EQUITY BANK GROUP 1ST QUARTER 2011 RESULTS ANALYSIS

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Equity Bank Group today morning released its financial results for the 1^st quarter ending March 31^st 2010.

If these results are anything to go by, then those ‘analysts’ predicting that banks would record depressed results are better off finding alternative careers.

Profit before Tax shot up by 72.77% to Kshs. 2.89 billion. Profit After Tax increased from Kshs. 1.25 billion in 2010 to Kshs. 2.33 billion in 2011, a growth of 86.4%.

Total Assets grew by 38% to 153.5 billion from 110.6 billion

Customer deposits went up to 108 billion, which is a 43.5% rise over the previous year. This culminated in Net Loans and advances growing by 30.2% to 86.2 billion

Total interest income grew by 29% to 4 billion taking cue from interest from loans advances which increased by 22.2 percent to 3.3 billion

Interest from government securities nearly doubled to 730 million from 381 million, a 91 percent increase.

Net Interest income grew by 36.9% to 3.6 billion.

Other fees and commissions were up 29 percent to 1.32 billion, a figure fed by the bank’s mammoth 6.2 million customers.

Forex income jumped nearly 3 and a half times to 390 million

Net non-performing loans were down nearly 37 percent to 1.85 billion.

Staff costs were up by 20% to1.31 billion as the bank expanded its reach across several East African countries.

Equity Bank Group C.E.O Dr. James Mwangi had this say to say:

“Our efforts to ensure sustained growth for this bank and for the regional economies at large have served to further endear us to the wider community as attested by the growing customer deposits and building of a strong brand,”

In mid-May Equity is set to begin operations in Rwanda, a country determined to become a regional if not continental hub in various fields. This will no doubt provide an opportunity for Equity Bank.

The country is also believed to be on the verge of getting a licence of operations from Tanzania.

Equity’s brilliant set of results show that the bank’s recent phenomenal growth is not about to end, as had been previously feared.

KCB (http://kenyainvesting.blogspot.com/2011/04/normal-0-false-false-false-en-us-x-none.html)and The Co-operative Bank of Kenya (CO-OP BANK 1ST QUARTER ANALYSIS)are the other banks to have released their results.

Barclays Bank of Kenya and Standard Chartered Bank of Kenya are the remaining banking heavyweights not to have released results.

KCB 1ST QUARTER 2011 ANALYSIS

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Kenya Commercial Bank (from now “KCB”) has released its results for the First Quarter 2011 period.

Profit before Tax grew by 31.6% to Kshs.2.51 billion. Profit After Tax increased from Kshs1.332 billion in 2010 to Kshs1.774 billion in 2011, a growth of 33.3%.

Total Assets grew by 22.78 percent to 271 billion.

Loans and advances grew by 23% to 155 billion as a result of an increase of customer deposits to 209 billion, which is a 12.9% rise over the previous year.

Interest from loans advances was up 14.5% to 4.65 billion.

Net Interest income was up 32% to Kshs.5.111 billion from Kshs.3.873 billion recorded in 2010.

KCB earned 1.028 billion from other fees and commissions, while Forex trading brought in 745 million, a rise of 69% from previous years.

Net non-performing loans went down by 14.44 percent to 5.7 billion. This was however negated by staff costs which went up by 22.6 percent to 2.57 billion. This has been KCB’s Achilles heel over the years.

KCB had a rights issue mid last year which raised 12.5 billion out of a targeted 15 billion.

Investors who took part in the issue, which was priced at 17/= are currently up 53% in about 9 months.  KCB was expected to distribute some of the money to its struggling subsidiaries to give them a boost. Their fully owned mortgaging subsidiary, S&L, was also to get a good chunk of the proceeds of the rights in order to boost their lending capacity in a Real Estate market that shows no signs of losing steam.

This set of results indicates that KCB’s subsidiaries have already broken even and have started to contribute towards the bottom line.

Things started to look up for KCB from Q4 2010, where the bank had a great performance enabling it to post an unprecedented 75.8% increase in PAT for the Full Year 2010 surprisingly edging Equity.

KCB’s announcement comes hot on the heels of The Co-operative Bank of Kenya’s announcement of a 57.7% increase in Profit After Tax from 1.04 billion to 1.64 billion. See Analysing The Co-operative Bank Of Kenya 1st Quarter 2011 Results 

Analysing The Co-operative Bank Of Kenya 1st Quarter 2011 Results

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The Co-operative Bank of Kenya (from now “The Bank”) has released its results for the First Quarter 2011 period.

Profit Before Tax increased by 57.4% from 1.3 billion to 2.04 billion. Profit After Tax increased by 57.7% from 1.04 billion to 1.64 billion

Total assets increased by 39.18 percent to 169.45 billion.

Customer deposits increased 35.89 percent from 100 billion to 135.954 billion.

This is a statement from The Bank that we can expect increased lending from them as they have an increasing deposit base which they can rely on.

