Thursday, April 24, 2008

EA Cables, Safaricom & KCB

Just how oversubscribed was Safaricom? Based on various hints from brokers, probably in the region of 200%. But that is for the retailer section and what I’m wary of is whether there was enough interest from foreign investors. Reading the prospectus, it seems that these were supposed to have gone through Morgan Stanley, yet many local brokers are saying they’ve received applications? Secondly, the book building price range was (according to the D&B summary anyway) supposed to have been announced by 9th of April and then FII would apply for their allocation. The only way I can see this being fully subscribed is if retail section is oversubscribed by more than 200% thus some shares are taken from the FII section.

EA Cables has spectacularly surprised by announcing 59% rise in PBT (43% PAT) despite the almost two months of disrupted business. It’s secret? Regional growth that is reducing country-specific risk and also aimed at tapping into economic growth in our neighbour nations.

Seems the rumours about possible oil in Uganda are now confirmed. Tullow's shares (one of the few shares I hold in the UK) has started racing after it announced that that it may have a billion-barrels of oil in Ug. Better get some more Ug shares as well…

After Equity, KCB is now rumoured to be in play for a foreign investor to come in possibly UK’s largest bank HSBC. Very curious. HSBC only has a small offshore piece in SA (via its acquisition of the old Midland bank). However, it’s also involved in an Africa fund joint venture with some Prince Hamed or the other. In any case, what a vote of confidence it would be for KCB, and Kenya generally!

Tuesday, April 22, 2008

Safaricom IPO and NSE phenomena

Gold rush: Kenya doesn't have gold, diamonds et al and the only oil will get will probably be expensively mined. But thank God for the NSE. If you invested Ksh200k in 2002, you have a 30-50% chance of having seen that Ksh200k turn into almost Ksh2m. As with any gold-rush, the pioneers probably staked the richest ores. All is not lost and those looking for opportunities should throw in some serious amounts, because like it or not, Kenya’s great times are ahead of us.
Margin-trading: The new trend in town is of course to take a loan and use it to invest in an IPO. The game being one of margins. For Safaricom, guys are probably thinking that if say they get a loan charging 15% APR, they’ll then only need for Safaricom to get to Ksh5.40 or higher for them to be in the money. That is because they’ll hope to cover the 5% interest charged for the 3 or so months they hold the loan plus the 2.1% commission charged when they exit the IPO position. Are there issues with margin trading of this kind? Yes, if Safaricom doesn’t get to 5.40, some guys will be looking for other sources of finance. Worst-case scenario is that a bank now becomes ones of the largest shareholders of Safaricom. When one considers the risks inherent in share-trading, lending is a dodo. Margin trading also makes share-trading a speculative activity which ion the real sense of the word it shouldn’t be.
High net-worthy and QIIs: Its impractical and a serious disincentive to expect somebody putting Ksh1m in an IPO to wait three months for a Ksh900k refund. That brokers have responded to this by offering QII status to their high-net worthy clients should be seen as good business. The socialist in us all would however not want to see some portions of society getting preferential treatment. So what should be done? How about, allowing high-net worthy (under a pre-agreed criteria) to participate as QIIs but enforce a lock-in for say a period of 12 months?

Monday, April 21, 2008

Monday shorts

Remember those days on the playground when you had that annoying kid who’d always pick his up ball and walk in a huff saying he didn’t want to play anymore. D&B are trying to pull-off that move. And people say the NSE/CMA don’t have any conflicts of interest?

A former boss once told me that success in the office is entirely dependant on your being able to shove out as much rubbish as you got. In more optimistic tones, this means being able to suggest what needs to be done for others to do. Right now, I believe I’m not doing that too well hence fewer posts.

The UK mortgage is a £1trillion dollar business. BoE is offering banks £50bn mortgage funding facility to allow them to increase their mortgage offerings (many have removed any fixed term products). On the same day of the announcement, RBS the 2nd largest announced a £10bn rights issue. Methinks, the bankers at BoE should be fired en masse.

Is your area at serious risk of house-price recession? The FT has designed a nice-little guide for UK.

