RoleofTalentinOurEconomy,&CytonnWeekly#29

ExecutiveSummary

• FixedIncome:T-billyieldsincreasedacrossalltenorswiththe91,182and364-daypaperscominginat7.9%,10.2%and11.0%from7.6%,9.9%and10.9%,respectively.TheMonetaryPolicyCommittee(MPC)issettomeeton25thJuly2016todiscussthecurrentstateoftheeconomicenvironmentanddecideonanypossiblemonetarypolicyaction.InourviewtheMPCshallholdtheCBRat10.5%;

• Equities:Duringtheweek,NSE20andNSE25closedonadownwardtrend,decliningby2.0%,and1.2%, respectively while NASI gained by 0.2%. Kenya Airways released its FY’2016 results havingrecordedalossofKshs26.2bn;

• RealEstate:PrimerentsinNairobifellforthethirdconsecutivequarteraccordingtoKnightfrank’sreportonPrimeGlobalRental Indexbut therewasanupward trend inhouseprices,while FusionCapitalhasregisteredanundersubscriptionontheKshs2.3bnD-REITshencehasextendedtheclosingdateto26thJuly2016;

• PrivateEquity:TheeducationandtechnologysectorscontinuetoattractprivatecapitalinAfricaasIFCincreasestheirequitystakeinSouthAfrica’sADvTECHby2.5%to4.1%valuedatUSD13.0mnandDPIpartnerswithEgypt’sB.TECH;

• FocusoftheWeek:HavinglaunchedourCytonnYoungLeadersProgram,thisweek,weexaminetheroleoftalenttotheeconomy,andhowitimpactstheoveralleconomicgrowth.

CompanyUpdates

• Cytonn Investment Co-operative membership recruitment drive is still on. For more information,pleaseseethelink:CytonnCooperative.TheCytonnCo-operativeisregisteredunderTheCo-operativeSocietiesActofKenya,2004.Theco-operativeallowstheordinaryinvestortoaccessaboveaveragemarket returns that have previously been accessible only to our privatewealth investors. To join,pleasecontactusatcoop@cytonn.comordownloadtheformsfromthewebsiteonthislink:Cytonnco-operativeforms.

• Toinvestinanyofourcurrentorupcomingrealestateprojects,pleasevisitCytonnRealEstate.Wecontinuetoseeverystronginterestinourproducts,particularlyTheAlma,whichisnow50%soldandhas delivered an annualized return for 55% p.a. for investors who bought off-plan. We have 12investmentreadyprojects,offeringattractivedevelopmentreturnsandbuyer'sreturnsofaminimumof25%p.a.Seefurtherdetailshere:Summaryofinvestmentreadyprojects

• OurSeniorInvestmentAnalyst,DuncanLumwamu,discussedKenyaAirways’planstosuspendannualsalaryincrementsforthenexttwoyearsandthefinancingofUSD2.0bnCentum’sAmuPowerprojectbyStandardBankonCNBCAfrica.DuncanLumwamuonCNBCAfrica.

• Wecontinuetobeefuptheteamwithseveralongoinghires:CareersatCytonn.

FixedIncome

Duringtheweek,T-billswereoversubscribedwithasubscriptionrateof124.9%comparedto82.1%recordedthepreviousweek.Thiswasasignificantimprovementowingtoanincreaseinsubscriptionforthe182-daypaper with a performance rate of 231.6% from 50.2% last week. The jump in subscription level can beattributedtoinvestorslockingtheirfundsinshort-termpapersastheyanticipateratestoriseinnear-term.Wenoteinvestors’preferenceto182-dayT-billasitofferedthemostattractiveeffectiveannualizedreturn,comparedtothe91-dayT-bill.Thesubscriptionforthe91and364-daypapersdroppedthisweekto70.3%and54.8%from80.5%and115.1%,respectively.Yieldshoweverincreasedacrossalltenorswiththe91,182and364-daypaperscominginat7.9%,10.2%and11.0%from7.6%,9.9%,and10.9%,respectively.

The91-dayT-billiscurrentlytradingbelowits5-yearaverageof10.0%,havingwitnessedadownwardtrendinthepreviousthreemonthstowardsthecloseofthelastfinancialyear.Thedownwardtrendforthe91-daypaperhasreversedandwearewitnessingupwardpressureontheratesduetoGovernmentborrowinggiventhenewfiscalyear,whichhasbeencharacterizedbyanuptickininflation.

Thisweek, thegovernmentoffered twobonds; the5-year (FXD2/2016/5)and the reopened20-year (FXD1/2008/20)with11.9yearstomaturity,toraiseKshs30.0bnforbudgetarysupport.Yieldsforthesebondscameinat14.1%and14.8%,inlinewithourrecommendationashighlightedinCytonnWeekly#28,whereweadvisedinvestorstobidbetween13.0%and14.0%forthe5-yearandbetween14.0%and15.0%forthe20-yearbond.TheCentralBankacceptedKshs33.5bncomparedtothetargetamountofKshs30.0bn.Investorsdemandedapremiumof0.5%and0.1%abovethemarketrateof13.6%and14.7%forthe5and20-yearbonds,respectively. This was due to expectations of upward pressure on interest rates owing to (i) pressure onGovernmenttofinancethe2016/2017budget,and(ii)relativelylowliquidityinthemoneymarket.