Interest from loans and advances was up 34.18 percent to 2.9 billion

Not surprisingly, interest income from Government banks was flat. They managed 530 million from govt. securities in 1st Quarter 2011 as opposed to the 531 million they got in 1st Quarter 2010. This was a very marginal 0.19 percent drop. This phenomenon is highly expected to repeat itself across the industry. Banking enthusiasts will have their eyes firmly fixed on Diamond Trust Bank another listed bank as they made a huge amount off Government Securities for the full year 2010.

Net Interest Income was up 46.4 percent

The bank leveraged on the huge cooperative movement to record an increase of 45 percent in Other Fees and Commissions. The huge numbers in the cooperative movement assures the bank of a streaming flow of income from fees and charges they levy on their customers from services such as withdrawals. Total operating income was thus up 41.1%

Management will however have to keep staff costs in check which went up by almost 27%. The Agency Banking model will ensure banks significantly cut costs.

Total Other Operating Expenses was up 30.22% to 2.536 billion.

Net non performing loans reduced by 54.5 percent from 1.98 billion to 1.28 billion, a sign that the bank has a much cleaner book.

Earnings Per Share (EPS) was up to 0.47 from 0.3, giving it a forward Price to Earnings Ratio (P/E Ratio) of 1.88.

The share has responded positively. As at 1.09 p.m the share price was at 18.40 giving it a forward P/E of 9.88. Demand for the stock was very high and supply thin.

Cooperative Bank is the first listed bank to release results. Other banks are soon expected to follow. The Bank's performance is expected to mirror the industry's performance, though those with significant bond portfolios in their books are expected to slightly dented.

In my last post NSE DOWN FOR 1ST QUARTER 2011, I had indicated that banks would release very good results for the 1st quarter. I expect Equity Bank and Kenya Commercial Bank to post similarly, if not more brilliant results.

NSE DOWN FOR THE 1ST QUARTER 2011

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The Nairobi Stock Exchange All Share Index (NASI) was slightly down 3.65%. The NASI ended the quarter at 94.37points from 97.82 points three months earlier.
The NSE 20 share index was down 14.03 percent in a quarter dominated by revolts in several Arab countries and an upsurge in the price of oil and other commodities. Investors were also jittery on 6 Kenyan suspects going to the Hague on 7th April where charges against them were expected to be read out

22 companies fell by more than 10 percent during this period. Of these, 7 listed firms fell by 20 percent or more in a show of decline of shareholders wealth.

Access Kenya led the drop with its share down 47% for the quarter. The company suffered a Ksh 7.9 million loss last year as mobile service providers entered Kenya's data market.
Sameer Africa was down 31.82%. The tyre maker's profits slumped 177 percent to Ksh 57 million from Ksh 158 million the previous year. The company did not issue a dividend to its shareholders. Sameer cited increased production costs for its dismal performance following sustained escalation in key raw material prices in the 2nd half of the year. The prices for synthetic and natural rubber surged during the year in operation. These two contribute 50% of material cost in a tyre.
In a surprising turn of events, Sasini Tea & Coffee fell 30 percent despite reporting an 82 percent jump in pretax profit to 1.4 billion shillings in resonance with the tea industry which earned Kenya 97 billion in 2010 to become Kenya's top Forex earner. Tea production is expected to fall this year, but prices will hold or edge up higher.
National carrier Kenya Airways was also down 30 percent to trade at 32.25 with investors fearing the climb in fuel prices will increase its operating costs. The share has since picked up slightly to close at 37.25 on Friday 15th April as a result of the news that the company had finally agreed a date for the delivery of Boeing planes in late 2013.
Mumias Sugar Company rounds up the top five losers of the first quarter. The share slipped 26% after its first half profit declined 22 percent as heavy rainfall hampered sugarcane deliveries.

At the other end of the spectrum, Pan Africa Insurance Holdings went up by 40 percent. Its profits surged 4 fold. Speculators drove up the share in anticipation of the 1:1 bonus the company had issued. The company also raised its dividend to 3 shillings
City Trust and Kapchorua Tea Company went up by 16.25% and 15% respectively.
Despite the cement price wars, East Africa Portland Cement managed to edge up 13.75%. The company is intent on reducing its energy costs which will enable it to be more competitive in pricing, in the wake of new entrants who have slashed prices of their products.
Kenya's largest bank by assets Kenya Commercial Bank went up by 8.05% on the back of 2010 full year results that defied investor expectations.

