KESTREL CAPITAL March 2015...The Darling That Is Kenya: Cautiously Optimistic (So much potential, quite a bit of bag-gage) The good… Following the GDP rebasing, Kenya’s recorded

KESTREL CAPITAL Member of the Nairobi Securities Exchange

March 2015

MACROECONOMIC AND STOCK MARKET OUTLOOK 2015 Global economy: Slightly dampened outlook? Global GDP growth projections revised

downwards by 30bps to 3.5% in 2015, and 3.7% in 2016 by the IMF.

Sub Saharan Africa- impressive growth despite headwinds: Excluding South Afr ica, the

region recorded an impressive 5.6% growth in 2014, coming second only to Emerging and Devel-

oping Asia at 6.5%.

Going forward, we expect Sub Saharan Africa to be sustained by: Investment in infrastruc-

ture, increased agricultural output and growing service sectors.

What is the expected impact on capital flows into Sub Saharan Africa? We expect pr ivate

capital flows into Sub Saharan Africa to contract slightly in 2015, as FDI inflows remain flat,

while portfolio and “other” inflows contract as global conditions gradually tighten and a “flight to

safety” scenario is witnessed with US denominated assets. The Darling That Is Kenya: Cautiously Optimistic (So much potential, quite a bit of bag-

gage)

The good…

Following the GDP rebasing, Kenya’s recorded output increased 25.3% in 2013 to KES

4.8Tr (USD 52.3bn) on the back of significant increase in the agr icultural, manufactur ing,

ICT and real estate sectors.

Stable macroeconomic environment- Inflation maintained within CBK’s limit, stable inter -

est rates, production driven credit growth.

Strong infrastructure development alluding to a shift from demand side to elements of sup-

ply side economics as the vehicle for sustainable growth in the long run.

Promising mineral and oil extraction industry to spur mining and oil sector growth in the

long term.

Expected implementation of Integrated Financial Management Information System

(IFMIS) and Single Treasury Account to improve public sector liquidity management.

Launch of Derivatives Market in 1H15 to lead to financial deepening of the secur ities mar-

ket.

The Bad…

Currency deficit-prospects going forward- Despite the GDP rebasing easing the twin defi-

cits, we still remain concerned, especially given the nature of Kenya’s exports (soft commodities)

and poor performance of tourism sector.

Does Kenya face the possibility of a debt trap? Cognizant of the relatively high debt level (as

a percentage of GDP), is Kenya therefore borrowing to spend and service its debt, or to “invest”?

Government rationalization stalled? Recurrent expenditure has increased quite substantial-

ly to account for 61.4% of total expenditure.

The Ugly…

Private and Public sector communication-a case of broken telephone

Kestrel Capital “Cherry Picks”

Growth Stocks- Safaricom, Equity Bank, KCB Bank and Co-op Bank

Value Stocks- Kenya Power, Kenya Re, CFC Stanbic Bank

Rights Issue Opportunities- Housing Finance, KenGen, National Bank

Middle Income growth & East Africa Exposure– E.A. Breweries, Carbacid

Real Estate Exposure- Housing Finance, Centum, Britam

Dividend Stocks- BAT Kenya, StanChart Bank, EA Cables

Bloomberg Ticker : KNSMIDX

Country Statistics Nominal GDP (USD bn) 55.0

Real GDP (USD bn) 42.0

Nominal GDP per capita (USD) 1,242.4

Real GDP per capita (USD) 948.9

Population (m) 44.3

Overall Inflation (%) 5.6

Total Debt to GDP % 50.8

Current Account Deficit to GDP (%) 7.4

GDP Growth

y/y q/q

1Q14 4.5% 10.9%

2Q14 5.7% -1.7%

3Q14 5.5% -2.6%

2014E 5.8%

Price Trend

Source: NSE

Analyst Linet Muriungi [email protected] +254 20 2251 758 +254 20 2217 049 www.kestrelcapital.com

Kenya 2015 Macroeconomic and Equities Outlook March 2015

KESTREL CAPITAL

GDP Growth Global economy: Slightly dampened outlook? The IMF released reviewed global growth

projections in January 2015, revising them downwards by 30bps to 3.5% in 2015, and 3.7% in

2016. The reassessment was as a result of downward revisions on particular developed markets

(Eurozone’s growth projected to be 1.2% and Japan’s 0.6% in 2015), while the US is estimated

to record sturdy growth (3.6%) in 2015. Emerging markets’ growth prospects remain varied,

with oil producing countries and commodity exporters facing strained GDP growth, courtesy of

the dip in global oil prices and falling commodity prices. Notably, BRICS economies face con-

trasting near-term growth outlooks. China’s rapid growth appears to be normalizing, with 6.8%

projected in 2015 (7.4% in 2014E), while India is projected to record 6.3% GDP growth in 2015

(5.8% in 2014E). Faced with policy hurdles and weak external demand of exports, Brazil and

South Africa are projected to grow at 0.3% and 2.1% respectively in 2015, while Russia’s GDP

is forecasted to contract 3.0% as the country takes a hit from the global oil price dip and geopo-

litical issues. Sub Saharan Africa is predicted to record 4.9% and 5.2% growth in 2015 and 2016

respectively, despite the strengthening of the USD in real terms against most currencies for net

importers, the impact of low global oil prices among oil producing countries, falling commodity

prices, potentially rising interest rates and risk spreads for commodity exporters. The lower oil

and commodity prices are expected to boost economic growth for importers, as they benefit from

lower import expenditure, increased disposable incomes for consumers and lower production

costs for final goods. Overall, a need for monetary and fiscal policy reforms, as well as rational-

izing recurrent government expenditure is necessary for both oil importers and exporters to sup-

port long term growth.

2013 2014 2015F 2016F

World Trade Volume (goods and services) 3.4 3.1 3.8 5.3

Advanced Economies Imports 2.0 3.0 3.7 4.8

EM & FM** Imports 5.5 3.6 3.2 6.1

Oil (0.9) (7.5) (41.1) 12.6

Nonfuel Commodities* (1.2) (4.0) (9.3) (0.7)

Advanced Economies Consumer Prices 1.4 1.4 1.0 1.5

EM & FM** Consumer Prices 5.9 5.4 5.7 5.4

LIBOR on USD Deposits (six month) 0.4 0.3 0.7 1.9

LIBOR on Euro Deposits (three month) 0.2 0.2 - 0.1

LIBOR On Japanese Yuan (Six month) 0.2 0.2 0.1 0.1

*average based on world commodity export weights **Emerging Markets and Frontier Markets

Source: IMF

Source: IMF

Regional GDP Growth-Historical and

Projections

Key Output Metrics-historical and y/y growth projections (%)


KESTREL CAPITAL

Sub Saharan Africa- impressive growth despite headwinds: Sub Saharan Afr ica has rec-

orded strong growth in recent years, with 4.5% output growth recorded in 2014 versus 4.3% rec-

orded in 2013. Excluding South Africa, the region recorded an impressive 5.6% growth in 2014,

coming second only to Emerging and Developing Asia at 6.5%, which was propelled by China’s

7.4% growth. The sturdy growth has been a result of the region’s investment in public infrastruc-

ture, increased agricultural output, consumer market growth stemming from an expanding middle

class and a rapidly growing service sector (primarily transport, ICT and financial services). The

accommodative monetary policies of advanced economies in the wake of the global financial

crisis and relaxed financial conditions in China also prompted high inflows of capital into the

region’s emerging and frontier markets, strong uptake of sovereign bonds issued by Sub Saharan

African countries and FDI inflows for fixed capital development in recent years.