TheCentralBankWeeklyreportrevealedthattheinterbankratedecreasedby220bpsto4.2%,from6.4%thepreviousweek,duetoimprovedliquiditylevelsinthemoneymarketwhichresultedintoanetliquidityinjectionofKshs14.7bn.TheliquidityinjectionwasasaresultofTermAuctionDepositMaturitiesworthKshs.12.7bn.OfinterestisthehighT-billrediscountthatwesawthisweekshowingthattheremusthavebeeninvestorswithasignificantliquiditycrunch.UsuallytheT-billrediscountingrateispunitivetoinvestorsasitiscalculatedat3.0%higherthantheprevailinginterestrate.

Belowisasummaryofthemoneymarketactivityduringtheweek:

allvaluesinKshsbn,unlessstatedotherwiseWeeklyLiquidityPosition–Kenya

LiquidityInjection LiquidityReduction TermAuctionDepositMaturities 12.7 T-bondsales 0.0GovernmentPayments 4.7 TransferfromBanks-Taxes 10.8T-bondRedemptions 0.0 T-bill(Primaryissues) 11.6T-billRediscount 24.7 TermAuctionDeposit 0.0T-bondInterest 0.0 ReverseRepoMaturities 0.0ReverseRepoPurchases 0.0 Repos 20.0

22.5%

11.7%

7.9%

Average=10.03%

5.0%

7.5%

10.0%

12.5%

15.0%

17.5%

20.0%

22.5%

25.0%Jan-15

Feb-15

Mar-15

Apr-15

May-…

Jun-15

Jul-1

5

Aug-15

Sep-15

Oct-15

Nov-15

Dec-15

Jan-16

Feb-16

Mar-16

Apr-16

May-…

Jun-16

Jul-1

6

91-dayT-billRate's5-yearAverage

ReposMaturities 15.0 TotalLiquidityInjection 57.1 TotalLiquidityWithdrawal 42.4 NetLiquidityInjection 14.7

AccordingtoBloomberg,yieldsforthe5-yearand10-yearEurobondsissuedin2014increasedweekonweekby0.1%each to5.4%and7.4%, respectively, from5.3%and7.3% lastweek, respectively. Since themid–January 2016 peak, yields on Kenyan Eurobond have declined by 3.4% and 2.2%on account of improvingmacroeconomicconditionsandtherecentcoolingofpoliticaltemperaturessincetherulingcoalitionandtheoppositioncoalitionagreedondialoguearoundelectoralreforms,causingtheoppositioncoalitiontoceasestreetprotests.Theinvestmentcommunityiskeenthatdiscussionswillleadtoaresolutiontoavoidanyfurtherchaosanddisruptionofeconomicactivities.

TheKenyaShillingdepreciatedagainstthedollarby0.3%thisweek,toclosetheweekat101.6,comparedto101.3 the previous week, driven by endmonth dollar demand from importers. The shilling was howeversupportedby theCentral Bank intervention in the foreign exchangemarket through the sale of dollars asindicatedbythedropindollarreservestoUSD7.83bnfromUSD7.84bn.Weexpecttheshillingtoremainstablefortheremainderoftheyearsupportedby(i)thehighlevelsofforeignexchangereservesequivalentto5.1monthsof import cover, and (ii) improveddiaspora remittances,with cumulative12months’diasporainflowstoMay2016increasingby11.1%toUSD1.6bnfromUSD1.5bnintheyeartoMay2015.

TheMonetaryPolicyCommittee(MPC)issettomeetonMonday25thofJuly,todiscussthewayforwardwithregardtomonetarypolicyandpossibleactionsontheCentralBankRate(CBR).Intheirpreviousmeeting,MPCcutthepolicyrateby100bpsto10.5%owingtoimprovedandfavorablemacroeconomicfactorscharacterizedbyfalling inflationandastablecurrency.Anumberofmacro-economic indicatorshavechangedsinceMay2016MPCmeetingassummarizedinthetablebelow;

KeyMacro-EconomicIndicators–Kenya

7.4%

5.4%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

22-Jul-14

22-Aug-14

22-Sep

-14

22-Oct-14

22-Nov-14

22-Dec-14

22-Jan

-15

22-Feb

-15

22-M

ar-15

22-Apr-15

22-M

ay-15

22-Jun

-15

22-Jul-15

22-Aug-15

22-Sep

-15

22-Oct-15

22-Nov-15

22-Dec-15

22-Jan

-16

22-Feb

-16

22-M

ar-16

22-Apr-16

22-M

ay-16

22-Jun

-16

22-Jul-16

KenyaEurobondYields

10-Year 5-Year

Indicators

Expectationsatstartof

2016/2017FiscalYear

ExperiencesincethelastMPC

meetingonMay23,2016

GoingforwardProbableCBRDirection

(Thismonth)

ProbableCBRDirection(LastMPCMeeting)

GovernmentBorrowing

GovernmentisexpectedtoborrowKshs.

229.0bnforthe2016/2017financialyear

Thegovernmenttobeontrackwithits

borrowingscheduleforthenewfiscalyear

Weexpectsomepressureongovernment

borrowinginthemediumtermduetothehighlevel

ofmaturities

KenyaRevenueAuthority

KRAtomisstherevenuecollection

target

TheKRAdidnotmeettheir

2015/2016fiscalyeartargetofKshs.

