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Kgori Capital economic insights

A conversation with Kgori Capital’s Portfolio Management Team

QUESTION: What is your latest outlook for the domestic economy in 2018 following the appointment of His Excellency Mokgweetsi Masisi as President of the Republic of Botswana?
    
ANSWER: Our inflation view remains unchanged from the start of the year. We still expect inflation to increase to the mid-range of the Bank of Botswana’s 3-6% objective range with risks balanced. The main upside risk relates to administered prices. Electricity and public transportation prices were increased by 10% and 14%-25% respectively, effective April 2018. Further price increases in water and fuel prices may drive inflation further up. The main risk to the downside emanates from continued tepid domestic demand.

We expect the Central Bank to maintain its current accommodative monetary policy stance in order to support economic growth. That said, we do not expect the Bank of Botswana to reduce rates further unless inflation continues to trend below its objective range. We do not expect this to be the case on account of increases in administered prices.

We are projecting GDP growth of about 4.0% for 2018 compared to the latest MFDP’s forecast of 5.3%. This represents solid but unremarkable growth. Any significant upside surprise will be driven by a combination of a spike in Government spending, the continued revival of the diamond market, above trend growth in the non-mining sector and the stability of water and electricity supply.

The newly inaugurated fifth President, H.E. Mokgweetsi Masisi, and his Administration accept that, now more than ever, there is a dire need to improve economic diversification execution. This will direct economic policy and strategy formulation during his term. Government has publically committed to a partnership with the private sector that focuses on giving Batswana an opportunity to set up industries that empower themselves and, in turn, to create much needed employment.

QUESTION: What are the biggest risks in your view to local banks?

ANSWER: The key issue facing the local banking sector remains the implementation and impact of IFRS 9. The implementation will affect retained earnings, and therefore capital adequacy, as well as increase the impairment charge for the year. Due to the large component of unsecured loans on bank balance sheets, we anticipate the impairment impact will be large and may alter the product mix of banks going forward.

Given the current rate environment, coupled with a lower-for-longer expectation, players are looking to ramp up their non-interest income to fuel top-line growth. We expect banking stocks to continue the decline in the short-term, with FNB faring better than competitors because it has a larger non-interest income earning base and it has more attractive valuation metrics.

QUESTION: Would you agree that the property sector is likely to continue to outperform?

ANSWER: We are seeing increased deal activity in the property space as companies poise for growth and currency exposure diversification. Zambia seems to be a favoured destination regionally due to attractive USD linked yields coupled with the relatively underdeveloped nature of the market.

Locally, property prices and rentals are under pressure due to the constrained consumer environment, thereby presenting acquisition opportunities. Property counters continue to deliver stable price returns and attractive dividend yields and thus remain in favour.

QUESTION: Have recent economic data releases impacted Kgori Capital’s view of retail companies?

ANSWER: The formal sector is under pressure, wage inflation remains low, jobs are being shed and companies rationalised; however consumption continues to grow. This growth is fueled by the informal sector whose spending habits and preferences differ; it is no longer about whether people are spending but what people are spending on. Consumption shifts have resulted in consumers moving to lower margin products and loss-leaders, impacting company profitability. Regional expansion has cushioned the impact to some degree but the consumer retail sector remains stressed. We maintain our unfavourable view of the sector.

QUESTION: How are fundamentals looking for the hospitality and leisure sector?

ANSWER: The trends in travel are shifting and competition is heating up. The entrance of more hotel chains, mushrooming of guest houses and adoption of alternative accommodation means such as Air BnB has put Cresta under pressure. We expect the luxury tourism sector to remain buoyant given positive global growth trends; therefore, the sector will continue to outperform.

QUESTION: What are Kgori Capital’s expectations for prospective local equity market returns?

ANSWER: Since the DCI peak in August 2015, local equity investors have suffered from low to negative returns. On a total return annualised basis for the last 1 year, 3 years, and 5 years local stocks have returned -3.7%, -0.7%, and 4.2% respectively. On a relative basis, local equities have underperformed local bonds, cash and most global asset classes. Unfortunately, we expect the slump for local stocks to continue in the short-term, based both on continued weak fundamentals and negative retail investor sentiment.

However, looking further out and more importantly in line with Kgori Capital’s investment horizon of three to five years, we are a lot more positive on prospective local equity market returns improving. By combining our bottom up analysis and top down insights on the key fundamental drivers for equity returns of price/earnings (P/E) ratio, earnings growth, and the dividend pay-out ratio, we have determined that the forward looking return profile is starting to make holding local equities a much more attractive proposition.

This is underpinned by one of our main investment themes of improving earnings momentum on more attractive entry valuations. We believe investors should focus more on what we expect will be the real driver of the markets going forward, earnings growth.