However, the above factors eased off as a result of slower growth in emerging markets which

affected SSA export demand, softening of commodity prices and reversal of the expansionary

monetary policy in the US. While the fiscal deficit of SSA narrowed to 2.5% of GDP due to ra-

tionalization exercises in certain countries (e.g Nigeria and Senegal), the fiscal position worsened

as expenditure increased due to an expanding wage bill (e.g Mozambique and Kenya) and in-

creased public investment (e.g Niger and Uganda). Sub Saharan Africa’s debt ratio remained

relatively stable at 30.0% of the region’s GDP, despite certain countries noting an upsurge in

debt (Ghana at 65.0% of GDP, Mozambique and Senegal at above 50.0%).

Little fluctuation was experienced in the current account deficits averaging at about 2.9% of out-

put in 2014. The softening of commodity prices, falling oil and metal prices exerted downward

pressure on the region’s export value, while growing private consumption and strong infrastruc-

ture-related projects spurred import demand. Inflation rose in 1H14, especially among countries

that experienced significant currency depreciation, which led to implementation of a contraction-

ary monetary policy in particular economies (e.g Ghana, South Africa), but eased in 2H14 with

the decline in oil prices for oil importers and low commodity prices.

Going forward, we expect growth in Sub Saharan Africa to be sustained by: Investment in

infrastructure, increased agricultural output and growing service sectors. IMF projections place

SSA’s output growth to be 4.9% in 2015 (4.6% in 2015 for World Bank). The twin deficits may

however worsen slightly, courtesy of reduced export demand from emerging markets and the fall

in commodity and oil prices among oil and commodity exporters, as well as increased Govern-

ment spending ahead of elections in various countries. With slight tightening of monetary poli-

cies in emerging markets, particularly China, we may see the Sub Saharan Africa region face less

favorable financing conditions and a slowdown of private capital flows. Further downside risks

to the positive SSA GDP growth projections are the security-related issues faced by countries in

the Sahel belt with adverse implications for stability, increasing the region’s political risk as well

as prolonged effects of Ebola in West Africa. Overall, we believe Kenya to be one of the benefi-

ciaries of possible portfolio shifts of funds within Sub Saharan Africa frontier markets in

2015/16.

Country Nature of Election Month/Year

Zambia Presidential

by-election Jan-15

Nigeria General Mar-15

Togo General Mar-15

Burundi Legislative Apr-15

Mauritius Parliamentary May-15

Burundi Presidential Jun-15

South Sudan General Jun-15

Ghana Presidential

& Parliamentary Jul-15

Tanzania General Oct-15

Cote D'Ivoire Presidential Oct-15

Central African Const. Ref.*

Republic Presidential 2015

Guinea General 2015

Niger Parliamentary 2015

Uganda General 2016

Kenya General Aug-2017

*Constitutional Referendum

Source: National Democratic Institution

Sub Saharan Africa Countries’

upcoming elections


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What is the expected impact on capital flows into Sub Saharan Africa? We expect pr ivate

capital flows into Sub Saharan Africa to contract slightly in 2015, as FDI inflows remain flat,

while portfolio and “other” inflows contract as global conditions gradually tighten. As the Euro-

pean Central Bank rolls out its EUR 60.0bn monthly asset purchase program up to September

2016, we expect a flight to safety from investors looking to invest the increased liquidity in USD

denominated assets, further aiding the strengthening of the USD. We expect to see a portfolio

shift among frontier equity markets, as investors may opt for oil importing SSA countries, while

major oil exporting countries continue to experience challenges in the near term.

Frontier markets with heavy reliance on portfolio flows (e.g Ghana, Namibia, Kenya), to finance

high fiscal and external current account deficits as well as oil and soft commodity reliant export-

ers with significant external debt, are exposed to currency volatility in the short term. Soft com-

modity and oil-exporting countries which may not have sufficient fiscal buffers to absorb the

falling price of commodities and oil, may result in governments rationalizing expenditure and/or

devaluing their currency, which could possibly lead to higher inflation. The Central Bank of Ni-

geria recently announced the devaluation of the Naira by 8.4% against the USD to cushion the

impact of the global oil price dip. We also believe SSA’s frontier markets’ ability to attract port-

folio capital flows going forward will depend on the ability to sustain macroeconomic stability

and speed of the countries to make necessary macroprudential policies regarding fiscal, monetary

and exchange rate policies as well as strengthen policy frameworks as frontier markets become

more integrated with the global financial system.

SSA Net Oil Exporters

Angola DRC Ghana

Cameroon Equatorial Guinea Nigeria

Chad Gabon South Sudan

Source: Kestrel Research

Source: IMF, EPFR

Source: IMF


KESTREL CAPITAL

The Darling That Is Kenya: So much potential, quite a

bit of baggage The good… Following the GDP rebasing, Kenya’s recorded output increased 25.3% in 2013 to KES

4.8Tr (USD 52.3bn) on the back of significant increase in the agriculture, manufacturing, ICT

and real estate sectors. Based on this, Kenya’s output growth was therefore recorded at 5.7% in

2013 (4.7% pre-rebasing). This therefore changes the share of GDP aggregate categories to see

agriculture, mining & construction, service, manufacturing and taxes account for 29.5%, 8.1%,

50.7%, 11.7% and 12.3% of GDP respectively, while the historical 3 year GDP growth averaged

5.4% to 2013 (against SSA’s average output growth of 4.9% to 2013) and is estimated to grow at

5.4% in 2014. Under the new figures, Kenya’s current account deficit appears to have improved,

averaging at 8.6% over the last 3 years to 2013 (7.4% in 2014E), while the fiscal deficit reduced

to a 3 year average of 5.5% of GDP to 2013 (4.8% in 2014E). As at November 2014, debt as a

percentage of GDP stood at 50.8%.

While the component of oil in Kenya’s import bill has declined quite significantly to approxi-

mately 17.0% (22.2% in the 11 months to November 2014), the machinery and transport equip-

ment has increased rather noticeably to become the largest component of Kenya’s import bill at

33.0% in the 9 months to 2014. Kenya will however not feel the effect of the global oil price dip

with regards to its current account due to declining revenue streams from agricultural exports

(tea, horticulture and coffee accounting for 17.7%, 13.4% and 3.8% of export value respectively

in the 9 months to November 2014). We would nonetheless like to point out that the strong in-

crease in imports suggest infrastructure investments, which in light of the decrease in the value

of consumables (i.e oil), highlight that the “quality” of imports is seen to be geared more towards

investments rather than consumption, a plus for the country in the long run. Additionally, alt-

hough the debt-to-GDP ratio appears rather high, we believe the current balance between domes-

tic and external debt is manageable (domestic debt at 52.8%, external debt at 47.2%). The 2013-

2015 IMF debt sustainability report suggests that Kenya remains well below the policy-

dependent debt burden thresholds. Kenya continues to face low risk of external debt distress and

is therefore debt sustainable. The biggest downside risk to Kenya’s external debt sustainability

however stems from exchange rate shocks and less favorable terms on new public sector loans.

