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25 June, 2017

Executive Summary

Fixed Income: During the week, there was a decrease in the level of T-bills subscriptions to 103.8%, compared to 155.2% recorded the previous week. Yields on the 182 and 364-day papers remained unchanged at 10.3% and 10.9%, respectively, while that of the 91-day paper declined by 10 bps w/w to 8.3% from 8.4% the previous week. We are projecting the inflation rate in the month of June to decline to between 10.7% - 11.0%, from 11.7% in May, mainly driven by a slowdown in food prices and reduced fuel prices;

Equities: The equities market was on an upward trend with NASI, NSE 20 and NSE 25 gaining 0.3%, 2.3% and 0.6%, respectively, taking YTD performance to 15.9%, 13.7% and 15.9% for NASI, NSE 20 and NSE 25, respectively. This performance was driven by gains in large cap stocks such as Bamburi, and Barclays Bank, which gained 7.8% and 4.2%, respectively. The Central Bank of Kenya (CBK) and the Kenya Bankers Association(KBA) have launched a website that is meant to provide the public with information on fees and charges relating to loan facilities offered by commercial banks and microfinance institutions. The Central Bank (CBK) and Kenya Deposit Insurance Corporation (KDIC) have issued tentative timelines for the resolution of Imperial Bank Limited’s receivership. Barclays Bank of Kenya has announced plans to lay off 130 employees through a voluntary exit scheme.

Private Equity: Activity in the private equity space continues to gain traction based on fundraising and investment activities witnessed during the week as, (i) Simba Corp acquired a 35.0% minority stake in Hemingways Holdings, and (ii) Fund for Agricultural Finance in Nigeria (FAFIN) has successfully closed its USD 65.9 mn fund, which will be deployed in the agricultural sector across Nigeria;

Real Estate: The warehousing sector continues to witness activity, as investors seek Grade A warehouse facilities with Alpha Business Park starting operations during the week. The direct contribution of travel and tourism sector in Kenya is projected to grow at 6.0% p.a between 2017 to 2027 according to Travel and Tourism Economic Impact 2017 report;

Focus of the Week: Given the importance of sound corporate governance in protecting the interest of investors, this week, we rank the 50 listed companies with a market cap of above Kshs 1.0 bn, on their corporate governance structure to arrive at a composite score and provide a deeper understanding of the level of corporate governance in each firm.

Company Updates

  • Our Investments Analyst, Caleb Mugendi, was on KTN News discussing the space of job creation in political parties’ manifestos. Watch Caleb on KTN News here
  • We continue to showcase real estate developments by our real estate development affiliate, Cytonn Real Estate, through weekly site visits. Here are progress videos and pictures on The Alma and Amara. The site visits target both investors looking to invest in real estate directly, and also those interested in high yield investment products to familiarize themselves with how we support the high yield returns. If interested in attending the site visits, kindly register here
  • We continue to see very strong interest in our Private Wealth Management training, which is at no cost, and is held bi-weekly, but is open only to pre-screened participants. The training can also be offered to institutions that would like their employees to be trained on Private Wealth Management. To get further details contact our Client Services team at clientservice@cytonn.com
  • For recent news about the company, see our news section here
  • We have 11 investment-ready projects, offering attractive development and buyer targeted returns of around 25.0% p.a. See further details here: Summary of investment-ready projects
  • To invest in any of our current or upcoming real estate projects, please visit Cytonn Real Estate
    • The Alma, which is over 55.0% sold, has delivered an annualized return of 55.0% p.a. for investors who bought off-plan. See The Alma
    • Amara Ridge is currently 100.0% sold and has delivered 33.0% p.a. returns to investors. See Amara Ridge
    • Situ Village is currently 15.0% sold. See Situ Village
    • The Ridge Phase One is currently 31.0% sold. See The Ridge
    • Taraji Heights is currently 10.0% sold. See Taraji Heights
    • RiverRun Estates is currently 6.1% sold after the recent launch
  • We are currently looking for 3-10 acres in Kikuyu, Lower Kabete, Upper Kabete, Loresho or Mountain View, and 7-10 acres of land in Karen, Garden Estate and Langáta for development of villas. Contact us at rdo@cytonn.com if you have any land for sale or joint ventures in the above areas.
  • We continue to beef up the team with the ongoing hires: Careers at Cytonn

Fixed Income

T-bills subscriptions decreased during the week to 103.8%, from 155.2% recorded the previous week, with the subscription rates for the 91, 182 and 364-day papers coming in at 83.7%, 120.4% and 95.2% compared to 311.4%, 158.6% and 89.4% the previous week, respectively, as investors’ attention shifted to the primary bond auction market. Despite the drop in this week’s subscription rate, the average subscription rate for the month of June stands at 156.4%, which is higher than the year to date monthly average of 148.8%. Yields on the 182 and 364-day papers remained unchanged at 10.3% and 10.9%, respectively, while that of the 91-day paper declined by 10 bps w/w to come in at 8.3% from 8.4% the previous week. The overall acceptance rate rose slightly to 95.2% compared to 93.0% the previous week, with the government accepting a total of Kshs 23.7 bn of the Kshs 24.9 bn worth of bids received against the Kshs 24.0 bn on offer in this auction.

