A market outlook from an analyst at NIC securities below!
Subject: Market outlook and some stocks!
The market has improved by 12.6% since the start of the year with the NSE-20 Share index rising to 3,618.53 as of 28th of May from 3,212.86 as of 2nd January. At its peak, the NSE-20 Share Index touched 3,708.88 as of May 21st. The gradual decline since May has been due to some profit-taking as well as some selling off on counters that are going ex-dividend.
The key factors driving the market have been; lower inflation, declining interest rates and an improving yield curve as well as steady earnings from some of the companies particularly the banking sector stocks. Nonetheless, we observe that the market has a long way to go with regards to up-side potential. The market is selling at a Price/earnings ratio of 7.4 which implies an earnings yield of 13.5%. We note that this is in line with the long-term treasury bond and thus this offers good opportunities.
With regards to sector preferences, we like the banking sector which is selling at a PE of 7.01 with a preference for KCB, Equity, NIC Bank and Standard Chartered. The first two are gaining significantly from agency banking and their wide distribution models which will drive their cost of funds lower and help them mobilize deposits. In turn, these cheap deposits are likely to provide the banks with funds once credit demand improves. Moreover, KCB and Equity are well prepared for the East African growth story through their subsidiaries. In fact, 2011 financial results showed that these two banks benefited from subsidiary profitability which cushioned them from the tough Kenyan environment. The two are currently the largest banks controlling approximately 25% of the market.
NIC and Standard Chartered are solid banking franchises with strong and conservative banking practices. Both have historically had low non-performing loans and thus strong asset quality and they both have good net-profit margins (25-28%). Further, they are selling at PEs of 4.53x and 7.78x respectively whereas their ROE’s are 26.3% and 27.6% respectively. We expect their up-coming rights issues to be well subscribed and we advise that an investor purchases shares both now and during the rights issues.
In energy, we are cognizant of the positive developments that are taking part in the energy sector. For one, discovery of oil in Turkana and potential gas discoveries in Lamu sit well for both KenGen and KPLC. We expect the government, through the national energy policy to implement investments that will enable the two companies to leverage their abilities so as to take advantage of these developments. For one, Kengen is building a 500MW gas plant in Lamu that will reduce its dependence on hydro sources and expensive thermal energy. This will increase revenues and importantly, their profit margins! We see Kengen as a long-term stock. The reason why is rather straight forward, currently, the company is selling at a dividend yield of 6.2%. If the profits grow by 10% per annum over the next 5-years, then the company in five years time will earn a dividend yield of 10% which can grow to 13% in another 3-years. In essence, owning the company’s stock is like owning a bond whose coupon increases with time. KPLC is also one to look at due to the fact that they’re increasing their tariffs. Nonetheless, we note that KPLC has got heavy capex requirements that could eat into their dividend pay-outs.
In other sectors, we see Transcentury as a long-term buy due to their strong portfolio companies such as Civicon, Avery, East African Cables and Chai Bora. The company is managed by a young dynamic leader in Dr. Gachao Kiuna who can definitely grow the company’s prospects. Bamburi Cement also looks attractive due to the growth in the cement sector which is likely to improve as interest rates decline.
Speculatively, we like Car & General (PE of 3.6x vis-à-vis market PE of 7), Standard Group (PE of 7x), Kenya Airways, Crown Berger (PE of 4x) and Unga Group (PE of 2x).
Regards,
Samora Kariuki | Research Analyst, NIC Securities | NIC Bank Group
NIC House, Masaba Road, Ground Floor | Tel: 020 2888553 | Fax: 020 2888544 | Mobile: 0711041553
Email:
samora.kariuki@nic-securities.com | Website:
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