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7 May, 2017

Executive Summary

Fixed Income: The level of T-bill subscription increased during the week, with overall subscription rate coming in at 196.2% compared to 103.1% recorded the previous week. The 182-day paper was on offer this week after 8 weeks of suspension from the auction market, recording a subscription rate of 253.8% at an average yield of 10.5%, compared to 412.5% and 10.5%, respectively, the last time it was offered in February 2017. The 2017 Human Development Index released by the United Nations Development Programme (UNDP) revealed that Kenya had the highest unemployment rate in the East African region, at 39.1% in 2016;

Equities: During the week, the equities market recorded mixed trends with NASI and NSE 25 gaining 1.5% and 1.6%, respectively, while NSE 20 declined by 0.3%. NIC bank and Stanbic bank released Q1?2017 results with both banks recording declines in core earnings per share by 3.9% and 9.3% to Kshs 1.5 and Kshs 6.3, from Kshs 1.6 and Kshs 7.0, respectively;

Private Equity: Activity in the private equity space continues to gain traction based on acquisitions and partnerships skewed towards the FMCG sector with: (i) GBfoods S.A. partnering with Helios Investment Partners, an Africa-focused private investment firm, to create one of Africa?s largest FMCG businesses, and (ii) Ethos a Southern African Private Equity firm, acquiring an undisclosed majority stake in Little Green Beverages (LGB);

Real Estate: The Kenya Bankers Association released their Q1 2017 Housing Price Index, which showed house prices grew at a slower pace in Q1 2017 as the index increased by 1.10% compared to 1.40% same time last year, amid reduced demand. The Kenya Tourism Board Authority announced plans to market Kenya?s tourism products through the ongoing Indian Premier League;

Focus of the Week: We focus on the Cytonn FY?2016 Insurance Report, analyzing the current state and future outlook of the industry based on the year 2016 results. We ranked the listed insurance firms based on their attractiveness and stability for investment from a franchise value and from a future growth opportunity perspective.

Company Updates

  • Cytonn Diaspora hosted an investment forum in London for Kenyans in the UK interested in investing back in Kenya. For more information, email diaspora@cytonn.com
  • Our Chief Investment Officer, Elizabeth Nkukuu, CFA spoke at the African Financial Services Investment Conference. Elizabeth discussed alternative investment opportunities in the East African financial services industry. For more information on alternative investments in East Africa, email investments@cytonn.com
  • Our Investments Manager, Maurice Oduor, was on Citizen TV discussing the minimum wage increase as announced by the president during the Labour Day celebrations. Watch Maurice Oduor on Citizen TV here
  • Cytonn Foundation conducted a training on Financial Statements Analysis for media; the training was attended by over 30 media personnel. Commenting on the training, Maurice Oduor, Investment Manager, said that ?an informed and analytical financial press is essential to well-functioning financial markets. We hope that the training we offer every six months will enhance the quality of information that goes into the dailies, which the general public relies on for their information.? For more information on our media training, email foundation@cytonn.com. See event note
  • We continually showcase real estate developments by our real estate development affiliate, Cytonn Real Estate, through weekly site visits. 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. To register for the training kindly use this link
  • For recent news about the company, see our news section here
  • We have 12 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
    • The Ridge Phase One is currently 20.0% sold. See The Ridge
    • Taraji Heights is currently 10.0% sold. See Taraji Heights
  • Following the completion of sales for Amara Ridge, we are currently looking for land in Karen for our next development. We are also looking for 3-10 acres of land in Garden Estate, Muthaiga North, South C and Lang?ata. Contact us at res@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 were oversubscribed for the 13th consecutive week, with the overall subscription rate rising to 196.2%, compared to 103.1% recorded the previous week. The 182-day paper was floated in this week?s auction after being suspended from the auction market for the last 8 weeks. The 182-day paper recorded a subscription rate of 253.8% at an average yield of 10.5% as compared to 412.5% and 10.5%, respectively, the last time it was offered in February 2017. Subscription rates for the 91 and 364-day papers came in at 295.7% and 98.9%, compared to 123.7% and 82.5% the previous week, respectively. The 364-day paper had the lowest subscription rate during the week, an indication that investors are biased towards short investment durations due to uncertainty in the interest rate environment. Yields on the 91 and 364-day papers remained unchanged at 8.8% and 10.9%, respectively. This may be due to either (i) the CBK?s disciplined stance in the auction market where bids that are above market are rejected and the market is responding positively to this by bidding at yields that the CBK considers reasonable and that are within the market levels, or (ii) the market views the heightened inflation as temporary.

