NSE weekly: KQ cut up by a hedge, CEO Mahinda's exit & others

NSE has started catching fire and should hit 3,000 before end of June as fund managers close for interim reporting. Discerning investors who conquered their fears in March are of course exiting into still underpriced shares... UK investors note £/Ksh rate is now Ksh125 (was 128 earlier in the week) from its strong Ksh114 earlier.

Results & Announcements:
The headline will be that KQ posted an eye-watering loss for 2009 (the largest in Kenya's history?), but

• Turnover was higher than prior yr across board though some of this was due to the slightly stronger Ksh over the period
• Passenger numbers were either higher or flat in all the its flight regions
• If you remove the hedging strategy's P&L impact from both yrs, KQ had a higher PAT than 2008

However,

• operating profit was lower driven by higher costs, which is not good especially if the $ strengthens this year
• the hedge was/is a mess and there is no getting around that. Mark to market is not the issue because that is international accounting standard. KQ would still have incurred the realised losses of Ksh1.4bn. You can't hedge a large portion of your fuel for 3yrs at $120 when the oil price has never gotten that high before. It’s similar to the way you won't buy a share at near its highest price. A 6 or 12 monthly rolling/calendar hedges might have been more ideal to allow recalibration of KQ's hedging strategy to oil futures.

So how did Virgin make a profit where BA and KQ haven't? Well, it didn't under IFRS but it did under UK GAAP (its a private company so can do this), which still allows hedging revaluation movements to be done via balance sheet and STRGL as opposed to P&L. DPS is Ksh1 and payable in October... Share price tanked initially but recovered to close down 15% for the day at Ksh20. Going forward, KQ will probably take a hit of a similar magnitude of released loss on its hedge, will have a lower unrealised loss (a round number would be Ksh1.5bn assuming oil prices stay at current levels), and should see continuing improvement in its BAU revenue for this year.

EABL's CEO Gerald Mahinda move is a bit strange. He has presided over a very successful spell at EABL and its a bit of a surprise he wasn't given a bigger job as say MD for the African operations. His replacement seems a relative novice into the Kenyan market. An opportunity for Keroche?

Macro:
Economy will move sideways this year and with remittances down expect interest rates to have to rise at some point to help bridge the budget gap.

FTSE and other markets:
Staying well balanced. Barclays went down well below £3 as expected but has since resurged as it confirmed BGI sale. Next test for all banks is the performance of govt bonds which may end up forcing interest rates upwards.

NSE shares I am looking to buy

A general comment. The NSE may fall a bit more, but I don't think the trend will last another month. Unless Co-op comes in and inflation stays flat at 27.6% or goes higher. Its therefore time to start looking at what are the good shares in the market:

1. KCB-Its annualised P/E for 2008 is around 15. The bank will start benefiting from its regional growth from 2009 and beyond. The only spoiler (which will impact the sector anyway), would be if the economy turned negative because of inflation thus increasing non performing loans.
2. AK- Fibre optic cable will be with us in 2009 in one shape or form. AK is an established player in the market already and in the first lane to take advantage of the faster, cheaper internet network. If it can't, somebody will buy a stake in a similar vein to ScanGroup.
3. Equity- The share has been good to me and remains my favourite despite the taking a turn since that announcement. Its annualised P/E still looks high but the bank has 3 more years of 60%+ growth to come all at a lower tax point and it would be churlish to ignore the opportunity.
4. DTB- Has some of the KCB ingredients (strong and aggressive regional franchise) though not the same balance sheet or branch network. Its slowly standing out in the mid-tier because its able to source funds in different ways from say NIC which doesn't have the branch network or the international connections.
5. TPS- Having logged out, I might be tempted to get back in should the price go below ksh58 (which would be its lowest for this year). Great hotel business and a bellweather company for its industry.
6. EABL/NMG- These two are back ups in case the NSE confounds my expectations and continues to go downhill beyond 4,000.
7. Industrial- Not touching especially those with a high energy cost component (whether fuel or electricity). Electricity price rises will burn margins.

Monday shorts

Well, last week ended on a rather sour note for some Crown Berger shareholders. Somehow, the stock fell by 50% on Friday even its though 6 month results were flat. Ama its the old City Trust story? The wider NSE remains depressed and it looks like supply and inflation have made the market a no go area for a while. Great results from EABL. 22% is a good growth number for blue chips like it and Safcom.

After noises from many of us, NSE improved and even refreshed its website. Sadly, things are now going back to where we were. It no longer posts results and even prices to go missing. Wake up guys!

Thinking real estate? Why not Ug?

Some interesting piece on Biwott. Ati m-o-i was his teacher?