Stable macroeconomic environment- Inflation maintained at single digits, stable interest

rates, production driven credit growth: Kenya’s macroeconomic environment remains ra-

ther stable, with inflation maintained at single digits, stable interest rates and production driven

credit growth observed in 2014. Inflation averaged 6.8% in 2014, touching a high of 8.4% in

August, before softening to a low of 6.0% in December. Current inflation rate stands at 5.6%, up

8bps from 5.5% in January. Weighted average lending rates in 2014 averaged 16.5%, with a high

of 17.1% recorded in February and a low of 15.9% recorded in November 2014. Private sector

credit growth was recorded at 25.3% in September 2014, primarily driven by credit uptake

Source: KNBS, Kestrel Research

Real GDP Growth-Kenya

Sectoral Distribution of Loans-

September 2014

Source; CBK, Kestrel Research


KESTREL CAPITAL

from Energy & Water (+47.5% y/y), Mining & Quarrying (+39.9%), Transport & Communica-

tion (+36.8%), Real Estate (+34.9%) and Financial Services (+30.3%). Consumption-centric

credit uptake remains high, with personal/household income growing 24.1% y/y and accounts for

25.3% of loans issued. Going forward, we expect inflation and interest rates to remain relatively

stable in 2015, hence assist in supporting the Shilling. The Monetary Policy Committee main-

tained the Central Bank Rate at 8.5% in February 2015. Strong growth is expected from the min-

ing & quarrying; manufacturing and transport & communication aided by declining energy pric-

es; electricity & water as the government continues to invest heavily in infrastructure develop-

ment, wholesale & retail trade impelled by favourable demographics and a growing middle class,

and the financial services sector as it enjoys the ripple effects of growth from other sectors. We

also expect improved output from the agriculture sector, contingent on favourable weather, fol-

lowing the signing of a new Economic Partnership Agreement between Kenya and the European

Union regarding fresh produce (i.e cut flowers, fresh vegetables, fruits & nuts) in February 2015.

This will see a reversal of the import duty levies imposed on Kenyan produce in 4Q14, following

the expiration of the previous EPA on September 2014, where cut flowers attracted a levy of

roughly 7.7%, while vegetables and pineapples incurred duty levies of approximately 30.0% and

22.0% respectively.

We however note a downside risk to our general inflation trend 2015 outlook, attributable to pos-

sible CPI increase in the food basket, should the long rains be lower than average. Following the

below average rainfall experienced in October-December 2014, there was lower than expected

harvest. The March-May long rains are however expected to start on time and have near average

cumulative rainfall. Continued importation of maize from Uganda and Tanzania is expected

through June 2015. Maize prices are therefore expected to marginally increase from January

through June 2015, though sufficient supplies will ensure price increases are not unseasonable or

particularly large

Strong infrastructure development alluding to a shift from demand side to elements of sup-

ply side economics as the vehicle for sustainable growth in the long run: In 2010, the Cen-

tral Bank of Kenya employed an expansionary monetary stance that saw money supply (M1)

grow 22.9% (+6.2% y/y in 2009) while GDP grew 8.4% in 2010 post-rebasing. However, 2011

was plagued with soaring inflation rates due to excess money supply in the system coupled with

the worst drought to hit Kenya in 40 years and high oil prices (ADNOC Murban oil price at a

high of USD 127.00). This saw weighted average lending rates touch a high of 20.3%, the Ken-

yan Shilling trade at KES 107 levels against the USD and the Central Bank Rate hit 18.0% in

2012 while GDP recorded 4.5% growth. In 2015, we expect the CBK to maintain a neutral mon-

etary policy stance as the Government focuses on supply side aspects of economic growth. The

current Government is investing heavily in infrastructure projects to mitigate the cost of doing

business in Kenya and improve access to inland Africa. Additionally, there are currently 47 pri-

ority Public Private Partnership (PPP) projects as per the PPP-Unit. Recently, the Lamu Port

Southern Sudan-Ethiopia Transport (LAPSSET) corridor project has received admission as a

Projected food security outcome:

Jan-March 2015

Inflation Rate Trends

*National Average Retail Price for Loose Maize (1Kg)

Source: KNBS

Source; Famine Early Warning Systems Network


KESTREL CAPITAL

Presidential Infrastructure Champion Initiative (PICI) project. The new status also provides in-

centive for Governments involved in LAPSSET to access financing and establishing Public-

Private Partnerships (PPP) agreements for the project’s advancement. The LAPSSET project is

valued at USD 24.5bn and will involve the development of several components including: 32

berths Lamu Port, Standard Gauge railway line, Crude Oil Pipeline, Product Oil Refinery and

Airports between Kenya, Ethiopia and South Sudan.

The Government of Kenya (GoK) launched the 10,000Km project in August 2014, roads are

going to be constructed in three phases, which will be divided into 3,000km, 2,000km and

5,000km, and the first phase has been subdivided into 45 lots. The roads will be constructed un-

der the annuity where contractors are provided constant flow of cash through loans from local

banks while they design, construct and maintain the roads. Treasury will then repay the loans

over a period of eight years in equal installments (annuity), starting from the time the construc-

tion works are concluded. KCB Bank has offered to finance local contractors who are willing to

build roads government’s USD 444.4m annuity scheme. Through this annuity model, the govern-

ment will be able to transfer construction, operation and maintenance risks to the private sector.

Additionally, the loans taken will be recorded in the contractors’ balance sheets, rather than the

Governments. The multi-billion project is being undertaken by the Kenya Urban Roads Authori-

ty (KURA) and the Kenya National Highways Authority. We would however like to point out

that the Government has not yet clearly pointed out how private contractors will get a Return on

Investment for maintaining the roads, with the idea of toll stations and part of the expected new

VAT charge on fuel hinted as cash flow stream by the GoK.

Expected implementation of Integrated Financial Management Information System

(IFMIS) and Single Treasury account to improve public sector liquidity management: The

IFMIS system will allow for the computerization of ministries’ budget allocations and expendi-

tures, procurement operations, reconciliation of revenue and payments, statements of the govern-

ment’s financial position, and production of statutory reports in real time at the county and na-

tional level. Additionally, effective implementation of the Treasury Single Account at the nation-

al level in 2013/14 and at the county level in 2014/15 will enable the Treasury to effectively

manage cash and avoid sourcing for domestic debt while parastatals hold liquid cash in various

accounts.

Promising mineral extraction industry to spur mining sector growth in the long term: Ken-

ya’s extraction industry shows a great deal of promise, as Base Titanium began to export in

2014, while gold and oil is at the exploration phase. As at 3Q14, the mining & quarrying sector

recorded 4.5% y/y growth while the sector’s credit uptake grew 39.9% y/y. Tullow Oil and Aus-

tralia’s Africa Oil Corporation estimate that Kenya will become a net oil exporter as early as

2019/20, with current exploration findings from Tullow Oil are positive, with Tullow having

discovered approximately 600.0m barrels of oil. While the falling oil prices may reduce the ex-

pected profitability investments in the oil sector, Kenya’s oil exploration projects have been


KESTREL CAPITAL

onshore and thus require a lower outlay than offshore projects. Two companies-Stockport (2013)

and Mayfox Mining (2014)- with gold exploration licenses raised funds by way of private place-

ment. We therefore believe the mineral extraction industry has a lot of potential and may contrib-

ute to the country’s export value growth in the medium-long term.

