Friday, 9 March 2018

Retail, Finance, Banking and Investment Top Wealth Creators For Kenyans

Retail businesses, finance, banking and investment have been revealed as the most profitable sectors for generating wealth in Kenya, according to according to data provided by Wealth-X for
the Knight Frank Wealth Report 2018.

The 12th edition of The Wealth Report percentages revealed that the retail businesses (18%); finance, banking and investment (18%); industrial businesses (8%); and manufacturing (6%). 

The majority of Kenya’s affluent are self-made (56%), 5% have inherited, while 39% have made wealth both from inheritance and their own enterprises.

Further, it highlighted that Kenya’s high net worth investors with KSh 500 million in assets increased by 16 percent in 2017 to hit to hit 1, 290 compared to 1, 110 in 2016. Out of the 1,290 individuals, 90 are worth KSh5 billion or more.

However, Kenya has less than 10 individuals worth KSh50 billion or more.

According to the Attitudes Survey insights, respondents said 46 percent of their Kenyan high net-worth investors’ clients are considering investing in property locally in 2018.

The wealthy are more interested in investing in offices at 39 percent; residential (i.e. hotels, retail, private rented sector/multifamily) and agricultural property at 28 percent; student accommodation and logistics/warehouses at 22 percent; infrastructure at 17 percent; industrial at 11 percent; and healthcare and retirement housing at 6 percent

Ben Woodhams, Managing Director at Knight Frank Kenya, said: “This expectation of increased wealth underlines the confidence that Kenyan HNWIs have in the future economic performance of the country.”

The Attitudes Survey, which collated responses of 500 of the world’s leading private bankers and wealth advisors, consistently showed that passing wealth to the next generation remains a major concern for the wealthy globally.

Andrew Shirley, Editor of The Wealth Report, said: “Fear that their children will fritter their inheritance away, the worry that passing on too much too soon will dampen their offspring’s entrepreneurial spirit, or simply concerns about how to treat siblings fairly—all weigh on their minds.”

Indeed, most Kenyan HNWIs have yet to put robust succession plans in place, with only 40% of respondents to the Attitudes Survey in the affirmative. This is the lowest percentage of succession preparedness worldwide, against a high of 65% in the US, global average of 53% and Africa’s 47%.

Retail Business

The sector is characterised by a growing young upwardly mobile and affluent middle class, rapid urbanization and growing internet and smartphone penetration are among the many reasons for the driving force behind the growth of the retail sector.

Real estate company Cytonn Investments has maintained a bullish outlook on Kenya’s retail market given the strong consumer spending propelled by an expanding middle class and a conducive macro-economic environment.

Cytonn in their weekly investor brief, “The retail sector is expected to record increased activity in 2018 as seen through retail chains unveiling expansion plans.”

“The retail sector involves any aspect of selling things from running a shopping mall, supermarkets, and shop to online retail businesses,” said The Wealth Report Editor, Andrew Shirley.

Cytonn Investments Senior Manager, Regional Markets, Mr Johnson Denge in 2017 said, “The sector is projected to have a growth Compound Annual Growth Rate (CAGR) of 7.4 percent in the next 2-3 years.” “We expect less development of brick and mortar malls and more growth in terms of expansion from foreign retailers,” he added.

Finance, Banking and Investment

A survey of the stock markets of 17 African countries by Barclays Africa Group has rated Kenya’s financial markets the most advanced in the East African region and 5 th with a score of 59% in the continent ahead of economic giants like Nigeria (53 %,) Ghana (49%) and Egypt (39%). South Africa with a score of 92% was ranked first.

Kenya scored the highest ranking in East Africa attributed to its strong contract enforcement
policies, market depth as well as the capacity of local investors, ahead of Uganda, Tanzania,
Rwanda and Ethiopia.

It outpaced its East African peers in the market depth pillar, which focussed on areas such as the range of financial products, currencies and hedging options available and capacity of local
investors’ parameters. It also emerged top in East Africa and 3rd on the continent with a score of 81% behind South Africa (100%) and Mauritius (93%).

The Central Bank of Kenya (CBK) has maintained “The (Kenyan) banking sector remains stable and resilient.”

Tuesday, 6 March 2018

What Next for Safaricom as Dominance Debate Rages on in the Telco Sector?

Safaricom (NSE: SCOM) is back in the limelight with proposals to have it halt on-net discounts and individually tailored loyalty schemes to reduce the barriers to entry for smaller players.

This is according to the latest recommendations to the Communications Authority of Kenya (CA) by British Firm MS Analysys Mason who carried out Telecommunication Competition Market Study in Kenya’.

In its report findings presented to the stakeholders and members of the public, Analysys Mason disclosed that “An earlier draft of the report proposed implementation by end of 2017 with functional separation of Safaricom and M-Pesa if this was delayed by factors within Safaricom’s control.”

“This remedy could be seen as disproportionate and constraining the CA’s discretion to act as it saw fit at the time. Final report is therefore, silent on what further remedies the CA might consider,” reads the report in part.

This relates to earlier concerns in 2015 by Airtel  that called for a review into Safaricom’s business model of operations which allegedly favoured the operator and wanted it to be declared dominant.

“The study was specifically meant to foster a competitive telecommunications market which can attract sustainable investments, provide more choices to consumers and increase consumer welfare through the provision of affordable high quality services,” according to the CA.

The Authority in May 2016 contracted M/S Analysys Mason of the UK to undertake the study.

