The Nairobi Stock Exchange has revised its benchmark index replacing East African Cables with Kenol Kobil Limited. The index that we estimate is trading on a 15.1x trailing P/E has become increasingly skewed toward the large cap stocks. The yield profile for the index has declined due to the rising market valuations but provides investors with a good opportunity to gauge the viability of the risk premium. The NSE Index dividend yield has dropped from 4.36% in December 2009 to 3.65% by September 2010 while the earnings yield has dropped from 7.51% to 6.62% during the same period. This shows that there is a premium building up as interest rates on short term securities declines. The index has been changed three times over the past three years. In July2008 Safaricom Limited, Equity Bank Group, East African Cables and Athi River Mining were added, while in December 2009 Co-Operative Bank of Kenya was added to the NSE 20 Share Index. We believe the move was motivated by the improved earnings profile and secondary market liquidity for KenolKobil versus its industrials peer. See below the changes in the P/E for Kenya’s benchmark index.
CommentaryThe Index is fast approaching a historistic support area of 4,700 – 4,800, together with the decreasing range of the NSE (High-Low). Usnig the week on week on data we can see the support and resistance levels will not be broken through. The apparent strengthening of the trend as experienced in August was not supported by trade volumes and the index has since been trading between 4,450 pts and 4,685 pts since.
While the mid term and long term trends (100 week MAs) point to a continued up trend, momentum has been declining from Mid-August 2010 and we could see the 4,200 mark support level retested as the index oscillates in a range sideways.
Dyer and Blair Investment Bank
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