1.4tn

WeexpecttheKRAtocontinuemissingtheircollectiontargets

Inflation AbovetheCBKtargetof7.5%

Increasedto5.8%inthemonthofJunedrivenby

risingfoodprices

Weexpectupwardinflationarypressureinthemediumtermasfoodpricesconsistentlyriseandduetothelevy

imposedonpetroleumproductswhichwilltrickledowntothe

transportsectorandalsoindirectlyaffectingfood

prices

Exchangerate(USD/Kshs)

Toremainstablesupportedbystrongdollarreservesand

improvedforeignexchangeinflowsthroughimproved

diasporaremittancesand

teaexports

Theshillinghasdepreciated0.8%againstthedollar

Toremainstablesupportedbystrongdollarreservesandimprovedforeign

exchangeinflowsthroughimproveddiasporaremittancesandtea

exports

BankingSector

Weexpectimproved

governance,followingtheclosureof

ImperialandDubaiBanksandconsolidationswithinthe

bankingindustry

Therehasbeenconsolidationin

thebankingsectorwiththe

acquisitionofGiro,ECBandOrientalBankbyI&M,MwalimuSaccoandBankM

Weexpectcontinuedstrictgovernanceand

M&Aswithinthebankingsector

Liquidity

Liquidityexpectedtoimprovegivenhighmaturitiesof

governmentsecurities

Liquidityhasgenerallyimprovedbutinthepast2

weeks,liquidityhasbeentightowingtoCBKmoppingupliquiditythroughRepostotamerisinginflation

Weexpectliquiditytobetightintheshort-termasCBKmopsupliquidityto

anchorinflationaryexpectations

Withtheabovestateofaffairs inthemoneymarketenvironment,where2outof6 indicatorsarepointingtowardsanupwardpressureoninterestrateswhile4areneutral,weexpecttheMPCtomaintaintheCBRrateat10.5%.WebelievethatmaintainingtheCBRwillbethebestoptionsoasnottostifleeconomicgrowth.

WeareprojectinginflationforthemonthofJulytorisetowithintherangeof6.5%-6.7%,drivenbyincreasesinfuelpricesthatwill leadtoanincreaseintransportationcostswhilehavingapassthroughtowardsfoodproduction,andalsotheeffectofamuchlowerbasefromlastyear.ThegovernmenthasintroducedaKshs6.0RoadMaintenanceLevyinthepricesofsuperpetrolanddiesel,leadingtoasharpincreaseinthepumppricesduringthemonthofJuly,2016.However,weexpectinflationtoremainwithinthegovernmenttargetannualrangeof2.5%-7.5%,goingforwardtotheendoftheyear.

Sovereign debt management was the main agenda this week as the 14th session of the United NationsConferenceonTradeandDevelopment(UNCTAD)inNairobiputtingthedevelopedworldatloggerheadswiththeirdevelopingcounterparts.ThedisagreementwasduetotheEuropeanUnion’s(EU)wantingtoblockthe“developingworld-backedtext”.This“text”stateshowsovereigndebtshouldbetreatedandwhichreferredtodebtrestructuringasopposedtotheEUdebtmanagement.Debtrestructuringisbeingpushedbyagroupcomprisingof77countrieswhiletheothergroupcomprisingof134countriesareadvocatingforthepassingofanewlegalregimeforsovereigndebtmanagement.Thecurrentstructureactsasaguaranteetolendersandthereforeimprovesaccesstofundstotheindividualdevelopingcountries.Webelievethattheratificationofthis regime will protect developing nations against hedge funds that have been buying bad debts andsubsequently imposingprolongeddebtpaymentsperiodswith the affected countriesbyeventually payingmorethantheoriginaldebtwhichtheydefaultedon.

ThegovernmentisaheadwithitsdomesticborrowingforthisfiscalyearhavingborrowedKshs23.3bnforthecurrentfiscalagainstatargetofKshs17.7bn(assumingapro-ratedborrowingthroughoutthefinancialyearofKshs229.6bnbudgetedfor the full financialyear). Interest rateshavebottomedoutandwearecurrentlywitnessingupwardpressureoninterestratesgivenrelativelylowliquiditylevelsgiventhecentralbank’smopupactivitiesinthemoneymarketinordertoanchorinflationaryexpectations.Itisduetothisthatweadviseinvestorstobebiasedtowardsshorttomedium-termpapers.

Equities

DuringtheweekNSE20andNSE25closedonadownwardtrend,decliningby2.0%,and1.2%,respectivelywhileNASIgainedw/wby0.2%,withtheYTDperformancecominginat-12.8%,-8.4%and-4.9%forNSE20,NSE 25 andNASI, respectively. Thisweek’s performance is attributable to gains in Safaricom at 4.0% anddeclines in select large cap stocks with Co-op Bank, EABL and Equity Group losing 2.0%, 3.3% and 3.9%,respectively. Since the February 2015 peak, the market has lost 31.9% and 22.3% for NSE 20 and NASI,respectively.

Equitiesturnoverroseby19.5%tocloseatKshs3.8bnfromKshs3.1bnthepreviousweek,withtheforeigninvestorsbeingnetbuyersrecordingnetinflowsofUSD6.6mn,comparedtoanetinflowsofUSD217,000recordedthepreviousweek.Wemaintainourexpectationofstrongerearningsgrowthin2016comparedto2015,withanestimatedgrowthof12.5%,supportedbyafavorablemacroeconomicenvironment.Giventhelowvaluations,long-terminvestorsshouldgraduallybetakingpositionsinthemarket.

