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During the week, T-bills were undersubscribed for the first time in five weeks, with the overall undersubscription rate coming in at 79.9%, a reversal from the oversubscription rate of 107.3% recorded the previous week. Investors’ preference for the shorter 91-day paper persisted, with the paper receiving bids worth Kshs 7.9 bn against the offered Kshs 4.0 bn, translating to an oversubscription rate of 197.8%, albeit lower than the oversubscription rate of 262.9% recorded the previous week. The subscription rate for the 182-day decreased to 57.6% from the 110.4% recorded last week, while the rate for the 364-day paper increased to 55.0% from the 41.8% recorded the previous week. The government accepted a total of Kshs 17.1 bn worth of bids out of Kshs 19.2 bn bids received, translating to an acceptance rate of 89.3%. The yields on the government papers were on a downward trajectory, with the yields on the 364-day, 182-day, and 91-day papers decreasing by 0.7 bps, 3.9 bps, and 1.5 bps to 16.86%, 16.67%, and 15.79% respectively from 16.87%, 16.71%, and 15.81% respectively recorded the previous week; In the primary bond market, the government is looking to raise Kshs 15.0 bn through the reopened infrastructure bond IFB/2023/17 with a tenor to maturity of 15.7 years. The bond will be offered at a fixed coupon rate of 14.4% and a yield of 17.7%; Also, during the week, S&P Global Ratings announced its revision of Kenya’s long-term sovereign credit rating, downgrading it to B-, and a stable outlook from a credit rating of B and a negative outlook, on the back of the government's decision to forgo proposed tax increases through the Finance Bill 2024 and rely on expenditure cuts, significantly impacting Kenya's fiscal trajectory and financing needs; Additionally, we are projecting the y/y inflation rate for August 2024 to come in at the range of 4.4% - 4.7% mainly on the back of the Central Bank Rate cut and increased electricity prices; During the week, the equities market was on an upward trajectory, with NSE 20 gaining the most by 3.4%, while NSE 25, NASI, and NSE 10 gained by 3.1%, 2.4 and 1.3% each respectively, taking the YTD performance to gains of 18.4%, 18.2%, 14.1% and 12.6% for NSE 25, NSE 10, NASI, and NSE 20 respectively. The equities market performance was driven by gains recorded by large-cap stocks such as Standard Chartered Bank, NCBA Bank, and KCB Group of 10.4%, 7.7%, and 7.0% respectively. The performance was however weighed down by losses recorded by large-cap stocks such as Cooperative Bank, EABL, and DTB-K of 6.4%, 5.1%, and 0.2% respectively; During the week, I&M Group Holdings released their H1’2024 financial results, recording a 21.1% increase in Profit After Tax (PAT) to Kshs 6.1 bn, from Kshs 5.0 bn in H1’2023. The performance was mainly driven by a 35.2% increase in Net Interest Income to Kshs 16.5 bn, from Kshs 12.2 bn in H1’2023, but was weighed down by a 10.9% decrease in Non-Interest Income to Kshs 6.2 bn from Kshs 6.9 bn recorded over a similar period in 2023, taking the Total Operating Income to Kshs 22.7 bn, from Kshs 19.1 bn in H1’2023; During the week, Standard Chartered Bank of Kenya released H1’2024 financial results, noting a 48.9% increase in Profit After Tax (PAT) to Kshs 10.3 bn, from Kshs 6.9 bn in H1’2023. The performance was mainly driven by a 24.9% increase in Total Operating Income to Kshs 26.1 bn, from Kshs 20.9 bn in H1’2023, attributable to the 36.1% increase in Net Non-Interest Income to Kshs 9.6 bn from Kshs 7.0 bn recorded in H1’2023; Also during the week, NCBA Bank released their H1’2024 Financial results, recording a 5.0% in Profit After Tax (PAT) to Kshs 9.8 bn, from Kshs 9.3 bn recorded in H1’2023. The performance was mainly driven by a 7.9% increase in Net non-Interest Income to Kshs 14.9 bn in H1’2024, from Kshs 13.8 bn recorded in H1’2023, but was weighed down by a 4.4% decrease in Net Interest Income to Kshs 16.5 bn from Kshs 17.2 bn recorded in H1’2023; In addition, during the week, KCB Group announced their H1’2024 financial results, recording an 86.4% increase in Profit After Tax (PAT) to Kshs 29.9 bn, from Kshs 16.1 bn in H1’2023. The performance was mainly driven by a 34.8% increase in net interest income to Kshs 61.3 bn in H1’2024, from Kshs 45.5 bn in H1’2023, coupled with a 20.8% increase in net non-interest income to Kshs 33.3 bn from Kshs 27.6 bn in H1’2023; During the week, HF Group released their H1’2024 financial results, recording a 46.3% increase in Profit After Tax (PAT) to Kshs 0.3 bn, from Kshs 0.2 bn recorded in H1’2023. The performance was mainly driven by a 12.5% increase in Total Operating income to Kshs 2.0 bn in H1’2024, from Kshs 1.8 bn in H1’2023 which outpaced the 8.9% increase in Total Operating expenses to Kshs 1.8 bn, from Kshs 1.6 bn in H1’2023; During the week, Liberty Kenya Holdings released their H1’2024 results, having fully implemented the new IFRS 17 reporting system. Liberty Kenya Holdings’ Profit After Tax (PAT) increased by 196.7% to Kshs 0.6 bn, from Kshs 0.2 bn recorded in H1’2023, mainly driven by an 851.9% increase in Net insurance income to Kshs 0.5 bn, from Kshs 0.1 bn in H1’2023, and further supported by a 39.2% increase in Net investment income to Kshs 1.0 bn, from Kshs 0.7 bn in H1’2023, During the week, CIC Group released their H1’2024 results. CIC’s Profit After Tax (PAT) increased marginally by 0.6% to remain relatively flat at the Kshs 0.7 bn, recorded in H1’2023. The performance was mainly driven by a 35.7% increase in Net investment income to Kshs 1.8 bn in H1’2024, from Kshs 1.3 bn in H1’2023, and further supported by a 21.4% increase in Net income from insurance service to Kshs 1.0 bn, from Kshs 0.9 bn in H1’2023. However, the performance was weighed down by the 61.5% increase in net expenses from reinsurance contracts to Kshs 1.4 bn, from Kshs 0.9 bn in H1’2024; During the week, Megna Homes, a Mombasa-based developer, launched the construction of its Kshs 4.0 bn modern gated community housing project in Kwa Sonko area, Kisauni, Mombasa County. The project, dubbed ‘Santana’ is set to sit on 12.0 acres of land and will comprise 816 modern units, including 336 three-bedroom units, 432 two-bedroom units, and 48 one-bedroom units with prices starting at Kshs 2.6 mn. Additionally, Shelter Afrique Development Bank (ShafDB), a leading Pan-African financing institution focused on housing, urban, and related infrastructure development, announced the signing of a Memorandum of Understanding (MOU) with CPF Group to partner in affordable housing projects in Kenya through the establishment of a joint Housing Solutions Fund, targeting improving both the supply and demand sides of affordable housing units; During the week, state-backed mortgage lender, Kenya Mortgage Refinance Company (KMRC) released its H1’2024 financial results, which posted an 84.4% increase in Profit after Tax (PAT) to Kshs 669.0 mn in H1’2024 from Kshs 362.8 mn in H1’2023. Additionally, the balance sheet expanded, with total assets registering a 15.0% increase to Kshs 24.9 bn in H1’2024 from Kshs 24.7 bn in H1’2023, driven by a 14.7% increase in loans advanced, which came in at Kshs 8.7 bn from Kshs 7.6 bn in H1’2023; In the retail sector, China Square, an international retail company, opened its latest store in Nyali, Mombasa County marking its 4th outlet in the country. The retail store which was officially opened to the public on 20th August, 2024 is situated at the Nyali Bazaar Mall along Links Road with an aim of providing affordable household products to residents; On the Unquoted Securities Platform, Acorn D-REIT and I-REIT traded at Kshs 25.4 and Kshs 22.2 per unit, respectively, as per the last updated data on 23rd August 2024. The performance represented a 27.0% and 11.0% gain for the D-REIT and I-REIT, respectively, from the Kshs 20.0 inception price. Additionally, ILAM Fahari I-REIT traded at Kshs 11.0 per share as of 23rd August, 2024, representing a 45.0% loss from the Kshs 20.0 inception price; Following the release of the H1’2024 results by all four authorized Real Estate Investment Trusts (REITs) in Kenya, the Cytonn Real Estate Research Team undertook an analysis of the financial performance of the REITs and identified the key factors that shaped the performance of the sector. The report will discuss the background and structure of REITs in Kenya, and assess the financial performance of the current REITs in the market during H1’2024 in terms of operational metrics, profitability metrics, leverage ratios, liquidity ratios, and valuation metrics. Investment Updates: Real Estate Updates: Hospitality Updates: Money Markets, T-Bills Primary Auction: During the week, T-bills were undersubscribed for the first time in five weeks, with the overall undersubscription rate coming in at 79.9%, a reversal from the oversubscription rate of 107.3% recorded the previous week. Investors’ preference for the shorter 91-day paper persisted, with the paper receiving bids worth Kshs 7.9 bn against the offered Kshs 4.0 bn, translating to an oversubscription rate of 197.8%, albeit lower than the oversubscription rate of 262.9% recorded the previous week. The subscription rate for the 182-day decreased to 57.6% from the 110.4% recorded last week, while the rate for the 364-day paper increased to 55.0% from the 41.8% recorded the previous week. The government accepted a total of Kshs 17.1 bn worth of bids out of Kshs 19.2 bn bids received, translating