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

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EQUITY RESEARCH NAMIBIA FEBRUARY 2011 2010 REVIEW AND 2011 OUTLOOK An Overview of 2010 SWAPO remains firmly in power. Judging from the regional and local authority elections that took place at the end of November 2010, the ruling SWAPO party continues to dominate the political space. However, the voter turnout was low as only 38% of registered voters made the effort to cast their votes. With the elections over, however, it is largely business as usual for SWAPO. In our view, the opposition needs to become a more credible force if democracy is to maintain its vibrancy and credibility with the electorate. However, the increasing popularity of the Rally for Democracy and Progress (RDP) bodes well. In addition, Namibia's constitution enshrines a multi-party system and a bill of rights. It also limits the executive president to two five-year terms and provides for the private ownership of property. Namibia has a relatively robust civil service infrastructure which it retained post-independence. NSX Indices were in line with major international indices. The NSX local Index was not only in line with major indicators such as JSE, Dow and FTSE in 2010, but also tracked the S&P Frontier Market Index throughout the year. On a YTD basis, the NSX Local index gained 11.60%, whereas the NSX overall Index gained 12.35%. The Namibian Stock Exchange (NSX) comprises mostly duallisted shares, with Anglo-American representing 50% of the total market capitalisation. The seven listed local companies constitute less than 1% of total market capitalisation. Local stocks benefiting from Domestic Investment Requirements (DIR). The local index (LCI) is less exposed to global market influences. The index has largely benefited from regulation forcing local asset managers to hold 35% of their portfolios in domestic companies. However, the risk is that the LCI may come under pressure if changes are made to the domestic investment requirement (DIR). Institutions such as the International Monetary Fund (IMF) have advocated for changes to the domestic investment requirement as there are concerns related to moral hazards. It remains to be seen however, whether the Namibian monetary authorities will make any changes to the DIR in 2011. Top 5 Gainers and Losers Opening Closing % Change % Change Company Price Price (LC) (USD) NSX Local Index 154.77 172.72 11.60 23.58 Truworths 43.99 71.76 63.13 80.65 Shoprite Holdings 65.75 99.85 51.86 68.18 Barloworld Ltd 45.61 67.00 46.90 62.68 Vukile Property Fund Ltd 10.55 14.85 40.76 55.88 Oceana Group Limited 30.00 38.50 28.33 42.12 Old Mutual Plc 13.18 12.98 -1.52 9.06 Stimulus Investments Ltd 104.99 102.99 -1.90 8.63 Afrox 22.65 20.65 -8.83 0.96 Trustco Group Holdings Ltd 0.70 0.60 -14.29 -5.08 Trans Hex Group Limited 4.00 2.33 -41.75 -35.49 Source: NSX Top Ten Shares by Market Cap. Company (NAD m) (USDm) % of Total Anglo-American plc 498,885 69,002.07 41.94 Paladin Energy Limited 160,913 22,256.23 13.53 Trans Hex Group Limited 112,533 15,564.77 9.46 Afrox 88,844 12,288.24 7.47 Barloworld Limited 66,164 9,151.38 5.56 Bidvest Namibia Limited 57,351 7,932.37 4.82 Namibia Breweries 51,391 7,108.08 4.32 Oceana Group Limited 30,101 4,163.32 2.53 Nictus 26,992 3,733.27 2.27 Truworths 25,019 3,460.41 2.10 Source: NSX 1.300 1.200 1.100 1.000 0.900 0.800 NSX vs S&P Africa Frontier Market Index Jan-10 May-10 Aug-10 Dec-10 NSX Local Index S&P Frontier Index Source: IAS 17
Market Outlook for 2011 Top Picks for 2011 Global economic recovery to dictate the pace in 2011. It is important to note that Namibia’s economy is hinged on the global commodity cycle. The economy is heavily dependent on the extraction and processing of minerals for export. Mining accounts for 8% of GDP, but provides more than 50% of foreign exchange earnings. Rich alluvial diamond deposits make Namibia a primary source for gem-quality diamonds. Namibia is the fourthlargest exporter of non-fuel minerals in Africa, the world's fifth-largest producer of uranium, and the producer of large quantities of lead, zinc, tin, silver, and tungsten. As the global economy recovers, the