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JANUARY 2015 STOCK PICKS
Member of the NIC BANK GROUP
KENYA
Preferred stock picks
SAFARICOM BUY at TP of KES 15.95 Current price KES 13.90
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Safaricom will invest KES 30bn to upgrade its infrastructure and offer subscribers be%er quality of data and
voice services. The funds will be spent in the next six months and will involve expansion and upgrade of its
transmission stations around the country. Roll out of 4G network launched.
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Safaricom has received approval from CBK to offer cashless payment services in matatus via M-PESA.
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Increase in subscribers and stronger ARPUs should continue to drive revenues. Safaricom’s market share increased by 400bps to 68% while Service ARPU increased by 10% to KES 558 per month in FY14.
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Strong cash generation and position likely to be maintained. This should enable Safaricom maintain and possibly increase dividend payout. Dividend payout was 82% in FY14.
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Safaricom has also lowered MPESA charges in the lower cadre (transactions below KES 1,500) by 65% in an
effort to fend off competition from MVNOs.
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Buy out of YU mobile infrastructure to improve network capability.
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Has re-strategized the Linda Jamii health insurance (which was jointly developed with Britam) to now target
SMEs. The product will be marketed at workplaces similar to group medical covers
KENGEN (Not Rated) BUY Current Price KES 9.55
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Upcoming rights issue expected in 2H15 to be the key catalyst for the stock in the near term. This will increase
its headroom for borrowing given its plans to increase capacity. Management’s estimates indicate that it will
require KES 729bn (KES 99bn for drilling and KES 630bn for development of generation infrastructure) to successful increase capacity to 4095MW by 2018.
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Recent addition of 250MW of geothermal and wind power in 1H15 into the national grid to boost revenue and
also lower the cost of electricity.
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Recently revised PPA agreements with KPLL favor Kengen as the former pays for both capacity availed and
energy supplied. Previously, Kengen would receive payments only on energy produced.
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Plans to phase out some of its diesel-fuelled emergency power generators replacing it with geothermal power
plants hence reducing costs incurred in generating energy as geothermal is cheaper.
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Kengen is currently the dominant power producer and will remain so owing to the expected increase in capacity and high barriers of entry within the energy sector
SCANGROUP BUY at TP 59.05 Current Price KES 45.00
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Currently receiving more support from parent company WPP after the la%er’s increased stake saw Scangroup
upgrade to a subsidiary (previously an associate).
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M&A activity to drive performance. Scangroup expects to increase its geographical presence and product
offering across SSA through mergers and acquisitions.
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Acquisition of Experiential Marketing of South Africa to boost 2H14 performance. Scangroup acquired 80.04%
of the marketing firm whose revenues stood at KES 1.6bn in FY13.
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Scangroup plans to boost revenue from digital advertising leveraging off WPP Digital, the digital arm of WPP
NIC Securities
7th January 2015
JANUARY 2015 STOCK PICKS
Member of the NIC BANK GROUP
KENYA
Preferred stock picks
EQUITY BANK BUY at TP of KES 59.41 Current Price KES 49.50
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Equity Bank recently received KES 5.6bn from the European Investment Bank to support lending to SMEs.
This should help support stronger loan growth to this highly lucrative segment.
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Equitel, Equity’s MVNO, is finally being rolled out. Already, approximately 200,000 SIM Cards have been issued. Money transfer charges will be set at 1% of transaction amount but capped at KES 25. Key near term
benefits of MVNO include increased efficiency and increased non funded income .
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Equity’s PBT 3Q14 growth of 26%y/y was the highest in the last 7 quarters. We note an improvement in cost
of risk (CoR) and NIR/total revenue as key drivers.
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Loan impairment charges declined by 62% to KES 900m, driving down Cost of risk (CoR) by 150bps y/y to
0.6% which augmented earnings. Despite increased lending, asset quality improved, as seen in the NPL ratio
declining by 30bps q/q and 120bps y/y to 4.3%. Of note is that impairments from subsidiaries now account for
30% of total impairments, against 21% a year earlier. .
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Strong loan growth to anchor earnings. Loans grew at 30% y/y in 3Q14. This was particularly strong in Q3,
growing by an absolute KES 20bn increase representing 40% of loans issued in the last 12 months,
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Strong growths in non funded income to adequately compensate for interest margin contraction. Revenue
channels include diaspora remi%ances, merchant banking and mobile payments.
COOP BANK BUY at TP 25.84 Current price KES 18.90
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Relatively poor 3Q14 slowed y/y performance. Co-op’s 9M14 PBT growth was much slower at 2.5%y/y, surprising on the downside given that 1H14 PBT grew at 15%y/y. The q/q growth of 35% was weaker than the
52% growth recorded over a similar period last year, resulting in a higher base.