The average interbank rate declined slightly to 6.1% from 6.4% recorded the previous week, despite the net liquidity reduction of Kshs 11.8 bn compared to a Kshs 0.1 bn injection the previous week. The net liquidity reduction during the week was as a result of the government?s liquidity mop-up activities of (i) term auction deposits of Kshs 11.5 bn, and (ii) OMO tap sales of Kshs 7.2 bn; aided by taxes remitted by banks, T-bill primary issues, repos and reverse repo maturities totaling Kshs 72.3 bn.

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


Term Auction Deposit Maturities


T-bond sales


Government Payments


Transfer from Banks - Taxes


T-bond Redemptions


T-bill (Primary issues)


T-bill Redemption


Term Auction Deposit


T-bond Interest


Reverse Repo Maturities


T-bill Re-discounts




Reverse Repo Purchases


OMO Tap Sales


Repos Maturities



Total Liquidity Injection


Total Liquidity Withdrawal



Net Liquidity Injection


According to Bloomberg, yields on the 5-year and 10-year Eurobonds, with 2.2 years and 7.2 years to maturity, remained relatively unchanged w/w, closing the week at 4.2% and 6.7%, respectively. Since the mid-January 2016 peak, yields on the Kenya Eurobonds have declined by 4.6% points and 3.0% points, respectively, for the 5-year and 10-year bonds due to stable macroeconomic conditions. 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 remained relatively stable against the dollar during the week to close at Kshs 103.1, from Kshs 103.2 recorded the previous week. However, the Shilling is likely to be under pressure in coming weeks on account of (i) increased dollar demand from oil importers as global oil prices drop below USD 50.0 per barrel, as it is cheaper for oil importers to increase purchases now before prices begin on an upward trend, and (ii) sugar imports as production declined due to low rainfall experienced in October and November 2016, thus requiring the government to import an additional 400,000 tonnes in the next 3 weeks to meet the demand for sugar in the country. On a year to date basis, the shilling has depreciated against the dollar by 0.6%. With the current forex reserve level currently at USD 8.3 bn (equivalent to 5.5 months of import cover), we believe the CBK will be able to support the shilling in the short term.

The 2017 Human Development Index (HDI), an annual report released by the United Nations Development Programme (UNDP), revealed that Kenya, the largest economy in East Africa has the highest unemployment rate at 39.1% in 2016 up from 24.1% in 2015. Unemployment rates for Tanzania, Ethiopia, Uganda and Rwanda were 24.0%, 21.6%, 18.1% and 17.1% in 2016, respectively.  According to the report major causes of unemployment were (i) inequality of income in the country, and (ii) slower growth of jobs with 832,900 new jobs having being generated in 2016 - 10.3% of these coming from the formal sector - down from 841,600 in 2015. The lower employment growth is likely to result in increased crime and violence cases, and low levels of savings and investments in country and  therefore becoming detrimental to economic growth in the long term.

Africa continues to be an attractive investment destination supported by high economic activity and a growing middle class. According to a report released by Ernst & Young (EY) Africa dubbed the EY Africa Attractiveness Program 2017, there was a 31.9% increase in capital investments into Africa to USD 94.1 bn in 2016 from USD 71.3 bn in 2015. Key highlights from the report include:

  1. The number of FDI projects declined by 12.3% to 676 projects and the number of jobs created from these projects declined by 13.1% to 129,150 jobs in 2016,
  2. The average capital invested per FDI project was USD 139.0 mn in 2016 up from USD 92.5 mn in 2015 due to the decline in number of FDI projects and increase in total capital invested,
  3. Most of the FDI inflows were concentrated in the largest economies per region with South Africa in southern Africa, Egypt and Morocco in northern Africa, Nigeria in western Africa and Kenya in eastern Africa,
  4. The US maintained its top position as the largest investor in Africa accounting for 13.5% of FDI projects, and
  5. Investment in the energy sector such as oil, gas and coal mining and exploration; and transport & logistics jointly accounted for 67.3% of the total capital invested.

The rates in the fixed income market have remained stable, despite indications of possible upward pressure on interest rates. The Government is ahead of its domestic borrowing for the current fiscal year, having borrowed Kshs 294.1 bn against a target of Kshs 249.3 bn (assuming a pro-rated borrowing throughout the financial year of Kshs 294.6 bn budgeted for the full financial year). The government has only borrowed Kshs 205.8 bn of the budgeted foreign borrowing, representing 44.5% of its foreign borrowing target of Kshs 462.3 bn, and the Kenya Revenue Authority (KRA) is expected to miss its overall revenue collection target of Kshs 1.5 tn for the current fiscal year having missed its first half target. It is important to note that the government is also behind its spending target, with total expenditure for the first half of the 2016/17 fiscal year coming in at Kshs 928.5 bn, which represents 83.6% of the pro-rated target of Kshs 1.1 tn. Development expenditure for the first half of the 2016/17 fiscal year had an absorption rate of 73.8% against 92.5% for recurrent expenditure. Given that the government has historically exceeded the absorption rate on recurrent expenditure averaging 103.5% while the development expenditure has averaged 65.0%, leaving the overall budget absorption rate below 100.0% consistently in the last 5 fiscal years, there still exists upwards pressure on interest rates, but may be subdued unless spending picks up. Government may also be looking at concessionary loans to finance the expenditure rather than borrowing from the foreign market. The possible budget deficit and high inflationary environment that we are currently in create uncertainty in the interest rate environment as domestic borrowing may exert an upward pressure on interest rates, and result in longer term papers not offering investors the best returns on a risk-adjusted basis. It is due to this that we think it is prudent for investors to be biased towards short-term fixed income instruments.


