Alpha Capital Monthly Research Newsletter - April 2024

Dear Mwekezaji,

Despite the earnings season, announcement of the market’s most anticipated dividend, speculation on other dividends, and release of Q1-24 banking results, the market was down in basically all metrics during the month of April 2024.

The economy remained stable in April 2024, without any notable shocks, registering an economic growth above 5% for Q1-24 while inflation remains at the bottom of the policy target range. This is amid improving business environment and growing investments as the government focuses on promoting investment opportunities and encourage domestic and foreign investments. The IMF projects Tanzania’s economic growth of 6.1% in the year 2024, projected to be third fastest in Africa, only behind Ivory Coast and Ethiopia.

Economic Developments

According to the Bank of Tanzania, economic growth in Q1-24 is estimated at 5.1%, backed by increased domestic and foreign investments. This was underpinned by the notable private sector credit growth which remained in double digits for the last two years.

Inflation remained within target at 3.1% in April 2024, from 3.0% in March 2024. Stable inflation stems from stabilized food prices as the non-core inflation stood at 1.4%, 50bps higher than March 2024. The Unprocessed Food Index saw a slight annual deflation of 0.5% in April from 0.6% in March 2024 and 0.1% in February 2024. However, the index saw a 1.0% inflation on a monthly basis, down from 1.9% for March 2024 due to seasonal movements. The period between February and April is historically known to have the highest monthly food inflation being far from harvest seasons.

Considering the weight and significance of food products in the consumption basket of the Tanzanian community, along with significance of agriculture as a sector in the balance of payment, employment, and its share to GDP, the government has been taking a number of initiatives to improve the agriculture sector and domestic food security, partially leading to the recent stability in food prices. Some of government’s initiatives include providing a TZS 1 trillion agriculture facility at the central bank available to commercial banks, to lend to the sector at less than 9% since 2021. In the same vein, the Bank of Tanzania further waived the statutory minimum reserve requirement for credit extended to agricultural activities. The government also provided subsidies in agriculture inputs such as fertilizers to alleviate input prices during the pandemic and global supply shock experienced since the end of 2021.

Moreover, in 2023, the Ministry of Agriculture oversaw the establishment of the Tanzania Agriculture Insurance Consortium (TAIC) which is a collaboration between the government, agriculture stakeholders, and insurance companies. The primary objective is to empower farmers against the risks surrounding agricultural activities, while simultaneously attract financing into the sector.

Furthermore, in his budget speech, the Minister for Agriculture hinted on the Ministry finalizing talks with NBC Bank in regards to the National Food Reserve Authority (NFRA) issuing a Food Security Bond so as to ensure sufficient domestic food supply. Despite this being a notable development for the sector, and a demonstrator of how capital markets can be utilized for economic development, generation of NFRA’s cashflows for debt service is a crucial question to be poised, so as to avoid addition of debt burden. We wait for the final structure of the program.

While non-core inflation was minimal, energy inflation was flaming as the Energy, Fuel and Utilities Index went up 9.3% in the year ending April 2024, the highest pace among all inflation consumption basket segments. This follows rising fuel prices following geopolitical tensions in the Middle East and Europe. Notably, the index’s annual inflation rose from 5.1% in December 2023. Energy inflation is backed by the 16% approximated increase of domestic fuel prices as published by EWURA. On a monthly basis prices went up 1.7% and 4% since the beginning of the year. The annual increase is echoed by the 11% global crude oil price increase according to Trading Economics. Global fuel prices have seen slight volatility in the last few weeks as increased global supply suppresses prices, while geopolitical tensions, especially in the middle east push prices higher.

Core inflation stood at 3.9%, highly influenced by Personal Care, Social Protection, and Miscellaneous Goods and Services segment which was up 7.5% in the year ending April 2024. Other influential segments in the core inflation were Transport (4.35%) lifted by the rise of fuel prices, and Restaurants and Accommodation Services segment (4.05%) as tourism sours following the government’s promotion and continued recovery from the pandemic.

Despite subdued inflation, the Bank of Tanzania raised the central bank policy rate (CBR) by 50bps to 6.0% in April 2024, as a pre-emptive measure against lingering inflationary pressures mostly stemming from persistent foreign exchange challenges facing developing countries. The Federal Open Market Committee (FOMC) in the meeting held on 1st May 2024, maintained interest rates at 23-year high amid stubborn inflationary data in February and March 2024. This is contrast to expectations in the beginning of the year where markets anticipated at least three rate cuts in 2024.

Despite elevation of the CBR by the Bank of Tanzania, it is still the lowest rate in the region, demonstrating relatively subdued inflation and diversified sources of foreign inflows. Moreover, the central bank has suppressed Treasury yields throughout the month, by accepting less than target amounts, despite hefty oversubscriptions, especially in the long-term tenor auctions.