to an acceptance rate of 89.3%. The yields on the government papers were on a downward trajectory, with the yields on the 364-day, 182-day, and 91-day papers decreasing by 0.7 bps, 3.9 bps, and 1.5 bps to 16.86%, 16.67%, and 15.79% respectively from 16.87%, 16.71% and 15.81% respectively recorded the previous week. The chart below shows the yield growth rate for the 91-day paper over the period: The chart below compares the overall average T-bill subscription rates obtained in 2018, 2022, 2023, and 2024 Year-to-date (YTD): Also, In the primary bond market, the government is looking to raise Kshs 15.0 bn through the reopened infrastructure bond IFB/2023/17 with a tenor to maturity of 15.7 years. The bond will be offered at fixed coupon rates of 14.4% and a yield of 17.7%; Money Market Performance: In the money markets, 3-month bank placements ended the week at 13.5% (based on what we have been offered by various banks), and the yields on the government papers were on a downward trajectory, with the yields on the 364-day and 91-day papers decreasing by 0.7 bps and 1.5 bps to remain relatively unchanged at 16.9% and 15.8% respectively, recorded the previous week. The yields on the Cytonn Money Market Fund increased marginally by 1.0 bps to close the week at 18.3% remaining relatively unchanged from last week, while the average yields on the Top 5 Money Market Funds increased by 1.8 bps to also remain relatively unchanged at the 17.9% recorded the previous week. The table below shows the Money Market Fund Yields for Kenyan Fund Managers as published on 23rd August 2024: Cytonn Report: Money Market Fund Yield for Fund Managers as published on 23rd August 2024 Rank Fund Manager Effective Annual Rate 1 Cytonn Money Market Fund (Dial *809# or Download the Cytonn App) 18.3% 2 Lofty-Corban Money Market Fund 18.2% 3 Etica Money Market Fund 18.1% 4 Kuza Money Market fund 17.4% 5 Arvocap Money Market Fund 17.3% 6 GenAfrica Money Market Fund 16.6% 7 Nabo Africa Money Market Fund 16.4% 8 GenCap Hela Imara Money Market Fund 16.2% 9 Madison Money Market Fund 16.2% 10 Jubilee Money Market Fund 16.1% 11 Enwealth Money Market Fund 16.0% 12 KCB Money Market Fund 15.8% 13 Co-op Money Market Fund 15.6% 14 Absa Shilling Money Market Fund 15.5% 15 Sanlam Money Market Fund 15.4% 16 Mayfair Money Market Fund 15.3% 17 Mali Money Market Fund 15.2% 18 Apollo Money Market Fund 15.1% 19 AA Kenya Shillings Fund 14.9% 20 Orient Kasha Money Market Fund 14.6% 21 Dry Associates Money Market Fund 13.9% 22 ICEA Lion Money Market Fund 13.8% 23 Equity Money Market Fund 13.8% 24 CIC Money Market Fund 13.7% 25 Old Mutual Money Market Fund 13.6% 26 British-American Money Market Fund 13.3% Source: Business Daily Liquidity: During the week, liquidity in the money markets tightened, with the average interbank rate increasing by 5.1 bps, to remain relatively unchanged from the 12.9% recorded the previous week, partly attributable to tax remittances that offset government payments. The average interbank volumes traded decreased significantly by 43.7% to Kshs 14.6 bn from Kshs 25.9 bn recorded the previous week. The chart below shows the interbank rates in the market over the years: Kenya Eurobonds: During the week, the yields on Eurobonds were on a downward trajectory, with the yields on the 10-year Eurobond issued in 2018 decreasing the most by 39.9 bps to 10.4% from 10.8% recorded the previous week, attributable to improved investor sentiment following the recent quiet after the anti-finance bill protests. The table below shows the summary of the performance of the Kenyan Eurobonds as of 23rd August 2024; Cytonn Report: Kenya Eurobonds Performance 2018 2019 2021 2024 Tenor 10-year issue 30-year issue 7-year issue 12-year issue 13-year issue 7-year issue Amount Issued (USD) 1.0 bn 1.0 bn 0.9 bn 1.2 bn 1.0 bn 1.5 bn Years to Maturity 3.6 23.6 2.8 7.8 9.8 6.5 Yields at Issue 7.3% 8.3% 7.0% 7.9% 6.2% 10.4% 1-Jan-24 9.8% 10.2% 10.1% 9.9% 9.5% 1-Aug-24 10.7% 11.1% 10.6% 11.0% 10.9% 11.1% 15-Aug-24 10.8% 11.1% 10.6% 10.9% 10.8% 11.1% 16-Aug-24 10.6% 10.9% 10.3% 10.8% 10.6% 10.8% 19-Aug-24 10.6% 10.9% 10.3% 10.7% 10.6% 10.8% 20-Aug-24 10.4% 10.9% 10.1% 10.6% 10.5% 10.7% 21-Aug-24 10.4% 10.9% 10.1% 10.6% 10.5% 10.7% 22-Aug-24 10.4% 10.9% 10.2% 10.6% 10.6% 10.7% Weekly Change (0.4%) (0.2%) (0.4%) (0.3%) (0.2%) (0.3%) MTD Change (0.3%) (0.2%) (0.4%) (0.4%) (0.4%) (0.3%) YTD Change 0.6% 0.7% 0.1% 0.7% 1.1% - Source: Central Bank of Kenya (CBK) and National Treasury Kenya Shilling: During the week, the Kenya Shilling appreciated against the US Dollar by 0.1%, to remain relatively unchanged at the Kshs 129.1 recorded the previous week. On a year-to-date basis, the shilling has appreciated by 17.8% against the dollar, a contrast to the 26.8% depreciation recorded in 2023. We expect the shilling to be supported by: The shilling is however expected to remain under pressure in 2024 as a result of: Key to note, Kenya’s forex reserves increased marginally by 1.2% during the week to close the week at USD 7.4 bn from the USD 7.3 bn recorded the previous week, equivalent to 3.8 months of import cover from last week, and below the statutory requirement of maintaining at least 4.0-months of import cover. The chart below summarizes the evolution of Kenya's months of import cover over the years: Weekly Highlights We are projecting the y/y inflation rate for August 2024 to come in at the range of 4.4% - 4.7% mainly on the back of: We, however, expect that inflation will be supported by: Going forward, we expect inflationary pressures to remain anchored in the short term, remaining in the CBK’s target range of 2.5%-7.5% aided by the stability in the exchange rate. However, risks remain, particularly from rising energy costs and the potential for increased demand-driven inflation due to accommodative monetary policy. The decision to lower the CBR to 12.75% during the latest MPC meeting will likely increase money supply, in turn tightening inflation. The CBK’s ability to balance growth and inflation through close monitoring of both inflation and exchange rate stability will be key to maintaining inflation within the target range. On August 23rd 2024, S&P Global Ratings announced its revision of Kenya’s long-term sovereign credit rating, downgrading it to B-, and a stable outlook from a credit rating of B and a negative outlook, on the back of the government's decision to forgo proposed tax increases through the Finance Bill 2024 and rely on expenditure cuts, significantly impacting Kenya's fiscal trajectory and financing needs. The downgrade of Kenya's rating indicates a greatly reduced ability to implement fiscal consolidation measures causing debt to keep increasing in the medium term, with debt servicing to revenue costs still projected to exceed the IMF threshold of 30.0%. Additionally, the rating agency affirmed their credit rating of B on Kenya’s short-term sovereign credit rating. In response to recent protests, the government withdrew the planned tax increases that were part of the 2024 Finance Bill. These tax measures were originally expected to generate Kshs 346.0 bn, or 1.9% of GDP. Given the current social climate, it is now unlikely that the government can implement these revenue-raising measures. Consequently, the government issued a supplementary budget to cut spending, forecasting the fiscal deficit to expand to 4.3% of GDP, which is 1.0% points higher than the initially projected 3.3% of GDP for FY’2024/25, which will be funded through increased domestic borrowing of 2.2% of GDP, up from 1.5% of GDP and foreign financing of 2.0% of GDP, from 1.8% of GDP. This expansion in the fiscal deficit will increase Kenya's net borrowing requirement and set government interest payments on a rising trajectory relative to revenue. Despite this fiscal slippage, Kenya is still expected to maintain reasonably strong access to concessional external financing, with the IMF likely to disburse funds under Kenya's seventh review, with a delay, around September 2024 originally delayed from June 2024 due to budget amendments. The stable outlook reflects strong anticipated economic growth and sustained access to external financing, which are expected to offset the challenges posed by limited capacity to implement fiscal consolidation measures and high debt servicing costs. However, risks remain, if Kenya faces increasing external or domestic refinancing pressures, possibly due to a continued drop in foreign exchange reserves or domestic liquidity. Key to note, Kenya's fiscal outlook is closely tied to the government's appeal against a recent court ruling concerning the FY’2023/24 Finance Bill, which may impact revenue collection. On August 5, 2024, the Court of Appeal of Kenya declared certain tax measures in the bill unconstitutional, citing insufficient public consultation during the legislative process. However, on August 20, 2024, the Supreme Court of Kenya allowed the government to continue collecting revenue under the bill until the appeal is heard from September 10th - 11th, 2024. This move positions Kenya alongside emerging economies like Angola, Nigeria, and Cameroon. The downgrade comes after Fitch Ratings announced its revision of Kenya’s credit score on 2nd August 2024, downgrading it to B- from a credit rating of B while also revising the outlook to stable, from a negative outlook affirmed on 16th February 2024. Additionally, this downgrade follows Moody’s downgrading Kenya’s IDR to Caa1 from a credit rating of B3 while