During the week, the equities market recorded mixed trends with NASI and NSE 25 gaining 1.5% and 1.6%, respectively, while NSE 20 declined by 0.3%, taking their YTD performances to 1.4%, (1.2%) and 1.2% for NASI, NSE 20 and NSE 25, respectively. This week?s performance was driven by gains in large cap stocks such as KCB Group, Equity Group and Safaricom, which gained 4.8%, 4.5% and 2.6%, respectively. Since the February 2015 peak, the market has lost 42.8% and 23.8% for NSE 20 and NASI, respectively.

Equities turnover decreased by 31.1% to close the week at USD 20.6 mn, from USD 30.0 mn the previous week. Foreign investors remained net sellers with a net outflow of USD 2.7 mn compared to a net outflow of USD 1.5 mn recorded the previous week and their participation decreased to 63.2%, from 69.5% recorded the previous week. Safaricom was the top mover for the week, accounting for 40.2% of market activity. We expect the Kenyan equities market to be flat in 2017, driven by slower growth in corporate earnings, neutral investor sentiment mainly due to the forthcoming general elections, and the aggressive rate hike cycle in the US, which may reduce the level of foreign investor participation in the local equities market.

The market is currently trading at a price to earnings ratio of 10.8x, compared to a historical average of 13.4x, and a dividend yield of 6.0%, compared to a historical average of 3.7%. The current 10.8x valuation is 11.3% above the most recent trough valuation of 9.7x experienced in the first week of February of 2017, and 30.0% above the previous trough valuation of 8.3x experienced in December of 2011. The charts below indicate the historical P/E and dividend yields of the market.

KCB Group plans to temporarily close some of its 19 branches in South Sudan following continued operational challenges caused by ongoing political instability, devaluation of the South Sudanese Pound and hyper-inflationary effects, which resulted in the bank reporting a Kshs 3.4 bn loss in its South Sudan subsidiary. The move, which is aimed at protecting shareholders? interests, is also likely to lead to an unspecified number of job losses. This comes after all the four Kenyan banks with operations in South Sudan (Equity Group, KCB Group, Co-operative Bank and Stanbic Holdings) reported losses from their operations in South Sudan in their FY?2016 results. The bank, however, stated that a change in the economic situation in South Sudan will lead to re-assessment of the viability of the branches. As highlighted in our Cytonn Weekly #10/2017, we are still of the view that the regional expansion strategy is a distraction and is eroding shareholders value and as such, KCB Group and other banks should re-assess their regional expansion strategy. It is likely that the total return thus far on the regional strategy remains deeply negative hence the hard decision to totally, rather than temporarily, close the branches may be wiser. Regional expansion in banking is best pursued by acquiring significant stakes in local players rather than trying to grow organically in a foreign market.

The Central Bank (CBK) has shortlisted potential investors in Chase Bank out of the 12 that expressed interest including 3 local banks, 4 foreign financial institutions and 5 other financial institutions and consortia. The CBK is seeking to sell Chase Bank as part of a restructuring plan meant to speed up recovery of the lender, having been under the management of KCB Group and the Kenya Deposit Insurance Corporation (KDIC) as the official receiver. The interest in Chase Bank by both local and foreign financial services sector players is an indication that the Kenyan banking sector remains attractive as it offers 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 19.9% in FY?2016 as highlighted in our Cytonn Weekly #14/2017. Banks are trading at a current Price to Book ratio of 1.2x compared to 1.9x three years ago. For CBK and KDIC, this is a historic development as it is the first time that a Kenyan bank under receivership has been reopened, and the ownership and capital challenges post reopening are being resolved in a very open and transparent process with clear timelines. In a market where regulatory processes are often shrouded with uncertainties and arbitrariness, the CBK and KDIC process with Chase Bank sets a benchmark.