On the other hand, in June 2017 during the rebrand of Orange to Telkom Kenya, Eddy Njoroge, Chairman of the Board, posed that “There is need for scrutiny and consideration in the sector in order to ensure fair competition. How can investors get a return where a market is skewed?

Njoroge had cited that it goes against pro-investment policies of the Government of Kenya, and risked slowing down Foreign Direct Investment (FDI) into the sector.

“The bottom line is that the market will not survive in the long term unless a robust policy mechanism is put in place to ensure healthy competition and overall sector development and growth by way of further investment,” he added.

Kenya’s top three telco companies Safaricom Limited, Telkom Kenya and Airtel Kenya continue to invest heavily in their product offerings and infrastructure to improve their networks.

For instance, according to Safaricom’s annual report and financial statements 2017,  they currently have the widest reach in the country with 4,677 sites providing 95 percent population coverage for 2G and 3,517 3G sites with a population coverage of 85 percent. Their fibre network connects key cities and towns spanning 4,700 kilometers.

On the other hand, Telkom Kenya believes that ‘To provide the best value for a simpler life, efficient business and stronger communities’, “Expanding our network is essential to delivering the mobile and broadband needs of tomorrow,” says  Aldo Mareuse, CEO of Telkom Kenya.

In 2017, Telkom invested KSh 5 billion towards network modernisation leading to the launch of its 4G network, which is currently available in 32 towns and urban centres across the country.

In 2018, Telkom gearing is for the second phase of investment with regard to network
modernisation and expansion.

The findings by Analysys Mason found out that Safaricom has more than 70 per cent market share of subscribers, minutes and revenue and benefits from a very high share of on-net traffic, paying out less than Airtel.

To remedy this, Analysys Mason propose that Safaricom to share its infrastructure with other networks to improve accessibility in seven of the most rural counties for 5 years.

"We believe that Safaricom’s high market share in the retail mobile communications and retail mobile money market has led to its high market share in the wholesale towers market, by making it uneconomic for the other Tier 1 operators to roll out in rural areas. Intervention in the wholesale towers market has therefore become a necessary remedy to allow other operators to compete more effectively in rural areas."
“The original tower sharing proposal covered 14 counties and has now been reduced to 7 northern counties based on principle of proportionality and in recognition of investment made by Safaricom in rural infrastructure,” said the report.

Safaricom’s 4G sites currently covers about 25 per cent of its network while 3517 3G sites covers Safaricom’s network.

Consequently, in December, Cytonn Investments Plc in their report focusing on ‘Safaricom’s 44 per cent of NSE Market Cap. and Portfolio Construction’, faulted its dominance at the Nairobi Securities Exchange (NSE) that it minimises portfolio diversification.

Safaricom, which is Kenya’s largest technology firm, accounts for 44.0 per cent of the Nairobi Securities Exchange (NSE) capitalisation.

According to Cytonn, investors and portfolio managers “Should be cautious of the equities market dominance by Safaricom, and in constructing a portfolio, should look for ways to discount allocation to Safaricom to something lower that the 44 percent it represents in the market, in order to achieve a portfolio that objectifies performance and risk diversification.”

Bob Collymore, Safaricom CEO when releasing the telco’s annual report and financial statements 2017, he reiterated that they exist to fulfill a purpose founded on three pillars: Putting the customer first, delivering relevant products and optimizing operational excellence.

“That purpose is to transform lives. We have continued to implement transformative strategies that touch the lives of our shareholders, customers, staff members and other stakeholders.”

However, the CEO further stated “For equitable growth in the sector, (Safaricom) feels it is important that our competitors are held up to the same stands so that our policy of sustained investment is not punishment. We will continue to invest in our business and pursue new business interests.”

“While Safaricom’s market share in some segments remains high, this has been attained through prudent investments and continuous innovation.”

CA has already said it does ‘not want to punish success’ as the sector awaits its final adoption of the recommendations which are expected around June this year.

Wednesday, 28 February 2018

Eurobond Proceeds To Reduce Kenya’s Local Debt Appetite

By Faith Atiti

Since 2013, the popularity of Eurobonds among African sovereigns has increased remarkably. Even so, the increase in yields and the strengthening of the US dollar following the initiation of US interest rate normalisation cycle in 2015 invited some caution, considerably reducing the number of new issues among African nations. 

That said, the recent dollar weakness coupled with the fear of crowding out private sector has encouraged a return of Eurobonds. 

Moreover, with narrowing fiscal space especially in commodity-dependent countries, the pressure to roll over maturing external debt has increased somewhat. 

The 10 and 30 year papers received a total of $14.0Bn in bids, with the heavy subscription reflecting the continued global yield chase and expected higher interest income from the bonds. The bonds carry coupon rates of 7.25% and 8.25% respectively. 

The papers issued at par have seen a considerable rally with yields on the 10 year bond dropping by about 20bps, in less than a week after issue. 

The bulk of these funds will be channelled towards development spending and partly for debt refinancing. This could reduce government’s domestic borrowing appetite in the near term, considering the country’s less than 80% development budget absorption. 

Combined with the persistently sound interbank liquidity, this should enhance downward pressure on yields across the curve.

In hindsight, after the debut Eurobond issue, the government cut the domestic debt target for the 2014/15 fiscal year by about 50%, a move that was partly credited for the near 280bps drop in the benchmark 91-day T-bill rate, in the two months following the issue. 

Yields have maintained a downward bias after the interest rate controls reduced commercial banks’ risk tolerance resulting in an increased preference for government securities as an asset class. 

Faith Atiti, is a Senior Research Economist, Commercial Bank of Africa Limited.