Congrats to KCIG, we have our first-non- IPO double-your-money large position…

Friday, April 18, 2008

Some good business news

As a self-confessed cheerleader of Equity bank, the confirmation of its ambitions to go regional is just awesome. Even at Ksh200, its still a steal if you know your stocks. In all honesty, it should also go for Akiba Commercial Bank if the TZ people will let it. And then start looking to move south to Malawi and Zambia. Go Equity!

A commodities market for Kenyan food produce has been overdue in my opinion. Its good news to see that the idea may finally be put into practice. If well implemented, it will revolutionalise agriculture in Kenya. Imagine a farmer being able to get maize futures alongside his shares, that way he could judge how much he was likely to get for his maize in 6 months time.

Finally, it was good to hear M7 retaliate how important Railway is/will be to East Africa's economic growth. My thinking is that we should go further and think about creating a Metropolitan Railway Plan with tenders for companies to build Africa's first underground railway system in Nai.

Politics: it could be worse, we could be Italians

As Kenyans bewail the sort of politicians that we seem to have been stuck with just contemplate Italy's case.
Since the end of World War 2, they’ve had 62 different governments.
Parliamentary debates are still settled with fistcuffs and hurling of chairs.
The Mafia (a more civilized version of Mungiki) still rules in large swathes of Southern Italy
Corruption is endemic-perhaps why Italians love Malindi so much…
The newly elected Silvio Berlusconi (Italy’s own Pattni) has stood five times, been elected three of them, been inducted on corruptions charges, is largest owner of 3 of the top Italian TV channels and of course owns AC Milan (who were found guilty of match-fixing). And you can throw in one or two cosmetic surgery sessions.

To be honest, the thing that has saved Italy is a culture of strong work ethic allied with strong institutions and especially its judiciary.

Wednesday, April 16, 2008

That's a "Kibaki Solution"

In on honour of the man that gave us the world's largest cabinet, the “Kibaki solution” signifies somebody who gives you the;

  • the least costly (to him)
  • least attractive (to you and other stakeholders)
  • most costly
  • most unambitious
  • most retrogressive


    Fence-setting par excellente.

Tuesday, April 15, 2008

The mythical free market capitalism

While reflecting on Bear Stearns and Northern Rock, we had a debate at work on "weak banks should be left to fall vs. systemic risk means they should get govt support". My argument was that the Brits in their understated way and the US in their loud way shouldn't be going around asking everybody to open their markets, practice free market ethos, yet in their own backyards, they drink wine.
So is free market capitalism only practiced in textbooks. The last 15 months probably present a good case for thinking this is so. Northern Rock required a bail-out of £50bn to avoid a full bank-run on it and Bear Stearns around £30bn. Prior to this, both operated highly-leveraged but nevertheless very successful businesses that earned shareholders and employees fat checks. Shouldn't both these stakeholders have been left to take the downside as well? Because if your answer is no, then the government must become an active stakeholder to limit or reduce the likelihood that it has to step in and save a bank. Moreover the LIBOR-base rate differentials caused by this issues shows that there are multiplier effects.
Thus regulation must become much more thorough (Northern Rock and peer banks used to get a visit from the FSA about once every 3 years under its "light touch" regulatory regime) and much more knowledgeable (a lot of the FSA supervisors were treated in a similar manner to auditors i.e. fed a little BS to keep them happy).

Another e.g. of the free market myth that has been busted is in the agriculture market. If you follow the futures market for commodities, you'll notice that wheat futures have been on the up since 2006, yet there is a shortage of the same. In theory, there should be glut because farmers would seamlessly have increased production to chase the anticipated higher prices. Again govt intervention is needed to subsidize higher grain/staple food farming to prevent food riots and agflation. This can't happen if you are busy buying into IMM/World bank prescriptions that are based on mythical free market capitalism that doesn't exist anywhere but in their well-paid heads...

