Competition Authority of Kenya Approves Acquisition of Gulf African Petroleum Corporation by Total Kenya

The Competition Authority of Kenya has approved the acquisition of Gulf African Petroleum Corporation (Gapco) by Total Kenya (NSE: TOTL). The transaction, first announced in May 2016, will see Total Kenya acquire the assets of the largest oil importer in Kenya. The acquisition will add 125 million litres of storage capacity to the current Total Kenya capacity of 52 million, ahead of Vivo which has a capacity of 77 million litres. Gapco’s 2014 sales (KES 184.0Billion) exceeded Total Kenya’s KES 170.0Bn. We expect this vertical integration transaction to i). give Total Kenya an upper hand in the competitive oil tendering system in the country ii). realize synergies of running an integrated business model and iii). propel top-line growth. Total Kenya currently trades at 6.5X FY15 earnings and 0.9X book, attractive multiples based on Return on ordinary equity of 13.26%.

The latest review by International Monetary Fund (IMF) indicates that capping of loans will trim credit access to small borrowers, leading to an economic growth slowdown. The lender argues that lending rate caps leads to a reallocation of lending from small borrowers towards the government and large private borrower, dampening GDP growth in 2017 and 2018 by 100bps. IMF has called for the scrapping of the interest cap legislation, as it is seen shrinking bank’s margins and a harbinger to the sector’s staff layoffs.

Fixed Income

Market turnover rose slightly to KES 1.2Bn with activity still focused on the long end of the curve. Fund managers have been the main drivers of the market bidding on long term papers which have shown stability (rate wise) over the last 18 months. The prospect that the regulator may not issue a long-end bond, while there is upward pressure on interest rates, is also acting as a driver for this demand. This week is expected to see an uptick in activity as a lot of the uncertainties were cleared up in the previous week.

The market remained relatively square on Friday in terms of liquidity as the regulator came in to mop up through Open Market Operations (OMO), picking up KES 6Bn at 10% and 10.4%, through the 7-day and 28-day repo (respectively).

This week attention may shift to the shorter duration infrastructure bonds due to the 12 year IFB on the horizon for this month’s auction. We believe we may see demand come in from locals on the bond while foreigners may look to take their gains and prepare to go in for the upcoming auction at higher rates.

Trading Expectation

Market turnover clocked KES 653Mn in Friday’s trading session. Safaricom Ltd (NSE: SCOM) topped the board, on account of foreign dominance of the telco stock. East African Breweries Ltd (NSE: EABL) came in second followed by listed tier-1 banks, KCB Group Ltd (NSE: KCB) and Equity Group Holdings Ltd (NSE: EQTY). We noted 80% foreign participation in the market. We expect last week’s trend to spill over into this week.