The country’s capital markets have seen some bright spots in 2015 amid the broader turbulence affecting emerging markets around the world. While the bourse was not untouched by the strengthening US dollar and macroeconomic headwinds, trading volumes – which are often low on African exchanges – were up year-on-year, and the market’s long-term fundamentals remain comparatively attractive. More general economic pressures – including currency depreciation, fiscal deficits and rising sovereign debt levels – along with a spate of high valuations and profit warnings in the first half of 2015 led to a slight decline in the Nairobi Securities Exchange (NSE) AllShare Index. The equity index peaked at 176.82 in February before ending September at 146.92, down 10% from 162.89, where it started the year.
However, the medium- and long-term outlook is fairly bright. On the back of demutualisation in 2014, the authorities are rolling out a number of tradeable instruments, work is ongoing on a new securities settlement platform and the Capital Markets Authority (CMA) has officially given the NSE approval to set up a new derivatives market. With the flurry of activity in agriculture, construction and transport, there remains a significant need for capital.
Size & Scope
The NSE had a total of 64 listings as of October 2015. They were split into 11 categories: agricultural; automobile and accessories; banking; commercial and services; construction and allied; energy and petroleum; insurance; investment; investment services; manufacturing and allied; and telecommunication and technology. Of these, banking had the most listings, with 11. Total market capitalisation stood at KSh1.955trn ($21.5bn).
As of late 2015 the NSE had authorised a total of 22 trading participants, which operate on the Main Investment Market Segment, and 23 nominated advisors, which are authorised to trade on the Growth Enterprise Market Segment (GEMS). GEMS was established in 2013 with the goal of attracting more small and medium-sized enterprises (SMEs) to the capital markets (see analysis).
The sector’s regulator is the CMA, an autonomous organisation that reports to the Treasury. It is self-financing, generating income via licensing fees, trading levies and processing of public and private issue approvals. However, regulatory reform is on the horizon in the form of a proposal to merge several Kenyan financial services regulatory bodies and agencies. The NSE, which is more than 60 years old, serves as the bourse, and, in line with global trends, it has recently demutualised and listed itself.
The NSE and the CMA are taking a series of steps to support long-term growth in the exchange (see analysis) as part of the Capital Markets Master Plan (2014-23). Among the initiatives being rolled out are new products to boost liquidity and help attract more domestic retail investors, given that only 4% of the population currently participates in the local market.
One such investment vehicle is exchange-traded funds (ETFs), which are due to be launched in the first quarter of 2016, with the NSE having already submitted proposed trading rules for review. A Practice Guidance Note to facilitate the launch of ETFs in Kenya was completed in June 2015. Other initiatives include a new securities settlement platform that is expected to go live in the first quarter of 2016, and will feature functionalities such as same-day trading, settlement services for government securities, and securities lending and borrowing to facilitate short-selling and other investment strategies.
The country also plans to launch a derivatives market by the end of 2015, which will make the NSE the second bourse in sub-Saharan Africa after the Johannesburg Stock Exchange to offer such instruments. Initial offerings on the long-awaited market will initially focus on financial derivatives and subsequently move on to commodities. The prospect of a derivatives market has received a positive response from both investors and market participants, and may be useful both in terms of offering new trading alternatives and in providing a tool to forecast future prices of currencies, interest rates and commodities. In preparation for the launch of the new market, the NSE has conducted a series of training sessions for market intermediaries and clearing banks.
Additionally, as with other alternative and smaller-cap markets across the continent – including the NILEX in Egypt and the GAX in Ghana – drawing SME listings is not easy in Kenya, but GEMS has attracted four companies since opening in January 2013, and more are expected in the coming years as awareness and training campaigns expand.
The government has also sought to encourage activity on the capital markets in other ways, including rolling back a capital gains tax (CGT). In a bid to help reduce the fiscal deficit, the government unveiled a CGT at 5% on equities and bond sales from January 1, 2015 after an absence of 30 years. According to local press, trading activity initially slumped by 70% as a result of the new tax and uncertainty over the nature of its assessment. The Kenya Association of Stockbrokers and Investment Banks took the issue to court, and in May the Institute of Certified Public Accountants called for the tax to be reviewed.