Overlooked shares and events

NMG: A solid blue-chip with enormous growth potential within and outside Kenya, its now offering an additional share for every one that you hold to increase liquidity. Despite a high absolute price, this is the best time to buy NMG shares if you are looking to hold until the next general election (whether in 2/5 years). It has good dividend too if you an income-investor.
Equity lock-in period: I'm seeing many jumping into this stock and this to my surprise. Equity's lock-in period comes to an end in just under 4 months time. Unless its confirmed otherwise at the AGM, some of its principal shareholders will be able to offload their holdings post-July thus possibly leading to a lower share price. Saying that, Equity is still the bank to watch for the next 2/3 years.
ARM: For those who missed its full year results, ARM is benefitting hugely from the new clinker, has plans to possibly add another one and is also developing the new site in Ukambani. Oh and its a multi-product firm unlike Bamburi or EAPC. Its slightly higher P/E to its cement peers doesn't lie.
The economy: I think Prof Ryan was more on point on this. We'll be lucky to get 3/4% growth this year given the downturn in agriculture and associated multiplier effects including negative ones such as inflation and likely drought later this year.

Tuesday, April 08, 2008

Rumour share-trading

One of the hallmarks of a bear/bull market these days is that rumours become an important component of your stock trading. You have to understand when a rumour is driving the market; which way is it driving the market; what is the rumour; who is the source of the rumour; and more importantly why the rumour?
In Kenya, rumours fall into three types: rumours that will lead to increased number of shares; rumours about merger activity and bankrupt/corruption-type rumours:

  • Increased number of shares via bonus issue: usually done before results announcement, tends to get very giddy response and only happens when the stock is doing exceptionally profitability-wise. These are the rarest because they don’t happen often and tend to be credible. Secondly, they also have a very short-window i.e. will usually happen just before the results are announced. This is the best bull to ride, but requires a lot of analysis of the motives from the stock’s point of view.
  • Increased number of shares via stock spilt: very popular rumour and will usually affect a share with a price above Ksh200. KPLC is probably in a class of its own on this one.
  • Increased number of shares via rights: also popular, but as investors become more savvy, they’re waiting for firm details (especially on pricing), and thus lacks the bull-ride it had in 2006 or early 2007
  • Merger activity: usually focused on banking and cement sectors. Last year was about NBK and later on about Equity. Rarely get any reaction unless it’s tangible.
  • Bankruptcy/liquidity/corruption sagas: usually coincide with a bearish market and may occasionally have political undertones. Equity has been the main victim (of both of them) even after Hellios entry. After benefitting from the 1-2&3 above, EA Cables also became victim early this year of a politically-driven rumour about its inability to meet loan repayments and pending bankruptcy proceedings.

Outside of Kenya, rumours tend to be intelligently targeted but don’t defer too much from above apart from those on profitability. Barclays, HBOS and Lehman Brothers have all been recent victims of the liquidity/bankruptcy-type rumours some very targeted by short-sellers. During the bull market era aka leverage era, Barclays used to be linked to every bank merger and Lehman to UBS’ investment banking ones.

Bottom-line though, the old line of buy on fundamentals sell on rumours, no longer suffices.

In other news, the best one line on credit crunch comes from a certain Omaha stock trader by the name Warren Buffet “You only learn who has been swimming naked when the tide goes out”.
Finally, my commiserations in advance of tonight’s Champions League game to Arsenal fans. Good wine takes a long-time to mature. Your time will come, but not tonight.

