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

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Market Outlook for 2011 Top Picks for 2011 The year began with the exchange continuing with its “clean up” exercise, which is focused on amongst other issues, trading platform selection, the establishment of the Index Committee, the strict enforcement of rules and regulations (January saw the suspension of 57 stock broking firms for not meeting minimum capital requirements) and broadening and deepening the market. These initiatives should see investor confidence continue to grow with regards to the transparency of the market. In terms of market performance, we anticipate 2011 will see the ASI outperforming the return it achieved in 2010. We expect the major drivers of the exchange to be: • Emerging and frontier markets are considered “sexy” again with risk appetite having returned to some extent, thanks to the global economic recovery. • Increased liquidity and the search for yield courtesy of expansionary monetary policies by many developed world central banks should see markets such as Nigeria enjoying an increase in portfolio flows. • The Nigerian economy is expected to continue to show strong growth, with the World Bank forecasting that growth in 2010 was 7.6%, anchored by positive domestic economic developments, particularly with regards to nonoil sector growth. Growth for 2011 and 2012 is forecast at 7.1% and 6.2% respectively. This broader economic growth should also continue to underpin the attractiveness of Nigeria’s demographics and growing middle class. • The removal of the ‘bad-debt’ overhang that has been hovering over the sector by the AMCON, and the improvement in financial performance of the sector that should result from this. This should herald increased investor interest, as should prospects of further consolidation within the sector. Cleaner balance sheets should also help unlock credit in the broader economy, with the increased liquidity benefiting capital markets. The major risk to our outlook we think is politics, with the presidential election scheduled for 9 April. It is generally expected, however, that the PDP with incumbent Goodluck Jonathan should retain power, which will be positive for the markets which thrive on continuity. Goodluck Jonathan’s reform agenda for the economy, which includes addressing critical issues such as the power sector, have hitherto been well received. We thus expect the stock exchange to record a better performance post the election, as investors take a more cautious approach in Q1. We believe banking sector (on the back of the creation of AMCON) and the consumer and infrastructure related sectors remain the most attractive for investors on the NSE. Our top picks in these sectors are the following: Banking First Bank, UBA, Zenith Bank – Large local branch networks allow for easier deposit mobilisation; regional footprint expanding (UBA); large balance sheets; can take advantage of further industry consolidation; positive local consumer market perception GTB – Impressive management team; technologically driven growth strategy; strong presence in the corporate market ETI – Solid Q3 10 results; pan-African expansion drive still ongoing; strong technology platform; alliance with Nedbank may receive more attention Consumer Nigerian Breweries – Beer consumption volumes on the rise; Heineken’s acquisition of controlling interest in five more brewers in Nigeria may see consolidation with Nigerian Breweries Nigerian Flour Mills - Diversified business well set to benefit from Nigeria’s demographics; high conglomerate discount means SOP much higher than market cap; large flour market share PZ Cussons – Increasing capacity; good existing personal care product range, but also now expanding into branded cooking oils and spreads in Nigeria in alliance with Wilmar UACN – Ideally placed to benefit from growing middle class consumers; JV with Tiger Brands to manage UACN’s food and dairy operations and SWAN water business has huge potential synergies Infrastructure CCNN – Underperformed the market in 2010 as the company underwent management and structural changes; trading at a discount to the sector; integration with Bua International should be a positive Lafarge Wapco - Looking to double capacity; cost saving initiatives and increased use of coal improving margins; relative valuations favourable 21
EQUITY RESEARCH UGANDA FEBRUARY 2011 2010 REVIEW AND 2011 OUTLOOK While politics and oil, (or the politics of oil, perhaps?), were the major themes playing on the minds of Ugandan’s during 2010, this did not deter from the local bourse’ performance as it closed the year as the top performer in SSA. On the political scene, campaigning for the upcoming presidential election, which is set for Friday the 18 th of February, was the name of the game. The odds seem to be stacked in favour of incumbent President Yoweri Museveni, who most are expecting to win and add another term thereby extending his rule to 30 years, despite a fierce challenge from third-time rival and former ally Kizza Besigye. Besigye, the president's doctor in the bush when he was a rebel leader, now heads the four-party Inter-Party Cooperation coalition that has made deep inroads in rural areas that are the veteran president's traditional support base. He says he was cheated of victory in the last two elections and cites rulings by the Supreme Court, which said the 2001 and 2006 elections were marred by vote-rigging but that this did not affect the overall result. Both candidates are striving to be the ones to take Uganda forward in what will potentially be a golden age for the country following the discovery of oil. Uganda is expected to reap the benefits of the significant oil find in the Lake Albert basin, west of the country. Following on from Shell’s abandoned exploration activities in that region 30 years ago due to falling oil prices and political tension, Tullow Oil (and former partner for the two blocks at Lake Albert, Heritage Oil Plc), returned to the basin and found large crude deposits, with a confirmed 800m barrels already discovered, out of an estimated 2.5bn barrels in reserves. Only four other SSA countries, Nigeria, Angola, Gabon and Sudan have proven reserves of over 2bn barrels. Top 5 Gainers and Losers - 2010 Opening Closing % Change % Change Company Price Price (LC) (USD) ALSI 732.53 1 188.07 62.19 33.81 British American Tobacco 270 1 740 544.44 431.69 Equity Bank 355 762 114.65 77.09 Jubilee Holdings 2 904 5 294 82.30 50.40 East African Breweries 3 636 5 783 59.05 31.22 Stanbic Bank Uganda 170 268 57.65 30.06 Kenya Commercial Bank 518 619 19.50 -1.41 NIC Bank 60 70 16.67 -3.75 Uganda Clays 50 50 - -17.50 S ource: USE/IAS Top Ten Shares by Market Cap. Company (UGX bn) (USD m) % of Total East African Breweries 4 573.05 2 006.22 35.81 Equity Bank 2 821.52 1 237.81 22.10 Kenya Commercial Bank 1 826.15 801.14 14.30 Stanbic Bank Uganda 1 371.86 601.84 10.74 NMG 718.66 315.28 5.63 Kenya Airways 610.72 267.93 4.78 Jubilee Holdings 238.23 104.51 1.87 DFCU Ltd 204.35 89.65 1.60 Bank of Baroda 201.60 88.44 1.58 British American Tobacco 85.40 37.47 0.67 Source: USE/IAS USE-ALSI relative to S&P African Frontier Index 1.80 1.70 1.60 The potential impact on Uganda’s economy of the discovery, (commercial production now expected to begin early 2012 having been pushed back), will be massive. The IMF is of the view that it is too soon to estimate precisely the impact of oil on the economy, as the timing, scope and pace of oil production will be a function of ongoing exploration and technical analyses. However, it does say oil revenues are likely to exceed one third of total government revenues and contribute up to 8% of GDP, and thus can be expected to alter meaningfully Uganda’s productive, fiscal and financial landscape. 1.50 1.40 1.30 1.20 1.10 1.00 0.90 Source: IAS S&P African Frontier USE-ALSI 22
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