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TABLE OF CONTENTS TABLE OF CONTENTS
Playbook 2021 Theme ...... 4
Macro-Economic Outlook ...... 7
Fixed Income Outlook ...... 10
Fixed Income Model Portfolio ...... 11
Equities Outlook ......
Banking Sector ...... 13
Non-Financials ...... 15
Equities Model Portfolio ...... 16
2021 Genghis Predictions ...... 20
2020 Markets Review ...... 22
2020 Capital Markets Developments ...... 23
2 List of Abbreviations and Acronyms BBI—Building Bridges Initiative Bn—Billion bps—basis points (1bp = 0.01%) BROP—Budget Review and Outlook Paper CAD—Current Account Deficit CBK—Central Bank of Kenya CoF—Cost of Funding CPI—Consumer Price Index CTI—Cost to Income ratio DRC—Democratic Republic of Congo DSSI—Debt Service Suspension Initiative EAC—East African Community EBITDA —Earnings before Interest Tax Depreciation Amortization EPS—Earnings per Share ERS—Economic Recovery Strategy EV—Enterprise Value FTSE—Financial Times Stock Exchange FX—Foreign Exchange FXD—Fixed Rate Bond FYxx—Financial year GDP—Gross Domestic Product GEMS—Growth Enterprise Market Segment IFB—Infrastructure Bond IFI—International Financial Institution IMF—International Monetary Fund KES—Kenya Shilling M&A—Mergers and Acquisition Mn—Million MSCI—Morgan Stanley Capital International MW—Megawatt NASI—Nairobi Securities Exchange All Share Index NIM—Net Interest Margin NIR—Non Interest Revenue NPL—Non Performing Loan NSE—Nairobi Securities Exchange OTC—Over The Counter PSCG—Private Sector Credit Growth P/E—Price to earnings P/B —Price to book PAT -—Profit after Tax PMI—Purchasing Managers Index OPEC—Organization of the Petroleum Exporting Countries ROE —Return on Equity TN—Trillion USD—US Dollar USP—Unquoted Securities Platform SSA—Sub-Sahara Africa VAT—Value Added Tax y/y—year-on-year YTD—Year to date
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Theme; Navigating the Now Normal
Theme; Navigating the Now Normal
No, that’s not a typo. The theme is just what it is, ‘Navigating the Now Normal’. The COVID-19 shock upended the world last year with far-reaching
consequences; an earthquake of a magnitude 9 comes closer. While the rollout of the vaccines this year are meant to be a shot in the arm (no pun
intended) to global economies, we are alive to the fact that the pandemic’s scars will still linger longer. Not only has COVID-19 exposed the domestic
economy’s soft spots, but the spillover effect has weighed heavily on investment opportunities. This year’s Playbook navigates this ‘now normal’ in- vestment landscape.
Amidst uncertainties, heightening fiscal and political risks and a temporary blip in corporate performance, lies opportunities in an undervalued market in 2021. The challenges of 2020 dragged the market 14.4% ( in USD) lower, with the NSE -20 index at a decade low and foreign investors exiting to the tune
of USD 28.8Bn . With the market having priced in the pandemic’s risks and steadying at current levels, the room for long-term upside on undervalued
fundamentally sound counters looks quite promising given their growth prospects and investment in innovations around product lines. Uncertainty on economic and business recovery may limit near-term significant upside on stocks. Additionally, we expect cautious foreign investor flows attract- ed by the discounted market and Kenya’s additional 3.2% weighting (Kuwait upgraded to MSCI Emerging Markets Index) in the recently reviewed MSCI Frontier Markets Index and subsequent upgrade of KCB Group to the Frontier Index. However, we see foreign investors concerned by prospects
of business recovery, sovereign debt levels and likelihood of heightened political activities with a referendum in 2020 and general election in 2021.
Foreign flows are likely to be heavily skewed towards technology stocks and other stocks with a clearer post-pandemic recovery backed by their cur- rent discounted valuations.
The Positives
Undervalued market. Kenya is trading at discounted multiples following the pandemic -induced sell-off in 2020 with the market retreating 14.4%, a
sharper downturn compared to select peers in Sub-Sahara Africa. Nigeria was an outlier, the best performing market in SSA, following an enormous
run into equities due to a flood of liquidity during 2020. While risks about our economy may persist, the potential upside from the market remains attractive based on the current market trading multiples at below its 5-year average price-earnings and against select SSA peers.
