Alpha Capital Monthly Research Newsletter - July 2024

Dear Mwekezaji,

July marks the beginning of the 2024/25 national budget implementation, while the most prominent stocks in our market completed dividend payments in June. The month witnessed significant activity, particularly in stock price movements and a surge in equity trading. Additionally, the central bank initiated the issuance calendar, providing insights into the direction of Treasury yields in the coming months.

Equity Market

The Dar es Salaam Stock Exchange (DSE) equity segment experienced a revival in July following the dividend payments in June. The market’s usual leaders, CRDB Bank Plc (DSE: CRDB) and NMB Bank Plc (DSE: NMB), saw equity turnovers increase substantially by 58% and 145% respectively, accounting for 51% and 31% of the total equity turnover for the month. Twiga Cement Plc (DSE: TPCC) also saw a notable increase, with its equity turnover multiplying more than fivefold on a monthly basis. Collectively, the three counters dominated 89.9% of the month's equity turnover.

Overall, equity turnover rose by 39% as investors re-engaged with the market after a relatively slow period during June's ex-dividend and payment phases. Many investors also reinvested dividends paid out in the previous month.

Foreign Participation

Despite the increased turnover, foreign participation declined in both absolute and relative terms. Foreign sellers accounted for 7.82% of total equity sales, equivalent to TZS 787 million ($0.292 million), while foreign buyers made up 3.02% of total equity purchases, amounting to TZS 304 million ($0.113 million). In contrast, foreign purchases in June totaled TZS 1.59 billion ($0.590 million), while foreign sales stood at TZS 2.12 billion ($0.785 million). Consequently, net foreign outflow decreased from TZS 527.35 million ($0.195 million) in June to TZS 483.04 million ($0.179 million) in July.

The Federal Open Market Committee (FOMC) of the U.S Federal Reserve decided to maintain interest rates at their July meeting, noting improved inflation data, though slightly above the target rate. Federal Reserve Chair Jerome Powell hinted at the possibility of a rate cut in September, depending on incoming data. The brief equities market scare in early August has added pressure on the Federal Reserve to consider rate cuts.

Similarly, the Bank of England has reduced interest rates by 25 basis points, marking the first cut since March 2020 and the start of an expansionary policy, while the European Central Bank (ECB) had slashed rates in June 2024. Rate cuts in developed economies are anticipated to redirect global investments into developing economies and frontier markets, resuming net positive foreign portfolio investments.

Price Movement

Both major indices maintained an upward trajectory in July, with prices gaining momentum despite June's ex-dividend and dividend payments. Domestic market capitalization increased by 2.04%, closing the month at TZS 12.09 trillion, while total market capitalization rose by 2.67% to TZS 17.28 trillion.

Domestic capitalization was largely driven by the two major banks, CRDB and NMB, which collectively account for approximately 35% of the domestic market capitalization. CRDB and NMB prices increased by 13.46% and 3.85% respectively during the month, driven by expectations of strong performance in the banking sector.

Banking sector results, published at the end of the month, showed CRDB with a surprising 53% profit growth in H1-24 compared to H1-23, primarily due to a 29% increase in interest income and a 24% rise in non-interest income. Consequently, the cost-to-income ratio fell from 50.3% to 45.4%, and the operating margin improved by 540 basis points to 49.4%. Similarly, the bank’s interest margin increased by 300 basis points to 73.8%, supported by a 14% rise in cheap deposits and a 27% increase in borrowings. CRDB’s loan book grew by 24% over the year, solidifying its position as the largest bank, with a total credit portfolio of TZS 9.49 trillion and total assets of TZS 14.97 trillion.

Meanwhile, NMB's net profit grew by 19.9%, driven by a 28.7% increase in non-interest income and improved operational efficiency, as evidenced by a 120 basis points reduction in the cost-to-income ratio to 36.9%. Interest income for the bank increased by 18.8%, while interest expenses rose by 40.3%, reflecting a 44.8% growth in borrowings compared to an 8.2% increase in deposits, financing a loan book that grew by 22.6%. As a result, the interest margin decreased by 350 basis points to 77.2%, while the operating margin improved slightly from 55.8% to 56.7%. NMB maintained its position as the most profitable bank, with a H1-24 net profit of TZS 314.17 billion.