NIC Bank released Q1?2017 results

NIC Bank released Q1?2017 results, recording a 3.9% decline in core earnings per share to Kshs 1.5 from Kshs 1.6 in Q1?2016, due to a 9.7% decline in total operating income but was cautioned by a 13.6% decline in total operating expenses. Key highlights for the performance from Q1?2016 to Q1?2017 include:

  • Total operating income declined by 9.7% to Kshs 3.7 bn from Kshs 4.1 bn in Q1?2016. This was attributed to a 13.1% decline in Non-Interest Income, and an 8.4% decline in Net Interest Income;
  • Interest Income declined by 13.9% to Kshs 4.3 bn from Kshs 5.0 bn in Q1?2016, owing to resetting of the loan book to fit within the loan pricing framework stipulated by the interest rate cap, while Interest expense declined more by 21.8% to Kshs 1.6 bn from Kshs 2.1 bn in Q1?2016. The Net Interest Margin thus decreased to 7.9% from 8.1% in Q1?2016;
  • Non-Funded Income (NFI) declined by 13.1% to Kshs 1.0 bn from Kshs 1.1 bn in Q1?2016. The decline in NFI was attributed to a 58.9% decline in other income to Kshs 0.1 bn from Kshs 0.3 bn in Q1'2016. The current revenue mix stands at 73:27 funded to non-funded income from 72:28 in Q1?2016;
  • Total operating expenses declined by 13.6% to Kshs 2.3 bn from Kshs 2.7 bn in Q1?2016 following a 33.4% decline in Loan Loss Provision (LLP) to Kshs 0.9 bn from Kshs 1.3 bn. Without LLP, operating expenses grew by 5.4% to Kshs 1.5 bn from Kshs 1.4 bn registered in Q1?2016. Staff costs grew by 12.4% to Kshs 0.7 bn from Kshs 0.6 bn in Q1?2016;
  • Cost to Income ratio improved to 63.0% from 65.8% in Q1?2016. Without LLP, cost to Income ratio deteriorated to 39.3% from 33.7% in Q1?2016;
  • Profit after tax declined by 3.9% to Kshs 0.95 bn from Kshs 0.99 bn in Q1?2016;
  • Loans and advances grew by 3.9% to Kshs 116.3 bn from Kshs 112.0 bn in Q1'2016, while customer deposits grew by 6.8% to Kshs 117.8 bn from Kshs 110.3 bn in Q1?2016, leading to a decline in the loan to deposit ratio to 98.7% from 101.5% in Q1'2016;
  • NIC Bank Kenya is currently sufficiently capitalized with a core capital to risk weighted assets ratio at 17.9%, 7.4% above the statutory requirement of 10.5%, with total capital to total risk weighted assets exceeding statutory requirement of 14.5% by 7.4% to close the period at 21.9%
  • The board did not recommend payment of an interim dividend.

NIC Bank concluded its mandate as the assets and liability consultant for Imperial Bank. Going forward, NIC Bank will thrive on the expected gains from investments in innovation and technology that are likely to improve the bank?s efficiency. The bank also revamped its mobile banking platform, NIC NOW, adding new functionalities to enhance user experience, which is expected to continue driving growth in deposit mobilization. For a more detailed analysis, see our NIC Bank Q1?2017 Earnings Note.

Stanbic Bank released Q1?2017 results

Stanbic Bank released Q1?2017 results, recording a 9.3% decline in core earnings per share to Kshs 6.3 from Kshs 7.0 in Q1?2016, attributed to a 9.9% decline in total operating income, which outpaced a 4.7% decline in total operating expenses. Key highlights for the performance from Q1?2016 to Q1?2017 include:

  • Total operating income declined by 9.9% to Kshs 4.2 bn from Kshs 4.7 bn in Q1?2016, attributed to a 12.4% decline in Net Interest Income, and a 6.3% decline in Non-Interest Income;
  • Interest Income declined by 12.6% to Kshs 3.9 bn from Kshs 4.4 bn in Q1?2016, while Interest Expense declined by 13.0% to Kshs 1.4 bn from Kshs 1.7 bn in Q1?2016. The Net Interest Margin thus improved to 6.9% from 5.9% in Q1?2016. The bank attributed the decline in interest income despite a growth in loans to the interest rate capping law;
  • Non-Funded Income (NFI) declined by 6.3% to Kshs 1.8 bn from 1.9 bn in Q1?2016. The decline in NFI was attributed to a 35.5% decline in foreign exchange trading income to Kshs 0.6 bn from Kshs 1.0 bn in Q1'2016, which was affected by unrealized income from the South Sudan business. The current revenue mix stands at 58:42 funded to non-funded income from 59:41 in Q1?2016;
  • Total operating expenses declined by 4.7% to Kshs 2.7 bn from Kshs 2.9 bn in Q1?2016 following a 42.3% decline in Loan Loss Provision (LLP) to Kshs 0.3 bn from Kshs 0.6 bn. Without LLP, operating expenses grew 4.7% to Kshs 2.4 bn from Kshs 2.3 bn registered in Q1?2016. Staff costs remained flat at Kshs 1.2 bn from Kshs 1.1 bn in Q1?2016;
  • Cost to Income ratio deteriorated to 64.4% from 60.9% in Q1?2016. Without LLP, Cost to Income ratio deteriorated to 56.7% from 48.8% in Q1?2016;
  • Profit after tax declined by 9.4% to Kshs 1.1 bn from Kshs 1.2 bn in Q1?2016;
  • Loans and advances grew by 11.4% to Kshs 115.4 bn from Kshs 103.6 bn in Q1'2016, while customer deposits grew by 20.0% to Kshs 130.6 bn from Kshs 108.8 bn in Q1?2016, leading to a decline in the loan to deposit ratio to 88.4% from 95.2% in Q1'2016;
  • Stanbic Bank is currently sufficiently capitalized with a core capital to risk weighted assets ratio at 15.0%, 4.5% above the statutory requirement, with total capital to total risk weighted assets exceeding statutory requirement by 2.5% to close the period at 17.0%
  • The board did not recommend payment of an interim dividend.

Going forward we expect Stanbic bank?s growth to be propelled by their diversified and clearly defined business strategy, enabling the bank to respond effectively to shifting market dynamics, with their Non-Funded Income at 42.3% of total operating income, coupled with the roll out of their new digital platform and support systems.

ARM Cement released FY?2016 results

ARM Cement released their FY?2016 results, recording a 3.1% decline in loss per share to Kshs 3.2 from Kshs 3.3 in FY?2015. This was driven by a 13.2% decline in revenue to Kshs 12.8 bn from Kshs 14.7 bn and a 102.6% increase in interest expenses to Kshs 2.8 bn. Key highlights for the performance from FY?2015 to FY?2016 include:

  • Revenue declined by 13.2% to Kshs 12.8 bn from Kshs 14.7 bn due to operating environment challenges in Tanzania characterized by (i) increased competition from lower priced Dangote cement at USD 53.0 per tonne at their plant in Mtwara, compared to ARM's USD 65.0-75.0 per tonne, (ii) lower cement prices in Tanzania at USD 65.0-75.0 per tonne, compared to USD 90.0 per tonne in Kenya hence lower margins, (iii) the Tanzania government's ban on importation of cheaper coal to support local coal procurement, hence leading to increased manufacturing costs despite the normalization of the electricity supply which was a problem in H1'2016, and (iv) Tanga and Dar es Salaam plants operating at 50.0% capacity compared to Kenya plants at 90.0%;
  • Finance costs were up 102.6% to Kshs 2.1 bn from Kshs 1.0 bn;
  • Loss before tax increased by 12.4% to Kshs 4.0 bn from Kshs 3.5 bn, while loss after tax decreased by 3.1% to Kshs 2.8 bn from Kshs 2.9 bn due to increase in tax credit to Kshs 1.2 bn from Kshs 0.6 bn;
  • Total assets remained relatively flat at Kshs. 51.1 bn compared to Kshs 51.9 bn in FY'2015. This is because the company did not invest in any capital projects in 2016 as they concentrated on debt restructuring. The company formally announced that they would exit their non-cement business, fertilizer manufacturing business, which is mostly capital intensive but has low margins;
  • Total liabilities declined by 33.7% to Kshs 23.3 bn from Kshs 35.1 bn attributed to 38.6% decrease in non-current liabilities to Kshs 9.1 bn from Kshs 14.8 bn, and a 30.1% decline in current liabilities to Kshs 14.2 from Kshs 20.3 bn. This decline in liabilities is attributed to decline in the debt burden by 45.8% as the company used most of the Kshs 14 bn equity injection received from CDC to pay off their debt.

Going forward, we expect the Kenyan business to continue driving ARM?s growth supported by stable cement prices and double-digit growth in volumes driven by growth in construction sector, even as the company plans to increase capacity of the Athi River plant by 650,000 tonnes. Despite the challenges in Tanzania, we don?t expect the firm to exit the market given that ARM has two plants in Tanzania already and is planning on completing the Tanga plant. We expect that sale of the non-cement business will free up cash that can be used in this expansion in order to reduce debt levels. In addition, the introduction of a new team from CDC into the board and corporate restructuring means that the company has the right people to drive their strategic plan towards their recovery.

