Tuesday, March 13, 2007

Of IPOs, OFDs, HFCK & Bears

Kimunya confirmed NSE's worst kept secret, Kenya Re won't happen in March but May and KenGen's 19% offload is being brought forward to next month. Kenya Re will most likely be the equivalent of the grocer who hides rotten oranges at the bottom (why are they taking on KNAC's assets at this stage of the game?), but at 60m shares will still be oversubscribed. KenGen's offload is a few months late or 1 year too early i.e. the timing is wrong. Reason-the tariff fiasco with the govt having realised too late that it had created a rod for its own back by committing on a prospectus to pay KenGen their real cost of production. So far, Treasury is covering the gap between what KPLC can profitably pay to KenGen and the amount KenGen needs to profitably continue to produce electricity. Govt is in such a mess that they paid a consultant to tell them that yes, you'll have to ask consumers to pay for the real and higher cost of producing electricity-many could have told the govt that without charging them! Without some confirmation of this, investors should stay away from the offload and buy the shares at k10-15 in the secondary market later this year.
HFCK announced their
FY06 results, PBT was up 56% primarily on lower staff costs (does that mean its not growing any more?) and lower loan loss provisions (good-HFCK nearly went bankrupt from carrying too much of the stuff). So not driven by revenue growth (1% up on FY05) and there was no dividend. There is still confusion over strategy. HFCK now wants to fund construction of properties. So it will be carrying two types of risks in its books-property not sold and then when its sold, it'll obviously have the more conventional lending risks. This is a market that KCB seems to be way ahead in so this investor doesn't see how HFCK will survive as a standalone entity to see out Frank Ireri's 5yr strategy. The strategy will require financing of around k13bn which I am not sure the proposed rights issue will bridge-perhaps a better idea would be to float a 25 year bond.
The current correction/bearish sentiment at the NSE is a perfect opportunity for the long-term stock investors most who will say its a necessary rite of passage that imparts important lessons for one to be successful. There is sympathy for those that were hoping to use the NSE bull run to raise short-term funds which there is quite a few in the current investor population, but not for the get-rich-quick crowd. For the rest, use this period to accumulate in stocks you believe will grow your capital in the medium to long-term.

Kenya Bankers Association revealed that Ksh20bn of the bad debts in the banking system is held by 100 defaulters-shouldn't they be letting all financial institutions know who they are?


bankelele said...

This underlies the problem I have with the "nation business daily" whose premise is that you can separate politics from business.

Kengen’s extra costs won’t be passed on to KPLC's consumers (maybe) until after this election (as per the minister) year. Meanwhile the government will have to juggle the difference in the tariffs.

MainaT said...

BD's premise is good-lets try and have less or no politics in business. After all, how many of our venerable cabinent ministers would you trust to run your business?
The govt is trying to kid people that its handling the difference-but thats our tax money! I wish there was more thought given to the electricity sector e.g. more distributors, building requirement to have solar panels etc.

Kenyanomics said...

Truth is electricity prices will have to rise for KPLC to stand on its feet. But that's a political hot potato that no one want to touch. Not in an election year as MainaT observed.

But by doing so we are postponing chaos in the industry. For how are we going to satisfy the ever expanding electricity demand. The same postponement of chaos can be seen in the sugar industry, which could have a ripple effect across COMESA region as other countries reciprocate on our protectionism.

Odegle said...

i disagree, KPLC just needs to get its act together. prices should even be lower. but i agree with bankelele, you cannot seperate politics from biashara.

MainaT said...

Od, plse elaborate as to why you think prices won't have to go up? Plse note that the issue is not to do with KPLC, its to do with KenGen whose cost of producing electricity is very high.

A said...

My 2cents, high power cost are from IPP producers (politically connected Moi goons) who negotiated high paying contracts for the next 20years. Kengen tried renegotiating but not all contracts have been revised. Most of the IPP produces use fuel to produce power, high fuel cost, high power costs.

Staff Writer said...

I doubt very much that IPPs can by themselves dictate overall energy prices. Their share of the market is far too small.