maintaining a negative outlook on July 8th 2024. To note, Kenya tapped into the international capital markets, having successfully issued a USD 1.5 bn Eurobond with a tenor of 6 years at a coupon rate of 9.75%. This issue follows issues by four other SSA countries earlier in the year. Ivory Coast tapped into the international capital markets on 24th January 2024, successfully issuing two bonds with respective maturities of 8.5 years and 12.5 years and coupon rates of 7.65% and 8.25% respectively, maturing on 30th January 2033 and 30th January 2037 respectively. In addition, Benin issued their debut dollar bond with a tenor of 14 years at a coupon rate of 8.375% on February 6th 2024. On June 6th 2024, Senegal followed suit by issuing a USD 750.0 mn Eurobond with a maturity of 7 years and a coupon rate of 7.75%. Also, on 23rd July 2024, Cameroon announced the issuance of a USD 550.0 mn Eurobond with a tenor of 7 years at a coupon rate of 9.5% and a yield of 10.75%. Below is a table comparing Kenya, Ivory Coast, Senegal, Cameroon Benin’s S&P Global’s credit rating and a summary of the Eurobond issues: Cytonn Report: S&P Global’s Rating's Long-Term Foreign-Currency Issuer Default Rating (IDR) S&P Global’s Rating's Long-Term Foreign-Currency Issuer Default Rating (IDR) 2024 Eurobond Issues Country IDR Credit Rating IDR Credit Outlook Rating Date Value (USD mn) Tenor (Years) Coupon Rate Yield at issuance Issuance Date Ivory Coast BB- Positive May-2024 1,100.0 8.5 7.650% 7.875% Jan-24 1,500.0 12.5 8.250% 8.50% Benin BB- Stable Apr-2024 750.0 14.0 8.375% 8.40% Feb-24 Kenya B- Stable Aug-2024 1,500.0 6.0 9.750% 10.375% Feb-24 Senegal B+ Stable Jun-2023 750.0 7.0 7.75% 7.75% Jun-24 Cameroon B- Stable Mar-24 550.0 7.0 9.5% 10.75 Jul-24 Below is a summary of the credit rating on Kenya by various rating agencies; Cytonn Report: Kenya’s Credit Ratings Rating Agency Previous Rating Previous Outlook Current Rating Current Outlook Meaning Date Released Moody's Rating B3 Negative Caa1 Negative Substantial credit risks 8th July, 2024 Fitch Ratings B Negative B- Stable Highly Speculative 2nd August 2024 S&P Global B Negative B- Stable Extremely high risk, very vulnerable to default 23rd August 2024 Source: Moody’s Ratings, Fitch Ratings, S&P Global Going forward, Kenya's government must navigate a fiscal strategy that prioritizes spending cuts over revenue generation from planned tax hikes. This approach, combined with the impact of political tensions, is expected to extend fiscal deficits, undermine debt affordability, and heighten liquidity risks. The government's ability to address significant borrowing requirements is further complicated by limited external financing options. Effective fiscal management and consistent policy direction will be essential for sustaining investor confidence and ensuring long-term economic growth. Rates in the Fixed Income market have been on an upward trend given the continued high demand for cash by the government and the occasional liquidity tightness in the money market.The government is 130.2% ahead of its prorated net domestic borrowing target of Kshs 62.8 bn, having a net borrowing position of Kshs 144.6 bn. However, we expect a downward readjustment of the yield curve in the short and medium term, with the government looking to increase its external borrowing to maintain the fiscal surplus, hence alleviating pressure in the domestic market. As such, we expect the yield curve to normalize in the medium to long-term and hence investors are expected to shift towards the long-term papers to lock in the high returns. Market Performance: During the week, the equities market was on an upward trajectory, with NSE 20 gaining the most by 3.4%, while NSE 25, NASI, and NSE 10 gained by 3.1%, 2.4 and 1.3% each respectively, taking the YTD performance to gains of 18.4%, 18.2%, 14.1% and 12.6% for NSE 25, NSE 10, NASI, and NSE 20 respectively. The equities market performance was driven by gains recorded by large-cap stocks such as Standard Chartered Bank, NCBA Bank, and KCB Group of 10.4%, 7.7%, and 7.0% respectively. The performance was however weighed down by losses recorded by large-cap stocks such as Cooperative Bank, EABL, and DTB-K of 6.4%, 5.1%, and 0.2% respectively. During the week, equities turnover increased by 52.9% to USD 9.3 mn from USD 6.1 mn recorded the previous week, taking the YTD total turnover to USD 425.8 mn. Foreign investors became net sellers for the first time in three weeks, with a net selling position of USD 0.2 mn, from a net buying position of USD 0.4 mn recorded the previous week, taking the YTD foreign net buying position to USD 4.2 mn. The market is currently trading at a price-to-earnings ratio (P/E) of 5.1x, 56.5% below the historical average of 11.8x. The dividend yield stands at 8.4%, 3.8% points above the historical average of 4.6%. Key to note, NASI’s PEG ratio currently stands at 0.6x, an indication that the market is undervalued relative to its future growth. A PEG ratio greater than 1.0x indicates the market is overvalued while a PEG ratio less than 1.0x indicates that the market is undervalued. The charts below indicate the historical P/E and dividend yields of the market; Universe of Coverage: Cytonn Report: Equities Universe of Coverage Company Price as at 16/08/2024 Price as at 23/08/2024 w/w change YTD Change Year Open 2024 Target Price* Dividend Yield Upside/ Downside** P/TBv Multiple Recommendation Jubilee Holdings 164.0 153.0 (6.7%) (17.3%) 260.7 260.7 9.3% 79.7% 0.2x Buy Equity Group*** 40.0 40.5 1.3% 18.4% 60.2 60.2 9.9% 58.5% 0.8x Buy Diamond Trust Bank*** 45.6 45.5 (0.2%) 1.7% 65.2 65.2 11.0% 54.3% 0.2x Buy KCB Group*** 29.9 32.0 7.0% 45.6% 46.7 46.7 0.0% 46.0% 0.5x Buy NCBA*** 39.0 42.0 7.7% 8.1% 55.2 55.2 11.3% 42.7% 0.8x Buy Co-op Bank*** 12.8 13.2 2.7% 15.9% 17.2 17.2 11.4% 42.2% 0.6x Buy CIC Group 2.2 2.1 (2.3%) (8.3%) 2.8 2.8 6.2% 39.5% 0.7x Buy ABSA Bank*** 14.1 14.2 1.1% 22.9% 17.3 17.3 10.9% 32.7% 1.1x Buy Britam 5.6 5.7 1.8% 11.7% 7.5 7.5 0.0% 30.7% 0.8x Buy Stanbic Holdings 116.8 123.3 5.6% 16.3% 145.3 145.3 12.5% 30.3% 0.8x Buy I&M Group*** 20.6 27.8 35.0% 59.3% 25.5 25.5 9.2% 0.9% 0.6x Lighten Target Price as per Cytonn Analyst estimates **Upside/ (Downside) is adjusted for Dividend Yield ***For Disclosure, these are stocks in which Cytonn and/or its affiliates are invested in Weekly Highlights Earnings Release Below is a summary of KCB Group’s H1’2024 performance: Balance Sheet Items H1'2023 H1'2024 y/y change Government Securities 362.4 357.1 (1.5%) Net Loans and Advances 1,032.2 1,032.6 0.0% Total Assets 1,864.6 1,976.9 6.0% Customer Deposits 1,471.2 1,490.6 1.3% Total Liabilities 1,646.6 1,728.6 5.0% Shareholders’ Funds 211.2 241.0 14.1% Key Ratios H1'2023 H1'2024 % point change Loan to Deposit ratio 70.2% 67.8% (2.4%) Government Securities to Deposits ratio 24.6% 24.0% (0.7%) Return on Average Equity 19.1% 22.7% 3.6% Return on Average Assets 2.4% 2.7% 0.2% Income Statement H1'2023 (Kshs bn) H1'2024 (Kshs bn) y/y change Net interest Income 45.5 61.3 34.8% Net non-interest income 27.6 33.3 20.8% Total Operating income 73.1 94.6 29.5% Loan loss provision (10.2) (12.2) 19.7% Total Operating expenses (50.6) (56.5) 11.7% Profit before tax 22.5 38.1 69.7% Profit after tax 16.1 29.9 86.4% Core EPS 5.0 9.3 86.4% Income Statement Ratios H1'2023 H1'2024 y/y change Yield from interest-earning assets 9.6% 11.3% 1.7% Cost of funding 3.3% 4.6% 1.3% Net Interest Spread 6.3% 6.7% 0.4% Net Interest Margin 6.6% 7.1% 0.5% Cost of Risk 13.9% 12.9% (1.1%) Net Interest Income as % of operating income 62.3% 64.8% 2.5% Non-Funded Income as a % of operating income 37.7% 35.2% (2.5%) Cost to Income Ratio 69.3% 59.7% (9.5%) Cost to Income Ratio (without LLP) 55.3% 46.8% (8.5%) Capital Adequacy Ratios H1'2023 H1'2024 % points change Core Capital/Total Liabilities 14.4% 15.8% 1.4% Minimum Statutory ratio 8.0% 8.0% 0.0% Excess 6.4% 7.8% 1.4% Core Capital/Total Risk Weighted Assets 15.0% 17.8% 2.8% Minimum Statutory ratio 10.5% 10.5% 0.0% Excess 4.5% 7.3% 2.8% Total Capital/Total Risk Weighted Assets 18.4% 20.3% 1.9% Minimum Statutory ratio 14.5% 14.5% 0.0% Excess 3.9% 5.8% 1.9% Liquidity Ratio 52.1% 47.0% (5.1%) Minimum Statutory ratio 20.0% 20.0% 0.0% Excess 32.1% 27.0% (5.1%) Key Take-Outs: For a more detailed analysis, see the KCB Group Holdings H1’2024 Earnings Note. Below is a summary of Standard Chartered Bank Ltd H1’2024 performance: Balance Sheet Items H1’2023 H1’2024 y/y change Net loans 145.4 149.3 2.7% Government Securities 70.7 71.6 1.3% Total Assets 361.7 377.3 4.3% Customer Deposits 283.7 276.4 (2.6%) Deposits per Branch 7.9 8.6 9.6% Total Liabilities 304.5 313.2 2.8% Shareholder's Funds 57.1 64.1 12.2% Balance Sheet Ratios H1’2023 H1’2024 % points change Loan to deposit ratio 51.3% 54.0% 2.7% Government securities to deposit ratio 24.9% 25.9% 1.0% Return on Average Equity 23.9% 28.4% 4.5% Return on Average Assets 3.7% 4.7% 0.9% Income Statement H1’2023 H1’2024 y/y change Net Interest Income 13.9 16.5 19.3% Net non-Interest Income 7.0 9.6 36.1% Total Operating income 20.9 26.1 24.9% Loan Loss provision 2.0 1.6 (23.3%) Total Operating expenses 11.2 11.6 3.1% Profit before tax 9.6 14.5 50.4% Profit after tax 6.9 10.3 48.9% Core EPS (Kshs) 18.3 27.2 48.9% Dividend Per Share (Kshs) - 8.0 Dividend Payout Ratio - 29.4% Dividend Yield (Annualized) - 3.8% Income Statement Ratios H1’2023 H1’2024 % points change Yield from interest-earning assets 9.1% 10.8% 1.7% Cost of funding 1.1% 1.5% 0.4% Net Interest