Wednesday, April 02, 2008

A short history of Kenyan IPOs: Lessons and reminiscences

KCB: Listing price Ksh20 in 1988. Suffice to say that if you were shareholder in 1988,you most likely would have lost your hair but made good evenutally as the stock is KSh24 (after many rights, additional divestures and spilts). Was the 1st GoK privatisation.
NBK: Listing price Ksh10 in 1994. Even with a 2nd GoK divesture in 1996, has posted 400% returns for IPO investors despite its dismal perfomance profits-wise. Thanks Jimnah.
Kenya Airways: Listing price Ksh11.25 in 1996. Its IPO was the Safaricom of its day and has salutary lessons for us all. Its listing in 1996 saw 110,000 new investors (was a huge number in those days) and was the first by an African Airline. Within no time and helped by Goldenberg, drought and moi-economics, the economy was in ICU. KQ's shares went down to KSh6 andwere stuck there for a spell. Investors slashed their wrists and vowed never again until KenGen IPO came along.
KenGen: Listing price Ksh11.90 in 2006. This IPO ushered the new era of NSE complete with CDSC accounts, investors increasing to 500k+ and was the first IPO I took part in. Perhaps due to the absence of IPOs for along-time, lessons were learned by all
*Don't make IPO a free-for-all, you'll end up high investor expenses from annual reports, AGMs and                     the like
                   *Share price will stagnate due to liquidity glut
                  * Do price it low
                  *Every investor will see profits and jump, cue oversubscriptions and interest-rate earning for brokers

ScanGroup: Listing price Ksh10.45  in 2006. With lessons learned, guys jumped and made a mint (some 300%). The share still has way too many investors. I have cashed out after getting frustrated about the stagnant price.
Everready: Listing price Ksh9.50 in 2006. A lemon among the recent IPOs. And most knowledgeable investors new it before it listed and thus went in for speculative purposes. Its high lasted a month before plummeting below IPO price where it has refused to come away from. I sold at around KSh18 for one my cdsc account and was flat on another due to lax broker nonsense.
Access Kenya: Listing price Ksh10 in 2007. Although I've made more money from others, this one I am enjoying because it has something of a schedenfraude about it. Firstly, many trashed it on the basis of the forthcoming fibre optic and Telkom's takeover by French Telecom. Secondly, the upside is so huge that I won't be surprised if it reaches mid 30s by next year. Beyond that, it's all about how well it adapts to increased competition, but I am sure it will.
Kenya Re: Listing price Ksh9.50 in 2007. Companies were now wise to the ways of retail investors and restricted their participation. This has ensured that the upside seen in the share has stayed as institutional investors are long-term. But will that last if KRe doesn't change its pre-IPO ways and given this Jan/Feb claims? I am still holding a small portion though I may dispose once I get a dividend for 2007.
Safaricom: Listing price Ksh5.00 in 2008. I hope many can see a pattern emerging in all the preceding IPOs. So judge Safcom as you'd any other share. That way, you'll invest on the basis of its fundamentals which will either look strong or weak. If you think it's strong, why buy for speculative purposes only to go for it later when it might have doubled in value? If you think its weak, then you better review your exit strategy once you know the allocations and especially for the QII and foreign investors. As well as the cabinet composition. If either or both has  massively oversubscribed
and cabinet is kosher, you are in the money . And out of the money if v.v.

The one that got away; et al

This should have been the perfect April fool's day tale. Ati Raila calls for rule to outlaw "pm"...
On a serious note, how difficult is it to name a cabinet and start thinking about IDPs for a change?
Kenya is always held-up as an example for this or the other and one can only hope Mugabe won't continue copying us for longer and will announce that he will retire to enjoy his Grace...

Tuesday, April 01, 2008

KPLC: What way forward?

I've avoided KPLC because the share has a big unresolved issue. Those are now three.
  1. Management: GoK has decided not renew Manitoba management contract. I thought the contract was ill-thought-out, not unlike many other agreements that we tend to sign with expatriates. Manitoba didn't actually deliver on any of the targets that they were set among them reducing transmission loses and increasing customer base (120,000 new customers is not a target-Safaricom and even Equity have all grown customers very fast over a short period of time). However, GoK interference in KPLC affairs was reduced by having Manitoba there instead of some of the abysmal characters we had in the past. Will their exit mark a return to the bad old days? CT thinks so, but I think we are now past the situation where GoK carries non-performing parastatals. I think Manitoba's biggest failure was to not break KPLC into two companies one which would exclusively do rural electrification and another to deal with urban.
  2. Transmission losses: KPLC loses something like 20% of the electricity it buys from KenGen and others. Imagine a supermarket having to write-off 20% of its stock or a bank losing 20% of customer deposits.
  3. Liberalisation of distribution- I've done a post on this before. I think KPLC like Telkom Kenya dearly misses competition in distribution so it can raise its game.