The money market was tight during the week, leading to an increase in the interbank rate to 3.6% from 2.8% the previous week. The Central bank was active in the reverse repo market in support of the liquidity situation with Kshs 11.0 bn being offered to the market during the week. There was a net liquidity reduction of Kshs 6.8 bn compared to an injection of Kshs 6.3 bn the previous week. The net liquidity reduction was due to T-bill primary issues, Transfers from Banks – Taxes and Reverse repo maturities totaling Kshs 76.2 bn from Kshs 76.4 bn, the previous week.

Below is a summary of the money market activity during the week:

all values in Kshs bn, unless stated otherwise

Weekly Liquidity Position – Kenya

Liquidity Injection

Liquidity Reduction

T-bill Redemption


Reverse Repo Maturities


Government Payments


Transfer from Banks - Taxes


T-bond Interest


T-bill (Primary issues)


Reverse Repo Purchases



Total Liquidity Injection


Total Liquidity Withdrawal



Net Liquidity Injection


Last week, the Kenyan government re-opened a 15-year fixed-coupon bond (FXD 2/2007/15), with an effective tenor to maturity of 5.0 years and a coupon rate of 13.5%, in a bid to raise Kshs 30.0 bn for budgetary support. The bond was 130.2% subscribed with Kshs 39.1 bn worth of bids received compared to Kshs 30.0 bn on offer. The average market bid rate was at 12.7%, while the average yield of the accepted bids came in at 12.5%, which is the yield trading in the secondary market. As has been the trend in the previous bond auctions held this year, which recorded an average acceptance rate of 59.5%, the government did not accept expensive bids, accepting Kshs 26.4 bn out of the Kshs 39.1 bn worth of bids received, translating to an acceptance rate of 67.6%.

According to Bloomberg, yields on the 5-year and 10-year Eurobonds, with 2.0 years and 7.0 years to maturity, rose by 30 bps w/w for both bonds, to close at 4.3% and 6.6%, from 4.0% and 6.3%, the previous week, respectively. Since the mid-January 2016 peak, yields on the Kenya Eurobonds have declined by 4.5% points and 3.1% points for the 5-year and 10-year, respectively, due to stable macroeconomic conditions in the country. The declining Eurobond yields and Standard & Poor’s (S&P) having maintained Kenya’s foreign and local currency sovereign credit ratings for the short and long term at “B+/B”, respectively, are indications that Kenya remains stable and hence an attractive investment destination.

The Kenya Shilling depreciated by 0.1% against the dollar during the week to close at Kshs 103.7 from Kshs 103.6 the previous week, driven by increased dollar demand from oil importers and a globally strengthening dollar. During the last meeting, the Fed increased the base rate and indicated possible rate hikes during the year, sighting the increase in the inflation rate, in tandem with wages increase and the continued improvement in investor confidence. On a year to date basis, the shilling has depreciated against the dollar by 1.1% as the Central bank continues to support the shilling as can be seen by the slight decline in the forex reserves over the last few weeks. In our view, the shilling should remain relatively stable in the short term, supported by: (i) the forex reserve level currently at USD 8.1 bn (equivalent to 5.4 months of import cover), (ii) the IMF precautionary credit facility of USD 1.5 bn (equivalent to 1.0 more month of import cover) that Kenya can utilise to stabilize the shilling in case of adverse movement in the forex market, and (iii) increased diaspora remittances that grew by 6.2% to Kshs 44.7 bn in Q1’2017, from Kshs 42.1 bn in Q1’2016.

We are projecting the inflation rate in the month of June to decline to between 10.7% - 11.0%, from 11.7% in May, mainly driven by a slowdown in food prices and reduced fuel prices. Going forward, we expect inflationary pressures to be subdued given (i) the food prices are expected to decline slightly due to the rains witnessed in the period March to June, and (ii) low global oil prices, due to rising US oil production, which has suppressed the global recovery of oil prices following OPECs decision to extend the deal to cut down on oil production. We expect inflationary pressures to ease in the second half of 2017, and average at 10.5% for the year, which is above the upper bound of the government target range of 2.5% - 7.5%.

HFC Limited, the banking and mortgage lending subsidiary of HF Group, is seeking to raise Kshs 3.0 bn through a short-term senior unsecured note program. The offer of the notes is by way of private placement and shall be issued in denominations of Kshs 1.0 mn. Subscribers shall hold onto the issue for a period of one year, which will have a value date of 30th June 2017 and is set to mature on 29th June 2018. The notes are not transferable and the proceeds of the issue are to be channeled towards general working capital financing. The yield on the note will be at a 1.5% premium over the 364-day T-bill, which is currently at 10.9%, translating to a yield of 12.4% on the issue. In our view, the issue offers an unattractive investment opportunity given (i) the 1.5% premium over the 364-day paper is not an appealing incentive considering the issue is unsecured, untradeable and not subject to regulatory approval. Given the nature of this note, we think that a minimum of 3.0% premium above the prevailing yield on similar tenor treasury instrument would be an attractive pricing to sufficiently compensate investors, and (ii) the bank is expected to use the proceeds in repaying the first tranche of the medium term note it issued in October 2010, worth Kshs 7.0 bn maturing on 2nd October 2017, while the bank will be forced to operate on thin margins, given that they are borrowing funds at a cost as high as 12.4%, whereas they can only earn a maximum yield of 14.0%, which is expected to strain the bank when it comes to paying back this particular issue.