Spread 7.9% 9.3% 1.3% Net Interest Margin 8.0% 9.5% 1.4% Cost of Risk 9.7% 6.0% (3.8%) Net Interest Income as % of operating income 66.3% 63.3% (3.0%) Non-Funded Income as a % of operating income 33.7% 36.7% 3.0% Cost to Income Ratio 53.8% 44.4% (9.4%) Cost to Income Ratio without LLP 44.1% 38.4% (5.6%) Capital Adequacy Ratios H1’2023 H1’2024 % points change Core Capital/Total Liabilities 17.0% 19.7% 2.7% Minimum Statutory ratio 8.0% 8.0% 0.0% Excess 9.0% 11.7% 2.7% Core Capital/Total Risk Weighted Assets 16.9% 18.8% 1.9% Minimum Statutory ratio 10.5% 10.5% 0.0% Excess 6.4% 8.3% 1.9% Total Capital/Total Risk Weighted Assets 17.3% 18.9% 1.6% Minimum Statutory ratio 14.5% 14.5% 0.0% Excess 2.8% 4.4% 1.6% Liquidity Ratio 62.8% 63.2% 0.3% Minimum Statutory ratio 20.0% 20.0% 0.0% Excess 42.8% 43.2% 0.3% Key Take-Outs: For a more detailed analysis, see the Standard Chartered Bank Kenya H1’2024 Earnings Note Below is a summary of NCBA Group’s H1’2024 performance: Balance Sheet H1'2023 (Kshs bn) H1'2024 (Kshs bn) y/y change Net Loans and Advances 292.4 309.7 5.9% Kenya Government Securities 202.3 182.6 (9.8%) Total Assets 660.3 689.1 4.4% Customer Deposits 516.6 528.9 2.4% Deposits Per Branch 4.8 4.6 (5.6%) Total Liabilities 572.0 587.7 2.7% Shareholders' Funds 88.3 101.4 14.8% Key Ratios H1'2023 H1'2024 % point change Loan to Deposit ratio 56.6% 58.6% 2.0% Government Securities to Deposits ratio 39.2% 34.5% (4.6%) Return on Average Equity 18.2% 23.1% 4.9% Return on Average Assets 2.4% 3.2% 0.8% Income Statement H1'2023 (Kshs bn) H1'2024 (Kshs bn) y/y change Net interest Income 8.4 8.3 (1.2%) Net non-interest income 7.2 7.7 7.4% Total Operating income 15.5 16.0 2.8% Loan loss provision 2.0 1.4 (30.9%) Total Operating expenses 9.2 9.4 3.1% Profit before tax 6.4 6.5 2.2% Profit after tax 5.1 5.3 4.7% Core EPS 3.1 3.2 4.7% Dividend Per Share 1.75 2.25 28.6% Dividend Payout ratio 30.8% 37.8% 7.0% Dividend Yield (Annualized) 9.2% 10.8% 1.6% Income Statement Ratios H1'2023 H1'2024 y/y change Yield from interest-earning assets 10.5% 12.5% 2.0% Cost of funding 4.7% 7.1% 2.3% Net Interest Margin 6.0% 5.8% (0.2%) Net Interest Income as % of operating income 55.5% 52.5% (3.0%) Non-Funded Income as a % of operating income 44.5% 47.5% 3.0% Cost to Income Ratio 60.2% 61.2% 1.0% Cost to Income without LLP 46.0% 52.6% 6.6% Capital Adequacy Ratios H1'2023 H1'2024 % points change Core Capital/Total Liabilities 16.7% 18.8% 2.1% Minimum Statutory ratio 8.0% 8.0% Excess 8.7% 10.8% 2.1% Core Capital/Total Risk Weighted Assets 17.9% 19.9% 2.0% Minimum Statutory ratio 10.5% 10.5% Excess 7.4% 9.4% 2.0% Total Capital/Total Risk Weighted Assets 18.0% 19.9% 2.0% Minimum Statutory ratio 14.5% 14.5% Excess 3.5% 5.4% 2.0% Liquidity Ratio 54.7% 53.6% (1.1%) Minimum Statutory ratio 20.0% 20.0% Excess 33.1% 31.6% (1.5%) Key Take-Outs: For a more detailed analysis, see the NCBA Group H1’2024 Earnings Note Below is a summary of I&M Group H1’2024 performance: Balance Sheet Items H1’2023 H1’2024 y/y change Government Securities 110.6 90.1 (18.6%) Net Loans and Advances 269.7 284.2 5.3% Total Assets 503.5 564.4 12.1% Customer Deposits 356.8 419.4 17.5% Total Liabilities 419.4 471.6 12.5% Shareholders’ Funds 78.2 86.4 10.5% Balance Sheet Ratios H1’2023 H1’2024 % points change Loan to Deposit Ratio 75.6% 67.8% (7.8%) Government Securities to Deposit Ratio 31.0% 21.5% (9.5%) Return on average equity 15.0% 16.3% 1.3% Return on average assets 2.5% 2.7% 0.2% Income Statement H1’2023 H1’2024 y/y change Net Interest Income 12.2 16.5 35.2% Net non-Interest Income 6.9 6.2 (10.9%) Total Operating income 19.1 22.7 18.5% Loan Loss provision (3.2) (3.5) 8.2% Total Operating expenses (12.5) (14.3) 13.9% Profit before tax 7.0 8.7 24.0% Profit after tax 5.0 6.1 21.1% Core EPS 3.0 3.7 21.1% Income Statement Ratios H1’2023 H1’2024 % points change Yield from interest-earning assets 10.4% 14.3% 3.9% Cost of funding 4.3% 6.3% 2.0% Net Interest Margin 6.2% 7.8% 1.6% Net Interest Income as % of operating income 63.9% 72.8% 9.0% Non-Funded Income as a % of operating income 36.1% 27.2% (9.0%) Cost to Income Ratio 65.6% 63.0% (2.6%) CIR without LLP 48.8% 47.7% (1.1%) Cost to Assets 1.9% 1.9% 0.1% Capital Adequacy Ratios H1’2023 H1’2024 % points change Core Capital/Total Liabilities 18.8% 17.7% (1.1%) Minimum Statutory ratio 8.0% 8.0% 0.0% Excess 10.8% 9.7% (1.1%) Core Capital/Total Risk Weighted Assets 14.0% 14.8% 0.8% Minimum Statutory ratio 10.5% 10.5% 0.0% Excess 3.5% 4.3% 0.8% Total Capital/Total Risk Weighted Assets 18.8% 18.1% (0.7%) Minimum Statutory ratio 14.5% 14.5% 0.0% Excess 4.3% 3.6% (0.7%) Liquidity Ratio 46.7% 50.8% 4.1% Minimum Statutory ratio 20.0% 20.0% 0.0% Excess 26.7% 30.8% 4.1% Key Take-Outs: For a more detailed analysis, see the I&M Group Holdings H1’2024 Earnings Note. Below is a summary of HF Group H1’2024 performance: Balance Sheet Items (Kshs bn) H1’2023 H1’2024 y/y change Net loans 38.1 37.9 (0.4%) Government Securities 9.8 12.2 24.4% Total Assets 60.7 63.7 5.0% Customer Deposits 40.7 45.0 10.7% Deposits Per Branch 1.6 1.6 0.0% Total Liabilities 51.9 54.4 5.0% Shareholder's Funds 8.9 9.3 5.2% Balance Sheet Ratios H1’2023 H1’2024 % y/y change Loan to deposit ratio 93.5% 84.2% (9.3%) Government Securities to deposit ratio 24.1% 27.1% 3.0% Return on Average Equity 4.7% 5.2% 0.5% Return on Average Assets 0.7% 0.8% 0.1% Income Statement (Kshs bn) H1’2023 H1’2024 y/y change Net Interest Income 1.27 1.33 4.7% Net non-Interest Income 0.5 0.7 30.7% Total Operating income 1.8 2.0 12.5% Loan Loss provision (0.2) (0.2) 5.3% Total Operating expenses (1.6) (1.8) 8.9% Profit before tax 0.2 0.3 41.7% Profit after tax 0.2 0.3 46.3% Core EPS 1.0 1.4 45.3% Income Statement Ratios H1’2023 H1’2024 y/y change Yield from interest-earning assets 10.0% 6.1% (3.8%) Cost of funding 4.9% 3.6% (1.3%) Net Interest Spread 5.1% 2.6% (2.5%) Net Interest Margin 5.2% 2.7% (2.5%) Cost of Risk 8.7% 8.2% (0.6%) Net Interest Income as % of operating income 69.9% 65.0% (4.9%) Non-Funded Income as a % of operating income 30.1% 35.0% 4.9% Cost to Income Ratio (with LLP) 89.0% 86.2% (2.8%) Cost to Income Ratio (without LLP) 80.3% 78.0% (2.3%) Capital Adequacy Ratios H1’2023 H1’2024 % points change Core Capital/Total Liabilities 6.7% 4.5% (2.2%) Minimum Statutory ratio 8.0% 8.0% 0.0% Excess (1.3%) (3.5%) (2.2%) Core Capital/Total Risk Weighted Assets 7.2% 5.2% (2.0%) Minimum Statutory ratio 10.5% 10.5% 0.0% Excess (3.3%) (5.3%) (2.0%) Total Capital/Total Risk Weighted Assets 11.0% 8.8% (2.2%) Minimum Statutory ratio 14.5% 14.5% 0.0% Excess (3.5%) (5.7%) (2.2%) Liquidity Ratio 24.7% 24.9% 0.2% Minimum Statutory ratio 20.0% 20.0% 0.0% Excess 4.7% 4.9% 0.2% Key Take-Outs: For a more detailed analysis, see the HF Group H1’2024 Earnings Note Asset Quality: The table below shows the asset quality of listed banks that have released their H1’2024 results using several metrics: Cytonn Report: Listed Banks Asset Quality H1'2024 NPL Ratio* H1'2023 NPL Ratio** % point change in NPL Ratio H1'2024 NPL Coverage* H1'2023 NPL Coverage** % point change in NPL Coverage Equity Group 13.9% 11.2% 2.7% 58.8% 54.5% 4.3% Co-operative Bank of Kenya 16.7% 14.6% 2.1% 59.5% 60.7% (1.2%) KCB Group 18.1% 16.2% 1.9% 18.1% 16.2% 1.9% HF Group 24.2% 23.1% 1.1% 75.6% 72.0% 3.6% Stanbic Bank 9.5% 9.2% 0.3% 75.0% 57.4% 17.6% NCBA Bank 12.2% 13.4% (1.2%) 59.8% 57.8% 2.0% I&M Group 11.4% 12.7% (1.3%) 57.9% 49.8% 8.1% Standard Chartered 9.9% 14.4% (4.5%) 83.7% 86.8% (3.1%) Mkt Weighted Average* 13.7% 12.7% 1.0% 56.5% 60.1% (3.6%) *Market cap weighted as at 16/08/2024 **Market cap weighted as at 21/09/2023 Key take-outs from the table include; Summary Performance The table below shows the performance of listed banks that have released their H1’2024 results using several metrics: Cytonn Report: Listed Banks Performance in H1’2024 Bank Core EPS Growth Interest Income Growth Interest Expense Growth Net Interest Income Growth Net Interest Margin Non-Funded Income Growth NFI to Total Operating Income Growth in Total Fees & Commissions Deposit Growth Growth in Government Securities Loan to Deposit Ratio Loan Growth Return on Average Equity KCB Group 86.4% 38.9% 46.5% 34.8% 7.1% 20.8% 35.2% 1.5% 1.3% (1.5%) 67.8% 0.0% 22.7% Standard Chartered 48.9% 25.4% 78.0% 19.3% 8.6% 36.1% 36.7% (17.7%) 66.5% (19.9%) 54.0% 2.7% 25.5% HF Group 45.3% 23.8% 44.4% 4.7% 5.3% 30.7% 35.0% 17.7% 10.7% 24.4% 84.2% (0.4%) 5.2% I&M Group 17.3% 46.1% 60.8% 35.2% 7.8% (10.9%) 27.2% 3.6% 17.5% (18.6%) 67.8% 5.3% 16.3% Equity Group 12.5% 21.5% 30.1% 17.2% 7.7% 17.2% 44.0% 15.5% 10.6% (5.1%) 60.9% (3.2%) 23.7% Co-operative Bank of Kenya 7.0% 24.4% 52.6% 10.7% 7.8% 11.2% 39.2% 4.4% 9.4% 7.3% 74.0% 2.8% 20.5% NCBA Bank 5.0% 25.4% 64.5% (4.4%) (0.2%) 7.9% 47.5% 6.4% 2.4% (9.8%) 58.6% 5.9% 23.1% Stanbic Holdings 2.3% 49.1% 154.3% 4.2% 7.9% (15.1%) 37.6% (6.3%) 30.3% (21.0%) 67.0% (2.4%) 18.5% H1'24 Mkt Weighted Average* 29.1% 30.4% 59.8% 17.6% 6.8% 13.7% 39.3% 3.1% 17.8% (8.0%) 63.6% 0.8% 22.2% H1'23 Mkt Weighted Average** 14.3% 28.2% 44.8% 21.0% 7.3% 27.9% 38.9% 26.6% 21.3% 5.3% 72.3% 20.5% 22.9% *Market cap weighted as at 16/08/2024 **Market cap weighted as at 21/09/2023 During the week, CIC Group released their H1’2024 results. CIC’s Profit After Tax (PAT) increased marginally by 0.6% to remain relatively flat at the Kshs 0.7 bn, recorded in H1’2023. The performance was mainly driven by a 35.7% increase in Net investment income to Kshs 1.8 bn in H1’2024, from Kshs 1.3 bn in H1’2023, and further supported by a 21.4% increase