Other counters contributing to the domestic capitalization rally included Afriprise Plc (DSE: AFRIPRISE), which gained 16.7% following the release of results that initially suppressed the price but led to a rebound at the end of the month. Additionally, Dar es Salaam Stock Exchange (DSE: DSE) and National Investment Company Ltd (DSE: NICOL) saw increases of 11.82% and 1.25% respectively. DSE's gain followed the announcement of a TZS 145/- dividend in early July, which is already past the ex-dividend date.

Conversely, three counters saw declines during the month, led by Mkombozi Commercial Bank (DSE: MKCB), which has faced increased demand since the beginning of the year but at lower prices. MKCB’s price fell by 10% during the month, and the stock currently trades at a trailing P/E ratio of 1.1x, despite an 80% year-on-year growth in H1-24 net profit. MKCB’s profit growth was driven by a 34% increase in interest income, while interest expenses decreased by 6.6%.

Twiga Cement Plc (TPCC) and Tanga Cement Plc (TCCL) were the other major losers for the month, with prices declining by 6.83% and 1.16% respectively. TPCC’s price drop reflects an 18% decline in revenue, leading to a 38% decrease in net profits. The company attributed this to unfavorable weather conditions in H1-24 and delayed project funding, but remains optimistic for H2-24.

TCCL’s slight price decline follows a delay in the offer from Scancem International D.A to TCCL retail shareholders, which the market had expected by the end of Q1-24. Since then, TCCL’s price has fallen by 19.81%. Uncertainties surrounding the offer and its price continue to weigh on the stock’s market value.

Beyond domestic counters, total market capitalization was also boosted by cross-listed counters, particularly East African Breweries (DSE: EABL) and KCB Commercial Bank (DSE: KCB). These two counters have seen their prices surge by 79% and 77% respectively since the beginning of the year, as the Nairobi Stock Exchange began to recover following the issuance of a Eurobond in December to settle obligations due in June 2024. Other cross-listed counters, including Jubilee Holdings (JHL) and National Media Group (NMG), gained 14.86% and 9.38% respectively since the beginning of the year, while Kenya Airways (KA) and Uchumi Supermarket (USL) remain suspended.

Fixed Income Securities

Primary Market

The Bank of Tanzania conducted five Treasury auctions in July, including three for Treasury bonds and two for Treasury bills. The total offer amount for the month was TZS 701.3 billion. The overall subscription rate across all auctions was 139%, with the central bank accepting 74% of the tender size, equivalent to 102.5% of the target amount.

Approximately 64% of the total offer size in Treasury auctions was for Treasury bonds. The 15-year and 20-year tenors each accounted for 26% of the total offer, while the 5-year tenor made up 12%. The 20-year tenor dominated subscriptions, representing 50% of the total tender size and 60% of the total collected amount.

Long-term tenors maintained yields slightly above 15% in July auctions, while the 364-day yields increased by 252 basis points between the last June auction and the final July auction. As of the end of July, the 364-day yield stood at 9.2777%. The rise in the 364-day yield aligns with the central bank's moderately tight monetary policy aimed at managing foreign currency demand, as the Bank of Tanzania supports the value of the Tanzanian Shilling.

Regarding long-term tenor yields, the central bank appears to have struck a balance between 15.0% and 15.5%, which appeals to investors without excessively draining liquidity from commercial banks. Commercial banks' sources of liquidity have increasingly shifted from deposits to borrowings, as the loan-to-deposit ratio rose to above 96% in March 2024, according to the Bank of Tanzania's Quarterly Statistics Bulletin.