Fixed Income Conclusions:

Rates in the fixed income market have remained stable, and we expect this to continue in the short-term, supported by:

  1. The government is expected to meet its domestic borrowing target for the 2017/18 fiscal year, as reduced credit to private sector following the capping of interest rates will make it easier for government to meet its domestic borrowing target, as institutions channel funds more actively towards government securities, and
  2. The government is expected to meet its foreign borrowing target in the 2017/18 fiscal year, with budget estimates projected to decline from Kshs 462.3 bn to Kshs 206.0 bn, which is the amount that the government has collected so far in the foreign market for this fiscal year.

Some of the factors that could put upward pressure on interest rates are:

  1. The Kenya Revenue Authority (KRA) is expected to face challenges in meeting its overall revenue collection target of Kshs 1.7 tn for the 2017/18 fiscal year, due to the expected subdued corporate earnings growth for the FY’2017,

Overall, the possible deficit that is likely to result from depressed revenue collection, and the high inflationary environment that we are currently in, create uncertainty in the interest rate environment. Our view is that investors should be biased towards short-term fixed income instruments to reduce duration risk.


During the week, the equities market was on an upward trend with NASI, NSE 20 and NSE 25 gaining 0.3%, 2.3% and 0.6%, respectively, taking YTD performance to 15.9%, 13.7% and 15.9% for NASI, NSE 20 and NSE 25, respectively. This week’s performance was driven by gains in large cap stocks such as Bamburi, and Barclays Bank, which gained 7.8% and 4.2%, respectively. Since the February 2015 peak, the market has lost 34.1% and 12.9% for NSE 20 and NASI, respectively.

Equities turnover declined by 17.9% to close the week at USD 45.8 mn, from USD 55.8 mn the previous week. Foreign investors turned net sellers with net outflow of USD 11.6 mn compared to a net inflow of USD 0.7 mn recorded the previous week. We expect that investor sentiment will remain neutral mainly due to the forthcoming general election, a factor that is likely to negatively affect the performance of the equities market.

The market is currently trading at a price to earnings ratio of 11.9x, compared to a historical average of 13.4x, and a dividend yield of 5.4%, compared to a historical average of 3.8%. The current P/E of 11.9x valuation is 22.7% above the most recent trough valuation of 9.7x experienced in the first week of February 2017, indicating substantial recovery since February 2017 and 42.3% above the previous trough valuation of 8.3x experienced in December 2011. The charts below indicate the historical P/E and dividend yields of the market.

Barclays Bank of Kenya has announced plans to lay off 130 of its employees through a voluntary exit scheme that is open to all permanent employees. This will bring the total number of staff laid off by the bank since 2016 to 301. The bank has steadily been reducing the number of employees as it seeks to automate its operations, especially at a branch level, and cut costs in response to the challenging operating environment, which is forcing banks to adopt cost rationalization measures. As highlighted in our Cytonn Weekly #24/2017, since the implementation of the interest rate cap, 11 banks have announced plans to downsize through laying off their staff, closure of branches, reviewing operating hours for some branches, or outright sales in the case of Tier III banks, all in a bid to remain competitive. We expect to see continued efforts by banks to reduce operating costs by managing staff costs, investing in digital banking platforms and intensifying the push for customers to embrace digital banking. Some banks such as Standard Chartered Bank have already taken measures to reduce the number of working hours in some of its branches in Nairobi, leaving customers with the only option of transacting through mobile applications and online banking platform. The table below highlights the number of staff retrenched and branches closed by financial institutions;