in Net income from insurance service to Kshs 1.0 bn, from Kshs 0.9 bn in H1’2023. However, the performance was weighed down by the 61.5% increase in net expenses from reinsurance contracts to Kshs 1.4 bn, from Kshs 0.9 bn in H1’2024 CIC Group H1’2024 Results: Cytonn Report: CIC Group Income Statement Item (All figures in Bns) H1’2023 H1’2024 y/y change Insurance Revenue 12.9 12.8 (0.4%) Insurance service expenses (11.1) (10.4) (6.9%) Net expenses from reinsurance contracts held (0.9) (1.4) 61.5% Net Insurance income 0.9 1.0 21.4% Net Investment Income 1.3 1.8 35.7% Net Financial result 0.7 0.7 (1.3%) Other Operating Expenses (0.7) (0.7) 6.8% Operating Profit 1.4 1.6 11.3% Profit Before Tax 1.2 1.3 7.2% Profit After Tax 0.7 0.7 0.6% Core EPS in Kshs 0.3 0.3 0.6% Cytonn Report: CIC Group Balance Sheet Item (All figures in Bns) H1'2023 H1'2024 y/y change Investment assets 3.8 7.8 108.4% Property & Equipments and Intangibles 1.4 1.5 8.2% Total Assets 50.6 57.8 14.2% Insurance Contract Liabilities 24.6 39.6 60.8% Provisions & other payables 3.4 3.8 12.7% Total liabilities 41.8 48.6 16.3% Shareholder funds 8.7 9.3 6.4% Minority Interest 0.0 (0.1) (740.6%) Total Equity 8.8 9.1 4.5% Key take outs from the results: Other highlights from the release include: Key to note, this was the third time the company was releasing their results under the new IFRS 17 reporting system. The new standard demands that insurers measure insurance contracts using updated estimates and assumptions that reflect the timing of cashflows and any uncertainty relating to insurance contracts. Going forward, the Group earnings will be boosted by product innovation tailored to meet changing customer demands, especially within the individual life, medical, and asset management sectors. This diversification in products is anticipated to fuel further revenue growth, particularly in regional markets. Moreover, continued investment in digital solutions aimed at enhancing operational efficiency and customer experience, along with capitalizing on its established regional presence where subsidiaries have exhibited strong growth, will remain key drivers of the Group’s growth in the upcoming periods. During the week, Liberty Kenya Holdings released their H1’2024 results, having fully implemented the new IFRS 17 reporting system. Liberty Kenya Holdings’ Profit After Tax (PAT) increased by 196.7% to Kshs 0.6 bn, from Kshs 0.2 bn recorded in H1’2023, mainly driven by an 851.9% increase in Net insurance income to Kshs 0.5 bn, from Kshs 0.1 bn in H1’2023, and further supported by a 39.2% increase in Net investment income to Kshs 1.0 bn, from Kshs 0.7 bn in H1’2023. Liberty Kenya Holdings Plc’s H1’2024 Results Cytonn Report: Liberty Kenya Holdings Income Statement Item (All figures in Bns) H1’2023 H1’2024 y/y change Net Insurance Service Revenue 0.1 0.5 851.9% Net Investment Revenue 0.7 1.0 39.2% Total Insurance and Investment Result 0.8 1.5 94.3% Other Operating Result (0.4) (0.6) 35.1% Profit Before Tax 0.4 1.0 160.2% Profit after tax 0.2 0.6 196.7% Core EPS 0.4 1.2 196.7% Cytonn Report: Liberty Kenya Holdings Balance Sheet Item (All figures in Bns) H1’2023 H1’2024 y/y change Financial Investments 21.3 26.2 23.3% Reinsurance contract assets 5.4 5.8 6.9% Total Assets 43.0 46.0 6.9% Insurance contract Liabilities 23.9 22.0 (7.8%) Total Liabilities 33.9 36.2 6.6% Shareholder funds 8.7 9.5 9.1% Minority Interest 0.4 0.3 16.5% Total Equity 9.1 9.8 8.1% Key take outs from the results: Going forward, the factors that would drive the company’s growth would be: Valuation Summary: We are “Neutral” on the Equities markets in the short term due to the current tough operating environment and huge foreign investor outflows, and, “Bullish” in the long term due to current cheap valuations and expected global and local economic recovery. With the market currently being undervalued for its future growth (PEG Ratio at 0.8x), we believe that investors should reposition towards value stocks with strong earnings growth and that are trading at discounts to their intrinsic value. We expect the current high foreign investors’ sell-offs to continue weighing down the equities outlook in the short term During the week, Megna Homes, a Mombasa-based developer, launched the construction of its Kshs 4.0 bn modern gated community housing project in Kwa Sonko area, Kisauni, Mombasa County. The project, dubbed ‘Santana’ is set to sit on 12.0 acres of land and will comprise 816 modern units, including 336 three-bedroom units, 432 two-bedroom units, and 48 one-bedroom units. The Santana housing project is expected to cater to wide housing needs and preferences, with prices starting from Kshs 2.6 mn. Additionally, the project will feature modern amenities such as an Olympic-sized swimming pool, multi-purpose community center, kids’ playground, football pitch, jogging tracks, green spaces, parking spaces and a police post. To facilitate an uptake of the units, Megna Homes has offered flexible plans, including quarterly and monthly options, with an additional ‘Lipa Mdogo Mdogo scheme” that allows clients to pay small incremental payments towards full ownership. Furthermore, the developer has partnered with leading financial institutions including KCB, ABSA, and Gulf Bank who will offer affordable mortgage loans to prospective homeowners making the owning the units more accessible and achievable. We expect this project by Megna Homes to position Kisauni as a more desirable residential area, potentially driving up property values, stimulating infrastructure development, and drive up demand for commercial and retail spaces in the surrounding area. The project is set to contribute positively to Kisauni by improving residents’ standards of living, community living and enhancing security of residents in the area through a police station, offering more than 2,000 youth job opportunities thus reducing unemployment rates, as well as opening up the area for more investment opportunities. Shelter Afrique Development Bank (ShafDB), a leading Pan-African financing institution focused on housing, urban, and related infrastructure development, announced the signing of a Memorandum of Understanding (MOU) with CPF Group to partner in affordable housing projects in Kenya. According to Shelter Afrique, this agreement will assist in boosting its primary goal of delivering decent and affordable housing units to Kenyan citizens through co-financing projects and also leveraging public-private partnerships. One of the key components of this partnership is the establishment of a joint Housing Solutions Fund for Kenyans, targeting improving both the supply and demand sides of affordable housing units. The fund will be jointly designed and managed by both firms providing the required strategy to raise capital and technical support to facilitate successful implementation. We expect this partnership between ShafDB and CPF group to positively impact on affordable housing landscape in Kenya. By combining their resources and expertise, they can potentially reduce the housing deficit currently estimated to be standing at 80.0% annually with only 50,000 new houses being built each year, while the demand stands at approximately 250,000 units, leaving a shortfall of about 200,000 housing units annually. Additionally, through the construction projects, the firms will positively improve the social and economic positions of many Kenyan citizens. During the week, state-backed mortgage lender, Kenya Mortgage Refinance Company (KMRC) released its H1’2024 financial results, which posted an 84.4% increase in Profit after Tax (PAT) to Kshs 669.0 mn in H1’2024 from Kshs 362.8 mn in H1’2023. Additionally, the balance sheet expanded, with total assets registering a 15.0% increase to Kshs 24.9 bn in H1’2024 from Kshs 24.7 bn in H1’2023, driven by a 14.7% increase in loans advanced, which came in at Kshs 8.7 bn from Kshs 7.6 bn in H1’2023. Below is a breakdown of KMRC’s financial performance in H1’2024; Cytonn Report: Summary of KMRC Statement of Comprehensive Income H1'2023 H1'2024 y/y Change REVENUE Interest Income 1,107,761,000 1,477,928,000 33.4% Interest expense (497,504,000) (521,749,000) 4.9% Net interest income 610,257,000 956,179,000 56.7% EXPENSES Operating and administration expenses (114,297,000) (138,938,000) 21.6% Depreciation and amortisation expenses (10,662,000) (16,655,000) 56.2% Total Expenses (124,959,000) (155,593,000) 24.5% Net profit before income tax 485,298,000 800,586,000 65.0% Income tax expense (122,553,000) (131,575,000) 7.4% PROFIT AFTER TAX 362,745,000 669,011,000 84.4% Cytonn Report: Summary of KMRC Statement of Financial Position H1'2023 H1'2024 y/y Change Assets Loan and Advances 7,643,120,000 8,763,118,000 14.7% Cash and Cash equivalents 11,623,967,000 14,365,558,000 23.6% Other Assets 5,731,522,000 5,625,526,000 (1.8%) Total Assets 24,998,609,000 28,754,202,000 15.0% Liabilities Borrowings 21,442,164,000 22,941,904,000 7.0% Debt securities in issue - 1,185,356,000 - Lease Liabilities 33,053,000 24,204,000 (26.8%) Other Liabilities 358,634,000 414,225,000 15.5% Total Liabilities 21,833,851,000 24,565,689,000 12.5% Capital Resources Share Capital 1,808,375,000 1,808,375,000 0.0% Revenue reserves 1,270,736,000 2,293,228,000 80.5% Other Revenues 10,517,000 - - Statutory Reserve 75,130,000 86,911,000 15.7% Total Capital 3,164,758,000 4,188,514,000 32.3% Total Liabilities and Equity 24,998,609,000 28,754,202,000 15.0% Income Statement: Balance Sheet: We anticipate