Below is our Equities Recommendation table. Key changes from last week include:

  • We have updated our valuation on all insurance stocks based on their FY?2016 performance and our outlook for the sector in the medium term;
  • We have placed ARM under review as we update our valuation following release of its FY?2016 results;
  • Safaricom moved from a ?Hold? recommendation with an upside of 7.4% to a ?Lighten? recommendation with an upside of 4.8%, following a 2.6% w/w price increase;
  • NIC Bank moved from a ?Lighten? recommendation with an upside of 1.7% to a ?Sell? recommendation with a downside of 0.1%, following a 1.9% price increase.

all prices in Kshs unless stated otherwise




Price as at 28/04/17

Price as at 05/05/17

w/w Change

YTD Change

Target Price*

Dividend Yield

Upside/ (Downside)**



Bamburi Cement










KCB Group***








































Kenya Re










CIC Group




















Co-op Bank










Jubilee Insurance




















Stanbic Holdings




















I&M Holdings




















HF Group










Equity 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

Accumulate ? Buying should be restrained and timed to happen when there are momentary dips in stock prices.

Lighten ? Investor to consider selling, timed to happen when there are price rallies

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

Private Equity

GBfoods S.A., a leading multinational food company headquartered in Barcelona, has formed a joint venture with Helios Investment Partners, an Africa-focused private equity investment firm, to create one of Africa?s largest Fast Moving Consumer Goods (FMCG) businesses. The joint venture, GBfoods Africa Holdco B.V., has acquired leading African FMCG companies such as: (i) Gino and Pomo, a tomato paste company, (ii) Jumbo and Jago, a milk powder and mayonnaise producing company, and it has also secured Bama (mayonnaise) distribution rights. Following the partnership and acquisitions, GBfoods will now have a larger distribution network with presence in over 30 African countries. The partnership is beneficial to both parties as Helios continues to expand their portfolio in Africa?s FMCG companies, while GBfoods will benefit from Helios? access to funding and its global backing, which will be core to their expansion strategy that targets Africa. Recently in July 2016, Helios and The Vitol Group (Vitol), an energy and commodities company based in the U.S., bought a 49% controlling stake valued at USD 210mn in Oando PLC, Nigeria?s leading indigenous energy group. See Cytonn Weekly#27

Ethos, a South African Private Equity firm, through Ethos Fund VI, has acquired an undisclosed majority stake in Little Green Beverages (LGB), in partnership with Nedbank Private Equity and the company?s management. This is the ninth transaction for the USD 623.0 mn Ethos fund VI. LGB is a South African company that produces a variety of beverages such as carbonated soft drinks, energy and mineral water, headquartered in Johannesburg, and distributes in African countries such as Botswana, Mozambique, Zimbabwe, Swaziland, Namibia and Lesotho. This capital injection will boost LGB?s growth strategy in Europe and in other African countries it has not ventured into. This continued investment in the FMCG sector in Africa is driven by (i) increase in disposable income spent on consumables, such as beverages and processed food products in Africa, (ii) infrastructural developments, such as improved road and transport networks, (iii) ease of access to FMCG products and improved distribution networks, and (iv) growth in the retail sector. The sector is however facing challenges, which include (i) counterfeit goods, (ii) low export levels of FMCG products and cheaper imports, and (iii) high cost of raw materials. Despite these challenges, the FMCG sector can make significant growth by adopting technological innovations and investment in new products.

Private equity investments in Africa remain robust as evidenced by the increased deals and deal volumes skewed towards the FMCG sector. Given (i) the high number of global investors looking to cash in on the growing middle class of Africa, (ii) the attractive valuations in frontier 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.

Real Estate

During the week, Kenya Bankers Association released their Q1?2017 Housing Price Index (KBA-HPI). The key take-outs from the report were:

  1. The housing market grew at a much slower rate in Q1?2017 recording a marginal price growth of 1.1%, which is a 0.5% points decline from the 1.6% growth recorded in Q4?2016. The rate of price growth has been on a downward trend since its peak in Q3?2016, during which prices grew by 2.2%. As per the report, the slower growth in house prices in the market is due to a decline in demand in the housing sector, which in our view is mainly as a result of: (i) reduced financing in the market attributed to structural challenges in the banking sector, which has seen private sector credit growth decline to a low of 4.0% in March 2017, from a high of 21.0% in August 2015, and (ii) slower uptake from buyers and investors as they adopt a wait and see approach over the upcoming elections;
  2. Apartments dominated the housing market transactions in Q1?2017, accounting for 76.0% of the total transactions in the market. Maisonettes and bungalows accounted for only 16.0% and 8.0% of transactions, respectively. We attribute this to the fact that apartments are cheaper than detached units, and hence have an element of affordability and also provide a central community leaving;
  3. We saw the buyers looking more at functionality of the houses with the main factors determining house prices in the quarter being size of the house in terms of floor area, number of bedrooms, age of the house, proximity to malls and provision of other amenities such as balconies, garage, and ensuite bathrooms, among others. As per the report, luxurious amenities such as gyms and swimming pools did not have a significant effect on the prices of the houses.