Kenya Banking Sector Restructuring



Staff Retrenchment

Branches Closed


Sidian Bank




Equity Group








Family Bank




First Community Bank




Bank of Africa




National Bank








Standard Chartered




KCB Group




Barclays Bank






The Central Bank (CBK) and Kenya Deposit Insurance Corporation (KDIC) have issued tentative timelines for the resolution of Imperial Bank Limited’s receivership. This comes only 3 months after the same process was run for Chase Bank Kenya Limited. The process will see potential investors and existing shareholder express their interest in the ownership of the bank, which has been under receivership since October 2015. CBK and KDIC anticipate that the entire process will take about 48 weeks and they will therefore seek to extend the bank’s receivership period by 12 months from the September 2017 deadline, which was set after a ruling by the high court granted a 90-day extension on the previously set June 2017 deadline. If the process is successful, Imperial Bank Limited will become the second Bank to be reopened after being put under receivership after Chase Bank Limited. CBK is in the process of finalizing the resolution of Chase bank’s receivership, and is expected to announce its preferred investor in the coming week. Given the high level of interest in Chase Bank Limited, which saw 12 investors, including 4 foreign banks put in bids, we expect to see high level interests in the acquisition of Imperial Bank Limited from both local and foreign financial services sector players owing to the fact that Kenyan banking sector remains attractive as it continues to offer access to high returns, with the return on equity being among the highest in the world, with listed banks having recorded return on equity of 16.8% in Q1’2017 and an average of 20.4% over the last five years. It is important to note however that bidders looking at Chase Bank Limited were dealing with a bank in operation, while those at Imperial Bank Limited will be looking at a bank that has been closed for over a year, which makes it a much harder sell for Imperial Bank Limited.

The Central Bank of Kenya (CBK) issued an operating license to Mayfair Bank Ltd which had received ‘approval in principle’ before the 2015 moratorium on licensing of banks. This is the second bank to be licensed by the CBK after they lifted the moratorium in March this year, and issued a license to Dubai Islamic Bank Limited(DIB) in April, bringing the total number of commercial banks in Kenya to 43, with 2 in receivership. The licensing of applicants that meet laid down statutory criteria is positive for the market, because (i) it eliminates randomness in licensing and (ii) subjects the value of a license to market forces, rather than arbitrary regulatory actions. In our view this further confirms the attractiveness of the Kenyan banking sector, which still remains among the most profitable banking sector in the world with return on average equity over the last five years at 20.4%.

The Central Bank of Kenya(CBK) and the Kenya Bankers Association(KBA) have launched a Cost of Credit website that is meant to provide the public with information on fees and charges relating to loan facilities offered by commercial banks and microfinance institutions. The website will allow the users to access the total cost of credit, an Annual Percentage Rate (APR), which is the effective interest rate per annum, and a repayment schedule. This move by CBK and KBA is meant to increase transparency on loan pricing by financial institutions and empower consumers to make informed decisions before they can access credit. In our view, while this may help with transparency, it does not address the key structural issues affecting banking and funding in Kenya. In more developed markets, bank funding makes only 40% of loans, while in Kenya and the region bank funding is at 95%. This means that banks will continue to have significant pricing power that can only be tamed through legislation, which is not necessarily an effective solution as witnessed by the drop in credit growth to private sector after the enactment of the law on capping of interest rates. It is crucial to develop capital markets and alternative sources of funding to bring down the 95% funding dominance by banks. The task to increase capital markets funding and alternative markets funding lies with the Capital Markets Authority and capital market participants.

Below is our Equities universe of coverage:

Our Equity Universe



Price as at 16/06/17

Price as at 23/06/17

w/w Change

YTD Change

Target Price*

Dividend Yield

Upside/ (Downside)**




















KCB Group***









I&M Holdings









HF Group


















Jubilee Insurance









Stanbic Holdings


















Co-op Bank









Equity Group









Standard Chartered









Kenya Re









CIC Group



























Sanlam Kenya

















*Target Price as per Cytonn Analyst estimates

**Upside / (Downside) is adjusted for Dividend Yield

***For full disclosure, Cytonn and/or its affiliates holds a significant stake in KCB Group, ranking as the 14th largest shareholder

We remain "neutral with a bias to positive" for investors with short to medium-term investments horizon and are "positive" for investors with a long-term investment horizon.

Private Equity


Simba Corporation (Simba Corp) has completed the acquisition of a minority stake, 35.0% in Hemingways Holdings Ltd. Simba Corporation is a leading regional corporation with diversified interests in real estate, hospitality as well as in auto-motive and power distribution services and solutions. Simba’s hospitality properties include the Olare Mara and Villa Rosa managed by world leading hotelier, Kempinski as well as Acacia Premier Hotel in Kisumu. This investment is aligned to Simba Corp’s goal of creating a substantial hospitality business platform with the intention to expand nationally and within the region. Hemingways develops luxury hotels and resorts and it is the parent company of three iconic properties in Kenya which include; Hemingways Watamu, Ol Seki Hemingways Mara and Hemingways Nairobi.

The transaction is beneficial to Hemingways as; (i) The investment by Simba Corp will provide additional capital to fund its growth and expansion as they are currently developing a new mixed use development in Watamu, and (ii) it will benefit from the experience and services of Simba Corp as an operator in the hospitality sector. The hospitality industry in Africa remains bullish attributed to factors such as; (i) growth in the tourism sector; the region is expected to attract 64.0 mn international tourist arrivals in 2017, as compared to 58.0 mn in 2016 (10.3% growth), and 110.0 mn by 2027 (89.7% growth), according to Jumia Travel Hospitality Report 2017, and (ii) growth in the travel industries where The International Air Transport Association (IATA) predicts a stronger growth of 4.8% in passenger numbers in the next 5-years starting 2017, attributed to an increase of international flights into the continent, as currently Africa accounts for only 3.0 % of the world’s air traffic.