KMRC to continue disbursing more mortgages in line with the government's goal of delivering approximately 200,000 mortgages through the company to boost homeownership in the country. Additionally, the company has demonstrated its ability to manage resources efficiently, as reflected in its financial statements, which builds confidence in its capacity to handle increased funding for stakeholders. We expect, the support to KMRC to continue growing as the company seeks partnerships with new primary mortgage lenders (PMLS) and as the company continues to initiate innovative financial products to further stimulate the mortgage market in Kenya. During the week, China Square, an international retail company, opened its latest store in Nyali, Mombasa County marking its 4th outlet in the country. The retail store which was officially opened to the public on 20th August, 2024 is situated at the Nyali Bazaar Mall along Links Road. The company aims to continue providing affordable housing products to the residents around Mombasa County with items ranging from appliances, furniture, stationary, and home deco among many other items. This launch marks a significant expansion for the retail store in the country in an attempt to capture the local retail market through affordable products. We expect the move by China square will offer employment opportunities, both directly within the store and indirectly through increased business for local suppliers or services. Additionally, the entry of a large retailer like China Square may drive up demand for retail spaces in the area as smaller businesses seek to establish nearby to tap into the increased foot traffic from the outlet. The chart below shows the main local and international retail supermarket chains. Cytonn Report: Main Local and International Retail Supermarket Chains # Name of retailer Category Branches as at FY’2018 Branches as at FY’2019 Branches as at FY’2020 Branches as at FY’2021 Branches as at FY’2022 Branches as at FY’2023 Branches opened in FY’2024 Closed Branches Current Branches 1 Naivas Hybrid* 46 61 69 79 91 100 5 105 2 Quick Mart Hybrid** 10 29 37 48 55 59 1 60 3 Chandarana Local 14 19 20 23 26 26 26 4 Carrefour International 6 7 9 16 19 22 1 23 5 Cleanshelf Local 9 10 11 12 12 13 13 6 Jaza Stores Local 4 2 6 7 Tuskys Local 53 64 64 6 6 5 59 5 8 China Square International 2 2 4 9 Uchumi Local 37 37 37 2 2 2 35 2 10 Panda Mart International 1 1 11 Game Stores International 2 2 3 3 3 12 Choppies International 13 15 15 15 13 Shoprite International 2 4 4 4 14 Nakumatt Local 65 65 65 65 Total 257 313 334 189 211 233 12 181 245 *51% owned by IBL Group (Mauritius), Proparco (France), and DEG (Germany), while 49% owned by Gakiwawa Family (Kenya) **More than 50% owned by Adenia Partners (Mauritius), while Less than 50% owned by Kinuthia Family (Kenya) Source: Cytonn Research On the Unquoted Securities Platform, Acorn D-REIT and I-REIT traded at Kshs 25.4 and Kshs 22.2 per unit, respectively, as per the last updated data on 23rd August 2024. The performance represented a 27.0% and 11.0% gain for the D-REIT and I-REIT, respectively, from the Kshs 20.0 inception price. The volumes traded for the D-REIT and I-REIT came in at Kshs 12.3 mn and Kshs 31.6 mn shares, respectively, with a turnover of Kshs 311.5 mn and Kshs 702.7 mn, respectively, since inception in February 2021. Additionally, ILAM Fahari I-REIT traded at Kshs 11.0 per share as of 23rd August, 2024, representing a 45.0% loss from the Kshs 20.0 inception price. The volume traded to date came in at 138,600 for the I-REIT, with a turnover of Kshs 1.5 mn since inception in November 2015. REITs offer various benefits, such as tax exemptions, diversified portfolios, and stable long-term profits. However, the ongoing decline in the performance of Kenyan REITs and the restructuring of their business portfolios are hindering significant previous investments. Additional general challenges include: i) insufficient understanding of the investment instrument among investors, ii) lengthy approval processes for REIT creation, iii) high minimum capital requirements of Kshs 100.0 mn for trustees, and iv) minimum investment amounts set at Kshs 5.0 mn for the Investment REITs, all of which continue to limit the performance of the Kenyan REITs market. We expect the performance of Kenya’s real estate sector to be sustained by: i) increased investment from local and international investors, particularly in the retail, hospitality and residential sectors ii) Favorable demographics in the country, leading to higher demand for housing and Real Estate, and iii) ongoing residential developments under the Affordable Housing Agenda, aiming to reduce the housing deficit in the country iv) increased recognition of Nairobi as a shopping hub bolstering the retail sector, v) increased infrastructural development in the country opening up satellite towns for more investment opportunities, vi) a growing middle-class; creating demand for retail commodities, and vii) growth and expansion efforts by both local and international retailers. However, challenges such as rising construction costs, an oversupply in select Real Estate classes, strain on infrastructure development, and high capital demands in REITs sector will continue to impede the real estate sector’s optimal performance by restricting developments and investments. Following the release of the H1’2024 results by all four authorized Real Estate Investment Trusts (REITs) in Kenya, the Cytonn Real Estate Research Team undertook an analysis of the financial performance of the REITs and identified the key factors that shaped the performance of the sector. For the earnings notes of the various REITs, click the links below: The in the report we will assess the financial performance of the current REITs in the market during H1’2024 in terms of operational metrics, profitability metrics, leverage ratios, liquidity ratios, and valuation metrics. In addition, we highlight the outlook regarding our expectations for the REITs sector going forward. This we will cover as follows; Section I: Overview of the REITs Sector in Kenya In H1’2024, Kenya’s Real Estate sector recorded notable growth in terms of activity compared to a similar period in 2023, attributable to continued investments flowing into the sector. Kenya's Real Estate sector continues to play a vital role in the nation's GDP, growing at a Compound Annual Growth Rate (CAGR) of 5.5% over the past five years. In Q1’2024, the sector expanded by 6.6 %, reaching Kshs 329.2 bn, up from Kshs 306.9 bn in the same period of 2023. This growth underscores the sector's increasing significance, with its contribution to the national GDP rising to 10.2% in Q1’2024 from 10.1% in the same period in 2023. Several factors have driven this growth, including: i) the Kenyan government is actively working to increase affordable housing availability, ii) infrastructure development continues to support real estate growth by opening new areas for investment, iii) the Kenya Mortgage Refinance Company (KMRC) is making home loans more accessible, iv) the retail sector is expanding, driven by both local and international retailers Kenya's status as a regional business hub is boosting demand for commercial and residential real estate, v) high urbanization and population growth rates are sustaining housing demand vi) investor confidence in the hospitality sector is growing, with a positive outlook for hotel development, and, vii) the alternatives market, particularly in specialized real estate, is showing potential for growth in 2024. Despite the aforementioned cushioning factors, several challenges hinder the optimal performance of the Real Estate sector. These challenges include Construction costs increased by 17.6% in H1’2024, primarily due to higher prices for key materials, which could hinder sector development. Oversupply of physical space exists in various sectors, leading to prolonged vacancy rates. The REITs market in Kenya faces challenges like large capital requirements, prolonged approval processes, and limited investor knowledge. Rising interest rates have made borrowing more expensive, reducing demand for mortgages and developer financing. Lenders are tightening their requirements, leading to constrained financing for developers and an increase in Non-Performing Loans (NPLs). Underdeveloped capital markets limit funding for real estate projects, with banks providing nearly 95.0% of funding for developers in Kenya. To address the funding gap, players in the Real Estate sector have increasingly turned to alternative financing methods like Real Estate Investment Trusts (REITs). In 2013, the Capital Markets Authority (CMA) introduced a detailed framework and regulations for REITs, enabling developers to secure capital through this investment avenue. Kenya's Real Estate sector has been expanding due to ongoing construction activities driven by strong demand for real estate developments. The residential market is significantly under-supplied, with an 80.0% housing deficit; only 50,000 units are delivered annually against an estimated need for 200,000 units per year. Additionally, the formal retail market in Kenya is still in its nascent stages, with a penetration rate of approximately 30.0%, as reported by the Nielsen Report 2018. Despite the high demand, developers in Kenya encounter limited financing options, with local banks providing nearly 95.0% of construction financing, in stark contrast to the 