Linturi's proposed bill (riking that accent, that is what I call keeping it real) chimes with something I heard, instead of 65, why not align presidential candidacy with civil service retirement age which is currently 55yrs? Also, make sure a MP can only serve two consecutive terms (anywhere in the country)...

I had another peek at the updated vision2030. The first shocker was on page 6. The 10% annual growth rate needs to be maintained for the next 25 years i.e. from 2005...That means we've already fallen on one target. The thing about this vision is that the formulators are not my generation but old men in their 50s and 60s who most likely won't be around to pick the brickbats when its not achieved. Or the plaudits if any. Planning or forecasting or any chore requiring target-setting boils down to SMART.

Talking of target-setting and performance contracts for judges. I have just one that I think anyone who has been through the Kenyan courts would want. Just tell us you'll reduce the case backlog by 20% on a year on year basis. Dank.

Enjoy your week...

Investment Strategy- Go Regional

One of my earliest posts was about an investment strategy for a 5 year investor at the NSE. This post updates those themes with one extra caveat, regional expansion.
If Kibz, RO and other politicians can change the habits of a lifetime, Kenya will be an African economic powerhouse by 2011. The upside of this is that the NSE will outdo its 2002-6 performance, as foreigners start chasing the frontier markets in earnest. The downside is that firms are now getting competitive and in every industry, listed companies will feel the heat.
If your chosen firm doesn't have any plans for East Africa to start with, then it'll struggle
to grow beyond being able to handle compe in Kenya. The 2nd important reason is to reduce the Kenyan political risk on your chosen stock which will be there in 2012 (if there are no elections in 2010 which I hope). You need stocks that can effortlessly grow come funny politics or not.
Both TZ and Ug are growing are at roughly similar rate of around 5% per year.
Ug is probably the easiest market to access grew at an estimated of 7% for and has opportunities in construction; banking; large infrastructure projects and the clincher, possible oil wealth.
TZ remains largely untapped and possibly hostile to Kenya but the EAC economic zone will overcome the latter.
Further on we have Rwanda and Burundi. Rwanda is working furiously hard to become an investment haven despite the smallsize of its  market and language barriers, is seen as having huge growth potential. If Kabila can breakaway from his father’s habits, there is not enough space to write about Congo's potential especially in commodities. Ethiopia with the 2nd largest population in Africa and an economy averaging 9% presents opportunities in agriculture; huge hydroelectricity potential; potash deposits and of course historic tourist sites.
In terms of stocks already expanding regionally, EA Cables; NMG; EABL; KCB ; Kenol; TPS and DTB are at the forefront of this trend.

What stocks I my investing in

Shanga has asked me what stocks I'm investing in at the NSE. Firstly a general comment about the current stock-investing environment. Its tough worldwide. Reason. Hotmoney aka money from western funds; sentiments about the US economy and of course, credit crunch are all making guys run around the world stock markets like headless chickens. Thus making quick bucks is not an option. In some markets, only risk-takers and those with a one yr+ view are buying.
As for the NSE, the positions I've taken so far this yr have either been based on companies with long-term prospects or for defensive reasons. By defensive I mean averaging. I haven't sold anything yet this yr because apart from Equity, the others haven't reached fruition and I believe they'll.

TPS- Because despite the tourism issues and the fact that 67% of its revenue is from Kenya, nobody does hospitality better in the whole of East, Central and Upper Southern Africa than Serena.
Athi River because it has a good base to go forward. And its not exclusively dependant on revenues from cement.
EA Cables, because Mugo the CEO is not yet 40 and has plenty of good ideas

1. Fibre-optic to take advantage of TEAMS, SEACOM and other under-sea cable projects coming online from 2009 onwards. And of-course, copper is expensive
2. Regional expansion. Most of its turnover growth for 2007 came from outside Kenya
3. Linchpin of Transcentury, therefore has strong shreholder support
4. Any price below Ksh40 is a buying ooportunity for this stockDiamond Trust because trust me its going places.

Barclays for defensive purposes and also because its very tempting when its under Ksh65 as it was a
few weeks back. EABL for the dividend tu.
On my watchlist remain AccessKenya and KCB.

The NSE & the Kofi mediation

As a general rule, I find an over-concentration on politics not only  soul destroying but also reminds me of that primary school saying that empty dembes make the most noise. Thus with our great nation dominated and adversely impacted by siasa mbaya, the adverse effects are being felt on our economy.