In June 2015 Cabinet Secretary for the National Treasury Henry Rotich said that the government was listening and that the gains tax would be replaced with a 0.3% withholding tax. When the president, Uhuru Kenyatta, subsequently signed the Finance Bill in September, after months of debate in parliament, both CGT and withholding tax were removed for NSE-traded equities and bonds starting in 2016.
Strong volumes of equity market trading were seen over the first half of 2015, with equity turnover worth KSh107bn ($1.18bn), up from KSh101bn ($1.11bn) a year earlier. Full-year equity trading volumes climbed from KSh86bn ($946m) in 2012 to KSh155bn ($1.7bn) in 2013 and KSh215bn ($2.4bn) in 2014. Meanwhile, bond trading dropped significantly and in the second quarter of 2015 averaged nearly KSh20bn ($220m) a month, down from the KSh42bn ($462m) average a year earlier.
The top 10 stocks by volume traded are Safaricom, Kenya Commercial Bank, Equity Bank, Coop Bank, Barclays, Mumias, Britam, Kenolkobil, Kenya Power and Lighting Company, and CIC. Liquidity does remain a constraint, yet trading is robust.
Kevin Tuitoek, macroeconomic analyst at Genghis Capital, told OBG that positives include determined action to improve security and rising power generation, which is likely to reduce electricity costs and stimulate economic activity. Negatives include profit warnings after pressure from increasing interest rates and high import costs, both linked to the decline in the currency; increased competition in sectors such as insurance; and slowing growth among leading banks. He added that the effects of a rise in the US target federal funds rate “are likely to cause some short-term ripple effect to emerging markets, including Kenya, with some risk of further currency shock and possible investor flight”.
Other markets saw equally encouraging indicators for investors. Soaring money market rates saw the October 5 auction pricing a 91-day treasury bill at 20.637%, up from 18.607% on September 28, according to the Central Bank of Kenya (CBK). The government’s one-year KSh30bn ($330m) bond sold at a record rate of 19.062%, offering the biggest returns for investors in three years.
Mergers & Acquisitions
The pace of corporate mergers and acquisitions (M&As) initially slowed in the first part of 2015 compared to a year earlier, but by August things had picked up, with 37 M&As at a total value of $767m, according to Burbridge Capital.
Larger trades included the Aviation Industry Corporation of China investing KSh6.7bn ($73.7m) in equity as NSE-listed Centum Investment Company attracted KSh14.7bn ($161.7m) for its Two Rivers development. East Africa Breweries sold Central Glass Industries to South Africa’s Consol Glass for KSh4.5bn ($49.5m). Seruji bought a 60% stake in Savannah Cement from two Chinese firms, while Africa Oil closed a $50m equity sale to the International Finance Corporation for its Kenya operations. Hong Kong-listed logistics firm Frontier Services Group used its Nairobi base as a bridgehead to buy South Africa’s Transit Freight Coordinators for $3.7m.
The financial sector has also witnessed a significant spate of activity. I&M Holdings did not disclose the total amount it spent when it bought lender Giro Commercial Bank in September 2015, and a month later it snapped up a majority stake in Burbridge Capital, while insurer Old Mutual acquired a 37.3% stake in local insurer UAP Holdings for $155.5m in cash, after investing a total of $253m during the month, taking its holding up to 60.7%. Previously, in November 2014, the private equity (PE) firm LeapFrog Investments purchased a majority stake in Kenya’s fourth-largest health insurance group, Resolution Insurance, with a bid valued at KSh1.6bn ($17.6m).
The financial sector continues to represent a major attraction for investors, although some institutions have seen pressures on profit margins, with share prices declining as a result. With increased capital requirements on the horizon and strong premium growth in the insurance sector, the outlook is favourable. Kenyan banks are spreading across the region and will eventually come to the market for capital to satisfy regulators. “The biggest challenge right now is meeting the capital requirements,” Richard Mambo, head of global financial institutions (East Africa) at Standard Bank, told OBG. “A lot of banks are issuing corporate bonds or doing rights issues. There are a lot of calls for capital.”