40.0% typically seen in developed countries. The graph below illustrates the comparison of construction financing in Kenya versus developed economies; Source: World Bank, Capital Markets Authority (CMA) To bridge the funding gap, developers are increasingly turning to alternative financing methods. In 2013, the Capital Markets Authority (CMA) introduced a regulatory framework for Real Estate Investment Trusts (REITs) in Kenya. REITs are collective investment vehicles that pool funds from investors, who then acquire rights or interests in a trust divided into units. Investors benefit from profits or income generated by the real estate assets held within the trust. To ensure transparency, accountability, and the protection of investors' interests, four essential entities play key roles in the REIT structure in Kenya: The relationship between key parties in a typical REIT structure is depicted in the figure below; Source: Capital Markets Authority (CMA) Since its introduction in 2013, the REIT market in Kenya has faced several hurdles that have hindered its growth. Key challenges include the hefty capital requirement of Kshs 100.0 mn for trustees, limiting this role largely to banks, and a protracted approval process for setting up REITs. Additionally, the high minimum investment threshold of Kshs 5.0 mn discourages potential investors, while a lack of sufficient investor education and awareness further impedes market expansion. As a result, the REIT market capitalization in Kenya remains significantly lower compared to other regions Source: European Public Real Estate Association (EPRA), World Bank Kenya's REIT market faces additional challenges due to its relatively underdeveloped capital markets, especially when compared to countries like South Africa. Currently, there is only one listed REIT in Kenya, which is not actively trading. This reflects a sector that has largely remained stagnant since the introduction of REIT regulations in 2013. Consequently, most property developers in Kenya continue to rely on traditional funding sources, such as banks, unlike in more developed markets. Since the establishment of REIT regulations, four REITs have been approved in Kenya, all structured as closed-ended funds with a fixed number of shares. However, none of these REITs are actively trading on the Main Investment Market Segment of the Nairobi Securities Exchange (NSE). Following the recent delisting of ILAM Fahari I-REIT, LAPTrust Imara I-REIT is the only listed REIT in the country, quoted on the restricted market sub-segment of the NSE's Main Investment Market. It is important to note that Imara did not raise funds upon listing. The ILAM Fahari I-REIT, Acorn I-REIT and D-REIT are not listed but trade on the Unquoted Securities Platform (USP), an over-the-counter market segment of the NSE. The table below outlines all REITs authorized by the Capital Markets Authority (CMA) in Kenya Cytonn Report: Authorized REITs in Kenya # Issuer Name Type of REIT Listing Date Market Segment Status 1 ICEA Lion Asset Management (ILAM) Fahari I-REIT July 2024 Unquoted Securities Platform (USP) Trading 2 Acorn Holdings Limited Acorn Student Accommodation (ASA) – Acorn ASA I-REIT February 2021 Unquoted Securities Platform (USP) Trading 3 Acorn Holdings Limited Acorn Student Accommodation (ASA) – Acorn ASA D-REIT February 2021 Unquoted Securities Platform (USP) Trading 4 Local Authorities Pension Trust (LAPTrust) Imara I-REIT March 2023 Restricted Market Sub-Segment of the Main Invesment Market Restricted Source: Nairobi Securities Exchange, CMA Section II: Themes that Shaped the REIT Sector in H1’2024 In this section, we examine the key themes that have significantly shaped the REIT sector up to H1 2024. We explore how evolving regulations, strategic acquisitions, and capital-raising initiatives have influenced the REIT industry's trajectory. Additionally, we provide insights into the broader factors that have impacted the sector's performance and overall direction during this period. REITs are formally established in accordance with regulations set forth for Real Estate Investment Trusts (REITs) and granted approval by the Capital Markets Authority (CMA) under the Capital Markets Real Estate Investment Trusts Collective Investment Schemes Regulations of 2013. Instead of taking the form of conventional companies, they are structured as trusts. The management of investment properties falls under the purview of a corporate REIT manager, licensed by the CMA. Units of listed REITs are traded on the Nairobi Securities Exchange (NSE), akin to shares of any other company listed on both the Main Market Segment and the Unquoted Security Platform (USP), providing investors with a liquid stake in Real Estate. Both individual and corporate investors have the opportunity to partake in a public offering on the NSE, as outlined in the Regulations of 2013. Furthermore, the regulations stipulate that Kenyan REITs are mandated to distribute a minimum of 80.0% of distributable earnings to their unitholders. REITs automatically qualify for several tax exemptions such as the Income Tax Act (ITA), Value Added Tax (VAT), and Capital Gains Tax (CGT) under the authorization of the Kenya Revenue Authority (KRA). Some of the recent regulatory transformations in the REITs industry include; Section 20 (1) (c) and (d) of the Income Tax Act (ITA) mandates that, upon registration with the Commissioner of the Kenya Revenue Authority (KRA), both REITs and the companies they invest in are exempt from the standard 30.0% Income Tax Rate (ITR). Furthermore, income distributed by REITs to their investors (unitholders) is not taxed. However, this exemption does not apply to the withholding tax on interest income and dividends received by non-exempt unitholders, as outlined in the first schedule of the ITA. The applicable withholding tax rates can be found in paragraph 5 of the third schedule of the Income Tax Act. A capital gain arises when the value of a unit upon transfer exceeds its adjusted cost. The disparity between these values is liable to a tax rate of 15.0%. Consequently, any profits made by a promoter or investors of a REIT from transferring property into the REIT are now subject to Capital Gains Tax (CGT) at the revised rate of 15.0%, supplanting the previous rate of 5.0% effective from 1 January 2023. Additionally, individuals holding units in a REIT who opt to sell their ownership stake are also required to remit CGT. This stipulation emerged following an amendment to Section 34 (1) (j) of the Income Tax Act through the Finance Act 2022. However, within the REIT industry, there are certain scenarios that qualify for exemptions from CGT: The Finance Act 2021 reinstated a significant alteration concerning the exemption from Value Added Tax (VAT) for transactions involving the transfer of assets to REITs and asset-backed securities. This exemption had previously been rescinded by the Tax Laws Amendment Act No. 2 of 2020. In line with Paragraph 33 of Part II of the First Schedule to the VAT Act 2021, a direct transfer of property from the REIT promoter or investors is not subject to VAT. However, if the transfer of assets to the REIT occurs indirectly, through the initial transfer of assets to the investee company, VAT will apply. It is noteworthy that the transfer of shares from a REITs SPV to the REIT trustee will be exempt from VAT, regardless of whether the initial asset transfer involved VAT. In accordance with the Stamp Duty Act's Section 96A, transfers of stabilized properties from Development REITs (D-REITs) to Income REITs (I-REITs) were previously exempt from stamp duty. However, this exemption expired on December 31, 2022. Effective January 1, 2023, such transfers are now subject to stamp duty as per Section 96A subsection 4. The intricate nature of REIT regulations, combined with the complexity of the REIT structure, can make it challenging for individuals to understand the tax implications of their investments. This lack of clarity can deter potential investors, fostering skepticism about the fairness and reliability of the REIT market. Moreover, the limited public information available on REIT regulations exacerbates this issue. Investors who are unaware of the tax consequences of their decisions may avoid investing altogether or make uninformed choices, potentially impacting their financial returns. To address these concerns, it is crucial for both the government and REIT stakeholders to prioritize the following: i) Enhanced Transparency: Increase public access to clear and concise information about REIT regulations and tax implications, ii) educational Initiatives: Launch educational campaigns and provide resources to inform investors about REITs and their associated tax considerations, iii) collaboration: Foster collaboration between regulatory authorities and industry stakeholders to raise awareness about the benefits and drawbacks of REIT investments, iv) Clear Documentation: Provide easily understandable documentation outlining the tax implications of various investment scenarios, and, v) Consultation Services: Establish accessible consultation services to allow investors to seek expert advice on tax-related aspects of REIT investments. By implementing these measures, we can help create a more informed and confident investment environment for REITs in Kenya. Acquisitions play a pivotal role in the dynamic landscape of the Kenyan REITs industry. These strategic moves signify the industry's