With 44% of our population classed as being below the poverty line (i.e. earning less than a dollar a day), the urgency of getting our economy growing constistently for like 10 + yrs, means that if a complete overhaul of the constitution is what it'll take to avoid the 5yr need to slaughter the "outsider" communities, lets get it done pronto. I was speaking to a friend who is in the insurance industry back home. On a normal month, he'd expect to write between ksh1-2m of new business. In Dec, he actually had one or two contracts of around that amount ready to sign in Jan. As it is, he hasn't written anything in January. Which is ironic given the prevailing situation where many businesses in Eldoret and other towns west of it are finding that the only way of redeeming their investments is to go for the Ksh1bn thatKibz announced. Reason? Many didn't insure their businesses. Tell me,when you have a business perhaps transacting ksh1m per month or more, shouldn'thave insurance especially where you have stock?

The bourse continues to sway back and forth and is now reflecting the fears and uncertainties about the direction Kenya's economy will take should are solution not be found. What remains on my stockwatch: AK, EABL/BBK ( for defensive purposes), EA Cables (who is its competitor for the fibre optic market?) and as always Equity should it breach KSh120.

As an aside, changes in the NSE matters to different people in different ways (an oxymoron I know). As an investor, when you want to know the value of your portfolio, you don't pay attention to the index movements, but to what you hold. Hence, I tend to follow the market cap number more closely than the index itself. For stockbrokers, market turnover matters most because that is what dictates their commission. For pension funds and unit trusts, it's the index. For hedge funds it's the volatility of the index. To gauge market sentiment, have a look at the volumes being traded (although its better to look at bid vs. ask). Long-term prospects are another matter.

Anyway, in my etravels, I picked up three articles worth a read. By the way, I think it's true what they say, if you repeat a lie enough times,it become a truth. Sample  George Bush and weapons of mass distraction in Iraq; the myths about who dominates who in Kenya. In all this I forgot that out of Kenya's 44 yrs of independence, m-o-1 ruled 24 of them...

1. David Anderson article on kenya's siasa mbaya
2. That article about RV's warlord
   
3. Senegal president's take on Sino-Africa relationship.

Week 36 @ the NSE

NSE went up 200pts in the week driven apparently by peeps who got their refunds and decided to splash out on the rest of the counters including KRe-that was clever move to announce the results just after listing. Some of the counters are now showing signs of the exuberance that was there about this time last yr. Exuberance can be another word for manipulation or good tidings being expected. The following have puzzled and made sense:

NIC-had already gone up by almost 70% from the price on July 25th confirmed plans to do rights followed by a bonus. What I don't understand is why if they are going to be selling the rights shares@Ksh70, peeps are running around trying to get some at Ksh180. Why not just wait post-bonus. Not complaining though...
DTK-in contrast, guys haven't really chased its shares despite it being a better prospect in my humble opinion
EABL-This tends to be a fairly dull share, capital gain-wise but this week has moved up after announcing a bonus issue and a tasty dividend. With the amount shares it trades, watch it go back to its customary 2 pts up 2 pts down post this little excitement
AK-one can appreciate the excitement about its recently acquisitions (Today Online and Open View), one should however also prepare to exit as soon as Telkom announces its strategic partner and or the cabling projects start giving firm dates of arrival on our shores.
KPLC-no comment, except look at preference shares (debt), transmission losses, GoK vote-buying tactics et al. If GoK wants the share to be more tradeable for wananchi, let it offload its equity so two birds in one go because it will remove the political risk attached to KPLC's share performance.

Excellent interview with EABL's CEO

I really like some of the ideas that Mahinda had.

1. "Utopia for business, is when politics and business are totally divorced": In the same way that an individual can't perform as a surgeon and a lawyer with equal excellence at the same time, GoK shouldn't expect or imagine that it can run businesses and govern at the same time. GoK's role should be to create the enabling framework, implement it and then run maintenance work over it, otherwise leave the private sector to run with these programmes. Civil servants owning or running businesses should either declare their interests or forfeit them.
2. Given Kenya's "chama" phenomena...GoK should move fast to incentivize local collective borrowing and investment: So support investment clubs by recognising legally and in terms of IPOs, giving the opportunity afforded so-called QIIs.
3. ...however, all these can only be done with the right leadership: Kenyans are yet to have the sort of leadership that is able to adequately address 21st Century problems that we face. For example, we talk day and night about diaspora remittances, but we don't want to give them dual citizenship; there are no known programmes to work with so-called developed nations to facilitate Kenyan economic migrants similar to those done by South Africa, Australia and New Zealand. In ICT, we need a qualified head of ICT who covers everything fro mobile telephony to the undersea cabling to computerisation of schools; GoK information network et al

