In August, inflation continued to decelerate, falling to an 18-month low of 6.7%, having already dropped to 7.3% in July from a peak of 8% in May. Given elevated global oil prices, second-round effects of fiscal measures and recent noise around global food prices, we think it is too early to celebrate.

 
By end of August, three-month T-bill yields jumped nearly touched 14% as yields continue to rise sharply. Such a rise comes amidst elevated interbank rates as well as elevated maturities in the Treasury market.
 

The upward trend likely to sustain

We maintain our view that yields will continue to trend upward. Investors are likely to remain wary of potential fiscal slippages, which will most likely lead to even further rises in the quantum of domestic borrowing. Higher global food and oil prices are also an upside risk to inflation.

 
FX pressures persist

The Kenya Shilling continued to slide and recently hit Ksh.146 to the USD. FX reserves fell USD805 million since the end of July to USD7.1bn (3.8 month of import cover); due to external debt amortization and financing of the current account deficit. The IMF expects import cover to fall to 3.3 months by the end of 2023.

Treasury yields show no respite

We recently attended an investor roadshow organised by Equity Bank in Nairobi and Kinshasa. In contrast to Lagos, despite electricity shortages in Kinshasha, there was no sound of diesel generators, and hospitality was far better. The mining sector remains the dominant driver of the Democratic Republic of Congo's (DRC) GDP growth with a positive trickle-down effect in hospitality (significant increase in capacity), infrastructure (pipeline of Public Private Partnership (PPP) projects), real estate (skyline dotted with cranes), and Fast Moving Consumer Goods (FMCG) (string of supermarket chains) sectors. Finally, the DRC has yet to unlock the benefits of being part of the East African Community (EAC) trading bloc.

The Equity Bank Group DRC subsidiary's strategy is to grow the SME portfolio by banking the value chain around corporate client relationships established by Banque Commerciale du Congo (BCDC). The growth opportunity in non-funded income is significant, especially in trade finance, mobile banking, and cash management. 

Our clients can request the full report (link to the blog). It includes our policy takeaways from interactions with the Governor of the Central Bank of Kenya (CBK) and Treasury Cabinet Secretary, first impressions of Kinshasha, Equity Bank Group Management discussions on the DRC opportunity, and Kenyan fund managers' predictions for the Kenya Shilling FX, five-year bond yields, and best-performing stock in FY2023.


 Equity Bank Group Investor Roadshow in Nairobi and Kinshasha


Africa had c448.6mtpa of installed capacity in 2022, but with only c246.8mt of demand, excess capacity was 45%, and utilisation rate was c54.4%, on our numbers. The incumbents - Dangote Cement, Holcim Group and Heidelberg accounted for 39.6% of installed capacity. Chinese firms - Huaxin and West China Cement have made investments since 2020. 

We believe competition risk will intensify across several African markets as new capacity comes online, mainly from Dangote, Huaxin, and West China Cement. Our clients can request the full report detailing what the incumbents are doing and which countries Huaxin and West China Cement are setting up production.



The African cement market offers some growth spots for investors despite excess capacity and competition

Bamburi Cement’s strategy message must improve to support their share price.

We are concerned with management’s lack of additional disclosure on Project Indigo (1.6 million tonnes per annum clinker plant) since May 2022, despite our extensive communication on its potential earnings upside. Based on local press reports, Bamburi was set to receive receive a project license for its shale mining location (Kitui County) in April 2023. It is one of the final licenses required before plant construction. In May 2022, the operational date guidance was set to be during the second half of 2024. We decided not to include this scenario in our model until we see management updates. There have also been notable changes at the Board of Directors and C-suite levels, which could delay construction.

Costs will stifle earnings outlook recovery, highlighting the importance of Project Indigo

Without Project Indigo, we cut our earnings forecast by 8.8% on average (2023 - 25 estimate) as costs will remain high (cUSD82/tonne average). We compute energy and imported clinker accounted for 54.8% (+0.2% versus FY20210 of FY2022 production costs). In April, there was a modest reduction in Kenyan power tariffs for industrials, and we do not expect material changes to the energy and imported clinker line items (c54.5% average of total cost base over 2023 - 27estimate). 

In addition, the Finance Bill 2023 (whose implementation has been frozen by the Kenyan Courts) has additional 10% duty on imported clinker (20% in total, if approved) and higher fuel price risk (logistics costs were 14.7% of the FY2022 cost base), emphasizing the need for the implementation of Project Indigo. The construction lead-time (at least 18 months), and FX risk (and leverage) as it will be 75% debt funded (cUSD240 million on our estimates), will delay any potential near-term margin accretion.

Our clients can request the full report to get our insights on the financial health of Bamburi and trading and target price recommendations, without Project Indigo. Download the  #EFGHermesOne #Kenya App today. http://bit.ly/3Yfl8Do


Bamuri Cement

NCBA is at a turning point

Our clients can request the full report with our analyst’s rating, target price, and full-year (FY) 2023 – 2027 forecasts. Following the merger of NIC Group and Commercial Bank of Africa (CBA) in Oct 2019, NCBA became the third largest bank in Kenya with a 9.3% market share (FY 2022). The bank operates across Kenya, Tanzania, Uganda, and Rwanda, with exposure in Ivory Coast through a mobile lending platform. We believe NCBA is at a turning point after raising its lending appetite from 3Q22, following three years of subdued loan growth, spinning off its digital-banking subsidiary to expand mobile lending and payment outside East Africa, and expanding its distribution network to grow its retail banking.