SSA 2020 Performance Chart (1) NSE Market Historical P/E Chart (2)
Source: NSE & Genghis Research
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Theme; Navigating the Now Normal
Undervalued opportunities abound. The sell-off of the banking counters present undervalued opportunity especially in the large tier banks that over last year invested in expansion locally and regionally. This portends market share gains and regional business diversification especially in EAC’s emerging economy of Rwanda. While short-term risks from the restructured loan book and weak domestic economy is likely to persist
this year, longer term prospects of the large tier banks against current trading multiples are compelling. Additionally, current trading multi-
ples on EABL and KenGen are enticing given their recent capacity addition initiatives that are expected to pay-off post-political uncertainties’ impact on business investment. Significant investments may take a back seat as political temperatures rise with the impending constitutional referendum this year likely to protract into the 2022 presidential elections contest.
The Risks
Market concentration and liquidity challenges. Safaricom holds significant portion of the entire market value (59.2%) which limits investment
options and diversification strategies especially for large institutional investors.
Sovereign debt levels at worrying levels due to the fast rising debt accumulation and debt servicing costs at a significant c.59% of ordinary reve- nue. Worse still is foreign debt service obligations which increases the country ’s sovereign vulnerability and potential exchange rate problems.
Political uncertainties impact on business investment. Significant investments may take a back seat as political temperatures rise with the im- pending constitutional referendum this year that is likely to protract into the 2022 presidential elections contest.
Banking sector may struggle with the restructured loan book. While majority of the restructured loan book are still considered normal loans, a
chunk of this may turn non-performing on slower post pandemic recovery and cash-flow challenges.
2020 Foreign Investor Performance at the NSE - Chart (3)
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PLAYBOOK 2018
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2021 MACRO-ECONOMIC OUTLOOK
We estimate a baseline real GDP growth rate of 5.0% in 2021. The sluggish growth, below pre COVID-19 trend (5.60%), will be weighed down by the impact of the pandemic on the economy. Purchasing Managers Index (PMI) Positive output gap hinges on successful COVID-19 vaccination on the population that will elimi-
65.00 nate the need of containment measures.
60.00 High frequency indicators, though signaling mixed messages, point to a bumpy road in 2021. 55.00 Purchasing Managers Index (PMI) picked momentum in the second half of last year. This was hardly surprising against the backdrop of easing of the aggressive containment measures intro- 50.00 duced in 2Q20. Nonetheless, the positive sentiment from the private sector signaled by the diffu- 45.00 sion index lost steam at the tail end of the year. We attribute this to the second-round impact 40.00 of the pandemic containment measures on the economy having a more lag time before fading.
35.00 To be sure, latest (3Q20) unemployment at 7.2% although an improvement from the prior quarter 30.00 is yet to fully recover to pre-pandemic levels (2019 average: 5.3%). Anecdotal evidence indicates Jan-15 Jan-17 Jan-19 Jan-21 sluggish labour recovery in sectors that have borne the brunt of the pandemic and current con- Source: IHS Markit & Genghis Research tainment measures. This suggests a marked slowdown in private consumption that will weigh down on growth.
Inflation trends This is exacerbated by the introduction of distortionary individual tax rate changes at the front-
20.00% end of 2020 that is erosive to households’ disposable income. Furthermore, the reversal of the corporate tax rate back to 30.0% and the kicking in of new corporate taxes in this part of the 15.00% business cycle will be equally counterproductive to business investment.
10.00% Monthly trade volume has gradually picked steam (KES 198.4Bn in Oct 2020 –vs– KES 155.9Bn in May 2020) despite the lackluster import growth (-6.3% y/y in 10M20). That said, exports will come 5.00% under pressure in the face of renewed aggressive containment measures to curb second wave of COVID-19 infections in pockets of developed markets. 0.00% Jan-15 Jan-17 Jan-19 Jan-21 Political noise is another key risk to watch out for in the year. The rhetoric around Building Bridg- -5.00% es Initiative (BBI) referendum will snuff out investor sentiment. At the moment, the referendum Headline Core Food Fuel timeline appears open-ended posing a layer of uncertainty. Unlike the cyclical 5-year elections that is penciled in the Constitution, we flag the politics around BBI poll as a major tail risk. Source: CBK & Genghis Research
We do not anticipate core inflation to edge up markedly due to subdued demand pressure. On
the other hand, we expect the recent 14.3% increase in the rate of VAT back to pre COVID-19 USDKES level of 16.0% to liftoff headline inflation in the short-term. We see fuel inflation (2020: 11.3%) will steady at c. 8.0% in the year with the global oil price clipped by early January pronouncement 112.00 by OPEC+ to gradually restore supply back to pre-pandemic levels. Overall, we hold the view that 110.00 headline inflation will remain anchored (2021F: 7.0%).
