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27 March, 2015

Executive Summary

  • Fixed Income: Investors continue to demand higher rates for Treasury instruments despite high liquidity in the Money Markets. The Infrastructure bond was highly oversubscribed as expected.
  • Equities: The NSE remains relatively flat despite the rally on Safaricom, which reached an all- time high of Kshs 17 per share. Companies continue to announce their 2014 end of year results.
  • Real Estate: The buoyant Real Estate sector attracts institutional investors and the key sectors to grow include among others: The retail malls, residential and student accommodation.
  • Private Equity:  Private Equity firms see significant growth in their portfolio companies and continue to invest to position them for growth. 
  • Focus of the Week:  This week we look at Leadership in the context of the passing away of Lee Kuan Yew of Singapore, and President Uhuru?s tackling of corruption; both events have a common theme on Leadership
  • Cytonn Company Updates: This was a busy week: 
    1. Cytonn Investments successfully hosted the first investor cocktail this past week; and we continue to thank our Clients for the very strong support accorded to us thus far. 
    2. We are now hiring for our second Cytonn Young Leaders Program - more details can be found at www.cytonn.com/downloads/Cytonn-Young-Leaders-Program.pdf : with applications open on www.cytonn.com/careers
    3. Incase you missed it, coverage on the launch of our development affiliate, Cytonn Real Estate, was covered at http://the-star.co.ke/news/cytonn-investments-sets-property-subsidiary ; and finally, 
    4. we closed a significant corporate credit financing facility with a local banking partner with proceeds of the facility going towards financing our growth initiatives.

Fixed Income Review

Treasury bill rates were stable in the week, with the 91, 182 and 364-day at 8.4%, 10.3% and 10.6% respectively. The Money markets were very liquid as can be seen from with the recent Infrastructure bond (IFB), which got a 206% subscription. CBK was looking for Kshs. 25 Bn and received bids of Kshs. 51.7 Bn, but of interest is that the investors continue to demand higher yields since the IFB rate increased by 0.3% to 11.6% despite the oversubscription.

The Kenya Shilling remained unchanged against the Dollar to close at 92.0 on Friday mainly due to CBK activity and Dollar weakening against other global currencies. The CBK mopped up Kshs. 10.4 Bn from the market through Repo operations and Term Auction deposits, and the global weakening of the Dollar continued after the release of weak durable goods? expenditure data in the US, which showed a decline of 1.4%.

We expect the secondary bond market to be active in the coming weeks as the money in the oversubscriptions finds a home, but the investors continue to be cautious against significant rate declines. The currency should hold at the current levels despite increased demand for the dollar by importers to cover the month end positions.

Equity Market Update

The NASI gained 1.0% while the NSE 20 lost 1.2% in a week that saw the NSE market capitalization rise by Kshs 20 billion driven by a price rally in Safaricom. Safaricom rose 4%, increasing its market capitalization to Kshs 660 Bn on increased demand from both local and foreign investors.

Companies continued to announce their end of year results as we come to the end of the first quarter and as they seek to meet the regulatory announcement requirement deadline.  Among the companies that announced include: Oil marketer KenolKobil, which reported a 95% increase in profit to Kshs 1.09 Bn despite 16% drop in revenue as the business underwent significant restructuring. The energy and petroleum sector gained 9% during the year as lower oil prices boosted petrol consumption thus raising prospects of improved financial performance by firms in the industry. With oil prices forecast to remain low, and the price to earnings of the sector at a low of 7.4X compared to the average 20X for the NSE, we expect price gains in the sector?s counters.

The Nairobi Stock Exchange announced a 16% rise in profits before tax with total income rising 32% on account of increased trading in equities and bonds. The company is additionally planning to invest in infrastructure to support new products and services such as derivatives trading and commodities trading at the bourse.

Going forward we expect increased activities as foreign investors take positions given that the developed markets continue to struggle with low economic growth figures as evidenced by the recent data releases by the US. The earnings received so far are within analyst?s expectations and the lack of surprises will lead to stable share prices.

Real Estate

Kenya?s construction sector last year contributed almost 5% to GDP, reaching close to $2.7 Bn and is forecast to rise to $3.3 Bn by 2016 according to a PWC report. This is on the back of the widening middle class, currently at 17% of the population and counting, which is expected to boost the residential market which faces a housing deficit. Developers are shifting to a high-density approach with larger plot ratios to crank up the supply of residential accommodation. 

The retail sector will also flourish as a result of the widening middle class and Kenya can be seen as a potential market for retail outlets and as a distribution point for goods into East and Central Africa. Kenya currently faces a student accommodation shortage and this presents a potential opportunity for developers. Phatisa already saw this opportunity in its studio apartments for students, which it is constructing in Nairobi, and we expect to see more of such developments. 

Upcoming malls and retail developments are pushing up land and property prices in the surrounding areas. Prices in Kayole, next to Shujaa Mall are shooting up to Kshs 3 million for a 26 X 66 foot parcel up from Kshs 1.8 million at the beginning of last year before the mall opened its doors. Thika Road Mall had a similar effect in Rosyambu, with rents going up by about 50% to Kshs 20,000 for a one-bedroom apartment. As we continue to see new developments bringing better roads and improving infrastructure, land prices will fetch better returns especially surrounding these areas.

