This research report was prepared by the Research Department of Old Mutual Securities Limited. Old Mutual Securities Limited is a securities trading company licensed by the Capital Markets Authority (Kenya) for the purpose of facilitating trade on the Nairobi Securities Exchange.

Here are our views on the news making headlines today for Kenya:
Equity runs ahead of rivals with takeover of DRC bank. Equity Group plans to acquire a 79 per cent stake in Pro Credit Bank Congo for Sh5.8 billion. The acquisition is partly being financed by share swaps though the exact number of shares and the strike price were unknown by the time of going to press. Equity’s chief executive James Mwangi said the deal, which is awaiting regulatory approval in Kenya and DRC, is the first of an ambitious Pan African expansion drive that will see it venture into nine more countries.

Our View: Though we like the bank’s strategy to adopt a pan African banking model though the creation of additional 411.4m ordinary shares would have a 10% dilution effect on the stock. In addition to the above, the launch of the Equitel is long overdue and it continues to face some challenges with 6 litigations having launched against it by the competition. Nonetheless, the product has 420,000+ subscribers and over 5.5m transactions but the recent partnership between KCB and Safaricom elevates our concern over the product uptake. However, we remain optimistic on the Group’s strategy to improve efficiency ratios (below 55.0%) hence we forecast a CTI ratio of 52.4% in FY15e. The bank trades on a forward P/E of 11.5x, P/NAVPS of 2.7x and a dividend yield of 3.5% against the sectors average P/E of 9.8x, P/NAVPS of 2.0x and a dividend yield of 3.4%. We have A HOLD recommendation on the stock based on a fair value estimate of KES 46.09, an ER of -2.9% from the current market price of KES 47.50.
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