Namibian economy should benefit accordingly. Real GDP growth is expected to have recovered to 3.8% in 2010, following the contraction of 0.8% in 2009. In 2011, we expect growth to accelerate to c4.0% as the global economic recovery gains momentum. Inflationary threats are minimal in 2011. Consumer inflation remains subdued with the inflation rate for November 2010 at 3.4% Given the subdued inflation environment, the Bank of Namibia (BON) continued with its monetary easing (in line with SARB) by cutting interest rates by 75 bps in December 2010. However, rates remain 50 bps higher in Namibia than in South Africa. This implies that the Bank of Namibia has room to cut rates by a further 50 bps. The key predicament relates to unemployment. In our view, Namibia's rising unemployment is the main challenge to the Namibian government. Recently, indications were that unemployment levels rose to a startling 51.2%. Evidently, an independent Namibia inherited a highly segmented labour market, with a major underlying factor being unequal access to education and sometimes, total lack of access to education for locals. NSX shares should continue to track the JSE in 2011. While the global economic recovery is proceeding broadly as expected, the recovery still remains fragile as strong policies to foster internal rebalancing of demand from public to private sources and external rebalancing from deficit to surplus economies are not yet in place. The WEO expects global activity to expand by 4.8% in 2010 and 4.2% in 2011. Given the fact that the NSX comprises mostly dual-listed shares (FTSE or JSE/FTSE) and that the NAD is pegged, one-to-one against the ZAR (under the CMA agreement), prospects on the NSX are hinged mainly on global factors. COMPANY Price P/E P/BV Recom. Hist T+1 T+2 Hist T+1 T+2 FNB Namib. 12.25 8.1 7.7 7.3 2.0 1.8 1.7 BUY N.A.M . 0.25 6.6 6.4 6.3 0.0 0.0 0.0 BUY Nictus 1.05 4.7 4.5 4.4 0.6 0.5 0.5 BUY Trustco 0.60 4.8 4.7 4.6 1.1 1.1 1.0 BUY The 2011 Hot Stocks Local stocks are “lekker” when it comes to value. Our focus has mainly been on the local stocks, given the exciting growth prospects. We like FNB Namibia because of its diversified income base. The group is an excellent example of a successful business with profitable, diversified operational divisions. FNB is changing this trend by showing that other diversified operations can also contribute successfully to a bank’s profit line. These are basically non-interest income (fees and commissions) and insurance premium income. On a relative basis, FNB’s earnings yield (EY) of 13.9% and dividend yield (DY) of 5.6% outperforms all the other local banks. In addition, a PER of 8.1x is undemanding relative to JSE banking sector PE of 13.62x. Another interesting stock is Namibia Asset Management (NAM), the only listed asset management firm in Namibia. The company manages funds on behalf of the largest pension funds in the country. NAM has also been growing its retail assets aggressively. In addition, NAM’s fully discretionary best house-view portfolios have been ranked third in the Alexander Forbes Survey for Namibian Funds. Trustco Group Holdings (TUC) continues to register solid growth as it expands its operation not only in Namibia but also in the region. The company ventured into the Zimbabwean market through a partnership with Zimbabwe’s Econet Wireless. In addition, Trustco's subsidiary, Trustco Mobile (Pty) Ltd, is pursuing an expansion strategy into Africa. We recommend investors tap into Trustco’s strong growth story. We also recommend exposure in Nictus, a diversified group operating in South Africa and Namibia. The company is involved in retailing furniture, motor and carpet, wholesaling carpet, immovable property, shortterm insurance and financing. Ratings are also undemanding at a PER of 4.7x and PBV of 0.6x. Policies should continue to favour local stocks. Local stocks should continue to be benefit from the domestic investment requirements (DIR). In addition, given an anticipated growth rate of c4.0% in 2011 on the back of global economic recovery gains, local stocks are likely to benefit from a recovery in consumer demand. 18
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