In recent years, domestic economic growth has often been patchy and corporate earnings fitful, but growth in 2018 is expected to be more broad-based, while corporate earnings should improve. As investors, we can never afford to let optimism compromise our approach, but we do at least recognise that we are probably about to experience the best economic backdrop seen for several years.

In recent years, domestic economic growth has often been patchy and corporate earnings fitful, but growth in 2018 is expected to be more broad-based, while corporate earnings should improve. As investors, we can never afford to let optimism compromise our approach, but we do at least recognise that we are probably about to experience the best economic backdrop seen for several years.

The Kgori Capital team: Alphonse Ndzinge, CFA – Managing Director;
Tshegofatso Tlhong, CFA – Portfolio Manager; and Kwabena Antwi, CFA, MBA, FCCA

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Business

New study reveals why youth entrepreneurs are failing

21st July 2022
Youth

The recent study on youth entrepreneurship in Botswana has identified difficult access to funding, land, machinery, lack of entrepreneurial mindset and proper training as serious challenges that continue to hamper youth entrepreneurship development in this country.

The study conducted by Alliance for African Partnership (AAP) in collaboration with University of Botswana has confirmed that despite the government and private sector multi-billion pula entrepreneurship development initiatives, many young people in Botswana continue to fail to grow their businesses into sustainable and successful companies that can help reduce unemployment.

University of Botswana researchers Gaofetege Ganamotse and Rudolph Boy who compiled findings in the 2022 study report for Botswana stated that as part of the study interviews were conducted with successful youth entrepreneurs to understand their critical success factors.

According to the researchers other participants were community leaders, business mentors, Ministry of Trade and Industry, Ministry of Youth, Gender, Sport and Culture, financial institutions, higher education institutions, non-governmental institutions, policymakers, private organizations, and support structures such as legal and technical experts and accountants who were interviewed to understand how they facilitate successful youth entrepreneurship.

The researchers said they found that although Botswana government is perceived as the most supportive to businesses when compared to other governments in sub-Saharan Africa, youth entrepreneurs still face challenges when accessing government funding. “Several finance-related challenges were identified by youth entrepreneurs. Some respondents lamented the lack of access to start-up finance, whereas others mentioned lack of access to infrastructure.”

The researchers stated that in Botswana entrepreneurship is not yet perceived as a field or career of choice by many youth “Participants in the study emphasized that the many youth are more of necessity entrepreneurs, seeing business venturing as a “fall back. Other facilitators mentioned that some youth do not display creativity, mind-blowing innovative solutions, and business management skills. Some youth entrepreneurs like to take shortcuts like selling sweets or muffins.”

According to the researchers, some of the youth do not display perseverance when they are faced with adversity in business. “Young people lack of an entrepreneurial mindset is a common challenge among youth in business. Some have a mindset focused on free services, handouts, and rapid gains. They want overnight success. As such, they give up easily when faced with challenges. On the other hand, some participants argue that they may opt for quick wins because they do not have access to any land, machinery, offices, and vehicles.”

The researchers stated that most youth involved in business ventures do not have the necessary training or skills to maintain a business. “Poor financial management has also been cited as one of the challenges for youth entrepreneurs, such as using profit for personal reasons rather than investing in the business. Also some are not being able to separate their livelihood from their businesses.

Lastly, youth entrepreneurs reported a lack of experience as one of the challenges. For example, the experience of running a business with projections, sticking to the projections, having an accounting system, maintaining a clean and clear billing system, and sound administration system.”

According to the researchers, the participants in the study emphasized that there is fragmentation within the entrepreneurial ecosystem, whereby there is replication of business activities without any differentiation. “There is no integration of the ecosystem players. As such, they end up with duplicate programs targeting the same objectives. The financial sector recommended that there is a need for an intermediary body that will bring all the ecosystem actors together and serve as a “one-stop shop” for entrepreneurs and build mentorship programs that accommodate the business lifecycle from inception to growth.”

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Business

BHC yearend financial results impressive

18th July 2022
BHC

Botswana Housing Corporation (BHC) is said to have recorded an operating surplus of P61 Million, an improvement compared to the previous year. The housing, office and other building needs giant met with stakeholders recently to share how the business has been.

The P61 million is a significant increase against the P6 million operating loss realized in the prior year. Profit before income tax also increased significantly from P2 million in the prior year to P72 million which resulted in an overall increase in surplus after tax from P1 million prior year to P64 million for the year under review.

Chief of Finance Officer, Diratsagae Kgamanyane disclosed; “This growth in surplus was driven mainly by rental revenue that increased by 15% from P209 million to P240 million and reduction in expenditure from P272 million to P214 million on the back of cost containment.”
He further stated that sales of high margin investment properties also contributed significantly to the growth in surplus as well as impairment reversals on receivables amounting to P25 million.

