NSE weekly catchup: some good news

The good news is that stocks are getting cheap at the NSE. Better news is they may yet get much cheaper-Nigerian banks P/Es are half for those of Kenyan banks. Sadly, the brokers just don't know what time of the day it is. How does this answer the fears of investors who know brokers are broke (but how broke?), and if they could eat when commissions were rolling in will not spare any investors’ cash? Saying you are going to do what you had said you were going to do in 2007 doesn't constitute change. If somebody knows you are likely to partake in what is not yours, it requires changes to this particular habit for them to be convinced into dealing with you...That or you move away. Bob Matthews now in the frame . NK next week? One of the more …suggestions I’ve heard is for GoK to do a bail-out of the NSE. Please, we have IDPs sleeping rough, 10m starving. So how do us investors (who can spare some cash to invest), get in front of the queue?

Full Year Results:
KCB was prudent on loan loss provisioning. And it seems like it’s been prudent about Triton and may have taken Ksh1bn (my assumption is that its Ksh1bn and not Ksh2.2bn originally mentioned) into the P&L. Viewed in this light, I have even a stronger supposition that BBK has not been prudent with its LLPs. KCB showed its strength by the fact that it still managed 40% on 2007. Other good things of note is the flat staff costs meaning that cost income ratio (if you remove Triton from the equation) remains on a downward path. KCB’s DPS is Ksh1. Equity>DTB>KCB>NIC>Stanchart>Co-op>BBK remains my bank share preference order at the NSE.
Bamburi- PAT down 11% due to a one-off hit for an insurance claim of Ksh1bn. Otherwise, gross profit was up 10% on a 24% turnover growth. Numbers are steady and as per expected and Bamburi also has supportive cash flows. DPS of 2.80 will be paid in July for those in books on 27th March.
East Africa Portland made a Ksh400m loss due to the Japanese loan (turnover was up 8%). Probably one of the worst run listed firms-it has had this loan since 2004 with attendant volatility in P&L and nobody has figured out how to deal with it…
BAT-PAT up 23% and the final Ksh12.50 DPS will be paid in April. Tempting but no tobacco for me.

Interims:
KenGen had a torrid 1st half of the year and now trades below IPO another crucial pointer to where we are at. Revenue was up 40% but was undermined by fuel costs going up 3times to Ksh4.7bn (oil prices were lower but it required more due to low water levels). PAT was down 33% therefore not a recoverable position.
KPLC-Excellent 53% growth in PAT supported by strong revnues (though Ksh1bn is fuel recoveries i.e opposite of KenGen). DPS will remain small however because of the preferred shares. Looks good for FY.
Carbacid also reported 31% growth in profits on strong sales. The share remains suspended which is a nonsense really.


FTSE:
Barclays had upward momentum after HSBC's exploratory announcement of a rights issue, but then came back down (thankfully for me), once Lloyds TSB confirmed the bad numbers at HBOS and that it still hadn't agreed to pay a fee for gova to take its toxic.

Macroview:
In 1963, Kenya had a population 8.9million. Today it’s circa 40m; by 2030 it’ll probably be around 60million. And we still lack urgency?
Last word: To Obama, verily I say unto you, the bitterest medicine is the most portent. We are all socialists now. Americans need to join the party. Sharpish.

KPC, KCB, KTB: we are not or are we?

In the 90's you read a financial scandal and re-read to see if what you were reading was true or some fictional thriller. One gets the same feeling reading some of the stories now.

One Samuel Gichuru is now known for his billions made at KPLC via various schemes such as the treated or untreated poles, deliberate reduction of HEP and ofcourse his appetite for "relations". Then you recall NBK and its laundry list of bad uncollateralised and unrecorded loans to the honourable MPs.

Now KPC has a missing 56m litres of oil which was allegedly bought by Triton. Triton had used this oil as collateral to borrow (wait for it), Ksh2bn from KCB (and I am ignoring the Ksh90bn that KCB has apparently lent to Triton over 4 years on the assumption most of it has been paid)! KCB which I unfortunately commended the other day for being ahead in its risk management now risks having to provide for a large portion of this loan as it didn't actually have anything but letters of assurance from KPC about its collateral. Triton collapsed just before year end... And yes, KPC is due to be listed this year... By the way, why was Triton doing KPC's job for it?

Memo to KCB: In good times, risk management has to be first class, in bad times, natural risk aversion should kick in. Its your collateral and it doesn't matter if KPC is the only one with storage, you have to have letters of guarantee that says KPC will bear the substantial risk of the collateral. Its not me being clever in hindsight. Did anybody evaluate Triton's cashflow and finances before the loan?