Launch of Derivatives market in 1H15 to lead to financial deepening of the equities mar-

ket: The Nairobi Secur ities Exchange is set to launch the der ivatives market in 2015. Final

stage consultations with the Johannesburg Stock Exchange regarding the market are ongoing and

could see the market launched as early as 1H15. It is expected that the NSE will initially imple-

ment cash-based settlement and move to physical-based settlement in the future. The current

forex derivatives OTC market is also expected to be pushed to the market, providing more in-

vestment options for investors. We can now expect Real Estate Investment Trusts (REITs) list-

ings, following the appointment of a REITs trustee. We believe these alternative investment in-

struments will deepen the equities market and attract higher portfolio flows into the market in the

medium term.


KESTREL CAPITAL

The Bad… Currency deficit-prospects going forward? Despite the GDP rebasing easing the cur rent

account deficit as a percentage of GDP, we still remain concerned, especially given the nature of

Kenya’s exports (soft commodities). Kenya’s imports have recorded a 10-year CAGR of 14.4%

to 2014E, against a 10 year CAGR in exports of 8.8% to 2014E. This has translated to the current

account deficit (as a percentage of imports) increasing from 5.4% in 2004 to 24.9% in 2014E.

Tea and horticulture exports account for about 17.7% and 13.4% of goods exported in 2014,

while Tourism’s contribution to service exports shrunk from approximately 14.0% in 2013 to

11.6% in 2014. Regarding Tourism sector credit, the sector’s credit contracted 7.1% y/y as at

September 2014, as security-related issues continue to hamper the sector’s growth.

Additionally, given the high weighting of short-term portfolio inflows, exposure to forex volatili-

ty for the Kenyan Shilling is increased. This is further enhanced by the expected strengthening of

the US Dollar in real terms. We may therefore see the Kenyan Shilling depreciate, albeit modest-

ly and gradually, as the Central Bank carries out open market operations as and when needed to

manage liquidity. Additionally, International Monetary Fund (IMF) approved Kenya’s KES

62.6bn (USD 688.3m) standby facility that will be used to defend the stability of the Kenyan

Shilling and only be drawn if need be. The facility is contingent on the Government taxing petro-

leum products which have in the past been exempt from VAT in the next financial year. The

Treasury expects to collect approximately KES 13.5bn from the new tax, equivalent to 0.3% and

3.3% of Kenya’s 2014 GDP and revenues respectively. While the Central Bank forex reserves

appear to be sufficient, there is an obvious need for the Government to create a business environ-

ment that spurs growth in the manufacturing sector to reduce reliance on agricultural exports and

aid in strengthening the Kenyan Shilling position in the long run. In 2014E, the manufacture sec-

tor accounted for 11.1% of GDP, while manufactured goods, chemicals & related products and

raw materials accounted for 9.8%, 7.5% and 7.7% of exports respectively.

Source: CBK, Kestrel Research

Import by Broad Economic

Category-November 2014

Source: KNBS

Twin Deficits as a % of GDP

Source: CBK, Kestrel Research


KESTREL CAPITAL

Does Kenya face the possibility of a debt trap? In a bid to assess whether Kenya does in

fact face the possibility of a debt trap, we will attempt to answer the following questions; What is

the comparison between prevalent interest rates and nominal GDP growth? What is the compari-

son between total debt stock growth and revenue growth as an indication of fiscal deficit position

going forward? Does Kenya have enough earnings muscle to service its external debt stock?

Therefore, cognizant of the relatively high debt level (as a percentage of GDP), is Kenya there-

fore borrowing to spend and service its debt, or to invest?

Based on historical data, Kenya’s nominal GDP growth over the past 5 years has been, on aver-

age, 260bps above the 5 year Treasury Bond, thus suggesting the Kenyan economic performance

to be positive and interest payments are not “eating” into GDP. Total debt stock has however

recorded a higher growth rate than revenue, recording a 5 year CAGR of 16.0% to 2014E (10

year CAGR of 12.9% to 2014E), vis-à-vis 5 year CAGR in revenue of 12.2% (10 year CAGR of

13.3%) to 2014E. The slowdown in revenue growth, relative to debt growth in the last 5 years

indicate debt raised may have possibly been channeled to recurrent expenditure, rather than de-

velopment expenditure. Meanwhile, the fiscal deficit (as a percentage of expenditure) has ex-

panded from a low of 6.3% in 2004 to 22.7% in 2013. The fiscal deficit as a percentage of ex-

penditure however improved to 5.7% in 2014E, following incremental collection (+19.7% y/y) in

both tax and non-tax revenue segments, and we expect this level to be maintained going forward,

given the additional revenue expected from the introduction of VAT on petroleum products. As

at December 2014, external debt accounted for 47.2% of total public debt. The Government

hopes to externalize more of its debt and is currently considering issuance of a Samurai Bond,

Sukuk and Diaspora Bonds in the next financial year, aimed at reducing local borrowing by

50.0%, given Kenya’s low Gross National Savings rate (11.0% in 2013). Kenya’s ability to ser-

vice external debt remains sturdy, with the total debt service cost, as a percentage of export val-

ue, at around 8.0-10.0% over the 3 years to 2014. Given the metrics aforementioned, we there-

fore believe that though Kenya’s debt levels may appear high, they do remain manageable and

Kenya does not face the possibility of a debt trap in the short-medium term. However, there is a

need for the National Government to increase its capital discipline and ensure debt raised going

forward is channeled to developmental expenditure in high growth sectors, especially with in-

creased forex risk and exposure to global market shocks, given the debt externalization process.

Composition of Government Ex-

penditure

Source: CBK

Financial Account Composition

Source: CBK

Comparisons: Bond Yield vs. Nominal GDP Growth, Revenue vs Debt Growth

Source: CBK, Kestrel Research Source: CBK, Kestrel Research


KESTREL CAPITAL

Government rationalization stalled? Recurrent expenditure has increased quite substan-

tially to account for 61.4% of total expenditure (comprising mostly salaries and wages), pro-

pelled by the progressive implementation of the new constitution-especially the setting up of

county government structures. There still continues to be significant teething problems in imple-

menting the new constitution with a difference in opinion over the role and duties of the central

government versus the county government as well as the amount the central government is to

disburse to the county governments. According to the 2013/2014 budget, approximately 69.0%

of revenues will come from national government transfers while 31.0% will be generated from

own revenue sources, with 50.8% of the budget allocated towards recurrent expenditure. The top

five counties with the highest budget deficit are; Vihiga (91.0%), Mombasa (86.0%), Nyamira

(70.0%), Siaya (43.0%) and Kisumu (38.0%). There were also disputes over whose responsibility

it was to make certain payments. With the incremental expenditure relating to county administra-

tion, this creates an “opportunity cost” of development projects foregone. We therefore strongly

believe an expenditure rationalization is imperative, even where external financing is relatively

secure.