108.00 A gradual growth recovery in the year (-vs- 2020) implies uptick in import demand. This will 106.00 likely see 12-month merchandize trade balance (Oct 2020: KES -884.9Bn) gradually edging up to 104.00 peak levels of KES -919.3Bn (June 2018). With the risk of new COVID-19 mutations across the
102.00 globe, we are still not upbeat on robust tourism recovery stifling services trade balance. That said, we expect diaspora remittance (11M20: +9.8% y/y) to have an offsetting effect on the overall 100.00 1/1/2018 7/1/2018 1/1/2019 7/1/2019 1/1/2020 7/1/2020 Current Account Deficit (CAD). Inflows from the international financial institutions (IFIs) – World Bank, IMF, Africa Development Bank - expected as from the end of first quarter will fund this Source: Bloomberg & Genghis Research deficit and restore FX Reserves back to c. USD 9.8Bn levels by end June. Overall, we thus see downward pressure on the Shilling this quarter (March 2020E: 111) against US dollar before steadying in the second quarter period.
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2021 MACRO-ECONOMIC OUTLOOK
We expect the CBK Monetary Policy Committee to maintain its neutral policy stance (CBR: 7.0%) through the year. The headline inflation is poised to rise on supply pressures (as op- PSCG and M3 Money Supply (KES, Bn’s) posed to demand) further cementing our view of a neutral policy stance. Credit to the pri-
2,850.00 4,100.00 vate sector grew by 8.2% y/y (Nov 2020) with c. KES 151.7Bn loan mediation between April to
2,800.00 4,000.00 November 2020 period. We see execution risks to the recently implemented SME Credit Guarantee Scheme, in particular with the non-resolution of the banks’ approval request for 2,750.00 3,900.00 their risk-based pricing models. On the other hand, banks restructured loans totaling KES 2,700.00 3,800.00 1.38Tn; representing 46.5% of sector loan book by end October. In the absence of robust 2,650.00 3,700.00 economic recovery, the restructured loans will likely elevate the non-performing loan ratio 2,600.00 3,600.00 (Oct 2020: 13.6%). 2,550.00 3,500.00 Jan-20 Mar-20 May-20 Jul-20 Sep-20 Nov-20 We expect FY2020/21 Supplementary Budget I Estimates in 1Q20. We think the spending Private Sector Credit stock, LHS M3 Money Supply, RHS adjustment will be at variance with the KES 102.3Bn (KES 16.8Bn in recurrent and KES 85.5Bn Source: CBK & Genghis Research in development) penciled in the 2020 BROP document. Separately, the government intends to rollout the Post COVID-19 Economic Recovery Strategy (ERS) and in our assessment, its
execution is less clear-cut.
Public debt is estimated to end FY2020/21 at KES 7.7Tn in the baseline scenario. FY2020/21 financing is also a moving target in light of the revenue target adjustments arising from tax changes at the start of the year coupled with expected budget spending revisions. The
anticipated new IMF facility signifies that the external: domestic borrowing split in the
fiscal year will adjust accordingly from the ratio in the initial budget.
That said, public debt sustainability is at a precarious position. Interest payments as a per- centage of ordinary revenue is at 28.9% for FY2020/21. For the first four months (July – Octo-
ber 2020) of the fiscal year, this ratio came in at 30.4%. Despite ordinary revenue expected to
be calibrated upwards in 2H20/21 period, we view the current business cycle as less condu- cive to realize the target. We therefore believe this metric will remain elevated (c. 30% level) at the end of the financial year.