As for KTB, the story shows another sad state of affairs especially when the tourism industry needs all the positive PR it can get.

So are we regressing back to m-o-i days again? My take is we are and I really hope that GoK is serious about divesting itself from business asap.

Economy in the midst of headwinds

After the clashes earlier this year, some of us our confident that because of the resilience of our private sector, the economy would get back on its feet very quickly. 6 months later:

1. Inflation in the 20s: Has meant less disposable income as families have to spend more on the basics or most likely, reducing their consumption of these basics.. This means less can be invested or saved. If there is less being saved/invested, you effectively have less capital for new projects as it now costs more to get the funds. 2ndly, reduced consumption means companies earn less or pay more to get higher turnover. Lower margins mean lower profits. Inflation can be reduced by aiming at the cause. In this case, we have reduced supplies of goods to supermarkets, grocers and so forth due to the destruction of the North Rift. Crops will take a while to grow and maybe disrupted by patchy rainfall. Hence GoK importing things like maize. 2ndly, GoK can increase interest rates, but so far I think the inclination is not to do so.
2. Safaricom IPO-induced liquidity crunch: Out of the Ksh236bn raised on the IPO, I'd conservatively say that 30% was done via loans which would have meant taking out a lot of liquidity from normal lending activity. Another 50% would have been a mixture of savings and investments and the remainder from shares. With quite a portion of this still stuck in the banks, the economy is experiencing some liquidity crunch. This is forcing banks to pay more on the interbank lending. Several have already raised interest rates on loans. For now, refunds will need to be speeded up but going forward, IPOs must be done differently.
3. Electricity: Last year, at the height of the annual tariff squabbles between Kengen and KPLC, coldtusker and myself argued that the solution was for GoK to go ahead and allow KPLC to charge consumers more straightaway. Electricity generation is too important to be left to GoK and KenGen should be allowed to earn so it can re-invest. However, political expedience (i.e. suicide) came in and GoK agreed to pay KenGen instead so that voters didn't runaway. So this year, what should have been done last year has been introduced at the worst possible time. If the increase to individuals is anything to go by, some foreign companies will definitely eb reconsidering their location in Kenya. A doubling of electricity costs is nothing to be sniffed at, What should be done? Well, its a good decision but the timing is all wrong and I think GoK should consider continuing the subsidy for this year at least so that the economy gets back on its feet faster.

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.

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.

Results Update

BBK announced frankly disappointing looking numbers and will be the worst among the listed banks (blog on this later). However, if one adjusts for the Ksh1bn spent on new branches and increasing ATMs, the numbers look okish. Apart from bad debts in 2008, the other is issue of concern is that potentially, there will be continually higher staff costs from the additional 4,000 staff.

StanChart has pleasantly surprised with a 32% rise from 2006 driven by FX and Other commissions. Moreover, its been a great year if you are a shareholder of StanChart because adjusting for the shareprice differences, it has a superior div yield and its share price appreciation
 is similar to BBK's . Even better for us NIC shareholders.  NIC hit 63% rise.
Bamburi saw very strong results on 34% rise in turnover but had Ksh2m wiped of its cashflow due to clinker expenses. It paid a very good dividend for the yr though at Ksh6.

Also announcing interim and others were KPLC, EA Portland (54% down on costs from Clinker), KRe got hit by higher claims but saw 9% rise in PAT due to lower tax rate ; KPLC saw flat turnover and hence slight PAT rise (4%).

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.

KPLC break-up (at last...

As argued here and here, the power sector is now beginning to get some much needed re-engineering. By removing the distribution business, it will allow resources to be directed at reducing 25%+ losses in power output thus enhancing revenue. The distribution business will like-wise benefit via more efficient delivery due to envisaged increase in competition. It will be interesting to see how GoK will carry this out given that KPLC is a listed share. As to the impact on its price, investors might be better off waiting to see the shape the listed business will have before voting with their pockets.

