Alpha Capital Monthly Research Newsletter - August 2023

Dear Mwekezaji,

Despite a slowdown in market activities in August, several significant developments occurred. Two issuances were announced, one of which was already open to public applications. The Tanzanian Stock Index (TSI) maintained a rally that began late in 2021, surpassing the DSEI. The latter was hindered by the performance of cross-listed companies that have been losing traction since the onset of the pandemic. The overall economy continued to show improvement, although the persistent shortage of USD remained a challenge.

The Monetary Policy Committee convened for its 227th ordinary meeting on August 31, 2023, and decided to maintain a less accommodative monetary policy stance. This decision was influenced by the fact that both private sector credit growth and extended broad money supply growth remained above the central bank's targets. However, private sector credit growth had been gradually decelerating since March 2023, reaching 20.8% in July, the lowest level since August 2022.

The less accommodative stance was also aligned with the central bank's intervention in the foreign exchange market, requiring the purchase of Tanzanian Shillings from the Interbank Foreign Exchange Market (IFEM). The TZS depreciated by 4.9% in the IFEM over the last two months, with a 1.7% depreciation rate in August alone.

In August, the total IFEM transactions amounted to $73.5 million, compared to $51.8 million in July 2023. Notably, 90% of the IFEM transactions in July were linked to the central bank's injections of foreign exchange into the banking sector. The central bank's foreign reserves stood at $5,246.7 million at the end of July, representing a 0.7% decrease compared to June 2023 but an 11.7% increase compared to May 2023. These reserves were sufficient to cover 4.7 months' worth of imports.

In the context of the global USD supply, the upcoming Federal Open Market Committee meeting on September 19-20, 2023, is highly anticipated. Market participants await the decision on U.S. interest rates and monetary policy, which will be guided by inflation data for August. U.S annual inflation rose by 50bps to 3.7% in August 2023, driven by fuel prices. Oil prices in the U.S. have been rising due to decreasing inventories and anticipated supply cuts from Russia.

The declining global oil inventories, coupled with deepening OPEC+ supply cuts, pose a challenge to global inflation. The combination of rising oil prices and a depreciating TZS create inflationary pressures in Tanzania. Fuel prices had already increased by at least 16% in early August, reflecting global prices and a weakened TZS. In early September, petrol prices rose modestly by 0.4%, while diesel prices surged by 11%. These rising fuel costs are expected to contribute to headline inflation in the near future, considering their impact on the cost of production and distribution of goods and services.

Tanzania’s headline inflation saw a slight uptick of 1.9 basis points to reach 3.34% for the year ending in August 2023, compared to July 2023. This halted the deceleration trend that had persisted since the beginning of the year. It's worth noting that this occurred despite easing food and energy inflation, which had been the main drivers throughout 2022. Energy, Fuel, and Utilities Index reported a 0.6% deflation for the year ending in August 2023, while Unprocessed Food Index, and Food Crops and Related Items Index dropped by 30.5 and 63.6 basis points, respectively, between July and August.

Core inflation, however, increased by 13.5% to reach 2.24%, primarily driven by the Services Index, particularly in tourism and accommodation. Services Index accounts for more than half of core inflation. The impact of rising fuel prices is expected to amplify inflationary pressures across various sectors in the near future.

DSE Market Activities

Regarding market activities on the Dar es Salaam Stock Exchange (DSE), a slowdown was observed for the second consecutive month in August. Equity turnover for the month declined by 9.9% to TZS 4.71 billion, with turnover on the CRDB counter falling by 34%. Despite this slowdown, CRDB remained the top mover for the month, accounting for 61% of the total equity turnover. On the other hand, NMB experienced an 85% increase in activities, to realize a turnover of TZS 520.93 million. Growth of activities on the NMB counter originated from an impressive half-year performance. NMB also emerged as the top gainer, with a price increase of 11.6%.