In agriculture, which represents more than a quarter of Kenya’s GDP, drought and below-average short rains for October to December 2014 hit tea production in the first quarter of 2015, but the March to May 2015 long rains were better, and some share prices have been climbing back in 2015. The weakening shilling boosted profits for exporters of horticultural and other products, many of which are paid for in euros or pounds. Kakuzi, a producer of tea, avocados, livestock and pineapples that is listed both in Nairobi and London, has seen a strong share price performance, up 75% by the end of September. Kapchorua Tea was also strong, climbing 43% to KSh198 ($2.18) per share during the same period.
Property development is also booming, particularly around Nairobi, as suburbs and new towns linked by motorways sprout in former coffee plantations. Land investments have outperformed other commodities over the past seven years, according to HassConsult, and the launch of real estate investment trusts (REITs) will make this sector more accessible to investors. In October 2015 Fahari I-REIT (investment REIT), issued by Stanlib Kenya, was approved by the CMA and announced plans for a KSh2.6bn-12.5bn ($28.6m-137.5m) initial public offering (IPO). Several more are likely to follow. However, many Kenyans still prefer direct investment in property and land, instead of the stock market, bank deposits or bonds.
The Kenyan market is actively courting foreign investment in the bourse, with notable results, although external events have made 2015 more of an uphill climb. The strengthening US dollar, for example, has had ramifications for emerging and frontier markets around Africa, resulting in two of the worst performing currencies in Ghana and South Africa. Kenya fared much better, although the CBK still had to take active measures to defend the shilling-dollar exchange rate, hiking interest rates twice since June 2015 to 11.5%. The shilling opened the year at KSh90.55:$1, then slipped for the first three quarters to peak at KSh106.12:$1 in September before starting to edge back.
These sorts of macroeconomic pressures have had an expected impact on the level of portfolio inflows. “Until recently, around 70% of stock market turnover was generated by foreign investors, but this has since declined to around 60%,” Jimnah Mbaru, chairman of Dyer and Blair, a local investment bank, told OBG. “Part of this is likely due to the steadily declining shilling, though regulatory uncertainty and global macroeconomic instability have also played their part.” However, this is expected to be a temporary trend, and most market participants interviewed by OBG said that the long-term trend is growing foreign investment. Jacqueline Mwiti, senior officer of corporate finance at the NSE, told OBG that, “There has been a lot of interest in listed and unlisted equities in the Kenyan market with funds from the Middle East, North America and Europe directing funds into the Kenyan asset markets.”
Foreign interest is also being actively encouraged by the government. In June 2015 Rotich announced the end of the 75% cap to the share that foreigners could own in NSE-listed companies. Changes to the capital markets (foreign investors) regulations meant limits would only be retained where there is a “strategic interest”. The impact of this could be noticeable in the short term, given that in March 2015 the CMA was required to hold further transactions for foreigners wishing to buy into British American Tobacco, which was already 76% foreign owned, and Total Kenya, which was 94% foreign owned.
Primary Markets & IPOS
No equity listings have followed the NSE’s own IPO in 2014, as low valuations deterred enterprises that had considered a share offer. However, the demand for capital remains, according to Marcel Mballa-Ekobena, executive head of investment products sales East Africa at CfC Stanbic Bank, because “the private sector is so dynamic”. Access to fresh capital is critical in most sectors, including banking and insurance, among others.
The NSE’s Odundo said he expected some major IPOs and listings in the next five years, mainly due to the government’s drive to build ports, roads, railways and power plants, some via a public-private partnership. A requirement for oil and gas firms to have 40% local ownership will also boost listings. Despite the limited activity for new equities, the debt market has been very active, with a number of new listings.
Pension industry assets were KSh750bn ($8.25bn) in June 2014, after climbing 18.4% in a year. Returns have been especially good for funds with substantial offshore holdings, although most Kenyan funds focus primarily on listed equities, government securities and real estate. Poor performance in both the currency and equity markets in the first half of 2015 may be encouraging them to reconsider. Banks have proved keen to buy stockbrokerages so that they can offer clients a fuller range of financial services. The NSE reduced licence fees for brokers to KSh25m ($275,000) after its 2014 demutualisation, as previously the only routes for would-be stockbrokers was to buy trading rights in an opaque market or buy a broker.
