Market in Focus: KCB To Shut Down Some South Sudan Branches

KCB Group plans to shut some of its 19 branches in South Sudan with management attributing the move to deteriorating operating circumstances in the country.

Back in 2014, KCB Group closed 3 branches citing similar reasons. At present, impact on numbers remains scanty as no further information has been provided. It is an ongoing event in the company as KCB Group had already started rationalizing their South Sudan business once political stability faced threats in the country. We, however, expect the unit to continue eroding earnings as the country is yet to stabilize.

In other market news, ARM Cement Ltd (NSE: ARM) announced weaker than expected FY16 results. Earnings still held in the negative territory but recorded a marginal improvement (3.14% y/y) to a loss of KES 2.80Bn (LPS KES 3.30) from a loss of KES 2.89Bn in 2015.

Revenue declined 13.18% y/y to KES 12.79Bn, mainly attributed to challenges in Tanzania; 1) Cement price wars, and 2) Ban of importation of coal which reduced utilization levels to 50% from 75%. Net cash and equivalents decreased by 161.6% y/y to a negative position (KES 1.23Bn). In the medium term, we are of the view that challenges in Tanzania will persist and will continue dragging group profitability.

However, we note that management is on track to its turnaround strategy on; 1) reduction in long-term debt (KES 13Bn from 24Bn in FY15), and 2) sale of the non-cement business. Overall, we expect group performance to be hinged on the Kenyan unit (10% growth in FY16) especially in view of ongoing infrastructure developments. Additionally, the focus to increase capacity in Kenya by 650,000 tons per year will position the company strategically for mid-to-long term growth.

Fixed Income:

Market turnover rose on Tuesday to 2.2 billion shillings still driven by trades on the longer end of the curve. Demand on these tenures remains high, however, the yields traded are nearing their resistance levels with yesterday’s trades for 10-year to 20-year going through at an average of 13.56 percent. This month’s bond issue proposal is leaning towards a 3.47 year and 4.85-year paper with a value of KES 30.0Bn and a probable green-shoe of KES 10.0Bn, the final confirmation is expected to come through on Thursday.

May will see quite a bit of pressure on the Central bank with bond maturities of KES 31.0Bn and T-bill maturities of KES 89.0Bn, we believe this is the driving factor behind the reopening of the 182-day T-Bill by the CBK. The domestic borrowing number currently stands at approximately KES 195Bn against a target of KES 235.6Bn with 2 months to go to the end of the financial year.
The overnight rate continued to fall yesterday closing at 6.1 percent on volumes of KES 16.8Bn as the regulator decided to sit out of the OMO sighting a square market.