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2021 FIXED INCOME OUTLOOK
We estimate net domestic borrowing at the end of 1H20/21 at KES 286.4Bn; implying that
the quantum to be raised in 2H20/21 will be KES 313.6Bn. Nonetheless, the borrowing tar- Maturities in 1Q21 (KES, Mn’s) get remains a moving target in our view. There’s an expected FY2020/21 Supplementary
75,000.00 Budget I Estimates has been priced in (2020 BROP at KES 102.3Bn) with a higher likelihood that it will be expansionary in light of rolling of the Post COVID-19 ERS plan. The increased 60,000.00 government spending is expected to be funded by the revised higher revenue target issu-
45,000.00 ing from the tax changes effected at the front-end of the year. Furthermore, Kenya’s partic- ipation in the debt service suspension initiative (DSSI) further unleashes resource space to 30,000.00 the tune of KES 32.9Bn with scope of an additional KES 40.6Bn in the fiscal year. Should the
15,000.00 discussions with IMF for a new facility materialize, this implies that net domestic quantum will reduce further. - Jan-21 Feb-21 Mar-21 15.0000 91-day 182-day 364-day T-Bonds 13.5000
Source: CBK & Genghis Research 12.0000 10.5000
9.0000
7.5000
6.0000
2 3 5 6 7 8 9
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10 11 12 13 15 16 18 20 21 23 17 19 22
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91-day 182-day 364-day Dec-20 Mar-21E
Maturities in the first quarter of 2021 total KES 410.1Bn against a quarterly average of KES
293.7Bn in the last half of 2020; a significant (53.5%) amount of the redemptions in the 364- day T-Bill tenor. Overall liquidity increased by KES 494.6Bn in March-Nov 2020 period,
Interbank rates in 2020 buoyed by non-bank holdings of government paper (KES 203.3Bn). In tandem, banks were
8.00% risk-on towards domestic debt with their holdings advancing by KES 186.3Bn (Apr-Dec 2020) while credit to the private sector trailed with an increase of KES 151.7Bn (Apr-Nov 7.00% 2020). The highly uncertain environment and the large maturities imply that demand for 6.00% government securities will remain the dominant theme in the year. 5.00%
4.00% That being the case, we expect primary bond issuance in February and March to feature 3.00% longer-tenor maturities in line with the 2020 medium-term debt management strategy. The 2.00% issuance of the 2-year paper and 16-year infrastructure bond in January further strengthens 1.00% this view as the average maturity in fixed rate bond (FXD) series and average life for infra- Dec-19 Mar-20 Jun-20 Sep-20 Dec-20 structure bond (IFB) series at the start of the year was 8.63 and 5.77 years, respectively. Low Average High Therefore, the least path of resistance to lengthen the debt profile will be issuance of new issues or re-opening of longer-dated issues. Source: CBK & Genghis Research
We expect the yield curve to rise 10bps (0.10%) on average this quarter and steady in the second quarter period. This factors in the cost-push inflation uptick that we expect in the
period. The net effect of FY2020/21 Supplementary Budget I Estimates, revenue revisions
and new IMF facility imply that targeted net domestic borrowing will surprise to the down- side. This will further give legs for longer-tenor issues in the remainder of the fiscal year. We remain constructive on the medium-term (5yr—10yr) segment of the yield curve. The
short-end of the curve is crowded hence investors should seek opportunities at the belly of the curve.
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FIXED INCOME MODEL PORTFOLIO
Genghis Capital Diversified Fixed Income Model Portfolio
Portfolio Maturity Modified 1 Yr. Expected
Bond Issue Allocation Issue Date Date Coupon Duration Total YTD Perf.
Core/Income Bonds FXD3/2019/5 22.84% 16/12/19 09/12/24 11.49% 3.29 11.16% FXD1/2018/005 20.85% 26/03/18 20/03/23 12.30% 1.87 12.11% 43.69% Aggressive/Income Bonds FXD1/2008/020 7.43% 21/12/08 05/06/28 13.75% 4.71 13.28% FXD1/2016/020 12.43% 26/09/16 01/09/36 14.00% 6.33 13.37% 19.86%
Trading Bonds FXD1/2019/10 10.07% 31/07/17 19/07/27 12.97% 4.20 12.55% IFB1/2016/009 14.46% 23/05/16 12/05/25 12.50% 2.39 12.26% IFB1/2016/015 7.23% 24/10/16 06/10/31 12.00% 4.26 11.57% 31.76% 3.35 11.60%
Bond holdings 95.31% 3.35 11.60% Cash 4.69% 0.00 0.00% Portfolio 100.00% 3.20 11.05%
The overall Genghis Capital fixed income bond portfolio trailed the overall FTSE NSE Kenya Bond Index in 2020. This was due to higher cash allocation with the maturity of two short-term papers in the year. The cash holdings has been reduced to 4.69% in 2021.
Core/Income: Makes up at least 50% of the overall portfolio mix and comprises of securities with an average duration of 2 years.
Aggressive/Income: This consists of medium-term bonds with an average duration of five years. The underlying approach is aggressive with preference towards higher coupon rate bonds
Diversified Trading: Has liquid bonds which also serve the secondary purpose for tax minimization. The amortizing nature of infra- structure bonds included in this segment reduces average duration, limiting interest rate sensitivity.
