KCB, EABL Best Buy-Rated Stocks in Frontier Markets - CITI

KCB Group and EABL have been listed as the best buy-rated stocks in frontier, small emerging and Gulf Cooperation Council markets.

In a survey conducted by CITI, investors preferred KCB counter due to its undemanding valuation (0.9x 2019e PB vs a 22% 2019e ROE), and its ability to navigate any economic downturn because of its larger corporate and payroll retail customer base.

“Furthermore since we expect movement on the Banking Act (rate caps) in the second half of 2019, we find the banks valuation offers an upside from today’s levels under both the scenario of caps remaining unchanged (+30%) and being amended (+55%),” said CITI in its Frontiers Markets in 2019 research.

CITI has projected a buy rating with a take-profit order of Ksh52, or 1.3x 2019e Book and 6.1x 2019e earnings.

Despite EABL’s dismal financial performance in recent years, the stock’s slide in 2018 has exaggerated the deterioration in fundamentals.

“Today, EABL shares are at a FY19e PE of 14.2x and FY19e EV/EBITDA of 6.4x, cheaper than they have been in years. With new capacity coming online amid a stable demand backdrop, we think now is a good entry point,” said the report.

A key frontier markets stocks preference with upside was Safaricom, while with the downside were Equity Bank, Kenyan Banks and Safaricom.

The Kenyan equity market slumped lower last year, despite a strong 2017, as Safaricom came under pressure along with other benchmark heavyweights, amid low trading volumes.

One of our preferred bellwethers of frontier flows is the performance of a basket of “go to” frontier markets stocks that have historically been popular with frontier funds. These stocks have consistently outperformed the FM index for years, but suddenly ran out of steam in 2018 and started underperforming, partly blamed on outflows.

“ We see 2019 as a reasonably good backdrop and are Buyers of both KCB and EABL,” says the research.

CITI surveyed a group of top frontier investors on their outlook for the year. The 30+ respondents collectively manage nearly $20b in dedicated frontier markets funds – 60 per cent of which are global frontier funds, with the remainder representing regional strategies.

Most of the investors surveyed are bullish and expect market gains, on the heels of a tough 2018. 57 per cent experienced outflows over the past year, while about a third saw inflows and a smaller number (11%) reported neutral flows.

Still, 61 per cent are optimistic, expecting inflows, compared with just 7 per cent expecting outflows (slightly higher than last year, when not a single respondent expected outflows) and 32 per cent calling for neither.

Respondents were asked what is the “right” size of a frontier fund, given liquidity constraints. The most replies (63 per cent) went for the $500m-$1b range as the maximum healthy size for an FM fund, while for an FEM fund the majority split between “$1b-2b” (30 per cent) and “>$2b” (39 per cent). This is in contrast with 2018 when more respondents expressed comfort with a larger target fund size, despite lower trading volumes.

Surveyed investors were also bullish on relative performance, with 83 per cent expecting FM to outperform Developed Markets, although the view on performance relative to emerging markets was more equivocal, with the highest number (41 per cent) calling for in-line performance, a slightly lower smaller number (39 per cent) calling for outperformance and 21 per cent expecting FM to underperform EM.