The table below shows changes in the index between 2015 and 2017.

Table showing KBA-HPI Changes between 2015 and 2017



Main Typology being Transacted










Source: Kenya Bankers Association

We expect the slow increase in prices to persist in 2017 as buyers and investors adjust to the reduced credit advancement, as well as increased supply in some markets, and the wary home-buyers buying less as a result of the upcoming elections. As highlighted in our Cytonn Weekly #7/2017, there is likely to be a slowdown in transaction volumes being witnessed in the 2nd and 3rd quarter of this year, due to the elections. We however expect the market to pick up pace in the last quarter of 2017 after the conclusion of the elections.

In a bid to increase tourist arrivals in the country and boost the hospitality sector, the Kenyan Tourism Board (KTB) is diversifying its marketing strategies, with the latest being a partnership with the Indian Premier League (IPL), through one of the teams, the Rising Pune Supergiant. The KTB has paid the team Kshs 25.0 mn to market Kenya?s tourism products through activities such as social media activations and brand promotions. KTB aims to attain approximately a 100 mn potential tourists globally through the 15 countries that will air the game including New Zealand, UK, Canada and most Asian countries. The IPL is the most attended cricket league in the world and ranks sixth among the world?s major sports leagues. KTB hopes to maximize the opportunity through destination marketing and promotional campaigns. Specifically, KTB aims to increase the number of Indians visiting the country by 56.0% to 100,000 from the 64,000 in 2016. Other initiatives adopted by KTB include hiring a Spanish consultancy firm, Innovative Tourism Advisers (THR), to advice the Kenyan Government on how to re-invent tourism sector as well as increase marketing of domestic tourism through the Tembea Kenya initiative.

In our view, the hospitality sector will continue to grow supported by (i) increased tourist arrivals into the country and (ii) Aggressive investment by the Kenyan government.

 Another highlight of the week was Uriithi Housing Cooperative?s announcement of a Kshs 1.5bn residential project in Murang?a. The project known as Panorama Gardens will be a 104-acre controlled development zone consisting of quarter-acre-maisonette homes, 3-bedroom bungalows and commercial zones, with a quarter acre going for as low as Kshs 2.9 mn. Developers are increasingly focusing on the low-to-middle income market segment, which has the highest housing deficit, and we expect more real estate players to continue targeting this low ? to- middle income segment of the real estate market.

We expect continued investment in the housing sector despite the slower price appreciation rates due to the high deficit, which is estimated at 200,000 units per annum.  

Kenya Listed Insurance Sector FY?2016 Report

Following the release of the FY?2016 results by insurance firms, we have carried out an analysis on Kenya?s insurance sector to decipher any material changes from our H1?2016 Insurance Report. In our analysis of the insurance sector, we seek to give a view on which insurance firms are the most attractive and stable for investment from a franchise value and from a future growth opportunity perspective. The report is themed "Operational Efficiency and Product Innovation key to Growth of the Sector in an era of Increased Regulation", as the insurance sector still struggles in the local market with low penetration levels, excessive duplication of products and the required increase in capital following adoption of a risk based capital adequacy framework.

On the back of a growing and stable economic environment in Kenya, the country?s insurance sector has also experienced robust growth over the years to become a key part of Kenya?s financial services sector, with the financial services sector in Kenya currently contributing 6.2% to Kenya?s GDP, from a 3.5% contribution 10-years ago. The insurance sector has benefited from (i) convenience and efficiency through insurance firms adopting alternative channels for both products distribution and premium collection such as Bancassurance and improved agency networks, (ii) advancement in technology and innovation making it possible to make premium payments through mobile phones, and (iii) a demographic boost in Kenya, such as a growing middle class, which has led to increased disposable income, thereby increasing demand for insurance products and services.

Following the strong growth achieved by the insurance sector over the last decade, there is need for the sector to transition into a more stable and sustainable sector. The Insurance Regulatory Authority (IRA) is at the forefront of this initiative, pushing for (i) the observance of prudential guidelines, (ii) better corporate governance of insurance companies, (iii) increased transparency in reporting of results, and (iv) using a risk-based approach to capitalization, with varying risk charges on respective investment options. As indicated in our FY?2016 Insurance Report, the key areas of focus in the sector include the following;

  1. Operational Efficiency: Insurance companies in Kenya have been affected adversely by the rising levels of inefficiency in their operations in the last three years, as collection of premiums and distribution of products have emerged to be a costly affair for the insurers. Insurance penetration still remains low at 3.0%, lower than the average of 3.5% in Africa, indicating that for insurance companies to penetrate the Kenyan market they will need to invest in better and efficient distribution channels.