Theequitiesmarketiscurrentlytradingatapricetoearningsratioof12.3x,versusahistoricalaverageof13.8x,withadividendyieldof4.8%versusahistoricalaverageof3.4%.ThechartsbelowindicatethehistoricalPEanddividendyieldsofthemarket.

KCBGrouphasannouncedtheresultsofthescripissue,recordingasubscriptionrateof54.0%raisingatotalofKshs1.6bnoutofthetargetedKshs2.9bn.InFY2015,KCBGroupdeclaredfinaldividendsofKshs2.0persharewithshareholdershavingtheoptionofreceivingKshs1.0ofthedividendpershareincashorconvertingtheequivalentpayouttosharesatKshs38.0pershare.Theundersubscriptioncanbeattributedtothefactthatasat17thJune2016,thefinaldayofexercisingtheoption,theconversionpricewas8.6%higherthanthemarketpricemeaningthatshareholderspreferredtoreceivetheirscripdividendincashandbuythesharesfrommarketatacheaperprice.KCBGroupissettocarryoutarightsissueinthecourseoftheyearbutdetailsofthisareyettoberevealed.ThebankplanstoraiseatotalofKshs10.0bnofcapitalthroughissueofequityin2016,andconsideringthat theyhavealreadyraisedKshs1.6bnthroughthescrip,KCBGroupwouldberaisingtheremainingKshs8.4bnbalanceintheupcomingrights.

Deacons,apopularclothing-lineretailshopinKenya,planstolistintheNairobiSecuritiesExchange(NSE).Theretailer is floating 123.6mn shares at Kshs 15.0per shareon theAlternative InvestmentMarket Segment(AIMS)oftheNSEthushaltingitstradingontheover-the-counter(OTC)market.TheOTClistingpricein2010wasKshs62.5andsincethen,therehasbeenasplitof2:1andabonusshareissueof1:1in2012.ThisbringsanadjustedpricetoKshs15.6andhencean indicationthattheshareholdersare losing4.0%basedonthecurrentofferpriceofKshs15.0.ThefundsraisedfromtheOTC listingenabledDeaconsto: (i) Increasethenumberofstoresby24.0%to31in2015from25in2010,(ii)ExpandregionallytoRwandain2011,and(iii)IntroducenewbrandstoitsportfolioincludingBabyshopin2011andBossiniin2013.Throughtheseactivities,

12.3x

8.0x

10.0x

12.0x

14.0x

16.0x

18.0x

20.0xNASIP/E

4.8%

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00% NASIDividendYield

Average=3.4%

Average=13.8x

thecompanyhasmanagedtogrowrevenuesbyaCAGRof24.2%fromKshs116.1mnin2011toKshs141.6mnin2015,albeitbuoyedbyhighoperatingcostsandhencenarrowprofitmargins.Deacons’intentiontolistaimstoenabletheretailerto(i)discoveritsmarketvalueandanalternativeexitoptionforitsshareholders,(ii)haveaccesstotheliquiditythecapitalmarketprovidesforitsfutureexpansionstrategies,(iii)realizegrowthforitsinvestors,and(iv)increasethepublic’sawarenessofitsbrand.

SwedfundInternational,PinpointInvestmentsLimited,OldMutualLifeAssurance,KestrelCapitalNominees,areamongDeacon’sexistingtoptenshareholders.Havingbeenoperationalsincethelate1950s,brandssuchasMr.Price,Babyshop,Angelo,4u2,Reebok,Adidas,BossiniandTruworthshavebecomehouseholdnamesinKenya,Mauritius, Uganda and Rwanda – the fourmarkets in which it operates. The clothing and fashionindustrycontinuestogrowdrivenby:(i)TherisingmiddleclasspopulationinAfricawith7ofthe10fastestgrowingeconomiesgloballybeinginthecontinentandgrowingatmorethan4.0%overthelast10years,and(ii)risingspendingpowerleadingtorisingconsumption.Deaconsisthereforesettogainfromthisandfrom:(i) Thepopulation’s preference for quality products as themiddle class digress from settling for third rateproducts,and(ii)Brandconsciousnessbroughtaboutbyincreasedawarenessthroughtheinternet,cableTVand extensivewestern-world visits. Tomeet Africa’s rising demand for traditional-themed clothing as thepopulationseekstoembracetheirheritage,Deaconswouldhavetoconsiderventuringintothislineofclothing.

KQreleasedFY’2016resultsrecordingalosspershareofKshs17.5fromKshs17.2inFY’2015drivenbyasurgeincostswitha14.1%growthinfleetownershipcostsanda48.9%riseinfinancecosts,despitea5.4%growthinrevenue.Keyhighlightsinclude:

• Totalrevenuegrewby5.4%toKshs116.2bn,fromKshs110.2bninFY’2015,whichisattributabletoa1.2%riseinnumberofpassengersto4.20mnfrom4.18mnresultingina5.0%increaseinpassengerrelatedrevenue;

• Financecostsgrewby48.9%toKshs7.0bn,fromKshs4.7bninFY’2015asaresultofariseinforeignexchangelossesbyKshs9.7bnbroughtaboutbythestrengtheningUSDagainsttheKenyaShillingby12.9%fromKshs89.0perUSDtoKshs100.5perUSDonaverageduringtheperiod.