Composition of Government Ex-

penditure

Source: CBK


KESTREL CAPITAL

The Ugly…

Private and Public sector communication-a case of broken telephone: Apprehensive of the

fact that a shift from theory to practice takes rather long in Kenya with regards to policy creation

and implementation due to red tape, lack of grasp of the technicalities in specialist fields and the

occasional politicizing of issues, the private sector has occasionally suffered from the time lag in

policy formation and implementation that have caused speed bumps in the take off, even normal

operation, of various sub-sectors. Below are a few examples.

Listing of Real Estate Investment Trusts (REITs): While REITs manager licens-

es began to be issued as early as 2013, we are yet to have any REIT listing. This was

due to delays caused by lack of proper understanding of the product by the public

sector policy makers, unsettled issues relating to taxation of the real estate investment

vehicle and appointment of trustees. Now that the trustees have been appointed, we

might see more activity regarding REITs in 2015/16.

Capital Gains Tax on the NSE; Government versus KASIB: Re-introduction of

the Capital Gains Tax, effective from 1st January 2015 saw trading activity at the

bourse slow down in the first month of the year ( monthly turnover in January de-

clined 39.2% y/y to KES 9.7bn), as the Kenya Association of Investment Bankers and

Stock Brokers had consultations regarding the feasibility of the mode of tax collec-

tion. This was reviewed in late February when the Cabinet Secretary to the National

Treasury announced that the proposed 5.0% Capital Gains Tax (“CGT”) on NSE se-

curities transactions, will now be filed by the individual investor and not his/her

stockbroker as previously implied. Under current Income Tax legislation, it is stated

that stockbrokers are responsible for collecting and remitting the CGT to tax authori-

ties on behalf of investors. It is also implied that brokers might be responsible for fil-

ing the tax on behalf of their clients as well. This is therefore a good first step of re-

lieving stockbrokers of the burden to account, collect and remit CGT for all NSE trad-

ing clients for each and every daily NSE transaction. The Treasury is working to leg-

islate this new development in the near future. While we await further clarity on the

matter, a few questions arise:

It is unclear as to whether corporate entities trading at the NSE will be taxed

on capital gains at 5.0%, or at the 30.0% corporate income tax rate as part of

their trading income.

As non-resident foreigners are generally not subject to local income tax fil-

ing obligations in Kenya, then the CGT tax filing requirement should not

apply to foreigners, as is practiced everywhere else in the world including

South Africa, UK, US, China, etc. We assume Kenya will follow best global

practice on this matter, as imposing CGT on non-resident foreigners would

negatively affect Kenya’s ability to attract foreign portfolio investment. Note

that non-resident foreigners are not subject to CGT on the stock exchanges

of all other East African countries, including Uganda, Tanzania and Rwanda.


KESTREL CAPITAL

Confirmation will be needed as to whether the CGT will only be applica-

ble to shares acquired as from 1st January 2015, or prior.

All of Kenya’s regional competitors including Uganda, Tanzania and

Rwanda, as well as Mauritius, Nigeria, Ghana, Zambia and Botswana,

exempt their respective stock exchanges from Capital Gains Tax. KASIB

will continue to lobby for total NSE exemption to ensure Kenya remains

competitive and follows regional practice with regard to further develop-

ing its small but growing stock exchange.

Mining and Petroleum Bills: The Petroleum sector is currently governed

by the Petroleum (Exploration and Production) Act 1986 and the related

regulations and model production-sharing contract; the Income Tax Act

2012 and relevant Finance Acts; and the 2010 constitution. Amendments

to Kenya's Petroleum (Exploration and Production) Act 1986 were tabled

in October 2013; but the bill is currently shelved. The Energy Bill, was

also drafted and first tabled in March 2013; it is now in its fifth iteration.

The Energy Bill covers upstream elements, also covered by the Petroleum

Act (e.g resource management, granting of licenses, operations and over-

sight of the sector). It also covers extraneous issues such as revenue man-

agement. The Geology, Minerals and Mining Bill has gone through vari-

ous revisions since 2012 and has not yet been passed into law. This has

posed uncertainty to many investors who remain cautious on investment

until an “investor friendly” environment is established. The major con-

cerns with the two bills center on Capital Gains Tax and Fiscal stability.

To sum things up: The macroeconomic environment in Kenya will remain stable in 2015,

even looking relatively attractive in comparison to other Sub Saharan economies that have histor-

ically been the “belle of the ball” such as Nigeria and Ghana. However, structural reforms target-

ing institutions, integration, and infrastructure are of utmost importance going forward. In certain

areas, the private sector innovation will always outpace public sector policy formation and im-

plementation of private markets, but it is the Government’s responsibility to effectively and effi-

ciently formulate and implement policies that are supportive of private sector growth.


KESTREL CAPITAL

Investment Strategies for FY15 While it is not highly likely that the NSE will experience as much of the bull run as enjoyed in

2013 and 2014, we believe that there are some baskets of opportunity in the equities market. Be-

low are our several investment strategies for 2015.

Capital gains potential

Growth stocks

Value stocks

Right Issues

Turnaround strategies

Real Estate strategy

Dividends strategy

Capital Gains Potential

Growth Stocks

We believe the counters mentioned below are poised for above average growth over the medium

and long term due to strong fundamentals and we therefore consider their current high valuation-

relative to peers not only justifiable, and likely to ease off as the companies continue to record

sturdy year-on-year growth.

Equity Bank:

Investor confidence remains, accessibility to cheap Tier II financing: Equity Bank

stands to benefit from lower Tier II financing from Norfund with it being a majority

shareholder which is necessary for long tenure lending including mortgages and

therefore aid in bridging any asset-liability mismatch that may be present

Ability to secure cheap deposits owing to its large customer numbers, expansive

branch and agency network will mitigate against margin compression

Asset quality to improve: NPL ratio eased 110bps y/y to 4.4% in 3Q14

Cost to income ratio will go below the 50.0% level as costs come off and the bene-

fits of the investment filter through

Focus on non-funded income growth going forward to drive its already impressive

ROE. Fees and commissions from agency banking, noting that Equity Bank has the

largest agency banking network with 15,875 agents

Safaricom:

Growth in voice revenues will be driven by increased minutes of use: The increase

in subscriber market share (from 65.1% to 67.8% in FY14) and reduction in churn

rate (from 30.5% in FY13 to 19.3% in FY14), helped raise the effective minutes

yield as evidenced by the 2.6% y/y increase in outbound calls minutes by subscrib-

er.


KESTREL CAPITAL

Safaricom has launched several products to help grow M-PESA revenue: The-

products include M-Shwari, Lipa Kodi, M-PESA IMT and Mymarket. As at the

end of FY14, M-Shwari had 3.6 million active customers and Commercial Bank of

Africa (Safaricom’s partner on M-Shwari) had managed to attract deposits worth

KES 4.0bn and issue KES 1.2bn in loans per month while maintaining a Non-

Performing Loans ratio of 2.7%.

Fast growth in active mobile data customers (+23.9% y/y) drove the 52.9% y/y

growth in mobile data revenues: As at the end of September 2014, Safaricom was

the largest mobile data provider with 71.6% of all mobile data subscriptions

(+120bps y/y).