On the Fundraising Front:

Sahel Capital, a fund manager for the Fund for Agricultural Finance in Nigeria (FAFIN), has successfully closed its USD 65.9 mn fund. As part of this close, the African Development Bank, CDC Group, and the Dutch Good Growth Fund have jointly committed USD 31.0 mn to FAFIN, joining existing co?sponsors of the fund to drive agricultural transformation in Nigeria. Sahel Capital intends to invest these funds over the next two years in the Nigerian agribusiness sector and create jobs while improving productivity and strengthening priority value chains. As part of this round, KfW Development Bank has also offered to increase its commitments to FAFIN by an additional USD 10.0 mn, subject to final approvals, which if provided would increase the fund size to USD 76.0 mn by December 2017. Since FAFIN’s launch in 2014, Sahel Capital has assessed over 100 companies and elected to invest in four indigenous high growth companies through investments in the dairy, edible oils, and poultry chains of Nigeria. With the additional capital raised, Sahel Capital aims to invest in 9 – 10 additional companies across Nigeria.

Agriculture averages 24.0% of GDP across Africa. With post-harvest activities taken into account, agriculture-related industry accounts for nearly half of all economic activity in sub-Saharan Africa and the World Bank projects that agriculture and agribusiness in Africa will grow to be a USD 1.0 tn industry by 2030. The agricultural sector continues to attract private equity investments driven by technological innovation in the industry.

Private equity investments in Africa remains robust as evidenced by the increased deals and fundraising activities. The increasing investor interest is attributed to (i) rapid urbanization, a resilient and adapting middle class and increased consumerism, (ii) the attractive valuations in private markets compared to global markets, and (iii) better economic projections in Sub Sahara Africa compared to global markets. We remain bullish on PE as an asset class in Sub-Sahara Africa. Going forward, the increasing investor interest and stable macro-economic environment will continue to boost deal flow into African markets.

Real Estate

The warehousing sector continues to attract high levels of interest, as investors seek Grade A warehouse facilities. During the week, three local companies, which include (i) East African Sea Food, (ii) Expro Group, and (iii) NOV Kenya moved into Alpha Business Park as it launched its operations. Alpha Business Park is located in Ruai along the Eastern By-pass, 11 kms from the JKIA cargo terminal and 11.1 kms from Thika Road. Another firm, Bidco Africa, also announced its plans to construct an industrial park in Tatu City Ruiru, Kiambu County, as part of its expansion plan, in a bid to tap into Nairobi’s growing demand for high-quality warehousing space.

The warehousing sector in Kenya is witnessing increased investment driven by (i) demand for high-quality warehousing space as growing local and international companies need to improve their distribution and supply chains, (ii) improving infrastructure such as roads and railways, making the movement of goods easier and cheaper, (iii) expansion and modernization of ports, (iv) demand for warehouse space by landlocked neighboring countries that rely on Kenyan ports, and (v) the rise of e-commerce, which has created demand for storage space for distribution centers.

In terms of performance, the sector has recorded positive growth with rentals rising by 11.0% in 2016 according to the Broll Report. The table below shows a summary of warehouses performance in various nodes of Nairobi in 2016:

Summary of Industrial Market Performance in Nairobi by Nodes


Price / SQFT "Kshs"

Rent / SQFT "Kshs"

Occupancy %

Rental Yields %

Baba Dogo





Industrial Area










Athi River





Mombasa Road










Baba Dogo was the best performing market with average rental yields of 7.1% and a high occupancy of 94%. This can be attributed to the high demand for warehousing space in the area due to presence of many manufacturing companies in the area as well as proximity to Thika Road making it easily to accessible both from the CBD and Central Kenya

Source: Cytonn Research

We expect increased investment in the industrial sector driven by the rapid infrastructural development in the country such as construction of roads and the launch of the Standard Gauge Railway hence easing transport and accessibility to various parts of the country and the neighboring land locked countries.

The Land Ministry has lifted the ban on the renewal of land leases in a move to revive and unlock land deals. There are a number of land parcels that remain undeveloped as investors shy away from developing land whose leases have expired, or are nearing expiry, while land owners cannot develop due to inaccessibility of credit that require leases before issuance of credit. In a move to make this new rule effective, the government will notify owners of land of the expiry of their leases five-years before the tenancy period expires. On the other hand, the Land Ministry, in a bid to free up unutilized and unproductive land, announced that owners of large and idle tracts of land mostly held for speculative purposes will risk losing such holdings upon the expiry of their lease terms. The approval of extension or renewal of lease for large-scale land owners shall be based on the benefits to the economy and the national development goals. In our view, these rules are a step in the right direction in providing a conducive environment for vibrant real estate sector as it will ease transfer of land to investors and developers, while placing all land in productive use and ease access to credit.