Stocks View

Accumulate/Buy:
Equity: Has now become a byword for perennial overachiever. Both income streams (NII and Commissions and Fees) looked strong from Q1 07. More than ever, the bank is eyeing the saccos market share and engaging it intelligently. One may get queasy about resultant non performing loans, but that depends on term over which you will hold onto the share and 2ndly, Equity has a more conservative definition of non-performing loans than required thus is able to pick up problem loans earlier-in theory. P/E may look too rich at around 32, but would only be around 20 if one was extrapolate the Q1 results to the full year. Downsides: How many of its principal shareholders will divest some of their holding come next July/Aug when the 2-year holding period ends?
NMG: Is now an East African media house in all but name tetchy govts notwithstanding. The Business Daily has been received far better than initial scepticism suggested. In saying that, I still think that it’s missing a vital constituency-namely, the NSE investors. Why not for example do monthly profiles of each of the 51/2 listed companies; interviews of key players in our economy-this is the only reason I read the Financial Post and I am sure there are others who would want to know more? NMG has a fat DPS; note that its P/E is far more sensible than that of Standard and one can feel a bonus share issue coming from next year. Downside: M7 is not Kibaki and will willingly crackdown on any perceived negativism, ditto TZ.
TPS: Yes another Aga Khan company. Tourism boom is now on and TPS are recapitalising, going regional and refreshing the brand and their hotels in earnest. Downside: usual terrorism/security advices are the main one.
Hold or Upgrade to Accumulate/Buy…
CFC: The universal banking concept means that it will continue to do well as a standalone entity albeit in need of rejig-a bank with no online proposition today needs searching questions about age and strategic aims of its management. As a standalone entity, one can hold onto its shares for the mid-long-term. However, with Stanbic on board, I believe the new entity will be the corporate bank of choice for East Africa and as such investors need to get on board.
KCB: The bad times should be behind it…Q1 was solid if unexciting though it’s getting higher fees now from increased lending. It’s another one expanding its reach beyond Kenya and successfully at that. The hold is to wait for the demobilisation of the share spilt. Downsides: Is GoK non-interference behind us (i.e. this is a politically sensitive stock in mind and thus 2007 elections represent t some uncertainty)?

Underweight/Sell:
KenGen: Once you get GoK 's incompetence being played out publicly as some kind of experiment, you know you shouldn't touch that share until govt stake is reduced. You can't commit legally to something that you can't or shouldn't do and then seek to dress as some kind of intelligent and well thought-out rescue from fiasco.

KPLC: Whole host of problems:

1. Bad debts,
2. Probably too wide a remit (I think rural electrification needs to go a smaller company with none of KPLC’s history);
3. Leakages-25% of its electricity wasted this way
4. A large unionised workforce (apparently some are paid more than their line managers)…
5. and finally the ropey margins.

Upsides: Demand for electricity will get insatiable in at current or higher economic growth rates.
Mumias: Please see previous post and comments…nothing has/will change

Shareholder Activism?

Just imagine that if it wasn't for The Children Investment Fund (TCI) increasing their stake in ABN Amro to 1% and demanding that the bank either breaks up or looks for a merger, ABN Amro would today still be serenely going about its business as only the Dutch do. Tomorrow, Barclays will most likely confirm that it has agreed to merge with ABN Amro, thus acting as a white knight to save ABN Amro from being broken up. And its not as if the ABN was underperfoming, only that its strategy was not clear.

Today there are Kenyans who hold large but minority stakes in some of the top NSE stocks, the question is, would they demand for example that KQ fires its head of customer service following recent poor pefomance in this area? Or could Transcentury demand the cancellation of Manitoba's management contract with KPLC due to continued underperfomance? Only time will tell...

KenGen/KPLC saga

The way forward on the ongoing saga between KenGen and KPLC with the former selling power to the latter at an enhanced tariff of Sh2.36, whilst KPLC and the Government want it to sell at Sh1.76 may finally be resovled tomorrow with the expected performance update to the investors.

The announcement is likely to move either company shares up or down depending on who is favored.

SHARE SPLITS

Following ICDCI, EA Cables, BBK and Sasini share splits, CMC holding recently announced a 10:1 split of their shares to make them affordable.

Speculations are also on KPLC, Equity, NMG and Jubilee to do a share split as their shares are highly priced.

Overhaul of the power sector

If I was to be asked which economic sector is really in need of overhauling in Kenya over the next 3 years (apart from banking, stockbroking, insurance, agriculture, car, transport to name but a few), i'd say the power sector is. And it would probably be the easiest to do. So what are some of my suggestions:

Short-term

KPLC needs to be better at collecting debts especially those owed by the government.
The pricing issue with KenGen needs to be passed onto the customer-the customer who is also a taxpayer is already paying for this thru the govt covering the shortfall between what KPLC is paying and what it should be paying KenGen. At the moment we are trying to hide the fact that power costs alot to produce in Kenya. This is the reality, so lets pay KenGen in a timely manner so they can continue to reinvest and find cheaper ways of producing more power.

Medium-term

We should introduce another distributor into the market-either serving certain areas of Kenya or in direct competition with KPLC. We should let KPLC be a private entity-so gove divesture to KQ's level. Of the two, its more important that we have some government conttrol over power generation.

Long-term

We must redouble efforts to utilise the most natural of our resources-the sun- to generate enough power. We should go further and require that all buildings-old and new-have the capability to easily hold the solar panels used.