Additional notable movers included Vodacom and TBL, both of which saw prearranged block transactions at significantly discounted prices, and accounting for 8.95% and 5.31% of the total turnover for the month respectively. The monthly weighted average price of Vodacom was 43% lower than the counter’s closing price. Similar was for TBL with a 41% discount from the closing price.

The prices of Vodacom and TBL were realized in the prearranged block transactions window which is not constrained by the Price Determination Rules of the Exchange. The purpose of this window is to accommodate transactions that arise from motives other than profit-seeking, such as the transfer of shares between related parties or transactions involving strategic investors. For prearranged block transactions, the minimum value is TZS 200 million, and the involved parties mutually agree on the transaction price before execution.

Foreign participation remained limited and skewed toward divestments. Foreign investors accounted for 11.96% of total divestments and only 2.06% of total equity investments, resulting in a net foreign outflow of TZS 466.59 million ($0.18 million), a 76% decrease from July's figure.

The Tanzanian Share Index (TSI) continued its upward trajectory, climbing by 1.44%, while domestic market capitalization closed the month at TZS 11.01 trillion. The TSI has maintained its rally since 2021, mainly driven by the banking sector's significant growth over the past two years. The TSI has seen a 7% increase since the beginning of the year and a 19.5% increase compared to the end of 2020.

During August, only three counters experienced positive price movements, while seven counters saw declines. NMB's strong performance and weight on the TSI contributed to the overall index's positive performance despite several counters ending the month in the red. DSE also recorded gains following a 34% profit growth announced at the end of July. DCB Commercial Bank (DCB) experienced a 3.57% increase, marking the final gainer for the month.

The uptick on the DSE counter follows a 34% six months profit growth announced in the end of July. The Exchange reported a 17% revenue growth driven by listing fees and investment income. The 43% growth in listing fees can be attributed to a more than 10% increase in the outstanding Treasury bonds listed on the Exchange since Treasury bonds account for more than 90% of listing fees income and more than 35% of the Exchange’s total revenue. Operating expenses rose by only 5%, which led to a 581bps gain on the operating margin.

In contrast, Mkombozi Commercial Bank (MKCB) suffered the most significant price decline during August, dropping by 11.54%. MKCB resumed profitability in 2022, recording an EPS of TZS 239, a significant improvement from the negative TZS 79 in 2021. However, with a non-performing loan (NPL) above 5%, MKCB would not be eligible for dividend payments according to central bank directives.

Other counters that experienced price declines in August included Maendeleo Bank (MBP - 10%), TCCIA Investment Company Ltd (TICL - 3.23%), CRDB Bank Plc (CRDB - 3.16%), Swissport Tanzania (SWISS - 2.44%), Tanga Cement (TCCL - 2.17%), and National Investment Company Ltd (NICOL - 1.02%). CRDB's price drop was attributed to a 3% profit growth for the first six months of 2023, considered an underperformance by the market. The bank issued a green bond at the end of August, known as the Kijani Bond, to finance environmentally and socially friendly projects.

TICL and NICOL experienced price declines despite positive developments in August. TICL announced plans for a rights issue, indicating a desire to explore new opportunities. NICOL reported a 30% profit growth, with strong revenue growth driven by dividend income and interest income from diversified investments.

Bonds turnover slightly decreased by 8% in August, reaching a total of TZS 448.2 billion compared to TZS 485.8 billion in July 2023. Long-term bonds continued to dominate the market, accounting for 83% of the total bonds turnover during the month. The bonds turnover ratio for August decreased slightly to 2.3%, down from 2.5% in July 2023.

Stocks to watch

TCCIA Investment Company Ltd (DSE: TICL) revealed its intention to conduct a rights issue and has already engaged an advisor for this purpose. As of March 2023, TICL boasted a debt-to-equity ratio of 8.3% and a current ratio of 1.84x. Notably, the net profit margin for TICL in 2022 reached an impressive 60%, driven by a 47% increase in net profit and a price-to-earnings (PE) ratio of 5.77x at year-end prices.