• Fleetownershipcostsroseby14.1%toKshs29.6bnfromKshs25.9bninFY’2015duetoimpactofleaseofaircraftandleaseprovisionforaircraftleasedoutorsold,allinthelasttwofinancialyears;

Despitethis,KQrecoverystrategydubbed‘OperationPride’hasseenanincreaseinrevenueby5.4%,a1.2%riseinnumberofpassengersinlightofa4.0%reductioninavailableseatsperKManda5%increaseinrevenuefrompassengers.Lastweek,KQreceivedaKshs10.0bnbridgingloanwhichKenyanTreasurysecuredfromtheAfricanExport-ImportBank(AfrieximBank)inabidtoeasecash-flowconstraints.Theairlinealsolaidoff80employeesinlinewithitscostcuttinginitiativetoreducepayrollcostsbyapproximatelyKshs2.0bnperannumbydownsizing itsworkforceby15.0%. Inourview,OperationPrideseemstobeworkingsupportedbytheTreasury–Governmentbailouts.However,westillmaintainthattheseareshorttermsolutionsanditisnotclearthatthelong-termchallengesthatledtoKQsfinancialproblemshavebeenaddressed.

UAP Holdings plans to acquire all OldMutual Kenya subsidiaries including OldMutual Capital, OM AssetManagers,OMLifeAssurance,FauluKenya,OMSecuritiesandOMPropertiesbefore it listsontheNairobiSecuritiesExchangeasplanned.InJuly2015,OldMutualPlcbought60.7%ofsharesinUAPHoldingsforKshs25.6bninadealthatsawamergerofbothassetmanagementandlifeinsurancebusinesses.Byacquiringthesubsidiaries,thetwocompanieswilleventuallymergeformingonlyoneassetmanagementsubsidiaryandonelifeinsurancesubsidiary,subjecttoregulatoryapproval.OldMutualKenyawillstillremainashareholderatUAPwhilestilloperatingitssubsidiariesintheregion.ThemoveissettoexpandUAP’scountrywidereachandclientelebasewhilestillearningdividendsforOldMutualasamajorityshareholderthereforequalifyingasamutuallybeneficialarrangement.

AshighlightedinCytonnWeekly#28,thisweekwepublishourrecommendationonBritishAmericanTobacco(BAT)Kenya.WerecommendanAccumulateonBATwithafairvaluepriceofKshs970.6,an18.0%upsidefromthecurrentpriceofKshs869.0withaforwarddividendyieldof6.3%.Ourrecommendationisbasedon;

• SteadyDividend:Maturecompanypayingoutallearningswithstablegrowthinearnings• Higherexcise taxes subsiding: Increased regulationof the sector coupledwith frequentexcise tax

increaseswillcontinuetohamperfurthergrowth.However,weseemtobeatthepeakoftaxrevisionbasedoncomplianceofthecigarettemanufacturerswhohaveadoptedtherequiredregulations

• Steadystategrowth:BAThasreachedamaturecompanystate,withaflatgrowthinrevenuedrivenbyasteadygrowth innewnumberofcustomers,withcustomersup-trading intastes.Exportsalesgrowthhasgrownsteady,asthefeedermarkets’uptakeincreaseindemand.

Fordetailsonthevaluation,seeourvaluationnoteon:BritishAmericanTobacco(BAT)KenyaValuationNote.

Belowisourequitiesrecommendationtable.KeyChangesfromourpreviousrecommendationare;

• EquityGrouphasmovedfroman“Accumulate”recommendation,withanupsideof15.5%toa“Buy”recommendationwithanupsideof20.0%,followinga3.9%w/wpricedecline

• JubileeInsurancehasmovedfroma“Sell”recommendation,withadownsideof(0.5%)toa“Lighten”recommendationwithanupsideof4.6%,followinga4.9%w/wpricedecline

• WehaveincludedBAT(K)inouruniverseofcoveragewithanAccumulaterecommendation.

allpricesinKshsunlessstated EQUITYRECOMMENDATION

No. Company Priceasat15/07/16Priceasat22/07/16

w/wChange

YTDChange

TargetPrice*

DividendYield

Upside/(Downside)** Recommendation

1. KCBGroup*** 32.3 32.5 0.8% (25.7%) 49.4 6.2% 58.2% Buy2. KenyaRe 19.8 19.8 0.0% (5.7%) 26.7 3.8% 38.6% Buy3. Centum 43.8 44.25 1.1% (4.8%) 57.2 2.3% 31.5% Buy4. DTBK*** 167.0 160 (4.2%) (14.4%) 204.2 1.6% 29.2% Buy5. Liberty 14.1 13.9 (1.1%) (28.7%) 17.2 0.0% 23.7% Buy6. EquityGroup 38.3 36.75 (3.9%) (8.1%) 42.1 5.4% 20.0% Buy7. Barclays 10.1 10.0 (0.5%) (26.5%) 10.9 10.0% 19.0% Accumulate8. BAT(K) 865.0 869.0 0.5% 10.7% 970.6 6.3% 18.0% Accumulate9. NIC 34.0 31.75 (6.6%) (26.6%) 35.7 3.9% 16.4% Accumulate10. HFGroup 19.6 19.9 1.5% (10.6%) 21.6 6.5% 15.1% Accumulate11. Co-opBank 15.2 14.9 (2.0%) (17.2%) 16.0 5.4% 12.8% Accumulate12. Britam 13.8 13.1 (4.7%) 0.8% 14.1 2.3% 9.9% Hold13. CfCStanbic 80.0 82.5 3.1% 0.0% 83.6 7.5% 8.8% Hold14. StandardChartered*** 210.0 208 (1.0%) 6.7% 208.6 8.2% 8.5% Hold15. PanAfrica 37.0 36.5 (1.4%) (39.2%) 39.0 0.0% 6.8% Hold16. CICInsurance 4.5 4.55 2.2% (26.6%) 4.7 2.2% 5.5% Hold17. JubileeHoldings 489.0 465 (4.9%) (3.9%) 477.8 1.8% 4.6% Lighten18. I&MHoldings 109.0 108 (0.9%) 8.0% 109.5 2.7% 4.1% Lighten19. Safaricom 17.4 18.05 4.0% 10.7% 16.6 4.2% (3.8%) Sell20. NBK 9.5 9.0 (5.3%) (42.9%) 5.4 0.0% (40.0%) Sell