During the week, the World Travel and Tourism Council (WTTC) released the Travel and Tourism Economic Impact 2017 report that focused on 185 countries in Africa, America, Europe, Asia-Pacific and Middle East. The report highlights the 2016 performance, as well as providing a 10-year forecast on the performance of the tourism sector. The report indicates that the travel and tourism sector continued to show positive growth in 2016 across all the countries, despite the shocks witnessed in the sector such as cases of insecurity, political instability, health pandemics and natural disasters. Travel and tourism generated USD 7.6 tn globally, equal to 10.2% of global GDP, 292 mn jobs, equivalent to 10% of jobs in the global economy, and accounted for 6.6% of total global exports. Growth in travel and tourism outpaced the growth recorded in the financial and business services, manufacturing, public services, retail and distribution, and transport sectors.

The report further analysed the travel and tourism sector in Kenya, and the following are the key takeouts;

  • GDP Contribution - The direct contribution of travel and tourism sector to GDP was Kshs. 257.4 bn, equal to 3.7% of total GDP in 2016 and is projected to grow at 6.0% p.a between 2017 to 2027,
  • Leisure: Leisure travel spending generated 65.8% of direct Travel and Tourism contribution to GDP in 2016 compared to 34.2% by business travel spending. Domestic travel spending generated 60.8% of direct Travel and Tourism contribution to GDP in 2016 compared with 39.2% by international tourism,
  • Employment - Travel and Tourism directly generated 399,000 jobs in 2016 equal to 3.4% of total national employment. This is projected to rise by 3.0% in 2017 and rise by 3.3% p.a to 569,000 jobs in 2027,
  • Visitor Exports/International Tourist Arrivals - Visitor exports generated Kshs. 173.1 bn, equal to 16.5% of total exports in 2016. This is projected to grow by 5.2% in 2017, and by 6.5% p.a, from 2017-2027 with international tourists’ arrivals projected to grow to Kshs 2.4 bn in 2027,
  • Capital Investment- Travel and Tourism sector attracted capital investment of Kshs. 85.1 bn, equal to 5.7% of the national total investment in 2016. This is projected to rise by 6.6% in 2017, and rise by 4.0% p.a. between 2017 – 2027.

The above factors highlight the recovery in the tourism sector, which supports the hospitality industry hence attracting both local and international investors and developers to tap into the vibrant sector. We expect continued growth of the hospitality industry to be supported by the following factors;

  • Increased government investment in the sector through aggressive local and international marketing,
  • Nairobi as the regional hub attracting key international conferences contributing positively to Meetings, Incentives, Conferences, and Exhibitions (MICE) tourism. As per the 2016 KNBS Economic Survey, there was an increase in international conferences, which resulted into an increase in number of local and international delegates over the past five-years by 3.3% and 20.9%, respectively,
  • The infrastructural developments in the country hence improved and easy accessibility of national parks and game parks, for example, completion of the Northern tourism circuit which connects with the coastal tourism circuit.

Other real estate highlights during the week are:

  1. An international developer, Larkspur Ltd has announced plans to put up a 41-storey luxurious apartment building on a one-acre parcel located on Fourth Ngong Avenue in Kilimani area. The development will comprise of 300 executive duplex apartments and the first five-floors will be reserved for parking bays. The development targets to tap into the growing demand for quality and high-end living space within the proximity of Nairobi’s CBD,
  2. The Nairobi Hospital has booked space at the Crystal Rivers Mall by Safaricom Pension Fund on 25-acres in Athi River,
  3. Tuskys Supermarket won reprieve in a court battle against real estate firm Juma Muchemi & Partners, which sued the retail chain for backing out of a deal to occupy a mall it developed in Nakuru. The charges were dismissed by High court, arguing that Tuskys’ decision was justified owing to completion delays by more than 5 -years and a threatened auction of the mall by Barclays Bank Limited.

Real estate remains resilient with increased investment in the hospitality and industrial sectors driven by increased demand and infrastructural development in various parts of the country

Cytonn Corporate Governance Index Report - 2017

Corporate governance constitutes the mechanisms, processes and relations through which companies are controlled and governed. Corporate governance is founded on the pillars that, businesses have to practice accountability to stakeholders, fairness, have transparency in business activities and exhibit independence in decision making. Corporate governance has become even more crucial given the recent global financial crisis in the West, and close to home given the recent bank failures and operational crisis in firms such as:

  1. Imperial Bank, which was placed under receivership by the CBK following unsound business conditions in the bank,
  2. Chase Bank, which was also placed under receivership following cases of unsound banking practices such as large unsecured loans to directors,
  3. Uchumi and Nakumatt which have experienced cash-flow problems due to mismanagement of the retailers,
  4. Kenya Airways, whose issues around governance came into light following four consecutive years of massive losses resulting from high debt levels after a botched expansion plan, and reduction in passenger numbers.

Investors have lost over Kshs. 270 bn in situations that are closely linked to failure of corporate governance and ethics.