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2018 MACRO-ECONOMIC & FIXED INCOME REPORT
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FINANCIALS
BANKING SECTOR
Long-term prospects for the banking sector remain positive especially for the banks that are taking opportunity accorded by the pandemic to invest in the efficiencies of technology, diversify their businesses and increase their market share locally and regionally. In the near term, the sector is expected to face headwinds especially with the restructured loan book (KES 1.4Tn, 46.5% of total sector loan book) that were affect- ed by the pandemic’s effect on customer repayment plans. Due to these concerns coupled with weak macro environment and likelihood of slower business investment, it is likely the sector may remain cautious on lending especially factoring in that the sector is not able to price risk despite repeal of the rate cap in 2019. Despite the expected temporary blip in operating metrics, we are enamoured by the growth ag- gressiveness of KCB Group and Equity Group with their acquisitions last year that positions the banks strongly in regional markets. We also like the fact that both banks maintain their lead in ROE despite booking some of the highest provisions last year. While we do not expect cash dividends this year for capital preservation (and that banks will require approvals from CBK for dividends payments, CBK is pro-capital preservation), long-term, the dividend yields (based on historical averages) of Absa Bank and Standard Chartered Bank are expected to re- vert to their historical averages of c.10% in the long-term.
We expect to see:
Gradual increase in Net Interest Margin on account of rising yields due to huge national government borrowing coupled with the pending approval of risk-based customer lending models by the CBK. The risk-based pricing models are envisaged to increase customer loan rates by between 100—150bps. The sector had expected approvals for their models at the tail end of last year and we expect that CBK is likely to give the thumbs up from this year to support private sector credit growth, which has in recent years lingered in the single digits. However, we expect that only new customer loans will be priced under the risk-based regime rather than repricing of the entire existing loan book.
Source; Genghis Research
Elevated (but better than FY20) cost of risk in the year, with additional provisions from the restructured loan book coupled with slow busi- ness recovery affecting customers’ ability to make repayment within the duration of the restructured loans (most of the restructuring covered a period of up to 1 year). In addition to worsening the Non-performing loan ratio, which has surprisingly been steady over 2020 despite the effects of the pandemic (at 13.6% in October 2020, 12.7% before Covid in February 2020), this risk environment is also likely to be unenticing for robust credit mediation during the year.
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FINANCIALS
Cautiousness in customer credit on concerns of an increase in non-performing loans due to the weak customer environment with the situation worsened by an aggressive government looking to finance its large budget deficit ultimately crowding out the private sector.
Source; Genghis Research
Dividends in 2021. We do not expect cash dividend announcements for the financial year with the sector increasingly looking at preserving capital buffers to provision for possibility of challenges on the restructured book and a weak credit market still under the effects of the pandemic.
BANKING SECTOR RECOMMENDATIONS
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NON - FINANCIALS SECTOR
SAFARICOM (HOLD) - Target Price KES 32.72
Momentum in M-PESA to accelerate. While volumes may soften in the short-term from levels observed during the free transfer window (transactions of below KES 1,000, the most popular transaction band), the low charges announced by the business applicable from 1st January is expected to reinvigorate transaction volumes in the medium term. We also like the innovations around new products such as Fuliza, and upcom- ing unit trust products. These innovations work to entrench the M-Pesa ecosystem in the financial services industry. On overall, for the upcoming year, we expect M-PESA revenue to decline 10.4% y/y from the 14.8% drop in 1H21.
Fixed data. The aggressive roll-out of the Fibre network catapulted the fibre business to the market leadership position last year. The accelerat- ed adoption of internet usage is expected to be a sustainable growth area of the fibre business coupled with the 4G network both on smartphones and for home wireless internet in regions unreachable by the fibre network.
The potential of Ethiopia. Ethiopia despite its lucrativeness for mobile money services is proving to have hurdles with recent comments from authorities indicating mobile money services are limited to local companies and must be in partnership with a local banking institution. Together with Vodacom and Vodafone, the company submitted a joint bid for one of the two telecommunications licenses on offer. If successful, this will be a leg-up for future expansion into the currently restricted mobile money services.
Despite a resilient business, we anticipate subdued y/y growth in FY21e on the Voice and SMS revenue lines (-2.2% and -15.6%, respectively), as com- petitive pressures in the two segments increases in the industry.
EAST AFRICAN BREWERIES (BUY) - Target Price KES 194.32 Restrictions on social events hit EABL quite hard in the prior financial year, with revenue fall of 9.0% y/y and PAT fall of 39.0%. However, since the restrictions were lifted, bars’ operations and limited social activity has resumed albeit under strict timelines.
We expect a rebound in revenue by c.63% y/y this financial year. Re-opening of bars is expected to have kick started sit-in consumption of bottled beer and Senator Keg. Spirits were resilient during the prior period with volumes supported by take-away.
Valuation metrics are at discounted lows, with Forward EV/EBITDA down to 5.9x from a 3-year average of 7.4x and below peers’ 10.5x despite its historically superior ROE.