*TargetPriceasperCytonnAnalystestimates **Upside/(Downside)isadjustedforDividendYield

We are neutral with a bias to positive on Equities given the higher earnings prospects, supported by afavorablemacroeconomicenvironment.

PrivateEquity

InternationalFinanceCorporation(IFC)hasacquireda2.5%equitystakeinADvTECHvaluedatUSD13.0mn,effectivelyvaluingthecompanyatUSD520mn.ThistransactionresultedtoanincreaseIFC’StotalholdingsinADvTECH to 4.1% after an earlier acquisition of 1.6%. ADvTECH leads the private sector in the fields ofeducationandresourcinginSouthAfricawithaproventrackrecordofexpandingeducationalopportunitiesandimprovingskillsforpeopleenteringthejobmarketorseekingtoimprovetheiremploymentprospects.ThenewcapitalwillbeusedtofacilitateADvTECH’sexpansionstrategyinSub-SaharanAfricathatentails:(i)increasing its schoolsandtertiaryeducationprograms, (ii) increasequalityeducationorvocational trainingaccessforatleast30,000additionalstudentsand(iii)providenewlearningoptionsforstudentsleavinghighschool.TheinvestmentwillalsoinvolvesynergiesindrivingstrategywithIFCprovidingADvTECHwithaccesstoaninvaluablenetworkofin-countryexpertsandeducationofficialsalongwithprivateandstateeducationprovidersatschoolsandtertiarylevelaswellasassistingthecompanytoexpandintonewmarketsinAfrica.Thisexpansionwillbedrivenby(i)Africa’sfastgrowingandyouthfulpopulationwhichrequiresincreasedjobsandpeoplewithskillstofillthem(ii)Existinggapsinthemarketwithdemandforqualityprimary,secondaryandtertiaryeducation(iii)Agrowingmiddleclasswithpurchasingpower.

DevelopmentPartners International (DPI),oneof the leadingAfricanprivateequity specialistswithUS$1.1billionundermanagement,hasthroughitsADPIIfundconcludedaninvestmentandstrategicpartnershipwithEgypt’sleadinghouseholdappliancesandconsumerelectronicsretailer,B.TECH,whichwillseethefundinvestEGP 300 million in the company. B.TECH operates a fast-growing portfolio of 67 retail stores across 22governoratesinEgyptwithanetworkof362wholesaledealerssupportedbythreemainwarehousesand57after-sales service centers. B.TECH distributes leading household appliances and consumer electronicsproducts including leading global brands such as Indesit, Ariston, Miele, Apple and Braun. B.TECH hasconsistentlygrownitsbusinessatanimpressive18%annualizedsalesgrowthoverthelast5yearsdrivenby(i)growingdemandforconsumerdurablesandelectronicsfromEgypt’smiddleclass(ii)B.TECH’smarketleadinginstalmentpaymentsystemwhichhasservedover700,000Egyptianstodateand(iii)afast-growingonlinepresencesupportedbyanadvancedwarehouseandafter-salescapability.

RealEstate

PrimerentsinNairobifellforthethirdconsecutivequarteraccordingtoKnightFrank’sreportonPrimeGlobalRentalindex.Theindex,whichtrackstheperformanceofluxuryresidentialrentsacross17keyworldcities,showedprimerentsfellgloballyforathirdconsecutivequarterwithrentsfallingonaverageby0.5%intheyeartomarch2016.Accordingtothereport,primerentsforNairobifell7.9%y/yinQ12016,rankingNairobilastpositionamongothercities.Overafour-yearperiodriseinrenthavebeendecliningwithNairobifallingfromposition1inQ12013at24.20%Y/Ychangetolastpositionat-7.90%Y/YQ12016intheglobalranking.Thisfallisattributabletoincreasedsupplyanddecreaseindemandforhousing,asmostofdemandforprimepropertieshasmainlybeenfromexpatriates.ThusRentshavetrendedlowerasthereisweakeneddemandfrom this segment of the market due to multinational firms downsizing as a result of adverse economiccircumstancesdrivenbylowcommoditypricessuchasslowdownintheoilindustry.ThistrendisexpectedtocontinuewithcompaniessuchasCoca-ColaannouncingthatitisreducingitsoperationsinKenya.Increaseinhousingsupplyinprimeendhomesalsocontributedtofallinrentsasthemarketisstagnatingatlowerrentalyieldsof3%-4%ascomparedtomiddleincomemarketsat5%-6%.