Raising Treasury yields higher could drain deposits from commercial banks, causing a crowding-out effect. Alternatively, lowering yields further might present two significant challenges: reduced collections from Treasury auctions to meet budgetary needs, and increased liquidity in the banking sector and economy, which could heighten demand for imports and foreign exchange, thereby affecting the value of the TZS and raising inflation.

Secondary Market

The fixed income securities turnover decreased by 34% in July, partly due to retail investors shifting focus to equities following dividend payments in June. Additionally, the month lacked long-term tenor auctions until the final day, when a 20-year auction took place. Long-term tenor auctions are typically followed by increased activities in the secondary market, particularly when the central bank resists yield increases, resulting into lower acceptance rates.

Total turnover in the secondary market for the month amounted to TZS 224.3 billion, down from TZS 340.9 billion in June 2024. The turnover-to-face-value premium slightly declined from 9.84% to 8.13% on a monthly basis, as reopened bonds were increasingly traded in the secondary market.

While Treasury bonds continued to trade at premium prices, corporate bonds were sold at discounts as high as 12.46%, notably observed in the NMB Jamii Bond. The NMB Jasiri Bond had an average trading discount of 6.27%, while the CRDB Kijani Bond had an average trading discount of 6.40%.

Collectively, corporate bonds accounted for 0.42% of the total bonds traded in the secondary market in July, with the CRDB Kijani Bond representing 36.6% of total corporate bond transactions, followed by the TMRC bond, which accounted for 32.1%.

Outlook & Lookouts

The key focus in the coming months is the monetary policy stance in developed economies, particularly in the U.S. At the end of July, the Bank of Japan raised interest rates for the second time since 2007, following an initial hike in March 2024, which moved Japan's interest rates out of negative territory. This decision led to the widespread unwinding of carry trades, where global investors had previously taken advantage of cheap credit from Japan to invest in global financial markets.

The rate hike in Japan, coupled with weaker-than-expected U.S. employment figures for July, which stoked fears of a recession, sent shockwaves through global equity markets. On Monday, August 5th, Japan's main index, the Nikkei 225, plummeted by 12%. U.S. and European equity markets also closed down more than 2% on the same day. Markets have experienced volatility throughout the first week of August as a result.

The turmoil in equity markets is putting pressure on central banks to cut rates amid rising recession concerns. The European Central Bank (ECB) and the Bank of England began cutting rates in June and July 2024, respectively, while the Bank of Japan has paused its rate hike program following the market turbulence. At the end of July, the Federal Reserve held interest rates steady, citing stabilizing inflation, though slightly above the target. Markets are anticipating a rate cut in September, with some analysts forecasting a total reduction of 105 basis points by the end of 2024 due to weaker-than-expected employment numbers and recent market volatility.

Rate cuts in developed economies are expected to facilitate capital flows into developing economies and frontier markets, alleviating foreign exchange challenges faced by these countries while boosting Foreign Direct Investment (FDI) and Foreign Portfolio Investment (FPI). An increase in foreign funds inflow is likely to ease inflation expectations and enable central banks in developing economies to increase liquidity to support economic growth as well as lower the cost of public and private debt. Additionally, a rise in FPI is expected to drive up equity prices and stimulate activity in financial markets.

Looking ahead to August, other key events include the release of H1-24 financial results for several listed companies that did not publish in July, including Afriprise, NICOL, DSE, SWISS, and TOL. Afriprise has announced a dividend of TZS 13 per share but has yet to release the dividend schedule. With the company’s share count having doubled due to a rights issue at the end of 2023, maintaining the dividend per share value means the total dividend payout will double compared to last year.

Additionally, two Treasury bond auctions are scheduled for August, with 10-year and 20-year tenors on August 7th and August 21st, respectively. We expect yields on the 20-years bond to remain high, above 15% but below 15.5%, as the central bank manages liquidity and foreign exchange stability. Activities in the equity markets are expected to be driven by the financial results published in July and throughout August.

Head, Research & Financial Analytics

Alpha Capital