Suppression of Treasury yields was crucial in the maintenance of sufficient liquidity in the banking sector as government’s efforts to encourage investments have elevated the demand for credit, while the overall loans to deposits ratio remains above 90% for the last eight quarters. The demand for credit is demonstrated by the banking sector performance which saw the overall net loan portfolio grow by 22% y-o-y in Q1-24 while total assets went up 17%. Similarly, the overall net profit for the quarter grew by 51% compared to Q1-23.

The banking sector has seen tremendous growth in the last few years as the business environment improves. The overall net profits for the sector multiplied more than ten times in the last five years, while total assets went up more than 70% during the period. An even mind-blowing fun fact is that the Q1-24 overall net profit for the sector is higher than the net profit for the full years 2017, 2018 and 2019 combined. Take a moment to digest this paragraph!

Equities Market

Equity turnover dropped by 41% in April 2024, amounting to TZS 10.72 billion. The drop is a result of a 36% drop in turnover on the CRDB Bank Plc (DSE: CRDB) counter, while value of block transactions on the Tanzania Breweries Ltd (DSE: TBL) counter halved. CRDB remained the top mover for the month, accounting for 50.4% of the total equity turnover, while collectively, CRDB and TBL accounted for 75.5%.

Foreign participation remained skewed on the selling side as the net foreign outflow amounted to TZS 3.16 billion ($1.15 million). Foreign investors accounted for 34.4% of total equity sales and 4.9% of total equity purchases for the month. Foreign participation remains subdued as geopolitical tensions remain apparent, and U.S maintains a tightened monetary policy.

Both of the two major indices were on the red in April as CRDB and NMB Bank Plc (DSE: NMB) were both on the losing side. The Tanzania Share Index (TSI) and the All Share Index (DSEI) dropped by 0.38% and 0.30% respectively. On top of the two banks, four other counters saw their prices slashed during the month, outweighing only four counters with positive price movements.

The leading price drop was Swissport Tanzania Plc (DSE: SWISS) which slid by 9.09% in April, and 24.24% since the beginning of the year. SWISS reported a 42% growth of net profits for the year 2023 following improved operational efficiency. SWISS’s revenue went up 7% while operational expenses grew by only 4%. As a result, operating margin gained 262bps to 14.3% while the net margin gained 222bps to 9.02%. Consequently, SWISS proposed a dividend of TZS 51.33/- per share, yielding 5.13% at the current price, and marking a dividend growth of 22% compared to last year. Despite the beautiful news surrounding profitability and dividend growth, the price still declines due to relatively lower yield which maximizes the opportunity cost. Lower dividend yield would be justified if the sector or specific company see significant opportunities. Revenue growth of SWISS and its operating environment suggest otherwise as competition is still limiting growth of the company.

Tanga Cement Plc (DSE: TCCL) saw its price drop by 3.81% to TZS 2,020/- due to a delayed offer from Scancem International D.A to retail shareholders. Initially, the offer was expected before the end of Q1-24, as such, the price began falling in March 2024, and has fallen by 5.66% since then to mid-May.

The price of CRDB dropped by 1.75% in April due to somewhat lower proposed dividend than expected. Notably, CRDB’s payout ratio of 30.9% for the year 2023 is the lowest since the bank was listed in 2009. CRDB’s dividend yield at the highest price point in Q1-24 was 8.9%, the highest in the last seven years, indicating a limited upside movement in the current period. The bank’s ex-dividend was 9th May 2024, and the price has fallen by 10.7% since then. However, the bank’s price was up up 21.74% since the beginning of the year to the end of April, moved by 2023 annual performance. The bank will hold its annual general meeting (AGM) on 18th May 2024 at the Arusha International Convention Centre (AICC).

Other monthly losers were Maendeleo Bank Plc (DSE: MBP) and Mkombozi Commercial Bank Plc (DSE: MKCB) which dropped by 1.64% and 1.59%. The two banks may be diamonds in the rough, positively impacted by the overall banking sector performance in the recent past. Both banks are currently profitable, denied dividend payments due to regulatory thresholds, but may be close to full compliance.

MBP saw its profit grow by 65% in 2023, mostly due to halving of impairment losses and 41% growth of net fees and commissions. Net interest income dropped by 3.6%, affected by rising interest expenses (8.9%) compared to 1.1% growth of interest income. Slow Interest income growth was despite a 22% growth of the loan portfolio and 31% growth of fixed income assets. The cost to income ratio is still at 58% similar to 2022, and hinders the bank from dividend payment consideration due to violation of the 55% threshold. However, the bank proposes a stock dividend for the year 2023, where shareholders shall be paid in more shares rather than cash. At the current market price MBP is trading at 3.35x PE ratio.