KCB Bank

Non funded income will be key in driving bottom line growth: We estimate Non

Funded income to account for 43.0% of total income in FY15F, driven by bancas-

surance, Biashara smart and Forex trading

Asset quality expected to improve further: The NPL ratio eased 160bps y/y (180bps

q/q) to 6.8% (industry average 6.0%) while the coverage ratio improved 240bps y/y

(480bps q/q) to 52.1% which remains slightly below the 53.9% industry average.

Management estimates NPL will decline to the range of 4.5% -5.0% in FY15F.

System changes in FY15 to result in short-term increase in operating expenses: The

bank plans on conducting a technical upgrade on the current Corporate Banking

System from R8 to R14 at a cost of USD 6.0m. Whilst this will exert pressure on

the bottom line in FY15, we expect the benefits to be realized from FY16 as the

bank benefits from efficiencies attributable to the upgrade.

Co-op Bank

Net interest income is estimated to grow at 6.6% y/y to KES 16.9bn in FY15: We

forecast interest income to increase 11.9% y/y to KES 22.6bn, with the yield on

interest earning assets declining 130bps y/y to 13.6%.

Non funded income is estimated to accelerate 24.2% y/y to KES 14.9bn on account

of fees and commissions from loans and advances, forex trading as well as trade

finance, mobile banking, agency banking, ATM fees, Sacco Link cards and

bancassurance.

Customer deposits mobilisation and loan book growth going forward will be en-

hanced by the banks extensive branch network (142 branches currently in place) as

well as alternative delivery channels.

In the long term, Co-op Bank plans on expanding to Uganda, Rwanda, Tanzania

and Ethiopia by implementing the same model where the bank partners with the

respective governments (as it did in South Sudan)


KESTREL CAPITAL

Value Stocks

These are companies that we feel are trading at significant discounts to their competitors and the

rest of the market.

Kenya Power

We note that currently, Kenya Power trades at P/E and P/B multiples of 4.5x and

0.5x (ROE of 13.5%), against our mean utility sector comparables (Africa and Mid-

dle East) of 17.2x and 2.5x (avg. ROE of 12.7%), thus providing a significant dis-

count on a P/E basis.

High margins in the short-term: Introduction of cheaper geothermal energy into the

grid paired with fixed ERC tariff to result in high gross margins for Kenya Power

in 2015.

Network upgrade and automation to improve power transmission and interconnec-

tivity: Kenya Power plans to increase its investment in upgrading and expanding its

grid. This will include sectionalizing and allocating specific distribution lines to

large Commercial & Industrial consumers, repair and reinforcement of existing

system lines as well as substation and feeder improvement.

KenyaRe

KenyaRe is currently trading at a trailing P/E ratio of 4.2x, P/B ratio of 0.7x and

ROE of 16.3%, compared to the insurance sector averages of 13.0x, 2.6x and

19.8% respectively.

It provides direct exposure to the Kenya insurance sector as at least 20.0%,

(increased from18.0%) of industry gross premiums have to go to Kenya Re (by

law). Moreover, the insurance penetration rate in Kenya is less than 3.0% (South

Africa’s penetration rate is 13.2%)indicating the potential for growth in the sector.

CFC Stanbic Holdings

CFC Stanbic is currently trading at a trailing P/E ratio of 8.0x, P/B ratio of 1.9x

(tangible P/B of 2.2x) and ROE of 23.9%, compared to the Tier I Bank averages of

11.4x, 2.8x and 24.5% respectively.

Current capital adequacy ratios provide sufficient head room for sturdy loan book

growth; Tier I capital ratio stood at 17.8% as at 1H14.

Competencies in trade finance and forex trading to continue growing non-funded

income, reducing reliance on funded income growth. Non-interest income account-

ed for 49.8% of total income in FY14.


KESTREL CAPITAL

Rights Issue Shares These are companies that we feel have good prospects and there will be an opportunity to buy at

discounted prices during their upcoming Rights Issues

KenGen

Kengen recently inaugurated the 180MW Olkaria I power plant expansion, the final piece in

their quest to generate an additional 280MW from geothermal energy. As a result of

Kengen's efforts in expanding their generation capacity, power generation capacity has im-

proved by over 50% between 2009 and 2015.

Consequently, 1H15 results (which were reported recently) saw the company's underlying

profit (excluding one-off tax gains) increase by 106.4% to KES 3.79bn as compared to KES

1.8bn in 1H14. As a result of the significant increase in earnings-per-share (inclusive of the

one-off tax gain), the company now trades at a trailing price-to-earnings ratio of 3.9x and a

price-to-book ratio of 0.3x.

The company is expected to launch a rights issue shortly, details for which were not availa-

ble at the time of publication of this report. Concerns however remain surrounding the mag-

nitude of dilution existing shareholders may face, as a result of the mode of participation of

the Kenyan government in the rights issue. The rights issue however is expected to help re-

duce the company's gearing levels over the short term, with the company expected to gear

back up over the mid-term in order to fund Kengen’s aggressive expansion plans.

The company expects to increase power generation capacity 2.4x by 2018, as part of their

commitment to the Government of Kenya's plans to increase power generation capacity in

Kenya to 5GW over the next 40 months.

Turnaround Strategies These are companies that are currently undergoing operating and asset restructuring. We there-

fore expect current measures to result in impressive earnings going forward.

KenolKobil

As at 1H14, KenolKobil recorded 299.5% y/y growth in profit before tax to KES

795.2m, driven by a rise in gross margins. The company has chosen to move away

from low margin business and focus on high margin business – the result will be

lower volumes but higher margins.

The company has undergone significant staff rationalization that has bought down

its costs. Operating expenses declined 22.0% y/y to KES 917.3m as at 1H14.

The company hopes to sell off underperforming, non-operating assets to pay down

debt which will in turn reduce finance costs.

Lower oil prices to benefit KenolKobil via lower working capital requirements and

as KenolKobil manages its inventory prudently.


KESTREL CAPITAL

Real Estate Strategy These are companies planning significant investments in commercial and residential real estate

to capitalize on a shortfall of supply in the market and growing valuations. The ongoing develop-

ment of new transport infrastructure by the Government is unlocking more affordable land for

residential and commercial real estate and these companies are poised to earn favourable returns

by developing properties. They hope to take advantage of the attractive valuations and shortage

of housing.

Housing Finance

Mortgage business remains Housing Finance’s bread and butter-We estimate loans

and advances to grow at a 4-year forward CAGR of 27.5% to KES 93.2bn in

FY17F. A growing branch network, coupled with opportunities to lend to investors

in housing developments by its subsidiary Kenya Building Society (KBS) support-

ed by a strong macro economic environment will be key in driving loan book

growth.

Housing Development, the new frontier! This “new” income stream is expected to

significantly boost Housing Finance’s earnings. Housing projects are forecasted to

account for 31.7% of total operating income in FY15F, 33.2% in FY16F and 34.7%

in FY17F, from 8.1% in FY14E and being non existent prior to FY13.

