The Covid-19 battering of Nairobi bourse-listed firm’s share prices has presented an attractive opportunity for investors with a long-term view to accumulate stocks and hope for a sustained recovery as companies start turning the corner on the pandemic.
Analysts are now projecting continued interest in most of the stocks especially in telecommunication and banking sectors with foreign investors already making a comeback.
The green shoots started showing last December as equities embarked on an upward trajectory.
The NSE-20–which tracks the 20 best performing counters– gained 6.2 percent in that month from November while all share index points also rose by 4.8 percent.
Large cap counters such as Safaricom hit a 52-week high of 34.25 on the Central Bank of Kenya announcing lapse of free M-Pesa transactions for Sh1,000 and below which had denied the telco billions of shillings.
Bamburi cement also gained 5.4 percent month-on-month to close at Sh37.85 as NCBA and DTB rose by 18.9 percent and 21.5 percent respectively in the same period.
The strong ending has spilled over to the New Year with more than half (31) of the Nairobi Securities Exchange (NSE) closing last week with price gains, signalling a renewed interest in equities after a tumultuous 2020.
Safaricom in particular touched a new-all-time high of Sh36.50, sending excitement to the market, especially with foreign investors turning net buyers.
The total value of investor wealth at the NSE is now at 11-month high with foreign investors showing increased interest in key counters.
“We anticipate the return of foreign investors to the bourse who in 2020 withdrew over Sh29 billion from the NSE on pandemic jitters,” says AIB-AXYS Africa in its outlook for the year.
A recent upgrade on the Morgan Stanley Capital International (MSCI) emerging markets index, gave Kenya increased allocation with the weight in the index rising to 9.49 percent from 8.2 percent after the exit of Kuwait.
“That increased weighting promises to result in more capital allocation to the Kenyan market by foreigners,” says NSE chief executive Geoffrey Odundo.
For banking stocks, high provisions for non-performing loans and sharp rise in requests for loan restructuring that were witnessed last year battered their prices.
However, ICEA-Lion Asset Management chief executive Einstein Kihanda says a strong recovery is expected hinged on slowed provisions and increased loan repayments.
“We see a huge upside potential for banking stocks. We expect that as the economy continues to recover in areas such as the hospitality industry, education and manufacturing, businesses and individuals start repaying loans leading to strong fundamentals for banks,” said Mr Kihanda.
Equity, KCB, NCBA, Cooperative Bank, DTB, Standard Chartered, Absa, I&M and Stanbic Bank, Absa and I&M all closed last year having shed prices in the range of 31.7 percent and 16.7 percent.
AIB-AXYS Africa reckons that the pick-up in economic activity is likely to result in a reduction in non-performing loans and increase earnings and this, therefore, makes most banking counters attractive.
Head of research at AIB-AXYS Africa Sarah Wanga says while earnings for last year are likely to be lower because of high loan loss provisions, the strong income from the core business of lending offers room for quick recovery.
“Investors have already factored in the earnings fall in the current prices so when banks release results we may not see a huge fall in results. Foreigners are making a comeback and are likely to concentrate on banks and Safaricom,” said Ms Wanga.
Loan book exposure
AIB outlook gives Co-op Bank stock the highest upside potential (34.6 percent) among banking stocks followed by Absa (34.5 percent) and DTB (29.6 percent).
The outlook says that Co-op’s declining cost of funds–it fell by 50 percent to 3.3 percent year-no-year in September–and limited loan book exposure in a single sector offers the tailwinds for a rebound in earnings.
“Diverse loan book will shield growth despite shutdown in some sectors of the economy,” says AIB which gives Co-op a target price of 16.82.
Equity and KCB, whose shares last year fell by 31.7 percent and 29.4 percent respectively have been given an upside potential of 14.4 percent and 21.2 percent in that order.
NSE chief executive Geoffrey Odundo says the macroeconomic environment looks more stable this year than in 2020, with discovery of vaccines for Covid-19 promising to boost investor sentiments.
“With several vaccines being found we are extremely positive about trading volumes and the return of foreign investors. From a valuation perspective, most prices are attractive and this promises to bring recovery,” says Mr Odundo.
ICEA Lion Asset Management head of research Judd Murigi says banks are expected to record a sharp earnings recovery this year on reduced loan losses and therefore this offers an attractive entry point for NSE investors.
“We think that the NSE all share index can make double digit returns this year because previous experiences show that every downturn is quickly followed by a strong rally in succeeding year,” adds Mr Murigi.