Telecom giant Safaricom was down 19.15% to 3.80/= as investors were apprehensive that the company would feel the heat from the price war initiated by Airtel Kenya. The share has since been stable at 4/= as it became evident that Mobile Number Portability is likely to have little or no effect on Safaricom due to Kenyans propensity to have multiple SIM cards. The company is focused on improving its network quality to retain its customers. Safaricom is also betting on data services to shore up revenues. It is yet to release its results.
East Africa Breweries was down 9.95% as new Alcohol Laws limited drinking hours. The company has recently announced an increase in the price of some of its brands. Shareholders have greeted this with optimism as it is expected to nullify the effect of the Alcohol Laws. The company closed on Friday 15th April at 200/= 

The drop in NSE led to investors collectively losing approximately 95 billion as the market capitalisation slumped to Ksh 984.98 Billion at 31st March 2011 compared to Ksh 1.08 Trillion on 31st December 2010.

Banks are expected to start reporting their Q1 results beginning from May. Stock Market enthusiasts are waiting with bated breath to see the effect that the increased inflation will have on their performance.
Personally, I feel the results will be very positive. The Central Bank had indicated that banks had lent more in January and February than they did for the entire 4th quarter. Ominous? I think so.

ANALYSING MUMIAS SUGAR COMPANY

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One week ago it was reported that Kenya could gain temporary reprieve of COMESA safeguards against unlimited importation of sugar from the bloc's members if it shows tangible progress in privatizing its state-owned sugar companies by the time the safeguards expire in February 2012.
The Kenya Government has stated that it will request for an extension if the privatisations are not completed in time. It is hard seeing that request turned down as the Government is not likely to accept much cheaper sugar in its borders to the detriment of the local industry plus the thousand of jobs it provides both directly and indirectly. Kenyan sugar companies are also clearly not ready.

This has prompted me to cast my eye back onto the Mumias Sugar Company (MSC) share.

SWOT ANALYSIS

STRENGTHS
Diversification: Mumias has embarked on a major diversification project which includes ethanol production, electricity generation and production of bottled water. All these are a by-product of the sugar producing process. MSC intends to embark on producing ethanol by December 2011 and projects to be producing 22 million litres of ethanol annually. Half of this project will be funded by internal sources while the other half is funded through debt financing. The engineering, procurement and construction of the 46 million dollar facility in Mumias is being undertaken by Avant Garde of India.

Brand Name: MSC is the market leader in the sugar industry. Indeed it produces half of Kenyan sugar. The middle class are known to appreciate established brands. Kenya is currently experiencing a surge in the middle class population due to recent economic growth. This will mean a shift from unbranded to branded products. MSC has been in the sugar business for decades and is thus the premier brand around.

Global Sugar Prices: A sustained rise in global prices of sugar is favourable to MSC.
International prices of sugar have remained high. Granted, MSC does not export much of its sugar.But this price trend could help cushion Kenya from increased competition when all special safeguards are eventually lifted. This is so as suppliers from COMESA have been diverting their stocks to better paying European, American and Asian markets, bringing some relief to local producers highly disadvantaged by high cost of production and inefficient production systems.

WEAKNESSES
Poor Road Transport Network: This makes it impossible to transport cane to the factory during adverse weather and subsequently, depresses the amount of sugar produced.

Reliability on Rain-fed Growing: This is more expensive than irrigation. TARDA aims to address this.


OPPORTUNITIES
TARDA Project: Mumias has stated that it is the final stages of singing agreements after weathering a barrage of criticisms by nature conservationists. Growing of cane at the Coast offers many advantages:
Cane will be able to mature faster.
Sucrose content in the sugarcane will increase.
The cost will reduce considerably by growing cane via irrigation as opposed via rain-fed growing.

Consequently, the TARDA Project will result in an additional 38MW of electricity and 40 million litres of ethanol. MSC though needs to move fast to implement this project as it has been dragging for far to long.

Petrol Blending: Sometime last year, it was recommended that petrol sold in Kenya be blended with 10 percent ethanol. This is a huge opportunity for Mumias to find a local market for its ethanol production. Though exactly when this will take off has been shrouded in the secrecy that usually surrounds Kenya's Energy Ministry

Acquisitions: MSC has not hidden its desire to acquire 1 or 2 sugar companies in the recent privatisation of Kenyan sugar companies. It will tap into its vast experience in the sugar industry in order to restructure the companies and bolster their performance. This is part of a larger plan to spend more than $300 million on sugar mill acquisitions in Kenya, Uganda and Tanzania.

THREATS
COMESA: Even though the safeguards may be extended, they will ultimately be stopped. It is yet to be seen how MSC will fare with full throttle competition from sugar producing COMESA countries.

Labour disputes: MSC has been accused of underpaying its farmers. This prompted  some Members of Parliament (MP's) to call for its de-listing.

Disputes with KPLC: KPLC has at times defended itself that at night when demand goes down in Western Kenya power generation had to be lowered to achieve acceptable levels of voltages in the region.They have previously refused to buy all the power that MSC generates which goes against the Power Purchase Agreement. This particular issue was settled though, and it is hoped that it will not come up again.

VERDICT
It is my opinion that Mumias Sugar Company holds tremendous growth opportunities for the next couple of years. I would buy and hold for at least 3 years at the current price of below Kshs. 10.