The benefits of good corporate governance include (i) protecting the interest of the investing public, (ii) reducing risks of corporate crisis, (iii) ensuring the firms have the right processes in place, with all decision making done in a transparent manner as per policy, (iv) improving access to funding at better costs, (v) improving firm valuation and share price performance, and (vi) generally improving the performance of the entire firm as it has a focus on ensuring corporate decisions result in the application of the highest standards of governance which enhances sustainability in the firm’s growth.

Last year, we released the first Cytonn Corporate Governance Index Report in which we highlighted key issues facing corporate governance in Kenya. The report themed “What is the role of corporate governance in the recent investor losses?”, painted a gloomy picture of the Kenyan corporates as one where investors had amassed substantial losses amounting to Kshs 257 bn as at May 2016, due to increased cases of corporate governance malpractices. With such a worrying statistic, it called on regulators to heighten their oversight stance on governance aided by increased scrutiny from professional bodies, non-governmental organizations and the general public.

Cytonn’s Corporate Governance Index ranks 50 listed companies, each with a market cap of above Kshs 1.0 bn, using 24 metrics on their corporate governance structure. The companies are ranked on 24 metrics to arrive at a composite score that provides a deeper understanding of the level of corporate governance in each firm. The main areas of analysis are in the (i) board composition, (ii) audit functions, (iii) CEO tenure and evaluation, (iv) remuneration, and (v) transparency. The score is a diffusion index with 50.0% as the base meaning that any score below 50.0% is flagged as having serious corporate governance issues while any score above 50.0% is skewed towards proper governance. However, the variance from 100% gives the risk associated with corporate governance.

We are glad to note that 2016/17 has witnessed a notable improvement and focus on corporate governance, leading to reduction in the number of corporate governance issues; this is evidenced by the few number of poor governance cases as well as measures taken to redress the companies that were drowning owing to poor governance such as boardroom changes especially among government owned entities, which we believe have been as a result of regulations aimed at restoring governance order in the market in pursuit of regaining investor confidence. Some of the key regulations include (i) the publishing of the CMA Code of Corporate Governance Practices for public companies, which is based on “apply or explain” approach that requires companies to actually follow the set out corporate governance codes, and (ii) the constitution of a board by the CBK which is tasked with ensuring the regulator performs its role in the banking sector. This increased level of regulation and signs of stability informs the theme of our report this year, “Corporate governance key to regaining confidence and protecting shareholder value in Kenyan listed companies”. Key highlights include:

  1. Regulation: Last year, the CMA published the “Code of Corporate Governance Practices” for public companies in Kenya, which is based on “apply or explain” approach that requires companies to actually follow the set out corporate governance codes, a shift from the previously applied “comply or explain” approach that lets individual companies to decide whether to follow set codes or not. The code, which came into effect this year in March is likely to lead to increased accountability by the board even as it guides in identifying potential gaps in the boardroom. In addition to this code, the Cabinet approved the State-sponsored Financial Bill 2017, which seeks to create the Financial Services Authority, a body that will consolidate and take over the functions of the Capital Markets Authority (CMA), Insurance Regulatory Authority (IRA), Retirement Benefits Authority (RBA) and Sacco Societies Regulatory Authority (SASRA). This body will be beneficial to the corporates as it is expected to lead to increased transparency in the non-bank financial services industry by eliminating regulatory gaps as well as providing a standard approach to corporate governance. With the banking sector having witnessed many cases of poor corporate governance, the CBK constituted a board tasked with ensuring the regulator performs its role in the banking sector, which we believe is a step towards the right direction in ensuring better oversight in the banking sector while ensuring that the regulator is also not exempted from having the proper corporate governance structure.
  2. Changes towards Stability: There has been a lot of changes in the companies that had potential governance issues including;
    • Recently the CBK invited potential investors to take an equity stake in Chase Bank Limited as part of restructuring plan meant to speed up recovery of the lender, having been under the receivership of KCB Group and the Kenya Deposit Insurance Corporation (KDIC) as the official receiver. Chase Bank Limited was placed under receivership following cases of unsound banking practices, which includes large unsecured loans to directors. This being the first time that a Kenyan bank in receivership has been reopened, the reopening will go a long way in restoring investor confidence especially in the banking sector.
    • The CBK and KDIC have also issued tentative timelines for the resolution of Imperial Bank Limited’s receivership which will see investors and shareholders express their interest in the ownership of the bank, which has been in receivership since October 2015. If the process is successful, Imperial Bank Limited will become the second Bank to be reopened after being put in receivership after Chase Bank Limited.
    • Mumias board hired 8 new managers as part of conditions given by the government and shareholders before bailing out the miller,
    • Uchumi hired a new CEO and senior managers to drive its turnaround strategy following the sacking of the former CEO for gross misconduct and negligence,
    • National Bank’s board appointed a new CEO following the sacking of the previous head and 5 other senior managers due to mismanagement and a loose credit policy, and,
    • Kenya Airways’ board hired a new chair to the board to oversee implementation of its turn-around strategy after an audit report revealed massive malpractices in the firm.

