Genghis Capital has launched its 2020 investment playbook with the theme “harnessing value” after a year in which the Nairobi Securities Exchange (NSE) all share-index had gained 18% compared to a loss of 18% in 2018.
Top gaining shares in 2019 were led by Sameer Africa which rose 86%, then Equity Group 53%, Longhorn Publishers 46%, KCB 44% and Safaricom 42%. Shares on the bottom side were Kenya Airways which lost 77%, then Uchumi Supermarkets -63% and Mumias Sugar -43%.
The playbook has a summary of 2019 whose gains were largely due to Safaricom and bank shares, and some of the year’s top deals which included the bank mergers of CBA & NIC and KCB & NBK. Other highlights of the year were the launch of derivative futures and the NSE Ibuka program which has uncovered some promising companies. It also notes the suspension of Mumias which joined Deacons and Athi River Mining as other shares in limbo.
Outlook for 2020: The report includes a macroeconomic outlook for the country this year during which they expect aggressive domestic borrowing by the government, and the Kenya shilling to range between 100 – 104 against the US dollar. They have also factored in the possibility of another Kenya political referendum happening during 2020.
Going forward, they expect that bank shares will do well, but that other equities will struggle this year. They look forward to the opportunity that derivatives have brought of diversification with lower trading costs but note that there is a need to have a market-maker to resolve some liquidity difficulties of trading derivatives.
They also note that the main shareholders at Unga and Express may try again to delist their company shares and take advantage of a new rule that reduces the takeover threshold requirement from being approval by 90% of shareholders to just 50%. Genghis also expect that the nationalization of Kenya Airways will be completed in 2020.
Genghis picks and recommendations:
- Momentum shares are Equity, EABL, KCB, Safaricom.
- Income Shares are KCB, Barclays, Co-op Bank, Stanchart, KenGen.
- Value shares are EABL KenGen, Kenya Re.
- Buy (expect gains of more than 15%) EABL, Kengen, Kenya Re, KCB, NCBA, and Diamond Trust.
- Hold (expect changes of between -15% to +14% over the next 12 months) Safaricom, Standard Chartered, Barclays, Equity, Cooperative, Stanbic, and I&M.
- Sell Recommendation: N/A
See last year’s picks by Genghis.
Nairobi-based investment bank Genghis Capital launched their 2019 “investor playbook” with the theme of embracing value. 2018 was a challenging year for the Kenyan economy and capital markets and that is expected to continue in 2019, but this also presents opportunities for investors.
Kenya has a relatively small number of stocks (65) on the Nairobi Stock Exchange (NSE) – and Genghis chose nine stocks as their 2019 financial (banking & insurance) and non-financial picks for investors, in three categories:
- Momentum stocks: Equity Bank, East African Breweries, KCB Group, Safaricom.
- Income stocks: Stanbic, Barclays Kenya, Standard Chartered, KCB.
- Value stocks: Kenya Reinsurance, KCB, Bamburi Cement.
They cited that Safaricom scored positively in every category while KCB and Equity banks had embraced digitization, high asset quality and low cost structures.
Other points from the playbook launch presentation:
- They do not expect a repeal of interest rate caps this year, even though its impact has been negative on the economy.
- Funds raised for infrastructure bonds are not all being used for that; some are going to retire other debts and they should be properly used
- Public-private partnerships are not coming to fruition; paperwork for the Nairobi-Nakuru highway was submitted in April 2018 but there has been no decision.
- To a question – “what is the regulator doing to increase the confidence of investors amid fraud incidents?” – the CMA can only do so much and the onus is still on the company directors. International markets have graver penalties than Kenya and perhaps it is time the Director of Public Prosecutions started looking at some cases here and following through on enforcement.
- While Kenya Re is a pick in the playbook, they generally don’t cover the insurance sector – it has challenges including fraud, price under-cutting, and low penetration levels (3%) and a lot has to happen to unlock value and growth in the insurance mass market. Kenya Re is there because it is under-valued (owing to lack of clear strategy and proper management) but would be desirable to other insurance investors if the government decided to sell its shareholding.
- They expect one main listing and others on the smaller NSE boards this year. But while a number of planned privatizations have been mentioned – Consolidated and Development banks, Kenya Pipeline, Kenya Ports they face numerous hurdles while others like sugar companies in Western Kenya have been on the pipeline since 2011.
The end of August marks the deadline for Kenyan banks to publish their unaudited half-year results (January to June 2017). Those of most banks are done and there are some trends, some concerns and some resilience areas seen in what’s been a challenging year for the sector that has for a long time been seen as one that earns super-profits for its shareholders.
The interest rate capping bill was signed last August, and while its initial impact was not fully seen in the 2016 results, one year later
these can now be interpreted. The law has had far-reaching impacts on different banks, their performance, operations and strategic directions. Overall, there has been a decline in bank results due to a mix of interest rate caps and digitization, as phones have taken over from branches as the main point for the bulk of customer transactions.