velocity as measured by the ratio of total value traded to market capitalisation worsened to 0.90% in 2010 compared to 1.33% recorded in 2009. In addition, the liquidity ratio of shares traded to shares in issue declined to 1.39% in 2010, compared to 3.40% in 2009. The market recorded trading activity on all counters except PIM and SUNBIRD. TNM registered the biggest trading volume of 93,121,603 representing 38.49% of the total. In value terms, NBS Bank registered the biggest turnover of MWK 307.15m, representing 16.49 % of total market turnover. Top 5 Gainers and Losers Opening Closing % Change % Change Company Price Price (LC) (USD) MSE DSI 4,087.19 3,922.61 -4.03 -6.45 MPICO 260 310 19.23 16.23 OML 25,000 28,000 12.00 9.18 Standard Bank 9,200 10,000 8.70 5.96 PCL 16,300 17,000 4.29 1.67 BHL 615 640 4.07 1.44 NBM 5,900 5,865 -0.59 -3.10 TNM 200 175 -12.50 -14.71 NBS 1,400 1,100 -21.43 -23.41 FMB 1,000 650 -35.00 -36.64 REAL 230 100 -56.52 -57.62 Source: MSE Top Ten Shares by Market Cap. Company (MWKm) (USDm) % of Total Old Mutual Plc 1,072,976.65 7,115.20 83.80 Illovo 78,478.88 520.41 6.13 NBM 27,374.01 181.52 2.14 Standard Bank 21,333.41 141.47 1.67 PCL 21,285.28 141.15 1.66 TNM 17,540.79 116.32 1.37 FMB 15,185.63 100.70 1.19 NICO 10,951.93 72.63 0.86 NBS 5,728.18 37.99 0.45 MPICO 3,561.97 23.62 0.28 Source: MSE DSI vs S&P Africa Frontier Market Index 1.30 1.20 1.10 1.00 0.90 0.80 Jan-10 May-10 Aug-10 Dec-10 DSI S&P Frontier Index Source: IAS 13
Market Outlook for 2011 No surprises in the political landscape expected. There are basically three main political parties in Malawi which include the United Democratic Front (UDF), the Malawi Congress Party (MCP) and the Democratic Progressive Party (DPP). However, the ruling Democratic Progressive Party (DPP) continues to consolidate its hold on power after it won 114 seats in the 2009 election. As a result, there appears to be diminishing influence from parties such as the United Democratic Front (UDF) and the Malawi Congress Party (MCP). While President Bingu wa Mutharika is from the UDF party, we expect that the DPP’s increase in power will enable it to push though policy reforms. Economic hurdles still remain in the picture. There has been significant progress in reducing the annual average inflation from the previous 8.4% in 2009 to about 7.4% in 2010. The decrease in annual inflation was largely associated with a decrease in the food index by 3.1% and non-food inflation by 0.2%. However, the main issue is that the economy depends on substantial inflows of economic assistance from the IMF, the World Bank, and individual donor nations. The over-dependence of the fiscus on concessional grants is evident from the fact that in the 2010/2011 budget, grants of MWK 85.0bn (USD 566.0m) from donors represented 30% of total revenue. Generally, the government is faced with many challenges that include developing a market economy, improving educational facilities and dealing with the rapidly growing problem of HIV/AIDS. Foreign currency shortages may stifle growth. The Kwacha depreciated by 2.52% against the USD during the review period of January to December 2010 from its trading position of MWK 147.00/USD to MWK 145.81/USD. However, the foreign exchanged system is a pegged one and the MWK is evidently overvalued. It is unlikely the MWK will allowed to free-float, as authorities are concerned about the inflationary impact of a weaker MWK and also because it would increase the costs of the fertilizer subsidy programme and push other imported costs higher. Our view is that the fixed peg has precipitated foreign currency shortages and amplified the external shocks to the economy. At current levels of about MWK 150/USD, we believe the MWK is overvalued. We expect market development to gather momentum as corporate activities increase in 2011. While we expect a lackluster trading year on the MSE, we believe corporate actions will increase. NBS Bank issued an additional 26,191,909 ordinary shares as bonus shares as at the record date of 24 December, 2010. The additional bonus shares were listed on the Exchange on 4 January 2011. Other corporate transactions include the sale of its life assurance business to Sanlam (SA) by NICO Holdings. In addition, indications are that NBM will acquire an existing investment bank in Zimbabwe. We expect such transactions to deepen the local stock market and improve liquidity levels. Top Picks for 2011 COMPANY Price P/E P/BV Recom. Hist T+1 T+2 Hist T+1 T+2 M PICO 3.10 3.3 3.1 3.0 0.6 0.6 0.6 BUY NBM 58.65 8.7 8.3 7.9 2.8 2.1 1.5 BUY NBS 11.00 6.7 6.4 6.1 2.2 2.2 1.4 BUY NICO 10.00 4.5 4.3 4.1 1.4 1.4 1.2 BUY PIM 6.25 6.2 5.9 5.6 0.6 0.5 0.5 BUY Press Corp. 177.00 3.8 3.6 3.4 0.9 3.1 2.7 BUY Std. Bank 100.00 7.5 6.7 6.1 2.6 2.5 1.8 BUY The 2011 Hot Stocks As highlighted in the 2010 review, the MSE largely traded in negative territory since June 2010. However, coinciding with Malawi’s foreign exchange shortage and combined with the MSE’s relatively low liquidity, this has meant sell orders by foreign investors remain outstanding, creating a share overhang in most counters. In our view, the MSE currently offers some buying opportunities for long-term investors. Another exciting point is that dividend yields are generally expected to remain strong, although some of the stronger performing companies, especially in the banking sector, could benefit their shareholders better through the distribution of higher rates of dividends. Given a dividend yield at about 4.2%, the market is relatively attractive to local investors, given local deposit rates of about 2.5%. Generally, Malawi has favorable climatic conditions that provide optimal conditions for sugar production. In our view, companies such as Illovo would be a safe haven for MSE investors. We also like property company MPICO, given that it maintains and manages an investment portfolio of high quality retail, industrial and commercial properties located mainly in the major metropolitan areas of Malawi, which offers investors sustainable and growing income and resultant capital appreciation. National Bank of Malawi (NBM) cannot be ignored, given that it is the largest bank in Malawi by all quantitative metrics, controlling c45% market share by deposits and c50% by advances book. As the largest bank in the country with direct exposure to the country’s largest corporates, NBM offers investors a direct play on Malawi’s economic growth story. Other recommended BUYs include NBS, NICO Holdings, PIM, Press Corporation and Standard Bank. 14
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Sub-Saharan Africa Stock Markets 2010 Review & 2011 ... - Imara

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