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

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.
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