By Cytonn Research Team, Apr 24, 2015
There was tight liquidity in the market due to corporate tax remittances, leading to T-bill undersubscription with the 364-day worst hit at 38%. Yields however remained unchanged at 8.4%, 10.3% and 10.6% for the 91, 182 and 364-day papers, respectively; investors are still seeking signals on the direction of interest rates movement.
The Kenya Shilling continued to record losses against the Dollar to close at a 3-year low of 94.0. The poor performance was attributed to heightened Dollar demand by corporates to pay dividends to foreign shareholders. As expected in our previous reports, the Central Bank was active in the market supporting the Shilling, and this is expected to continue given the high reserves amounting to 4.5 months of import cover, which is well above the East African Community?s required minimum of 4.0 months.
The Kenyan Government released FY 2015/2016 expenditure estimates, which showed public expenditure will rise by 25% to Kshs 2.17 trillion. Energy, Infrastructure and ICT sectors, combined, will for the first time overtake Education, having been allocated 27.3% (Kshs 385.4 bn) of the budget compared to 21.7% (Kshs 256.8 bn) previously. National Security share of the budget will also rise to 8.2% (Kshs 114.07 bn) from the current 7.7% (Kshs 90.72 bn). This signals emphasis on infrastructure investments and improving security, which are critical to long-term economic growth.
In the near-term, we see risk of rates going up due to market uncertainty. We would be biased towards short durations.
The markets ended relatively flat, with the NASI declining by 0.3%, while the NSE 20 declined by 0.6%, as a result of declines in large-cap counters including Britam and EABL, which fell 10.8% and 4.5%, respectively.
On the earnings front, there was only one significant reporting by Transcentury, which reported a loss of Kshs 8.43 per share, compared to earnings of Kshs 1.04 in 2013. The company sold its 34% stake in KU Railway Holdings Limited, which saw it earn 21% less than its fair value of Kshs 4.8 billion, booking a Kshs 1 billion loss. Revenues also declined 13%, affected by a delay in projects that have since commenced this year. The company is heavily invested in power, and is set to benefit from the commissioning of its new power plant in Q2 2015.
The Competition Authority of Kenya (CAK) has set a 10-month deadline that requires trade associations in the Financial Services and Agriculture sectors to align their operations with the competition law and stop price fixing. The Kenya Bankers Association, the Association of Kenya Reinsurers, the Association of Kenya Insurers and the Kenya Forex Bureaus Association will all be required to re-evaluate their practices; it is not clear how CAK will get these trade associations to comply.
The stock market continues to be driven by corporate news and actions, with counters in the Banking sector trading broadly lower as they approach their ex-dividend dates. We remain neutral on equities given stretched valuations and lower earnings growth prospects. The market continues to be a stock-pickers market to derive value.
House prices increased by 2.8% in Q1 2015, compared to Q4 2014?s 2.2%, on the back of increased demand for apartments according to the Kenya Bankers Association?s Q1 Housing Price Index. Demand for apartments is driven by desire for convenience and security.
Due to (i) rapid urbanisation outpacing infrastructure development and (ii) increased insecurity, there is preference for community living such as apartment complexes and gated communities. Key drivers for price were, among others: size of the house, access to social amenities, the ease of redevelopment, and security.
Dormans Coffee Group is reported to have acquired 10 acres of land in the 2,500 acre Tatu City development for the construction of its headquarters. The company intends to spend Kshs 650 million to move its coffee roasting factory and head office into the new headquarters, as it follows other companies seeking to move to less congested neighborhoods, which goes to highlight the market opportunity that exists for masterplanned developments. However, the success of such gigantic masterplanned developments such as Tatu City and Konza City remain to be seen in Kenya.
Kenyatta National Hospital (KNH) is reported to be seeking private funding under the Public - Private Partnerships (PPP) framework to build Kenya?s first public pediatric hospital. The emerging trend of PPP initiatives targeted at providing basic services like education and healthcare highlights the opportunity to deploy private capital in these sectors. For example, earlier in 2013, Abraaj group?s Africa Health Fund and Sweden?s Swedfund had announced an investment of USD 6.5 million into Nairobi Women?s Hospital.
Every week we pick a topic that has either been trending in the financial press or that is relevant to investments and focus on it, hence the ?Focus of the Week.?
While discussing high level investment opportunities for this week, the Investment Team realized that with stretched valuations in equity markets and rates uncertainty in fixed income markets, we thought we?d analyze further into how investors can get more exposure to alternative assets such as Real Estate.
The most fundamental building block of any Real Estate development is land. Ironically, many landowners (?LO?) tend not to have the next two essentials of development, (i) the finances and, (ii) the development expertise. On the other hand, those with development expertise and finances tend to be limited in terms of suitable land for development. Consequently, a win-win solution is for LO?s seeking development expertise and finances to partner with institutions that possess development expertise and can access financing from investors.
The partnership can usually take any form, but the most optimal form we recommend is to enter into a Joint Venture Agreement (?JVA?); where the LO?s duty is to contribute land, and the development partner?s duty is to source financing and take responsibility for all that pertains to executing the development from start to finish.
However, several JVA?s have run into trouble with some making news headlines. Below we highlight 7 issues for LOs and developers to keenly consider when evaluating a JV partner:
Cytonn?s Real Estate and Investment Team has over Kshs 8 billion of Real Estate JV experience, both in terms of advisory and capital commitments:
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.