***IndicatescompaniesinwhichCytonnholdssharesin Accumulate–Buyingshouldberestrainedandtimedtohappenwhentherearemomentarydipsinstockprices. Lighten–Investortoconsiderselling,timedtohappenwhentherearepricerallies

ThefollowingisasummaryofQuarteronerentalperformanceover4yearsaccordingtoKnightFrank

Nairobi’sPrimeRentsPerformance Year 12Monthchange 6Monthchange 3Monthchange Rank2013 24.2% 17.0% 14.4% 12014 25.8% 7.5% 2.1% 12015 0.7% 0.7% 0.0% 112016 (7.9%) (7.9%) (2.9%) 17

Source:KnightFrankPrimeGlobalRentalindexreport

PrimeresidentialpricesinNairobihasalsobeenonadecreasingtrendinconsistenttorentsasfrom2013to2015.However,pricesbuckedthetrendandincreasedby1.5%betweenDecember2015andMarch2016,and3.3%intheyeartoMarch2016rankingposition15outof32citiesaccordingtoKnightFrank.Usually,luxuryrentalandsalesmarketstendtomoveinsamedirections,withbuyerstargetingrentalyields,priceandcapitalappreciation.Theincreaseinpricesin2015to2016isdrivenbyincreaseinlandpricesovertime,withNyari,RundaandKarenrecording6.28fold,5.28fold,6.48foldrespectivelyamongothersoveraperiodof8yearsasindicated in Hass property House price Index Q1 2016 report.More so the consistent drop in prices hasconsistentlyattractedbuyershencethemarketisreactingtothedemandatthecurrentpricesaveragingKshs277,419–Kshs341,819persqminprimeareas.

ThefollowingisasummaryofNairobipriceperformanceover4years

Nairobi’sPrimePricesPerformance Year 12Monthchange 6Monthchange 3Monthchange Rank2013 8.4% 3.1% 1.6% 102014 4.2% 1.5% 1.0% 192015 (0.5%) 0.3% (1.0%) 262016 3.3% 2.2% 1.5% 15

Source:KnightFrankGlobalCitiesIndexreport

Thepricesinthissegmentaregrowingataslowratebutthereisnoexpectationofadeclineintheshorttomediumterm.InourviewtheresidentialmarketinKenyaisstillanattractiveinvestmentforbothrentandsalemarketsgiventhatonlyapproximately17%ofKenya’spopulationlivesintheirownhomes,andthereisahousingunit’sdeficitof250,000unitsperannumagainstasupplyof50,000housingunits.Thisopportunityishowevermore concentrated in themiddle income class areas and satellite Towns and therefore investorsshouldfocusmoreintothesemarketstotapontotalreturnsatminimumof25%.

Thefollowingisasummaryofreturnsinvariousmarketsegments

TotalReturnsaccordingtoZonesZone AverageYield AverageCapitalAppreciation AverageTotalReturn

Satellite 5.3% 22.9% 28.2%

UpperMiddle 5.7% 19.7% 25.5%

Highend 4.4% 20.3% 24.7%

LowerMiddle 4.6% 19.8% 24.4%

Average 5.1% 20.7% 25.8%

Satellite towns had the highest returns in Q1’2016 due to high capital appreciation rates driven byinfrastructuraldevelopment,andincreasedinvestmentintheseareas.

Source:CytonnResearch,HassConsultLandPriceIndexQ12016

FusionCapitalhasregisteredanundersubscriptionontheKshs2.3bnD-REITshencehasextendedtheclosingdateto26thJuly2016fromtheinitialdateof15thJuly2016.ThelowsubscriptionratescanbeattributedtoinvestoreducationasmostoftheparticipantsinthecapitalmarketareyettounderstandandembraceREITsasaninvestibleassetclass.FusionCapital’sextensionofthedatesisaimedatgivinginvestorsmoretimetoapply for theD-REITS.The listingdate for theD-REIThasalsobeenpushedto10thAugust2016.Formoreinformation,pleaseseeCytonnweekly#27.

RoleofTalentinOurEconomy

To transition to a mid-income economy, a low-income but developing economy, such as Kenya, has toimplementamyriadofeconomicgrowthinitiativesinordertoachievesustainedeconomicgrowththatwilltranslate to higher incomes and better standards of living. Such initiatives include (i) a generally enablingbusinessenvironment,(ii)openmarketsallowingforthefreeflowoflabor,capital,goodsandservices,(iii)astable and democratic system of governance based on the rule of law, and (iv) a highly educated,entrepreneurialandinnovativepooloftalent,amongother initiatives.ThisfocusnotediscussestheroleoftalentingrowingoureconomyinthecontextofourownexperienceatCytonnandmakessomesuggestionsonhowtodeepenourtalentpooltoimproveoureconomy.

LastweekweofficiallylaunchedourCytonnYoungLeadersProgramme(“CYLP”),whichisourcorestrategyforidentifying,attractinganddevelopingtheverybesttalentwecanget.SinceinceptiontwoyearsagoCYLPhastrained over 180 university graduates and we have made employment offers to 61 of these programparticipants.About50%ofourpermanentstaff ismadeofpeoplewerecruitedstraightoutofcollege.Thisprogramhasbeenoneofthekeydriversofourrapidgrowth,hencethedecisiontodoafocusnoteontalentrightaftertheCYLPlaunch.FormoreinformationaboutCYLP,seeCYLP:

Talent, in the context of economic growth, can be defined as a group of people, such as employees of acompany,whohaveanaptitudeforparticulartasks.Peopleinanorganizationarereferredtoastalentbecauseit is through their unique skill sets, commitment and hard work that the organization grows. A growingcompanyemploysmorepeople,paysmoretaxes,andproducesmorerelevantgoodsandservices;allofwhichculminateintoagrowingeconomywithbetterstandardsofliving.