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NIMs expanded by 40bps y/y and 70bps q/q to 9.5% defying the trend across the sector and in spite of increased lending to the corporate sector. Going forward, NIMs expansion could be maintained given the launch
of M-Coop Cash, a mobile banking platform targeting the high margin micro and consumer segments offering
unsecured loans of between KES 100 and KES 200,000 a%racting a one off interest rate of 7% (lower than CBA’s
M-Shwari rate of 7.5%, but higher than EQB’s 1-2%) and repayable within 30 days.
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Increased presence translating into stronger loan growth. Loan book expanded by 31% y/y in 3Q14 benefi%ing
from an expansion drive that has seen 49 new branches over the last 3 years, with 20 added in FY13. Management expects the increased presence to help sustain strong loan growth.
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Accelerating growth in non-funded income to support earnings as net interest margins decline. NIR increased
by 23% y/y in 3Q14. NIR expected to improve due to increased transactions as customers numbers grow.
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Operating expenses expected to ease a COOP’s slows down on branch expansion in favor of consolidation of
the existing branches. CIR stood at 58% in 3Q14. Break even of new branches also key to reducing CIR
NIC Securities
7th January 2015
2
JANUARY 2015 STOCK PICKS
Member of the NIC BANK GROUP
KENYA
Preferred stock picks
KENYA RE (Not Rated) BUY Current price KES 17.35
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Recent acquisition of minority stake in Africa Trade Insurance Agency (ATI) adds a new revenue stream and
deepens market presence. ATI has operations in Kenya, Tanzania and Zambia.
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Recorded a 6% increase in 1H14 PBT to KES 1.7bn as gross wri%en premiums increased by 22% to KES 4.9bn
a%ributable to new business shares across the pan African region. This highlights a growing appetite for insurance products across the region.
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Enjoys guaranteed premiums of 18% from Kenyan insurance companies offering it a steady flow of premiums.
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Has a wide presence across Africa providing reinsurance services to more than 159 companies in over 45 countries in Africa, Middle East and Asia. Plans to operate and provide services in Southern Africa following its
successful expansion into West African market in 2012.
BRITAM (Not Rated) BUY Current price KES 29.00
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Despite the fall out with Acorn, Britam remains fundamentally strong. We expect all real estate plans to proceed even with the termination of the partnership with Acorn. Britam owns 25% of Acorn. Upcoming KES
10bn property fund to provide a cash boost for real estate ventures. Britam is also developing a 30 storey office
complex in the Upper Hill area to be completed in 2015.
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Currently on an expansion drive, with key acquisitions concluded and more in the pipeline. Proceeds from the
recently concluded bond issue to finance expansion into new markets. Britam raised KES 6bn from its bond
issue which was oversubscribed by 147%.
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Expected improvement in revenue from insurance segment due to the acquisition of 99% stake in Real Insurance which has exposure to 5 countries in Africa.
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Acquisition of Real Insurance in 2013 has helped Britam increase its market share to 11.2% becoming the 2nd
largest insurer behind Jubilee’s 12.6% stake.
ARM Cement HOLD at TP KES 99 Current price KES 83.00
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Tanzania to be the key driver of growth, with forecast cement revenue contribution of 48% in FY16F (FY13A
contribution of 25%). New Tanga plant with a capacity of 3200 tonnes of clinker and 4000 tonnes of cement per
day recently commissioned. Another plant with a capacity of 2,500 tonnes per day set for commissioning in
2015. This is expected to alleviate pressure on gross margins.
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Plans for another plant in Kigali, Rwanda with a capacity of 200,000 tonnes per day also underway.
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Expected increase in cement volumes in Kenya in FY14 as compared to FY13 when weaker industry consumption figures were reported following an election affected 1H13.
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High entry costs into the cement business will ward off competition and cause cement prices to remain relatively stable.
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1H14 EPS increased by 21% to KES 1.71.
NIC Securities
7th January 2015
3
JANUARY 2015 STOCK PICKS
Member of the NIC BANK GROUP
KENYA
Preferred stock picks
KCB HOLD at TP of KES 63.63 Current Price KES 56.00
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KCB reported a 3Q14 PBT growth of 17% (1H14; +16%), yet again underpinned by a robust growth in NIRs
(3Q14; +37% vs. 3Q13; +8%) and a decline in CIR.
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3Q14 loan growth was resurgent. Loans increased by 17% compared to mid single digits in the past 3 years
and is ahead of management’s FY14 guidance of a 13% loan growth.