Thursday's Budget & the NSE

As always, Kimunya's presentation was Raila-like, populist but please read the detail. Some of the bits that will likely impact the NSE in the coming year/s are: Govt direct participation in the NSE per paragraph 38. Following its failed OFD for 19% of KenGen and the fiasco that was Mumias (for the shareholders at least), GoK wants to be able to sell its stakes in various NSE listed shares in small blocks as opposed to doing a large block at a go. Sounds good in theory, but in an illiquid market like NSE, this will only be doable if its targeted i.e. the block is partially offered to institutional investors. The issue that is causing concern is where GoK may try to shore up a share price. Opinion here is that the first is ok with safeguards, but the 2nd is a no no. Repayment of NBK's npls owed by parastatals over the next 20 years. No doubt, this will increase its liquidity and allow it to lend more. The question here is the interest repayments. NBK has been accounting for interest on npl in its P&L, in which case any subsequent repayments would not go through the P&L, but this is only if it has done this for all its npls. Another ksh13bn remains to be cleared. GoK also announced that it will be selling more its stake in NBK. Increased recapitalisation requirements for financial institutions over the next 3 years: There are currently several banks that fall under the ksh1bn that will be required. CFC-but they are already in advanced merger talks with Stanbic-for 6 months? DTK-despite doing a rights issue in December, they may need to complete their merger with Habib Bank HFCK-they are in the midst of a rights issue to sort this out NIC- they announced a rights issue on Friday Within the unlisted banking sector, there is quite a few that again will most likely merge or seek help from their shareholders. More importantly, the insurance sector is also being required to recapitalise. Sin taxes were in effect again, but one suspects that the demand inelasticity for these products is such that only a big rise in the duty would dent the profitability of EABL and BAT. Construction-related stocks will benefit from allowances on low cost housing. Finally, happy papa's day to all the fathers out there!

Another solid performance from EABL

Come rain come sunshine, people will have a beer , and EABL will continue to unsurprise. One thing I like about EABL is they not only perform like a company on top of their game, they also look like one. Check out their website; dividend policy is one of continued growth; they have their CSR sorted out; you know when their results will be coming out a year before the results are out; their response to competition is sure and rapid-the senator kegs are a good example of this.
In contrast, Barclays don't have a website to speak of, still prefer to buy t-bills than lending to corporate Kenya and are only responding to Equity's threat like 18 months later than they should have. They do a rights issue-ostensibly to fund their expansion into the unbanked market and then cut dividend for the same reason?

More stock picks for 2007

EA Cables: since the takeover by the G-29, the company has taken over a TZ company to given an additional leg in its ambitions to be an east African entity again; saw dizzy price heights before stock spilt and continues to return credibly good financials. All these factors will continue over the next few years because the common denominator-majority ownership by TransCentury will want to stay for several few more years.The cons is probably the same, the G-29 involvement means that should they want to exit or become stretched by involvement in other projects the company will suffer.
NMG and DTK:both majority owned by the progressive Aga Khan. NMG will become the dominant media house in East Africa over the next few years. As with the recent bonus share issue for Diamond Trust, I believe NMG will have a share spilt at some point this year to increase the liquidity of its shares and as a capital-raising exercise for future expansions. For NMG the only issues will be barriers to its expansion namely political interference as happened in ’06 when several of its staff and journalists were denied workings permits by TZ and had to leave. DTK will be expanding operations to the region.
ICDC:formed in 1967, ICDI has acted as an investor in various businesses. It has some features of a private equity fund and those of a mutual fund. The company is currently benefiting from NSE resurgence but also owns various profitable unlisted companies that could be listed in the NSE over the coming years.
KCB:Terry Davidson’s turn-round plans are well on target. The bank is now competitive in the Kenyan market, should start operating profitably in TZ and is expanding into South Sudan. I expect further government divesture in the next few years as well a share spilt. The downside is that the bank still has a significant NPL problem of the political variety i.e. politicians and their business who owe it money. This will require political will not yet seen in the current government.
Equity: the CEO is one most visionary and able mangers in Kenya’s private sector today. He is also one of the bank’s largest shareholders. The next 18 months should see the bank’s share price rocket reflecting its performance. Post this, employees will be allowed to offload their shares and hence may see lower share price. The chinks in its armour are probably to do with its fast growth i.e. non performing loans. 2ndly its success in spreading banking to village has not gone unnoticed by its bigger rivals-Barclays has now done an about-turn and will be re-opening some of the branches it closed in the late 90s. Thus there will be increased competition for Equity.
CMC:as the middle class base in Kenya expands more and more will be buying new cars rather mitumbas. And CMC are in a prime position to benefit from this.
For stable dividend policy and share growth, one should also look-out for EABL, Standard Chartered. For speculative purposes try Sameer and Scangroup.
PS: Since my post on 22nd on NSE opportunities for 2007, Barclays has since risen by 30% as investors recognise the opportunity its price presented. Those who moved in mid to late Dec will probably see the price double in the next 12-15 months.