We expect strong revenue growth going forward driven by additional volumes of Senator Keg following the commissioning of the 1Mn hectoli- ter capacity in Kisumu brewery as well as strong performance of Serengeti Lite in Tanzania.
Key risk is random tax adjustments by government which is expected to dampen especially the double digit growth in the spirits portfolio. The government is increasingly looking for funding of its large deficit and its one soft target has been alcoholic products.
KenGen (BUY) - Target Price KES 7.11
We are enticed by the capacity expansion initiatives. The 165MW Olkaria V was connected to the grid in October 2019 and is expected to be followed by an upcoming 83MW Olkaria 1 Unit 6 power plant in the next year and 140MW Olkaria VI power plant within another two years.
Revenue diversification. We are delighted that countries across Eastern Africa are taking note of KenGen’s expertise in geothermal generation. In 2019, the company bagged contractual revenues to the tune of KES 12.5Bn from Ethiopia and South Sudan for geothermal exploration and drill- ing services. Other considerations are directly connecting industrial customers in its upcoming industrial park at Olkaria as well as supplying steam for their industrial operations.
We expect the 33% dividend policy to be sustained on the back of income growth from the capacity expansion initiatives and the additional non- electricity revenue channels.
Single buyer risk to persist. KPLC has persistently been under challenges and in our view, this has been the major driver of the weak pricing of the stock, with pricing for both counters having high correlation.
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EQUITIES MODEL PORTFOLIO
MODEL PORTFOLIO
INVESTMENT PHILOSOPHY
Our investment philosophy seeks to combine a firm macroeconomic understanding and framework with disciplined fundamental analysis and signifi- cant local insight. We identify companies which offer substantial value against their intrinsic prices, taking into account the politico-economic circum- stances that could shape the business environment in 2021 and beyond. Using standard metrics, we then screen and rank the stocks into Momen- tum, Income and Value categories. This allows us to position “trading ideas’’ alongside our standard buy-hold-sell recommendations as the portfolios are constructed along similar mandates and scenarios to those encountered by our clients. The performance is tracked via Bloomberg. Additionally, we include our commentary along with our published results.
Summary Model Portfolio Performance
Momentum Stocks
These are stocks that are highly liquid and sensitive to market movements. They are fundamentally strong counters and tend to respond to evolv- ing market dynamics much faster than other stocks. We have maintained the 4 stocks in this portfolio. In 2020, only Safaricom was an outperform- er with a return of +8.7% while Equity Group, KCB Group and EABL pulled back by an average of 27.8%. Safaricom’s performance follows a global sen- timent on tech stocks with technology and innovation expected to be key growth driver in the post-Covid environment.
Source; Genghis Research
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EQUITIES MODEL PORTFOLIO
Income Stocks
These are stocks with both a stable dividend and high yield. We have maintained our minimum dividend yield at 6.1% despite the stocks trading at substantially higher yields following depression in market prices. Noteworthy in this portfolio is that we maintained the historically high yielding and high pay-out stocks but the short term dynamics from the effects of the pandemic may mean no cash dividends at least this year. For purely income investors, we recommend a short-term re-allocation to the income-bonds as discussed in our fixed income model portfolio.
Source; Genghis Research
Value Stocks
These are stocks that are priced at a discount to their fundamental value (primarily book value and earnings). Stocks under this category generally tend to have good fundamentals with potential for capital appreciation but may have fallen out of favour in the market and are therefore consid- ered bargain counters. The portfolio is our only negative performer but still out-performs the NSE-20 Index. We have maintained the three stocks (EABL, KenGen and Kenya-re) given their current upside and deep value characteristics. Kenya-Re has recently been trading at deep discount (net cash per share) and its latest financial performance (1H20) was quite commendable under a pandemic, recorded at 45.9% growth in the bottom-line. KenGen is expected to also have a blockbuster financial year, from recently sighted unaudited 2020 financial results on the back of capacity addi- tions, ongoing revenue diversification and one-off tax credit.
Source; Genghis Research
Source; Genghis Research
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EQUITIES MODEL PORTFOLIO
Portfolio Update
Below is the updated model portfolio
We used two techniques to establish weights for the constituents in our model portfolios with each method assigned a 50.0% allocation in the total weighting. The first method is based on the correlations between the constituents and takes into account the risk profile of the constituents as a group, meaning that the lower the correlation between two positions, the less alike they are, the greater the benefit of diversification. This is achieved with the mean-variance optimization method. The second method is a weighting based on the expected potential return on the respec- tive counters. We have included our top stock picks in our model portfolio and made some adjustments from our previous update.