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Diversification into investment banking and banc assurance to support non funded income growth. The bank’s
large balance sheet, usually a consideration for clients seeking to raise capital could provide an edge to its investment banking arm in seeking big ticket deals. NIRs/Total revenues ratio increased by 200bps to 40%, mostly on recoveries and banc assurance income.
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Slowdown in branch expansion and consolidation of subsidiaries to improve efficiency and reduce cost to income ratio. Cost to Income ratio was at 48.3% in 3Q14 vs. 51.7% in 4Q13.
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KCB’s strong capital position is supportive of an acceleration in loan growth. A tier 1 ratio of 16% versus a
minimum requirement of 10.5% provides ample headroom for lending.
KENYA POWER (Not Rated) BUY Current Price KES 15.70
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New connections expected to drive revenue growth. Connections doubled in FY14 to 443,254 a%ributable to
increased spending on infrastructure and a KES 2.7bn subsidy from the government for Rural Electrification
Programme connections.
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KPLL recently took on debt to finance the upgrade and expansion of its distribution network. More debt is
likely to be incurred in the near term given the current debt to equity ratio of 0.58 against a target ratio of 0.7.
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Ongoing system upgrade project and automation to reduce system losses further and increase EBITDA margins.
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We expect the additional 250MW of geothermal and wind power in 1H15 by Kengen to result into lower purchase costs for KPLL translating to higher gross profit margins
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KPLL is the sole distributor of electricity in Kenya.
CIC INSURANCE BUY Current price KES 9.85
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Strong growth momentum maintained with a 1H14 PBT growth of 67% underpinned by a 26% increase in
gross wri%en premiums.
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Opportunities for growth given low penetration of insurance in the country.
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Diversification into more stable income streams in real estate. Plans to construct a high-end residential estate
on a 200 acre land in Kiambu.
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Regional expansion drive with plans in the pipeline for operations in South Sudan, Uganda and Malawi
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Recently issued a KES 5bn with funds to be deployed in real estate, regional expansion and a medical project.
NIC Securities
7th January 2015
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JANUARY 2015 STOCK PICKS
Member of the NIC BANK GROUP
KENYA
Preferred stock picks
DIAMOND TRUST BANK (Not Rated) BUY Current price KES 239.00
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Strong growth in earnings maintained. PBT increased by 17% to KES 6.2bn in 3Q14 as loans and deposits both
increased by 23% y/y
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Capital position addressed through the just concluded rights issue. DTB raised KES 3.6bn in new capital by
offering 22m new shares at KES 165 per share via a rights issue that was oversubscribed by 340%. Tier 1 and
Tier 2 capital stood at an ample 17.2% and 19.7% respectively in as at 3Q14.
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Funds raised to be deployed to expansion into new markets outside East Africa. Expanded presence should
offer DTB a competitive edge in regional banking.
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Be%er operational efficiency. CIR stood at 44% in 3Q14, well below Tier 1 counterparts, whose average CIR
stands at c.50%
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Continued focus on high margin SMEs with the support of IFC a boon for margins, especially as lending rates
decline. IFC recently loaned KES 1.8bn for onward lending to SMEs.
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High asset quality. Despite a 54% increase in NLPs the bank is accumulated provisions provide adequate cover
for the NPLs. Coverage ratio stood at 90%, one of the highest in the banking sector.
NIC BANK BUY Current Price KES 58.50
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Rights issue to raise KES 2.1bn successfully completed. Proceeds to strengthen capital position and support
lending.
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Proceeds from the bond issue to also enhance capital and support balance sheet expansion. A further KES
4.8bn loan has been secured to facilitate USD lending.
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NIC’s financial supermarket model which includes investment banking, stock brokerage and insurance agency
should provide a competitive edge and improve cross sell ratio.
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Investment in technology to enhance operating efficiency. NIC’s recently launched NIC NOW mobile application offers expanded banking capabilities on mobile phones.
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Consolidation of existing regional markets to enhance profitability.
UCHUMI SELL at TP of KES 10.93 Current price KES 10.25
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Rights issue in the ratio of 3:8 at a price of KES 9.00 recently concluded, but results yet to be disclosed.
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The lengthy delay of rights issue caused Uchumi to incur more debt which will erode operating profit margins.
Uchumi has taken on three loans amounting to KES 1.3bn within the last 12 months and will likely take on
more debt given the share price depreciation in relation to initial target.
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Cash flow generation has been limited with our FY14A estimates pointing at an ending cash balance of KES –
506m. This has seen Uchumi rely a lot on overdraft facilities which totaled KES 781m as at 1H14 (last available
breakdown of debt).
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Expansion into smaller towns unlikely to give UCSP the customer traffic needed to accelerate sales. At the
same time, the retailer is yet to benefit from the devolved government structure given the teething problems
associated with the transition.
NIC Securities
7th January 2015
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