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Daily Market Report – 23rd June 2020


Faida Research - June 23, 2020 - 0 comments

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Market Commentary:

  • The All Share Index eased by 1.5% to close the day at 140.47. We attribute this mainly to price decline on Safaricom (2.5% to KES 29.45) on profit taking activity. NSE 20 share Index also declined by 0.4% to close the day at 1,949.82. The banking sector accounted for 56.8% of the day’s traded value with majority of the counters recording price gains.
  • Kengen recorded a significant increase in activity, trading 10.5 million shares and gaining 1.6% to close the day at KES 5.10. This was on the back of increased foreign investor demand. Overall, foreign investors were net sellers accounting for 72.9% of the day’s sales against 22.8% of the day’s purchases.

 

News Highlights:

Equity Group Discontinues Talks to Acquire Atlas Mara Banking Assets

 Equity Group (herein “bank”) announced that it has reached a mutual agreement with Atlas Mara Limited to discontinue discussions on the proposed acquisition of banking assets from Atlas Mara Limited for the foreseeable future.

 The bank cited a need to “refine” its strategy in light of the COVID-19 pandemic. According to the bank, this refinement entailed conserving cash and liquidity.

 The bank added that it would place more focus on its digital strategy while re-evaluating the acquisition of new businesses that would require significant capital injection and managerial focus.

 The bank, however, affirmed its commitment to find new opportunities in Africa.

Commentary

 The decision does not come as a surprise to us. During a previous interaction with the bank, management hinted at a possible delay in closing the transaction. We note, other than Rwanda, the rest of the banks in the proposed Atlas Mara deal (Tanzania, Zambia and Mozambique) were not profitable. Equity bank was probably betting on acquiring the assets at a discount then turning around the performance. The adverse macroeconomic conditions in some of these countries (like Zambia) would have made this a daunting task.

 We note that regional expansion has been a mixed bag for most Kenyan banks. Our analysis of the regional performance in 2018 revealed that of the seven banks that had expanded regionally, only DTB, Equity Bank and I&M had regional units contributing more than 10.0% to the respective group’s profits before tax. In Equity’s case, though the contribution to profits before is relatively high (2018:14.0% and 1Q2020: 24.4%), the average cost to income ratio in the regional units is high (1Q2020: 64.1%) compared to the Kenyan unit (1Q2020: 45.6%).

 In our view, the bank should focus on improving profitability of existing regional units and increasing their contribution to the group performance instead of venturing into new markets.

 

Recommendations:

Long Term Buy- KCB, Equity, Absa, Stanbic, NCBA

Hold- Safaricom

Sell- Stanchart, Bamburi, HF

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