Building a niche digital-banking franchise

Through its mobile network operators (MNOs) partnerships, NCBA underwrites mobile micro loans. The bank’s digital-lending portfolio has grown at a 29% compound average growth rate (CAGR) (FY 2019- 2022), with annual disbursements reaching Kes 729 billion (2.5x its traditional lending portfolio) in FY22. Safaricom’s overdraft facility, Fuliza, contributed 86% of NCBA’s digital loan portfolio. With penetration levels of NCBA’s key household micro loan products (Fuliza and M-Shwari) at 25% and 16%, respectively, we believe there is room for growth. The digital-banking subsidiary’s contribution to the group’s total income and profit before tax (PBT) stood at 17.3% and 22.5%, respectively, in FY 2022.

Traditional banking earnings also starting to increase

Post-merger, NCBA’s loan growth trailed the sector at 3.1% vs 10.9% CAGR (FY19-FY22). We believe this was driven by a decision to de-risk the balance sheet as the corporate segment’s non-performing loan (NPL) ratio reached a high of 17.1% in FY21. Through a combination of write-offs and recoveries, NCBA’s asset quality has strengthened, and we expect lending to increase. Earnings growth will be further supported by margin expansion, normalization of risk charges, and improving cost efficiency.

NCBA Group

More pain still lies ahead
 
Over the last three years, frontier currencies have taken a notable beating due to the global turbulence of a post COVID-19 recovery and the Russia-Ukraine war. The sizable currency moves have helped contain the recent external pressure, with current account deficits narrowing across the board from their peaks in 2021/22. Nevertheless, we see the foreign exchange (FX) adjustment cycle as far from over and flag four key continued pressure points: i) unfinished current account (CA)  adjustments, with some import controls still lingering; ii) less-than-enough monetary adjustments, with real rates remaining well in negative territory; iii) continued existence of FX backlogs that are yet to be cleared; and iv) global monetary tightening that continues to constrain access to much-needed foreign capital and weighs on local confidence.

Screening frontier currencies

We have devised an FX risk screener, which we use to assess the extent of future risk to currencies under our coverage. The matrix comprises a number of variables, including the strength of FX reserves and their recent direction, real effective exchange rate, real rates, and FX liabilities (including backlogs and gross external financing needs). Our analysis designate Morocco and Vietnam as countries with the lowest FX risk within our coverage and we expect 0-5% depreciation in their local currencies against the USD. They are followed by a second batch (with 5-10% depreciation risk), which includes Bangladesh, Kenya, and Tanzania, whose FX buffers remain, especially when contrasted with still-lingering FX backlogs. Finally, comes the batch with the largest FX risk, which includes Nigeria and Pakistan, in light of unfinished adjustments, relatively still depressed interest rates, and sizable gross external financing needs.

Frontier FX – Not yet out of the woods

Kenya is at its lowest valuation ever amid the improving macro environment
The Kenyan market is down 23% YTD (31% in USD terms). Much of this is due to the lower valuation of Safaricom, but even the market ex-Safaricom is cheap (3.3x 12m Fwd P/E). Market liquidity is poor(3 million average daily trading volume (ADTV) of just USD3.5 million), but the macro outlook is improving.

IMF review and Eurobond rally show light at the end of the tunnel
On May 23, 2023, the fifth review of the current IMF programme for Kenya highlighted a favourable medium-term outlook and announced an extension and additional funding.

Kenya Shilling T-Bill rates are high
Yields on 12-month Kenya Shilling T-bills are up year-to-date (YTD) and at their highest level since 2018; real 12-month yields are 3.5%. FY24 fiscal measures are a risk to this disinflationary trend.

EFG Hermes Kenya Macroeconomic Analytics June 2023

The question on the breakfast table in most Kenyan households revolves around the sugar price. People are concerned about whether it will drop from a record high of Ksh 200 per kg or will it continue to rise in June, pushing up the inflation rate– which tracks commodity and services prices – over a year. The inflation rate in May 2023 stood at 8 percent, rising from 7.9 percent in April.

Local and global sugar shortages in 2023 contributed to a rise in average annual inflation from 7.6% in December 2022 to 8.03% in May 2023. India and Pakistan, the biggest sugar producers responsible for 25 percent of the global sugar production, are experiencing shortages and export restrictions. India, the top sugar-producing nation, has been diverting to ethanol rather than sugar production, worsening the sugar shortage crisis. It is targeting to have a 20 percent ethanol -gasoline blend for its vehicles use, thus reducing the reliance on petrol.

In Kenya, the sugar shortage crisis comes five years after the maize crisis drove inflation to record highs of 11 per cent.

The impact of the high cost of sugar on inflation

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