MOMENTUM STOCKS Market Price Target Price Upside Rating P/B - P/E Ratio ROE
Equity Group 36.10 43.66 20.9% Buy 1.0 16.2% EABL 155.00 194.32 25.4% Buy 20.0 63.3% KCB Group 38.50 47.79 24.1% Buy 0.9 12.7% Safaricom 35.00 32.72 -6.5% Hold 20.8 49.1% Cash Weighted Average 17.7%
INCOME STOCKS Market Price Target Price Upside Rating P/B - P/E Ratio ROE
KCB Group 38.50 47.79 24.1% Buy 0.9 12.7% Absa Bank 9.40 11.57 23.1% Buy 1.2 15.2% COOP Bank 12.50 13.34 6.7% Hold 0.9 13.0% SCBK 144.50 152.36 5.4% Hold 1.2 12.5% KenGen 5.38 7.11 32.2% Buy 3.3 5.5% Cash Weighted Average 21.0%
VALUE STOCKS Market Price Target Price Upside Rating P/B - P/E Ratio ROE
EABL 155.00 194.32 25.4% Buy 20.0 63.3% KenGen 5.72 7.11 24.3% Buy 3.3 5.5% Kenya Re 2.78 4.05 45.7% Buy 0.2 10.0% Cash Weighted Average 31.2%
Source; Genghis Research
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2021 Genghis Predictions
19 2021 Genghis Predictions
1. Will the equities market close in the positive this year? Yes. We anticipate positive optimism on the bourse this year triggered by the large-scale rollout of COVID-19 vaccine across the globe to tackle the pandemic and help repair the economic fallout. Furthermore, the current price level of most counters offer attrac- tive entry points.
2. Which sectors are likely to recover faster?
We think the eventual lifting of the containment measures will be supportive of the services sectors, in particular, Education, ICT, Transport and Health.
3. Will there be a rebasing of the economy this year?
Yes. The GDP rebasing – revision of the GDP base year from 2009 - had been pre-empted to occur in the current financial year. The rebasing of the CPI basket in March last year to a base month of February 2019 – from previous base month of February 2009 - further cements our view.
4. How many corporate bonds will be issued this year? We project two corporate bonds’ listings in 2021
5. Is there a likelihood of new equity listings this year?
We believe that this year is ripe to see some fresh listings at the NSE, boosted by the Ibuka program.
6. Which sector(s) are likely to see mergers and acquisition activities this year? Banking, in our view, is the sector that will record mergers and acquisition activities this year. This has been salient in recent years and we don’t expect this trend to ease.
7. How many people will be vaccinated against COVID-19 in Kenya this year? 198,256. This is the number that we believe will voluntarily opt to be vaccinated against the pandemic. The subdued demand issues from a deep psychology that ‘Covid is no longer a threat’, reflected in the less strict adherence of the containment measures.
8. Do we think that the postponed 2020 Tokyo Olympics will be held in July/August 2021? Yes. We are hopeful that the Summer Olympics will be held this year. After all, Kenya needs to bag some gold medals
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2020 Review
21 2020 Review
Bearish sentiment dominated the market in 2020, worsened by the Covid-19 pandemic which gathered momentum from 2Q20. The market’s dip
eroded gains made in the prior year when a rally on banking sector stocks in 4Q19 lifted 2019’s performance. The Nairobi All Share Index
(NASI) closed the year 8.6% lower compared to the gain of 18.5% in 2019. The index touched a high of 171.36 on 10th January and dipped to
a low of 127.01 on 5th August as the pandemic unraveled. The equities market was dominated by foreign investors at 64% (67.6% in 2019) of
total market turnover who turned net sellers (KES 28.8Bn) from net buyers (KES 2.3Bn) in the prior year, while most local institutions
stayed out of the equities market during the year.
Government restrictions to curtail spread of the pandemic shut down the economy with companies undergoing a tough period with the major blue chips reporting negative bottom-line performance in their quarterly reporting against cost cutting measures. Almost all the banks
have issued profit warnings while other companies continue to offer similar statements as they close in on their full year reporting period. 11 companies issued profit warnings for their 2019 financial results.
Equity turnover in 2020 amounted to KES 148.28Bn from KES 154.11Bn recorded in 2019, a 3.8% decrease year-on-year. Market capitalization de-
clined 7.8% in the year to close at KES 2.3Tn.
2020 Market Performance Foreign Participation % of Total Turnover
2020 Top Charts
Source: NSE & Genghis Research
22 2020 Review
2020 Capital Markets
Merger activity in banking sector continues for the second consecutive year;
Equity Group completes acquisition of additional stake of 66.53% stake in Banque Commercial du Congo (BCDC), the second largest bank in DRC by asset base. The transaction cost was pegged at USD 95Mn from an earlier envisaged USD 105Mn. The stake from the majority shareholder
of BCDC, George Arthur Forrest, is meant to strengthen Equity Group’s DRC operations by merging BCDC with Equity Bank Congo S.A (EBC).