Centum Investments

Is one of the largest real-estate developers in East Africa, through its flagship Two

Rivers development that includes the ongoing construction of the largest mall in

Sub-Saharan Africa (excluding South Africa)

As at 1H15 ended September 2014, the company’s real estate segment accounted

for 34% of its investment portfolio, with 63% of its income attributable to real-

estate in FY14

Received a REIT manager license and plans to launch both a Development REIT

and an Income REIT in the near term to maximize the value of its real-estate port-

folio

Has a pipeline of additional real estate projects, including Pearl Marina, which is a

mixed-use development in Uganda to be developed on 360 acres (146ha) beginning

2015

Britam

One of Britam’s long-term growth strategies is property development across East

Africa

Owns 46.1% of Housing Finance, which is the largest mortgage lender in Kenya

and a leading property developer

Owns 25.0% of Acorn, a leading real estate project management and development

company in Kenya


KESTREL CAPITAL

Owns an independent subsidiary, “Bramer Properties”, whose sole purpose is prop-

erty development

Apart from the ongoing development of a commercial building in Nairobi, the com-

pany is expected to begin embarking on additional real estate projects in the near

future, following its successful raising of KES 6.0bn through a Medium-term note

in 2014

The share of property in Britam’s balance sheet has been increasing: property ac-

counted for 8.1% of total assets in FY13 compared to 4.8% in FY12.

Dividend Strategy

These are companies that based on present operations have reached the point of maturity and

hence, payout a large percentage of the profits in dividends. The only reason they would change

their dividend policy is if they believe the current level of dividends cannot be sustained in the

future.

BAT Kenya

Has trailing dividend yield of 5.2%, which is one of the highest in the NSE

Maintains a 99.0% dividend pay out ratio policy

The dividend pay out policy will be sustainable over the medium-term, owing to

the company’s improving profitability, reducing capital expenditure and controlled

borrowing

StanChart Bank

Above average Dividend Yield: The bank has the best dividend yield in the bank-

ing sector at 4.1% compared to KCB Bank 3.5%, Equity Bank 3.3% and Co-op

Bank 2.2%.

It currently has a dividend payout of 41.9%

Non-funded income, a key growth area: Non funded income is expected to grow

strongly owing to the bank’s strong investment in ICT. Stanchart Bank is the only

bank with a digital branch in Kenya where customers can walk in and carry out

banking transactions without getting assistance from clerks


KESTREL CAPITAL

East Africa Exposure These are companies that have a strong regional presence and are expected to benefit from a

growing middle income segment within the East African region. These companies are therefore

considered long term investments.

East Africa Breweries

We expect to see mid-high single digit revenue growth in FY15, driven by EABL’s

‘route-to-consumer’ efforts and a partial recovery in consumption volumes in the

value segment. Non-tax driven price increases, especially in EABL’s premium seg-

ments, are expected to be less aggressive in FY15, with the forecasted increase in

revenue to be driven predominantly by increase in consumption volumes. Profita-

bility trends are also expected to be positive across each geographic area, as the

company benefits from economies of scale as a result of increased consumption.

We however expect the impact of these gains to be more pronounced in EABL’s

non-Kenyan subsidiaries.

We conservatively estimate debt levels to increase by the end of FY15 as a result of

the medium-term-note (MTN) that has recently been opened by the group. In esti-

mating this however, we assume that the group will (1) fully exercise the MTN and

(2) management does not retire any existing overdraft and bank debt through the

proceeds of free cash flow over the course of FY15. We further estimate that, as a

result of the increase in overall debt levels, group financing costs will increase on a

year-on-year basis in FY15 vs. FY14, to the detriment of net profitability. We do

however note that management may choose to retire a portion of the existing out-

standing debt over the course of 2H15 from the proceeds of any free cash flow to

the firm, thereby reducing overall funding costs to the benefit of earnings.

Overall the mid-long term however, the business continues to be operationally cash

flow positive, with strong economic characteristics, commanding over 90% of the

formal beer market in Kenya, with improving characteristics in their East African

subsidiaries. We ultimately expect the group to work through their current financ-

ing conundrum, to benefit of shareholders (as financing costs eventually come

down). We do however caution against the high share price relative to the group’s

fundamentals and note that we continue to have a ‘Hold’ rating on the group in

view of this.

Carbacid

Earnings are highly correlated to E.A. Breweries, as it sells carbon dioxide to E.A.

Breweries.

The relatively stable macroeconomic conditions in Kenya, Uganda and Tanzania

over the next 3 years should result in growth in overall beverage volumes, hence

increased C02 volume sales.

Trades at P/E, P/B and ROE multiples of 13.0x, 3.1x, 23.8%, in comparison to E.A.

Breweries’ multiples of 35.1x, 27.1x and 77.2%, due to the Brewer’s high debt-to-

equity ratio, while Carbacid is debt free.


KESTREL CAPITAL

Top 45 counters by market capitalization

Company Sector Year 12 M 12 M Price YTD Mkt2 Weighting EPS DPS NAV P/E DIV P/B ROE Daily T/ O1

end High Low % cap % yld % x % vol

Safaricom Telecom Mar 15.95 11.95 15.80 12.5 6,896 26.3 0.66 0.47 2.2 23.8 3.0 7.3 30.6 1,583,160

EA Breweries Breweries Jun 350.00 255.00 304.00 -1.3 2,620 10.0 8.80 5.50 11.4 34.5 1.8 26.7 77.2 1,387,743

Equity Bank Banking Dec 59.00 31.25 52.00 4.0 2,099 8.0 4.21 1.50 15.4 12.4 2.9 3.4 27.3 1,165,993

KCB Bank Banking Dec 60.00 46.00 59.50 4.4 1,962 7.5 5.57 2.00 25.0 10.7 3.4 2.4 22.3 1,453,882

Stanchart Bank Banking Dec 355.00 294.00 355.00 6.0 1,196 4.6 34.57 14.50 129.0 10.3 4.1 2.8 26.8 126,120

Co-op Bank Banking Dec 24.00 17.55 20.00 0.0 1,066 4.1 1.76 0.43 8.3 11.3 2.1 2.4 21.2 285,241

Barclays Bank Banking Dec 18.20 15.95 17.05 2.1 1,009 3.9 1.54 1.00 7.0 11.0 5.9 2.4 22.0 151,605

BAT Kenya Tobacco Dec 1,047.00 521.00 831.00 -8.5 906 3.5 42.55 42.50 81.3 19.5 5.1 10.2 52.4 168,609

Bamburi Cement Cement Dec 207.00 139.00 163.00 17.3 645 2.5 10.75 12.00 73.6 15.2 7.4 2.2 14.6 234,992

DTB Bank Banking Dec 275.00 218.00 242.00 3.0 639 2.4 23.58 2.10 119.6 10.3 0.9 2.0 19.7 170,069

Britam Insurance Dec 37.00 17.40 27.25 -8.4 562 2.1 1.71 0.25 11.9 15.9 0.9 2.3 14.4 274,258

CfC Stanbic Banking Dec 148.00 105.00 124.00 0.0 534 2.0 13.86 5.20 67.4 8.9 4.2 1.8 20.6 67,456

I&M Holdings Banking Dec 147.00 120.00 124.00 0.8 530 2.0 12.11 1.90 46.9 10.2 1.5 2.6 25.8 62,073

Nation Media Media Dec 325.00 230.00 248.00 -5.7 510 1.9 13.88 10.00 49.4 17.9 4.0 5.0 28.1 76,379