evolution, adaptability, sustainability, and growth potential. As of December 2023, the industry has witnessed noteworthy acquisitions that are reshaping the sector. These acquisitions hold a promising outlook for the industry, contributing to its progress and value proposition. They exemplify how REITs are actively enhancing their portfolios, expanding their market presence, and optimizing their performance. Some of the notable acquisitions as at H1’2024 include; In the future, we expect REITs to maintain a strategic acquisition strategy. This will involve actively seeking opportunities to expand their portfolios, diversify their holdings, and respond to evolving market demands. Additionally, REITs are likely to prioritize environmental sustainability, as exemplified by Acorn Holding's issuance of green bonds. Such acquisitions can also stimulate innovation within the industry, encouraging the development of new ideas, designs, and services that cater to the needs of both investors and tenants. Raising capital is essential in the REITs industry, fueling growth, development, and innovation. Securing funds from diverse sources, whether through debt or equity, enables REITs to expand their portfolios, improve existing properties, and explore new investment opportunities. This practice benefits the REITs and significantly shapes the Real Estate landscape, providing attractive investment options to stakeholders. Some of the notable capital infusion in the REITs industry as of H1’2024 include; ILAM Fahari I-REIT's delisting from the Main Investment Market Segment (MIMS) of the Nairobi Securities Exchange (NSE) was a strategic response to operational difficulties and the need for structural optimization. After receiving approval from the Capital Markets Authority (CMA), ILAM Fahari transitioned to a Restricted I-REIT, focusing on professional investors. This shift from the unrestricted segment to a restricted one highlights the REIT's challenges and its proactive restructuring approach. Operational issues prompted a reassessment, leading to resolutions at an Extraordinary General Meeting (EGM) in December 2023, where the decision to convert to a restricted REIT and delist received strong support from unitholders. Implications of Delisting: ILAM Fahari’s delisting and conversion were aligned with its goal to focus on professional investors, offering them specialized investment opportunities, enhancing flexibility, and unlocking growth potential. While this restructuring aids operational efficiency and capital raising, it limits retail investor participation, signaling a shift towards catering to high-net-worth individuals. Going forward, capital raising through equity, debt, and strategic partnerships, particularly in affordable housing and infrastructure, will be crucial in driving the expansion and sustainability of Kenya's REIT industry. Collaborative efforts, regulatory support, and investor education will be key to ensuring successful capital raising and a vibrant future for the sector. During H1 2024, ICEA Lion Asset Managers (ILAM) Fahari I-REIT was admitted to the Unquoted Securities Platform (USP) of the Nairobi Securities Exchange (NSE), following their delisting from the main investment market in February 2024. ILAM Fahari joined Acorn I-REIT, Acorn D-REIT, and Linzi Sukuk in the USP, marking the first trading day in the segment. The delisting from the Main Investment Market Segment (MIMS) of the NSE will provide greater flexibility in managing the REIT's portfolio without affecting the unitholders’ ability to trade their units. The REIT’s shares (units) were available for trading on the platform at a fixed price of Kshs 11.0, representing the price at which a section of minority investors was bought out last year by ILAM, which is also the manager of the REIT. Section III: Summary Performance of the REITs in H1’2024 The tables below highlight the performance of the Kenyan REITs sector, showing the performance using several National Association of Real Estate Investments Trusts (NAREIT) approved metrics, and the key take-outs; Cytonn Report: Summary Performance Kenya REITs in H1’2024 Laptrust Imara I-REIT ILAM Fahari I-REIT Acorn I-REIT Acorn D-REIT H1'2023 H1'2024 y/y change H1'2023 H1'2024 y/y Change H1'2023 H1'2024 y/y Change H1'2023 H1'2024 y/y Change H1'2023 H1'2024 y/y Change Operating Metrics Net Operating Income (NOI) 99.6 162.4 63.0% 86.0 53.8 59.8% 128.0 309.9 142.1% 334.2 260.2 (22.2%) 647.9 786.3 21.4% Profitability Metrics Funds from Operations 99.6 162.4 63.0% 86.0 53.8 59.8% 149.8 359.0 139.6% 334.2 260.2 (22.2%) 669.7 835.3 24.7% Adjusted FFO 99.6 162.4 63.0% 84.4 55.1 53.2% 149.8 359.0 139.6% 334.2 260.2 (22.2%) 668.1 836.6 25.2% Cash Available for Distribution (CAD) 99.6 129.9 30.4% 86.0 53.8 59.8% 92.8 104.0 12.0% 0.0 123.6 278.5 411.3 47.7% Cash Amounts Distributed (CAD) 0.0 162.4 0.0% 0.0 0.0 0.0% 87.0 32.7 -62.4% 0.0 181.4 87.0 376.5 332.8% Valuation Metrics Net Asset Value (NAV) 7,024.3 6,948.6 (1.1%) 3,392.8 3,233.6 4.9% 6,341.9 7,435.4 17.2% 6,547.7 6749.5 3.1% 23,306.6 24,367.1 4.5% Source: Cytonn Research Key takeaways from the table include: The table below makes a comparison of the leverage and liquidity ratios of all four Kenyan REITs during H1’2024 and H1’2023; Cytonn Report: Leverage & Liquidity Ratios of Kenyan REITs Laptrust Imara I-REIT ILAM Fahari I-REIT Acorn I-REIT Acorn D-REIT H1’2023* H1’2024** y/y change H1'2023 H1’2024 H1’2023 H1’2024 y/y Change H1’2023 H1’2024 y/y Change H1’2023 H1’2024 y/y Change Leverage Ratios Debt to Equity Ratios 0.0x 0.0x 0.0x 0.0x 0.0% 0.0x 0.0x 0.0% 0.6x 0.3x (55.0%) 0.2x 0.1x (10.4%) Debt to Total Market Cap Ratio 0.0% 0.0x 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 64.0% 28.0% (56.2%) 29.7% 8.1% (21.7%) Debt to Gross Book Value Ratio 0.0% 0.0x 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 35.1% 14.6 % (58.4%) 16.3% 4.2% (12.1%) Debt to EBITDA Multiple 0.0x 0.0x 0.0x 0.0x 0.0% 0.0x 0.0x 0.0% 11.8x 7.0x (40.4%) 5.5x 2.0x (63.2%) Liquidity Ratios Debt Service Coverage Ratio - - - - - - - 8.1% 14.2% 6.1% 2.5% 4.1% 1.6% Implied Capitalization Rate 0.0% 2.4% 12.3% 3.3% (72.8%) 0.0% 3.0% 53.9% 3.2% 2.4% (26.5%) 2.2% 2.7% (0.4%) *Market cap weighted as at 30/06/2023 **Market cap weighted as at 30/06/2024 Source: Cytonn Research Key takeaways from the table include; The table below presents a summary of key valuation metrics of Kenyan REITs in H1’2024; Cytonn Report: Valuation Metrics for Kenyan REITs Laptrust Imara I-REIT ILAM Fahari I-REIT Acorn I-REIT Acorn D-REIT H1’2023 H1’2024 H1'2023 H1’2024 y/y Change H1’2023 H1’2024 y/y Change H1’2023 H1’2024 y/y Change H1’2023 H1’2024 y/y Change y/y change Price/ FFO per Share 69.5x 42.6x (38.6%) 12.7x 37.0x 191.1% 41.6x 20.3x 51.3% 18.5x 25.1x 35.9% 35.6X 31.3X (12.2%) Dividend Yield 0.00% 1.9% 0.0% 0.0% 0.0% 1.4% 0.4% (0.9%) 0.0% 1.8% 0.0% 0.3% 3.8% 3.5% Dividend Coverage/ Payout Ratio 100.0% 80.0% (20%) 0.0% 0.0% 0.0% 93.7% 10.6% (83.2%) 0.0% 69.7% 0.0% 48.4% 40.1% (8.4%) Net Asset Value 7,024.3 6,948.6 (1.1%) 3,392.8 3233.6 (4.7%) 6341.9 7,435.4 17.2% 6,547.7 6,749.5 3.1% 23,306.6 24,367.1 4.5% Net Asset Value per Share 20.3 20.1 (1.1%) 18.7 17.9 (4.7%) 22.0 22.5 2.5% 25.3 25.4 0.2% 21.6 21.4 (0.6%) Annualized Dividend Yield 0.0% 3.8% 0.0% 0.0% 0.0% 0.0% 2.7% 0.9% (67.8%) 0.0% 3.6% 0.0% 0.7% 2.1% 1.4% Source: Cytonn Research Section IV: Conclusion, Recommendations, and Outlook for the REITs Sector Kenya's REITs market has seen moderate performance, shaped by various factors. Despite challenges, there are encouraging trends, such as growth in net operating incomes, indicating improved financial performance. Additionally, leverage ratios for most REITs have remained low, with many REITs being ungeared and relying on short-term debt for their operations to avoid overexposure to rising interest rates. This trend is expected to continue as REITs seek to maintain financial sustainability, as evidenced by Acorn Holdings' issuance of a green bond. Moreover, the recent regulatory proposal by the Capital Markets Authority (CMA) to reduce the minimum investment amounts for professional investors to Kshs 10,000 is anticipated to increase interest in the sector and attract a broader investor base. Recommendations to Enhance the REITs Sector: The outlook for Kenya's REITs sector remains cautiously optimistic. While challenges such as high construction costs and market saturation in certain areas persist, the continued government support through infrastructure development and affordable housing initiatives provides a positive backdrop. Investors are expected to remain focused on income-generating REITs, particularly those tied to resilient sectors like retail and commercial properties. The sector's growth will likely hinge on increased investor awareness and the broadening of investment options within the REITs market. To read the full Cytonn Kenya’s REITs H1’2024 Report, click here. Disclaimer:The views expressed in this publication are those of the writers where particulars are not warranted. This publication, which is in compliance with Section 2 of the Capital Markets Authority Act Cap 485A, is meant for general information only and is not a warranty, representation, advice, or solicitation of any nature. Readers are advised in all circ*mstances to seek the advice of a registered investment advisor.Executive Summary
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Focus of the Week : Kenya’s Real Estate Investment Trusts (REITs) H1’2024 Report