Given its robust balance sheet and profitability, the primary rationale behind the rights issue appears to be the pursuit of forthcoming opportunities that the company aims to capitalize on. In 2023, TICL made forays into the Nairobi financial market and invested in shares of KCB Group and Equity Group. Additionally, the company issued a dividend of TZS 13 per share, resulting in a noteworthy dividend yield of 8.67%.

National Investment Company Ltd (DSE: NICOL) recently published its semiannual financial results for the half year of 2023, revealing an impressive 30% growth in profits. Normalized revenue showed a robust 26% increase, reaching TZS 8.72 billion. This figure excludes the write-backs associated with prior provisions, specifically those related to an FDR in Yetu Microfinance and a lawsuit, which together totaled TZS 1.2 billion. The growth in revenue was primarily fueled by a 14% uptick in dividend income, totaling TZS 6.03 billion, and a substantial 63% surge in interest income, reaching TZS 2.69 billion. This notable increase in interest income can be attributed to the company's strategic diversification from equities into Treasury bonds over the past three years.

However, it's worth noting that the normalized operating margin increased by 300 basis points to reach 90%, while the normalized pre-tax margin experienced a significant decrease of 1100 basis points, dropping to 75%. This decline in the pre-tax margin can be traced back to finance costs associated with a TZS 21.6 billion loan secured in December 2022. This loan was used to finance the acquisition of real estate properties, including the 50 Mirambo Building, where NICOL's offices are currently located. Notably, NICOL's net asset value per share as of the end of June 2023 stood at TZS 1,955/-, which is more than four times its current market price.

We have been closely monitoring NICO since the beginning of the year, as one of the most undervalued stocks on the DSE. Additionally, there is anticipation of a substantial dividend payout, stemming from a remarkable 54% profit growth achieved in 2022. As of June 2023, NICO reported a free cash flow per share of TZS 213/-. NICO is slated to convene its annual general meeting (AGM) on the 7th October 2023, and one of the agendas is a dividend proposal for the year 2022. The exact dividend amount remains uncertain because the fund manager does not have a defined dividend policy in place.

TOL Gases Ltd (DSE: TOL) declared a dividend of TZS 50/- per share in August. The counter trades cum-dividend until September 15, 2023, and it is scheduled to be paid out on or before October 20, 2023. Impressively, this represents a 25% annual growth in dividends, despite the company achieving a modest 5.6% profit growth in 2022.

Additionally, TOL Gases has expressed intentions to explore opportunities in the natural gas industry. Currently, the company's team is engaged in conducting feasibility studies for this venture. However, the means of financing this endeavor remain unclear, given the company's historical pattern of consistent negative end of year net cash flow. TOL has recorded negative end of year net cash flows in twelve out of the last thirteen years. Notably, the positive cash flow achieved in the exceptional year, 2022, was largely due to a substantial loan uptake, the largest since the company was listed back in 1998. This loan was specifically intended to double the production capacity of carbon dioxide.

The move into the natural gas sector comes amid TOL Gases' ongoing efforts to expand its production and distribution of medical and industrial gases. Furthermore, there exists a significant opportunity for the company in supplying carbon dioxide to regional factories, including those in Malawi, Mozambique, and Zimbabwe.

Market Outlook

Looking ahead, limited foreign investor participation is expected to continue, and global fuel price increases pose inflationary risks globally, potentially extending the tightening policy of the U.S. The direction of U.S. interest rates will be closely watched after the Federal Open Market Committee meeting on September 19-20, 2023. Rising U.S. interest rates may lead to sustained net foreign outflows from emerging and frontier markets. In that regard, the European Central Bank (ECB) just recently announced a 25bps bump in interest rates, citing prolonged elevated inflation.

An uptick in domestic inflation is also expected due to spillover effects from global and domestic fuel prices. This, coupled with above-target money supply growth, may influence the central bank to maintain a less accommodative stance, potentially impacting banks' performance.

Happy Investing

Head, Research & Financial Analytics

Alpha Capital