ARM Cement Cement Dec 92.50 76.00 85.00 -1.2 459 1.8 3.02 0.60 18.2 28.2 0.7 4.7 16.6 217,616

NIC Bank Banking Dec 81.50 55.50 62.00 7.8 432 1.7 6.43 1.00 34.7 9.6 1.6 1.8 18.5 170,509

Centum Investments Finance Mar 78.00 35.50 59.00 -3.3 428 1.6 5.10 - 35.4 11.6 - 1.7 14.4 511,730

Kenya Power Power Jun 18.30 12.90 18.30 26.6 389 1.5 3.90 0.50 29.6 4.7 2.7 0.6 13.2 120,346

Jubilee Insurance Insurance Dec 549.00 303.00 548.00 21.8 358 1.4 42.36 7.00 194.2 12.9 1.3 2.8 21.8 48,369

Umeme Ltd. Power Dec 26.50 13.00 21.00 19.2 340 1.3 1.75 0.84 6.0 11.0 4.4 3.2 29.3 38,026

CIC Insurance Insurance Dec 11.90 7.15 9.40 6.9 268 1.0 0.42 0.10 2.8 22.6 1.1 3.4 15.1 86,837

KenGen Power Jun 12.95 8.90 11.10 7.8 266 1.0 3.07 0.40 36.7 3.6 3.6 0.3 8.4 71,727

Scangroup Media Dec 61.50 40.75 47.50 5.0 196 0.7 2.49 0.40 21.6 19.1 0.8 2.2 11.5 445,596

KenolKobil Oil Dec 10.35 8.00 10.05 15.5 161 0.6 0.59 0.10 4.7 17.2 1.0 2.1 12.5 90,960

Kenya Airways Airlines Mar 13.25 7.75 9.30 6.9 152 0.6 (10.49) - 10.0 - - 0.9 (104.8) 29,563

Kenya Re Insurance Dec 20.50 16.25 18.60 9.1 142 0.5 4.36 0.60 26.7 4.3 3.2 0.7 16.3 74,316

Pan Africa Insurance Insurance Dec 141.00 102.00 133.00 10.8 139 0.5 9.07 4.50 39.4 14.7 3.4 3.4 23.1 429,459

Liberty K. Holdings Insurance Dec 24.75 15.20 24.75 6.5 139 0.5 2.15 1.00 10.7 11.5 4.0 2.3 20.2 16,679

Housing Finance Banking Dec 50.25 33.50 38.75 -15.3 98 0.4 4.50 1.75 26.5 8.6 4.5 1.5 17.0 73,149

National Bank Banking Dec 33.50 23.50 24.75 0.0 76 0.3 3.11 0.33 43.7 8.0 1.3 0.6 7.1 8,501

TPSEA Serena Tourism Dec 46.75 32.50 33.00 -10.8 66 0.3 2.14 1.35 59.9 15.4 4.1 0.6 3.6 35,262

Kakuzi Agric Dec 345.00 110.00 289.00 60.6 62 0.2 7.56 3.75 146.9 38.3 1.3 2.0 5.1 6,519

Carbacid Gases July 38.00 20.00 21.50 -1.1 60 0.2 1.87 0.50 9.0 11.5 2.3 2.4 20.7 271,090

EA Portland Cement Jun 105.00 51.00 60.00 3.4 59 0.2 (7.09) - 73.8 - - 0.8 (9.6) 1,329

Trans-Century Finance Dec 29.50 17.75 17.75 -8.3 53 0.2 (5.75) 0.40 31.0 - 2.3 0.6 (18.5) 32,331

Total Oil Oil Dec 31.25 22.00 27.50 14.6 52 0.2 6.91 0.60 37.3 4.0 2.2 0.7 18.5 16,851

Mumias Sugar Sugar Jun 3.55 1.40 2.65 35.9 44 0.2 (2.53) - 6.0 - - 0.4 (42.2) 93,630

EA Cables Manufac. Dec 16.80 13.80 15.65 -3.4 43 0.2 1.35 1.00 7.3 11.6 6.4 2.1 14.1 10,365

NSE Finance Dec 27.00 16.30 19.55 0.0 41 0.2 1.10 0.25 4.1 17.7 1.3 4.8 27.2 32,310

Uchumi Supermarkets Retail Jun 15.85 8.00 9.75 -3.0 39 0.1 0.04 0.22 10.9 237.2 2.2 0.9 0.4 43,985

Sasini Tea & Coffee Agric Sept 17.75 11.55 15.60 21.4 39 0.1 0.10 0.25 52.1 156.0 1.6 0.3 0.2 4,138

Unga Food Jun 54.50 22.25 46.75 17.6 39 0.1 4.14 0.75 61.9 11.3 1.6 0.8 6.7 7,542

Standard Newspapers Media Dec 47.25 27.00 40.75 17.3 36 0.1 2.57 0.50 24.4 15.9 1.2 1.7 10.5 1,419

Crown Paints Manufac. Dec 165.00 16.15 123.00 10.8 32 0.1 10.05 1.75 62.0 12.2 1.4 2.0 16.2 1,185

BOC Kenya Gases Dec 164.00 125.00 148.00 18.4 31 0.1 10.38 5.20 106.3 14.3 3.5 1.4 9.8 3,002

*Market Cap Weighted average mean,**3 monthly daily average (USD) *18.7 *2.9 *6.7 * **9.8 **10,277,453

1 3 month average daily turnover in USD

2 Market capitalization in USD millions

*** Market Median


KESTREL CAPITAL

Recommendation guide

STRONG BUY: Highly undervalued/ strong fundamentals

BUY: Good value/ strong fundamentals

ACCUMULATE: Buy on price dips

HOLD: Correctly valued with little pricing upside or downside

LIGHTEN: Overvalued by the market/ Reduce exposure/Declining fundamentals/

industry concerns

SELL: Weak fundamentals and challenging operating environment/Highly

overpriced

Disclaimer Note: Readers should be aware that Kestrel Capital (EA) Ltd does and seeks to do business with companies covered in its research

reports. Consequently, a conflict of interest may arise that could affect the objectivity of this report. This document should only be

considered a single factor used by investors in making their investment decisions. The reader should independently evaluate the

investment risks and is solely responsible for their investment decisions.

The opinions and information portrayed in this report may change without prior notice to investors. This publication may not be distrib-

uted to the public media or quoted or used by the public media without prior and express written consent of Kestrel Capital (EA) Ltd.

Directors, staff of Kestrel Capital (EA) Ltd and their family members, may from time to time hold shares in the company it recommends

to either buy or sell and as such the investor should determine for themselves the applicability of this recommendation.

This document does not constitute an offer, or the solicitation of an offer, for the sale or purchase of any security. Whilst every care

has been taken in preparing this document, no representation, warranty or undertaking (express or implied) is given and no responsi-

bility or liability is accepted by Kestrel Capital or any employee of Kestrel Capital as to the accuracy of the information contained and

opinions expressed herein.

Documents

KESTREL CAPITAL March 2015...The Darling That Is Kenya: Cautiously Optimistic (So much potential, quite a bit of bag-gage) The good… Following the GDP rebasing, Kenya’s recorded