Companies Report Lower Earnings Growth

Equity Markets On A Losing Streak As Companies Report Lower Earnings Growth

The market continued its losing streak in the week. NASI fell by 1.8% and NSE 20 lost 3.0%, on the back of declines in Liberty Kenya Holdings Limited, Britam, Centum and Barclays that fell by 8.7%, 6.5%, 4.7% and 4.7%, respectively. Key to note during the week was that there was a net positive inflow from foreign investors for the first time in five weeks, an indication that they could be taking advantage of the weak shilling and the market correction to invest back into the market.

Since its February peak, NASI is down by 14%, while NSE 20 has declined by 18%; this is clear correction territory, but given slower earnings growth and a rising rate environment, it is too early to review our neutral stance on equities.

A number of companies announced results during the week. As we had earlier projected, earnings growth were muted across the industries. Housing Finance registered a profit after tax (“PAT”) growth of 2.3% y/y to Kshs 485 mn in H1’2015, down from the 19% growth recorded in H1’2014.

This deceleration in PAT is attributed to increases in interest expense following overall increases in deposits by 35.3% y/y compared to an increase in loans of 28.8% y/y. Non-performing loans ratio however declined by 1.6% y/y to 8.1%, now well below the industry average of 8.6%, supported by an improved loan book quality.

The operating expenses for the period increased by 16.4% y/y largely driven by increases in staff costs in anticipation of expansion. Following the current interest rate scenario in the country, the mortgage market may be dampened by the increased lending rates. As such, we expect to see a slower growth from the bank going forward. We shall be releasing our comprehensive banking report upon release of all banks H1’2015 results.

In other earnings news, British American Tobacco (BAT) and WPP Scangroup released their H1’2015 results. BAT registered an 8.3% increase in PAT to Kshs 1.9 bn, compared to Kshs 1.8 bn in H1’2014. The company benefitted from the weak shilling with the gross revenue increasing by 3%.

The tobacco industry globally continues to face issues driven by different regulatory proposals, and the company must come up with innovative ways to grow its business. WPP Scangroup’s half-year results were relatively flat with PAT growing by 1.4% to Kshs 185 mn, while revenues increased by 2.3% y/y to Kshs 2.3 bn. Despite huge expansions into the region, we are yet to see growth in this company.

All the reporting companies this week – HF, BAT and WPP Scangroup reported anaemic earnings growth of less than 10%, so far affirming our view that earnings growth will slow this year.

As we pointed out last week, mobile money is the next growth area for banks, and in line with this, Equity Bank last week launched Equitel, a mobile money transfer service that rides on Airtel’s infrastructure for voice, data and SMS services. The bank is targeting 5 mn customers by the end of 2015, which coupled with increased transaction volumes, should

• boost transaction revenues in the increasingly competitive industry, and
• gear the bank towards revenue diversification by increase their non-interest income.

We remain neutral on equities given the lower earnings growth prospects in most industries due to lower projected economic growth rate.