MKCB saw its net profit for the year 2023 grow by 36% as fees and commissions more than doubled during the year, lifting non-interest income by 60%. Operational expenses merely grew by 4.4%, suppressing the cost to income ratio (CIR) from 51% in 2022 to 48% in 2023. The loan portfolio of MKCB rose by 17% during the year, while overall decline of lending rates somewhat hit the bank leading to subdued growth of interest income. The loan to deposits ratio stood at 67%, leaving enough room for substantial growth, especially with the current growing demand for credit. However, the bank’s NPL ratio stood at 8%, higher than the regulatory threshold, and the only impediment denying the bank dividend payment to shareholders. With the current loan portfolio growth, and better quality of loans in the recent past, the hurdle can be eliminated within the next two years. MKCB is currently trading at 1.9x PE ratio. A theoretical 30% payout ratio for the bank would yield 17.6% at the current price.

NMB saw its price slightly fall by a mere 0.84% to close the month at TZS 4,740/- as investors focused on CRDB’s dividend. The price has since recovered and rose by 5.5% up to mid-May following the bank’s dividend announcement of TZS 361.18/- per share, yielding 7.2% at the current price.

The top gainer for the month of April was National Investment Company Ltd (DSE: NICOL) which saw its price rise by 23% in April alone, marking a 60% growth since the beginning of the year. The bull-run of NICOL was triggered by the fund manager’s profit growth as well as the growth of NMB which is NICOL’s largest single asset. Market momentum caught up, and now the projected dividend yield for NICOL is less than the actual dividend yield for NMB at current prices.

Other gainers were TOL Gases Ltd (DSE: TOL), TCCIA Investment Company Ltd (DSE: TICL) and Dar es Salaam Stock Exchange Plc (DSE: DSE). Prices of the three companies gained 4.55%, 2.70% and 1.09% respectively. TOL gains traction from the pending opportunities in industrial gases, and the company’s recent high dividend payout ratio despite tight cash flow.

The price of TICL recovered back to TZS 190/- similar to the beginning of the year, marking a monthly growth of 2.70%. TICL’s price has remained around the same level due to conflicting assessment from investors as the company reports substantial profit growth but the EPS and projected dividend are down by close to 30%. This originates from the rights issue in the end of 2023 which doubled the company’s number of shares hence less absolute value of EPS and DPS. I personally expect to see substantial growth on the counter in the next 16 months, as the funds raised in the rights issue are fully invested and generating income. The price might initially decline before it rises, but that will mostly depend with how much investors have understood the impact of the increased number of shares.

The price of DSE moved slightly up resulting from the 30% profit growth for the year 2023 reported in the end of January 2024. Investors await the dividend announcement from DSE with an expected payout ratio of 60% and an expected dividend yield of 8.3% at the current price.

Fixed Income Market

Total bonds turnover in the secondary market fell by 20% during the month of April 2024. The value of bond transactions during the month amounted to TZS 217.82 billion, down from TZS 272.29 billion in March 2024. During April, value of transactions was highly concentrated on the 20 years tenor which accounted for 73% of the total bonds turnover. The development echoes market’s appetite of long-term bonds, evidently seen in primary auctions.

The Bank of Tanzania conducted three Treasury re-opening auctions during the month of April, raising a total of TZS 278.99 billion. The total offer size from the Bank of Tanzania was TZS 368 billion, while the tender size from the public amounted to TZS 1.06 trillion, marking a subscription rate of 289%. The central bank’s push back on yields is evident in the auctions conduct. While the Bank received 1,911 total bids during the month, only 642 bids were accepted. Moreover, the central bank accepted only 26.2% of the total value of bids from the public, despite that being only 75% of the targeted amount for the auctions. As a result, yields of the 20 and 25-years tenors both dropped by 27bps and 66bps during the month.

Outlook and Lookouts

CRDB entered the ex-dividend period on the 8th May 2024, and until mid-May the price has already dropped 10.7%. Dividends will be paid on 5th June 2024. The bank will hold its annual general meeting on 18th May 2024, and investors are eager to hear of the developments in DRC and the new insurance subsidiary. On the other hand, NMB just announced its dividend as narrated above, while the cum-dividend period will stay for three weeks, up to 5th June 2024 while dividends will be paid on 19th June 2024. NMB’s AGM will be held a day after entering the ex-dividend period, on 7th June 2024.

Another lookout is TICL as we wait for Q1-24 results to gauge investments utilized by the fresh funds raised from the rights issue in the end of 2023. Movement in the overall profits may determine the movement of the fund manager’s price in the near future. Dividend per share for the year 2023 is expected to fall by approximately 28% given the company’s dividend policy and increased number of shares. We expect this to negatively impact its price in the very short term and create an opportunity for keen investors.

We are also on the lookout of the next U.S Federal Open Market Committee meeting which will be on 12th June 2024, regarding the direction of U.S monetary policy. U.S inflation slightly dropped in April 2024, but numbers are still higher than initially expected. The Fed has held rates steady for the last six meetings as hopes of rate cuts now fade due to stubborn price indices. U.S monetary policy is crucial in determining the movement of foreign portfolio investments (FPIs) in developing markets, while also affecting inflation and exchange rate risks in these markets.

Head, Research & Financial Analytics

Alpha Capital