It is said that the Corporation recorded a total revenue of P702 million, an 8% decrease when compared to the P760 million recorded in the prior year. “Sales revenue which is one of the major revenue streams returned impressive margins, contributing to the overall growth in the gross margin,” added Kgamanyane.

He further stated professional fees revenue line declined significantly by 64% to P5 million from P14 million in the prior year which attributed to suspension of planned projects by their clients due to Covid-19 pandemic. “Facilities Management revenue decreased by P 24 million from P69 million recorded in prior year to P45 million due to reduction in projects,” Kgamanyane said.

The Corporation’s strength is on its investment properties portfolio that stood at P1.4 billion at the end of the reporting period. “The Corporation continues its strategy to diversify revenue streams despite both facilities management income and professional fees being challenged by the prevailing economic conditions that have seen its major clients curtailing spending,” added the CEO.

On the one hand, the Corporation’s Strategic Performance which intended to build 12 300 houses by 2023 has so far managed to build 4 830 houses under their SHHA funding scheme, 1 240 houses for commercial or external use which includes use by government and 1 970 houses to rent to individuals.

BHC Acting CEO Pascaline Sefawe noted that; BHC’s planned projects are said to include building 336 flat units in Gaborone Block 7 at approximately P224 million, 100 units in Maun at approximately P78 million, 13 units in Phakalane at approximately P26 million, 212 units in Kazungula at approximately P160 million, 96 units at approximately P42 million in Francistown and 84 units at approximately P61 million in Letlhakane. Emphasing; “People tend to accuse us of only building houses in Gaborone, so here we are, including other areas in our planned projects.”

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Business

Commercial banks to cash big on high interest rates on loans

18th July 2022
Commercial-banks

Researchers from some government owned regulatory institutions in the financial sector have projected that the banking sector’s profitability could increase, following Bank of Botswana Monetary Policy Committee recent decision to increase monetary policy rate.

In its bid to manage inflation, Bank of Botswana Monetary Policy Committee last month increased monetary policy rate by 0.50 percent from 1.65 percent to 2.15 percent, a development which resulted with commercial banking sector increasing interest rate in lending to household and companies. As a result of BoB adjustment of Monetary Policy Rate, from 1.65 percent to 2.15 percent commercial banks increased prime lending rate from 5.76 percent to 6.26 percent.

Researchers from Bank of Botswana, the Non-Bank Financial Institutions Regulatory Authority, the Financial Intelligence Agency and the Botswana Stock Exchange indicated that due to prospects of high inflation during the second half of 2022, there is a possibility that the Monetary Policy Committee could further increase monetary policy rate in the next meeting in August 25 2022.

Inflation rose from 9.6 percent in April 2022 to 11.9 percent in May 2022, remaining above the Bank of Botswana medium-term objective range of 3 – 6 percent. According to the researchers inflation could increase further and remain high due to factors that include: the potential increase in international commodity prices beyond current forecasts, logistical constraints due to lags in production, the economic and price effects of the ongoing Russia- Ukraine conflict, uncertain COVID-19 profile, domestic risk factors relating to possible regular annual administered price adjustments, short-term unintended consequences of import restrictions resulting with shortages in supplies leading to price increases, as well as second-round effects of the recent increases in administered prices “Furthermore, the likelihood of further increases in domestic fuel prices in response to persistent high international oil prices could add upward pressure to inflation,” said the researchers.

The researchers indicated that Bank of Botswana could be forced to further increase monetary policy rate from the current 2.15 percent if inflation rises persistently. “Should inflation rise persistently this could necessitate an upward adjustment in the policy rate. It is against this background that the interest rate scenario assumes a 1.5 percentage points (moderate scenario) and 2.25 percentage points (severe scenario) upward adjustment in the policy rate,” said the researchers.

The researchers indicated that while any upward adjustment on BoB monetary policy rate and commercial banks prime lending rate result with increase in the cost of borrowing for household and compnies, it increase profitability for the banking sector. “Increases in the policy rate are associated with an overall increase in bank profitability, with resultant increases in the capital adequacy ratio of 0.1 percentage points and 0.2 percentage points for the moderate and severe scenarios, respectively,” said the researchers who added that upward adjustment in monetary policy rate would raise extra capital for the banking sector.

“The increase in profit generally reflects the banking industry’s positive interest rate gap, where interest earning assets exceed interest earning liabilities maturing in the next twelve months. Therefore, an increase of 1.5 percentage points in the policy rate would result in industry gains of P71.7 million (4.1 percent increase), while a 2.25 percentage points increase would lead to a gain of P173.9 million (6.1 percent increase), dominated by large banks,” said the researchers.

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