In October 2015 I&M Bank signed a deal to buy a 65% holding in corporate finance and investment firm Burbridge Capital, subject to approval by regulators. Two months before, Mauritian fund manager Axis had acquired Kenyan stockbroker ApexAfrica Capital for KSh470m ($5.2m) through local unit Mauritius Kenya Investment Holding, making it the highest price paid for a market intermediary in East Africa. Earlier, in 2014, Equity Bank had bought a majority in collapsed stockbroker Francis Thuo & Partners for a suggested KSh150m ($1.65m) and Commercial Bank of Africa is said to have paid the same for a trading seat. Meanwhile, Renaissance Capital was reported to have paid KSh250m ($2.75m) for a seat in 2007.
PE activity in Africa is still fairly limited but it is growing rapidly, and while South Africa remains the dominant sub-Saharan market for funds looking at the continent, Kenya is attracting its fair share of attention. Kenya-based Burbridge Capital lists 29 PE transactions for 2015 up to September, totalling $1.3bn. Estimated at a total of $897m, 11 transactions were successful exits by funds, building a track record and encouraging new investors to join the sector. Key deals included those in the banking, insurance, education, energy and real estate sectors.
One of the biggest deals was the sale by Helios of a 12.22% stake in Equity Bank to Norwegian funds Norfund and NorFinance for KSh23bn ($253m) and another 5.58% stake to Kenya’s National Social Security Fund for KSh9.7bn ($106.7m). Burbridge Capital estimates that Helios quadrupled the KSh11bn ($121m) it paid in 2007 to acquire its 24.99% stake and also collected KSh6.5bn ($71.5m) in dividends, giving a 4.6 times exit cash multiple.
Another KSh23bn ($253m) changed hands when PE firms Abraaj Group, AfricInvest and Swedfund, along with Centum, sold a combined 60.7% shareholding in UAP Holdings to Old Mutual. The UK’s Actis sold its 30% stake in Mombasa’s Tsavo Power to Globeleq Africa, CDC Group and Norfund for KSh23.8bn ($261.8m). In July 2015 Norfund made an equity investment of KSh476m ($5.2m) in Vertical Agro, the biggest exporter of organic vegetables. Several PE funds are also working successfully with SMEs. In September 2015 GroFin launched a regional small and growing businesses fund. Other segment players include Business Partners International, which has a Kenya SME fund; Acumen Fund, which has been operating since 2001; Investeq Capital; and Uganda-based African Agricultural Capital.
In July 2015 Moody’s affirmed a “B1” rating and stable outlook, balancing the positives of growth prospects, leadership in East Africa and commitment to reform with the negatives of government and current account deficits, and security challenges. However, the public budget weighed on the economy more generally. In October 2015 Standard & Poor’s downgraded the outlook on Kenya’s “B+” rating to “negative” from “stable”, citing risks from currency depreciation, deficits and rising debt. Fitch moved Kenya from stable “B+” to negative “BB-” due to deteriorating finances.
There are interesting times ahead for Kenya’s capital markets. Mballa-Ekobena said valuations are now looking tempting in the context of future growth, even with short-end rates above 20% in the last quarter of 2015. “We should not look at them in isolation but as a longer-term growth story for Kenya,” he said. “Growth alone is not the key value driver. Corporate action is most important; you need to see what management is doing differently in their specific sectors.” Some PE firms had been delaying their exits and could now consider using the bourse.
“There’s no better time to be in Kenya. Investors should focus on the government’s financial support for transport and energy, the country’s oil discoveries and economic growth above the sub-Saharan average,” said Michael Kafe, economist at Morgan Stanley. “In the next three to five years Kenya is going to be a producer and likely an exporter of oil, which changes the economy. Kenya, in the context of sub-Saharan Africa, is one of the better-run ones.”
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