Additionally, the group announced collapse of transaction with Atlas Mara Ltd to acquire four banking operations across Rwanda, Zambia, Mozambique and Tanzania. Following the collapse of this transaction, Atlas Mara Ltd entered a deal with KCB Group as detailed below.
KCB Group’s intention to acquire 62.02% stake in Banque Populaire du Rwanda (BPR) and 100% in African Banking Corporation Tanzania. The transaction cost was pegged at USD 40Mn. Rwanda has been a rising star economically and on business prospects, one of the key attraction of
Kenya’s largest lenders.
The Co-operative Bank of Kenya acquisition of Jamii Bora Bank, in a transaction that leaves COOP bank a 90% shareholder. The transaction was more of a lifeline to the struggling bank with a 2019 industry market share of 0.12%.
I&M Holdings acquisition of 90% stake in Orient Bank Uganda at a cost of KES 3.6Bn . This transaction seeks to strengthen its presence in Uganda.
Carbacid Investment’s 100% bid for BOC Gases. BOC Plc Uk, the parent company of BOC Gases seeks to exit African operations and has offered to
tender its 65% stake to Carbacid Investments. The deal is valued at KES 1.2Bn (KES 63.50 per share).
Kenya Airways pending nationalization. The government of Kenya intends to take-over the national carrier through a buy-out of other shareholders
(51%) including a consortium of banks and KLM. The shares have since been suspended from trading .
Restructuring of Nairobi Business Ventures. Shares of NBV were suspended from trading during the year following a restructuring transaction in which Delta International FZE would acquire a stake in NBV for capital support for the struggling business.
New Listing by introduction; HomeBoyz Entertainment Plc. After months in the Ibuka programme, 63.2Mn shares of the company were introduced
into the GEMS segment of the NSE at share price of KES 4.66.
Ibuka programme welcomed at least 6 new admissions. The Ibuka programme is an Incubator and Accelerator programme that targets companies with the aim of restructuring their operations, access investors and enhance their visibility. One of the objectives of the programme is to in- crease the number of listings at the NSE., with HomeBoyz Entertainment emerging from the program to list at the NSE.
Profit warnings escalate especially from blue chips including EABL, KCB, Absa, Standard Chartered Bank, I&M Bank, Britam, Nation Media, Unga Group, HF Group, KPLC, Longhorn,
Launch of Unquoted Securities Platform (USP). The USP launched by the NSE is an over-the-counter (OTC) platform for trading shares of unlisted companies that seek to raise capital via private placements. The platform will provide liquidity and a price discovery mechanism for shares of unquoted companies (a challenge of OTC shares).
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KEY CONTACTS
Key Contacts: Research Key Contacts: Dealing Churchill Ogutu Faith Mukeli [email protected] [email protected]
Gerald Muriuki David Micheke [email protected] [email protected]
Kevin Ngige
Direct Line: +254 730 145 000 Website: www.genghis-capital.com
Twitter handle: @genghiscapital
Recommendations guide: Buy (B): The stock’s total return* is expected to be more than 15% (or more, depending on the perceived risk) over the next 12 months from date of report publication. Hold (H): The stock’s total return* is expected to be in the range of -15% to +14% over the next 12 months from the date of report publication. Sell (S): The stock’s total return* is expected to be less than -15% over the next 12 months from the date of report publication. Speculative Buy: GCL may issue a “Speculative Buy” when the Research Analyst covering the company is of the view that the risk/ return tradeoff is somewhat less compelling than that of a BUY rating. These companies tend to have very high upside potential, but also a high degree of risk or uncertainty with regard to future financial results or economic conditions
Disclaimer: The content provided on this document is provided as general information and does not constitute advice or recommen- dation by Genghis Capital Ltd and should not be relied upon for investment decisions or any other matter and that this document does not constitute a distribution recommending the purchase or sale of any security or portfolio. Please note that past performance is no indication of future results. The ideas expressed in the document are solely the opinions of the author at the time of publication and are subject to change without notice. Although the author has made every effort to provide accurate information at the date of publi- cation all information available in this report is provided without any express or implied warranty of any kind as to its correctness. You should consult your own independent financial adviser to obtain professional advice before exercising any decisions based on the in- formation present in this document. Any action that you take as a result of this information, analysis, or advertisement is ultimately your responsibility.
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