Private Equity

Mimosa pharmacy, rebranded to Goodlife, got a $4.5 million loan from IFC to expand its distribution network across East Africa. Goodlife is partly owned by the private equity firm Catalyst Principal Partners. Catalyst saw an opportunity in the $642 million Kenyan Pharmaceutical sector, which is highly fragmented across smaller businesses resulting into inconsistent quality and higher consumer prices. Goodlife aims to increase its stores to 20 by December from the current 12 by opening outlets in malls, petrol stations and adjacent to health care facilities. The firm plans to invest Kshs 1.67 Bn in the next 5 years and open up 80 pharmacies. Many businesses in Kenya are unable to realize their true capabilities due to lack of resources and Private Equity firms seek this opportunity to add value.

The dispute between Centum Investment and REA Trading over the largest sisal producer in Africa, Rea Vipingo Plantation, has been sorted out of court with Centum acquiring 9,646 acres of the Vipingo land at Kshs 180,000 per acre and 900 acres of Vipingo Estates Limited at Kshs 340 Mn. Centum paid more than the market-price that was estimated at Kshs 175,000 per acre. REA will also pay Kshs 5 higher for the deal on the Kshs 75 per share it had offered initially. This further reiterates the confidence that Private Equity firms have in adding value and making strategic acquisition, making them willing to pay more than the market value to enable firms realize their full potential and exploit potential synergies. We view Centum?s heighten acquisitions activity across several sectors ? real estate, energy and infrastructure, banking ? as a clear indicator of its commitment to attain its vision as a leading regional investment platform. It is one of the few local brands that truly appreciates and takes advantage of the vast investment opportunities that this region has to offer.

Key Focus for the Week is Leadership

Every week we pick a topic that has trended for the week and write about it from an investments point of view. This week, we believe that two topics worth looking at are the passing away of Lee Kuan Yew (LKY), the father of modern Singapore, and President Uhuru?s cracking on graft here in Kenya. One common thread about these two topics is leadership: LKY led his nation to prosperity by, among other things, aggressively tackling corruption, and President Uhuru has the opportunity to lead his nation to prosperity by primarily, tackling corruption. 

We view leadership simply as a ?process of social influence by which a person can enlist the aid and support of others in the accomplishment of a common task.? For example, here at Cytonn, our three common tasks are protecting the interests of our clients, delivering the best returns to our clients and giving the best services to our clients; anyone who can influence their colleagues to achieve these three tasks is a leader, they don?t have to be the CEO. Hence leadership is about the ability to influence; not necessarily a position, but of course a position can make it easier to influence.

LKY led his country from a Third World country that was corrupt, vulnerable, and poor, into a First World country that is stable, prosperous, safe and clean. He did this by recognizing that economic prosperity is a central pillar to any country that wants to improve the living standards of its people. Having made economic prosperity the central pillar of his vision, he then threw his life into achieving that prosperity by taking deliberate steps; these steps would include making a decision that Singapore would go at it alone post separation with Malaysia, rather than try to be part of a community where it did not fit. He built industries in manufacturing and finance, and created a moral compass for his nation to guide its diverse population.

At independence, Singapore GDP per capita was about $450; today it is at $55,000 ? a 122 times increment. Over the same period, from 1960 till today, Kenya?s has grown from $97 to $1,245 ? a 12 times increment. It is important to understand that at the time of independence, corruption in Singapore was rife in most departments just as it is in Kenya today. In Singapore, LKY made it crystal clear that there was zero tolerance to corruption, and all newly elected cabinet members wore white shirts and white slacks to symbolize purity and honesty in their personal behavior and their public life. LKY himself observed, ?it is easy to start off with high moral standards, strong convictions, and determination to beat down corruption. But it is difficult to live up to these good intentions unless the leaders are strong and determined enough to deal with all transgressors, and without exceptions.? 

 A clear vision of a stable and prosperous Singapore, a clear strategy of economic prosperity as the cornerstone of that vision, and an energetic and rigorous execution of the strategy, with zero tolerance to corruption, has led to the Singapore we see today. 

So as President Uhuru grapples with corruption in his government, as he starts to deal with the vice, it is important to note that unless he can bring the vice firmly under control, by dealing ruthlessly with the corrupt, the vision of a stable and prosperous Kenya, so ably captured as Vision 2030, will remain just a vision on paper. But fortunately, the president has the bully pulpit of the presidency and has the opportunity to start us onto an enduring path to prosperity. He should seize it. 

Actors in the financial markets understand the high levels of corruption can only deter international investors, reward mediocrity, while suppressing entrepreneurial genius that is not reliant on bribing as a core business strategy. Investments are core to economic prosperity, and we cannot reach optimal levels of investment in a highly corrupt environment, whether in the public or private sectors. 


Disclaimer: The views expressed in this publication, are those of the writers where particulars are not warranted- as the facts may change from time to time. This publication is meant for general information only, and is not a warranty, representation or solicitation for any product that may be on offer. Readers are thereby advised in all circumstances, to seek the advice of an independent financial advisor to advise them of the suitability of any financial product for their investment purposes