TheeconomicdevelopmentofSingaporeundertheleadershipofLeeKuanYewisfamousasoneofthegreatesteconomicsuccessstoriesinhistory.Singapore’spercapitaGDPjumpedfromaroundUS$500in1965,byastaggering2,800%,toUS$14,500by1991,theendofhisrule;theGDPpercapitahassincecontinuedtogrowtoUS$55,000.LeeKuanYewimplementedalotofinitiativestomakeSingaporethemostprosperousnationinSoutheastAsia,andnurturingandattractingtalentwasoneofthecoreinitiatives. Inhisbook,“FromThirdWorldtoFirst”,LeeKuanYewsays,“talentisacountry’smostpreciousasset…itisthedefiningfactor.”Inthe1950s and 1960s, the leadership focused on building an efficient, universal education system that wouldprovideaskilledworkforceforSingapore’sindustrializationprogrammeaswellastoreduceunemploymentrates.LeeKuanYewalsosawtheneedtobuildaprofessionalteachingforceandinternationallycompetitivelocaluniversitiesthatwouldputSingaporeontheworldmap.SingaporeworkedwithitsmissionsinBritain,theUS,Australia,NewZealandandCanadatoidentifypromisingstudentsinforeignuniversitiesandinterestthemwithjobsinSingapore.Today,mostofSingaporeUniversitiesareknowninternationallyforhighteaching

standardsespeciallyinthefieldofscienceandmathematics.Singaporecurrentlyhasanunemploymentrateof1.9%makingitoneofthelowestunemploymentratesintheworldwithmajorityofthelaborforcebeinghighlyskilledandwelleducated.

WhileSingaporeisdifferentfromKenya,wecanlearnagreatlessonthattalentindeedpromoteseconomicgrowthandtalentcanbothbedevelopedlocallyandalsoimportedascasewasforimmigrantsinSingapore.

ThegovernmentofKenyaisalreadydoingalottoincreasethetalentpool,including:

i. Introductionoffreeandcompulsoryprimaryeducation

ii. Promotingaccesstohighereducationbyincreasingthenumberofuniversitiesandtertiarycolleges,whilealsoincreasingtheintakeperiodstoaccommodatemorestudentsintotertiaryeducation

iii. Providingloansandbursaries,throughtheHigherEducationLoansBoardandotherdevolvedfunds,toneedy students to finance theiruniversity education,whilemaintainingaffordableeducation inpublictertiaryinstitutions

iv. Effecting other programmes such as National Industrial Training Authority (NITA), Kenya NationalVolunteersProgram(KNVP)andKenyaYouthEmpowermentProgram(KYEP) tohelp indevelopingskillsthatarerelevanttothejobmarketandhencereducingunemploymentlevelsinthecountry.

However,thegovernmentandtheprivatesectorneedacollaborativeefforttodoalotmore.Wethinkthefollowingmaybehelpful:

i. Increase access to education in both secondary and university, by extending free education tosecondary levels andmakinguniversity educationmoreaccessible andaffordable; thiswill needamoreefficientstudentloandisbursementandcollectioneffort

ii. Makeiseasierforforeigntalentandimmigrantstoobtainworkpermits.Thecurrentsystemistoobureaucratic andmakes it hard to bring in themuch needed foreign talent and skills, which canenhanceourproductivecapacityandcreatemorejobs

iii. Haveaclearandaggressiveindustrializationandmanufacturingprogram,whichwillcreatejobsforgraduatesfromtechnicalinstitutestherebyreducingunemploymentandincreasingproductivitywhichinturnleadstogrowthoftheeconomy

iv. Createsignificantincentivesforemployerswithstrategictalentdevelopmentprograms,suchasCYLP,whicharefocusedonequippingrawtalentfromuniversitieswithproductiveskills

v. DevelopstrategieswithkeyKenyanmissionsandembassiesaroundtheworldtoattracttalentedandskilled Kenyan diaspora back home to enable skills transfer. This may involve giving significantincentivestobothreturningskilledKenyandiasporaworkersandthecompaniestheyjoin

vi. Corporatesshouldplayakeyroleintermsofinvestingintrainingprogramstoincreasethepoolofskilledtalent,bytrainingandemployingrawtalentfromuniversities,ratherthancompetingforthelimitedpoolofexperiencedtalent.While thismayseem likeCorporateSocialResponsibility, it isastrategiccompetitiveadvantagetocorporates.

TheKenyaneconomyisonagrowthtrajectorygiventheprevailingmacroeconomicstability,ayoungandgrowingpopulation,andincreasingeaseofdoingbusiness.Itiscriticalthatwequickenourgrowthtrajectorybyinvestingheavilyandoverasustainedperiodoftime,andasanationalpriorityjustasSingaporedid,innurturingandattractingtalent.Itisastrategicpriorityforthecountryandparticularlyforitsprivatesector.

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particulars are not warranted- as the facts may change from time to time. This

publication is meant for general information only, and is not a warranty, representation

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