The graph below highlights the rising levels of inefficiencies in the sector since 2014, which the firms operating in the sector need to pin to steer growth and sustain profitability;

Source; Cytonn Investments

  1. Product Innovation: With an industry combined ratio average at 126.5%, insurance companies are not profitable from their core business, and diversification to alternative revenue streams has been key to their profitability. Insurance products in the market are not tailored to the common consumer and players in the market lack innovation to target customers with low disposable income. The value addition area we see is innovation into more relevant products to improve uptake, while also maintaining effective and efficient channels of distribution for these products. In the recent past, we have witnessed increased partnerships between insurance firms and banks, with players in the sector aiming to target the banks? large base of customers to sell their insurance products. Significant opportunities remain in the Kenyan insurance market, with growth areas identified especially in commercial lines such as oil, real estate and infrastructure, and,
  2. Regulation & Compliance: With the new Insurance Act, there is going to be increased regulation on capital adequacy and risk charges on respective investment options. This will lead to increased risk-based analysis on investments, improved supervision on internal practices and a more regulated insurance sector, thereby improving investor sentiment. According to the Finance Bill (2017), all financial services firms excluding banks will be regulated by the Financial Services Authority (FSA), and in our view this move is likely to see increased transparency in the financial services industry.

Based on the above, we expect increased product innovation and operational efficiency in the sector to drive profitability and thus growth of the sector amidst the heightened regulation

Below are some operating metrics for listed insurance companies in Kenya:

FY?2016 Insurance Sector Metrics



Core EPS Growth

Net Premium Growth

Claims Growth

Loss Ratio

Expense Ratio






















Kenya Re



































2016 Weighted Average*








2015 Weighted Average*








*Average is market cap weighted

**Cannot be calculated since Britam registered a profit in 2016 from a loss in 2015

Key take outs from the table above include:

  • The average core EPS rose to 3.4% in 2016 from (39.1%) in 2015 across the industry, mainly as a result of change in valuation methodology for long-term insurance liabilities using Gross Premiums as opposed to Net Premiums in the past effectively reducing provisions for future claims,
  • The loss ratio across the sector declined to 61.6% from 65.0% in 2015, following introduction of measures by market players to reduce fraudulent claims,
  • The expense ratio increased to 56.3% from 50.0% in 2015, owing to increase in operating expenses amidst a sluggish growth in net premiums earned, and
  • On average the insurance sector has delivered a Return on Average Equity of 13.8% a marginal improvement from 12.4% in 2015.

Based on the Cytonn FY?2016 Insurance Report, we ranked insurance firms from a franchise value and from a future growth opportunity perspective with the former getting a weight of 40% and the latter a weight of 60%. The ranking is as follows:



Franchise Value Total Score

Total Return


Composite FY'2016 Score

FY'16 Rank

H1'16 Rank

Kenya Re Insurance






Britam Holdings






Jubilee Holdings






CIC Group






Liberty Holdings






Sanlam Kenya






The key take outs from the ranking were;

  • Kenya Re maintained the top position ranking top in the franchise score category on the back of a strong combined ratio and solvency ratio, indicating better capacity to generate profits from its core business,
  • Britam has moved one rank up from position 3 to position 2 as a result of an improved loss ratio and reserve leverage,
  • CIC Group dropped three positions to rank 4th from top position in H1?2016 as a result of declined profitability recording a return on tangible equity (ROaTE) of 2.5% way below the industry average of 10.9%, and
  • Sanlam retained its bottom position ranking 6th in both the total return score category and franchise score category.

For more details on the ranking methodology, see our FY?2016 Insurance Report.

While the sector is currently struggling, we are of the view that insurance companies have a lot they can do in order to register considerable growth and improve penetration in the country. We expect the synergy between banks and insurance companies to offer Bancassurance to continue as well as the integration of mobile money payments to allow for policy payments through this increasingly preferred transaction medium. It would be a great move for the sector to adopt mobile and online underwriting platforms enhancing convenience to customers in taking insurance policies thus raising the uptake of insurance products. We also expect that there will be increased regulation in the sector, as well as increased consolidation to reduce duplication of products by insurance companies. These efforts will improve revenue channels for insurance firms and uptake of insurance as a lifestyle and necessary expense.


Disclaimer: The views expressed in this publication, are those of the writers where particulars are not warranted. This publication, which is in compliance with Section 2 of the Capital Markets Authority Act Cap 485A, is meant for general information only, and is not a warranty, representation, advice or solicitation of any nature. Readers are advised in all circumstances to seek the advice of a registered investment advisor.