In addition, we have also witnessed significant corporate governance changes in entities such as (i) Limuru Tea that hired a new CEO as well as a new chairman to the board in fulfillment of CMA’s governance requirements, (ii) TransCentury, which made changes to its board following acquisition of 25.0% stake by Kuramo Capital that saw entry of 3 new non-executive directors representing Kuramo, and the exit of 4 former members, and (iii) Home Africa, in which 7 of the firm’s directors exited following mismanagement that led to the firm reporting a loss of Kshs 118.1 mn in H1’2016, with the board size reducing to 6 members from the previous 10 members after replacement of 3 members. Given the financial challenges that has plagued Nakumatt recently, we believe corporate governance changes are eminent to help get the retailer back to stable ground.

Compared to last year, the average performance for companies has improved by 4.1% to an average score of 65.7%, from 61.6% in 2016 mainly driven by better disclosures around governance. This is an indication that Kenyan listed companies are firming up to better governance practices, which is expected to lead to better performance of various companies. Companies also registered better performance on ethnic diversity with an average score of 62.1% compared to a score of 59.4% registered last year. A higher score on ethnic diversity indicates better assortment in board composition, which improves the quality of decision making and enhances creativity and innovation translating to better performance by the companies. The average score on gender diversity, however declined to 16.4% from 18.3% in 2016. This is an indication that there remains a lot more to be done by companies with regards to having female members on their boards, and we believe that full compliance to the CMA’s Code of Corporate Governance Practices will be key in achieving this. Below is a graph highlighting the comparison in average score under the comprehensive score, ethnic diversity and gender diversity categories.

Another key highlight from this year’s report is the strong correlation between corporate governance and returns on stocks of the listed entities. The top 25 companies in the Cytonn CGI have delivered an absolute return of approximately 37.8% over the last 5-years compared to the bottom 25 companies, which have delivered an absolute return of (5.1%) per annum over the last 5-years.

The diversity of the board by gender and ethnicity is also directly correlated to stock returns as indicated below:

Top 25 companies under the gender diversity criteria recorded a 5-year absolute return of 40.2% compared to a negative return of 8.1% recorded by bottom 25 companies.

Under ethnic diversity, Top 25 companies delivered a 5-year absolute return of 26.1% compared to a return of 10.3% recorded by bottom 25 companies. These three graphs indicate the strong correlation between the level of governance in an entity and the investor sentiments on the company as measured by the performance of its stock.

*We have excluded agricultural stocks due to their repricing as they were priced due to their real estate holdings

Below is a summary of the top 5 companies under each of the categories cited above:

Summary of the top 5 Companies under various categories


Comprehensive Score

Gender Diversity

Ethnic Diversity









KCB Group


Barclays Bank Ltd


Sanlam Kenya



DTB Bank


Mumias Sugar Co.


KCB Group



Jubilee Holdings


B.O.C Kenya


East Africa Breweries



Standard Chartered Bank


HF Group


Flame Tree Group







Safaricom Ltd


In comparison to last year, a number of companies recorded improvement in their comprehensive score due to various reasons, as outlined below:

  • Uchumi: It was the most improved company with a score of 60.4% from a score of 37.5% in our last report. This was due to (i) better disclosures on board composition and activities such as meetings and evaluation of the board, and shareholding of directors, (ii) rotation of auditor to KPMG from Ernst & Young
  • WPP Scangroup: Scangroup’s score improved to 66.7% from a score of 45.8% last year. This was due to changes in the board, increasing the board size to 9 members from 6 members, and improving female representation. There was also disclosure on rotation of auditors and evaluation of the CEO
  • Liberty Holdings: The company’s score improved to 81.3% from 66.7% also due to better disclosure on board composition, tenure and evaluation of the CEO and shareholding by directors

Key to note from all these companies is the common improvement in disclosures, which forms an integral part in corporate governance. Transparency aids in protecting stakeholders interest.

On the contrary, a number of companies also recorded declines in their comprehensive score, including:

  • EA Cables: EA Cables recorded a decline in comprehensive score of 8.3% to a score of 54.2% from 62.5% in our last report. This was due to decline in female representation in the board, decline in attendance to meetings by board members and increase in the average age of board members
  • Kakuzi Limited: The company’s score declined to 54.2% from a score of 60.4% last year mainly due to non-disclosures relating to board members and the increase in board size to an even number from a previous odd number
  • Kenya Airways: Despite the boardroom changes by the airline, its score dropped to 60.4% from a previous score of 66.7%. This is due to reduced shareholding by directors to zero as well as non-disclosures on board members’ attendance to meetings

As shown in the above graphs, sound corporate governance is essential to well-functioning and vibrant financial markets. We believe that the Kenyan listed entities are firming up to sound corporate governance practices supported by increased regulation from various bodies and organizations responsible for corporate governance oversight, which is essential for stability of the companies and the general market. We therefore hope that the regulations put in place will go a long way in instilling a proper governance culture and ultimately, deepening the capital markets.

For a comprehensive analysis on the ranking and methodology behind it, see our Cytonn Corporate Governance Index Report – 2017.