In August, inflation continued to decelerate, falling to an 18-month low of 6.7%, having already dropped to 7.3% in July from a peak of 8% in May. Given elevated global oil prices, second-round effects of fiscal measures and recent noise around global food prices, we think it is too early to celebrate.

By end of August, three-month T-bill yields jumped nearly touched 14% as yields continue to rise sharply. Such a rise comes amidst elevated interbank rates as well as elevated maturities in the Treasury market.

The upward trend likely to sustain

We maintain our view that yields will continue to trend upward. Investors are likely to remain wary of potential fiscal slippages, which will most likely lead to even further rises in the quantum of domestic borrowing. Higher global food and oil prices are also an upside risk to inflation.

FX pressures persist

The Kenya Shilling continued to slide and recently hit Ksh.146 to the USD. FX reserves fell USD805 million since the end of July to USD7.1bn (3.8 month of import cover); due to external debt amortization and financing of the current account deficit. The IMF expects import cover to fall to 3.3 months by the end of 2023.

We recently attended an investor roadshow organised by Equity Bank in Nairobi and Kinshasa. In contrast to Lagos, despite electricity shortages in Kinshasha, there was no sound of diesel generators, and hospitality was far better. The mining sector remains the dominant driver of the Democratic Republic of Congo’s (DRC) GDP growth with a positive trickle-down effect in hospitality (significant increase in capacity), infrastructure (pipeline of Public Private Partnership (PPP) projects), real estate (skyline dotted with cranes), and Fast Moving Consumer Goods (FMCG) (string of supermarket chains) sectors. Finally, the DRC has yet to unlock the benefits of being part of the East African Community (EAC) trading bloc.

The Equity Bank Group DRC subsidiary’s strategy is to grow the SME portfolio by banking the value chain around corporate client relationships established by Banque Commerciale du Congo (BCDC). The growth opportunity in non-funded income is significant, especially in trade finance, mobile banking, and cash management.

Our clients can request the full report (link to the blog). It includes our policy takeaways from interactions with the Governor of the Central Bank of Kenya (CBK) and Treasury Cabinet Secretary, first impressions of Kinshasha, Equity Bank Group Management discussions on the DRC opportunity, and Kenyan fund managers’ predictions for the Kenya Shilling FX, five-year bond yields, and best-performing stock in FY2023.

Africa had c448.6mtpa of installed capacity in 2022, but with only c246.8mt of demand, excess capacity was 45%, and utilisation rate was c54.4%, on our numbers. The incumbents – Dangote Cement, Holcim Group and Heidelberg accounted for 39.6% of installed capacity. Chinese firms – Huaxin and West China Cement have made investments since 2020.

We believe competition risk will intensify across several African markets as new capacity comes online, mainly from Dangote, Huaxin, and West China Cement. Our clients can request the full report detailing what the incumbents are doing and which countries Huaxin and West China Cement are setting up production.

We are concerned with management’s lack of additional disclosure on Project Indigo (1.6 million tonnes per annum clinker plant) since May 2022, despite our extensive communication on its potential earnings upside. Based on local press reports, Bamburi was set to receive receive a project license for its shale mining location (Kitui County) in April 2023. It is one of the final licenses required before plant construction. In May 2022, the operational date guidance was set to be during the second half of 2024. We decided not to include this scenario in our model until we see management updates. There have also been notable changes at the Board of Directors and C-suite levels, which could delay construction.

Costs will stifle earnings outlook recovery, highlighting the importance of Project Indigo

Without Project Indigo, we cut our earnings forecast by 8.8% on average (2023 – 25 estimate) as costs will remain high (cUSD82/tonne average). We compute energy and imported clinker accounted for 54.8% (+0.2% versus FY20210 of FY2022 production costs). In April, there was a modest reduction in Kenyan power tariffs for industrials, and we do not expect material changes to the energy and imported clinker line items (c54.5% average of total cost base over 2023 – 27estimate).

In addition, the Finance Bill 2023 (whose implementation has been frozen by the Kenyan Courts) has additional 10% duty on imported clinker (20% in total, if approved) and higher fuel price risk (logistics costs were 14.7% of the FY2022 cost base), emphasizing the need for the implementation of Project Indigo. The construction lead-time (at least 18 months), and FX risk (and leverage) as it will be 75% debt funded (cUSD240 million on our estimates), will delay any potential near-term margin accretion.