NSE weekly catch up: pause for thought

Volumes went a little higher this week but brokers won't see anything like the pre-Safcom volumes without the two key ingredients. Confidence. Economy.



Rea Vipingo announced PAT up 46% on one-off gain from acquisition gain for year ended Sept 08. Removing this one-off gain, shows PAT was flat vs last year. Turnover was 10% higher so its not exactly a growth story. DPS was reduced from Ksh0.80 to Ksh0.20. Investors have downloaded the share this week in disappointment.


So what to make of Safaricom's plan to issue a bond (I doubt if banks feel bold enough to do a syndicated loan)?NSE's initial reaction has been to punish the share with price nugging Ksh3.00. But an investor should explore the possible impacts so as to price the share correctly



a) If its a revenue generating e.g. to acquire bolt-on internet knowhow ahead of fibre optic or for network capacity or capability enhancement (I keep hearing Mpesa is getting teething network issues). This will be positive.

b) If its a defensive move e.g. to roll current debt; enhance cash flow or mere repair to network. Then its a negative because the jaw effect will be narrowed (revenue is under pressure).


Macro view: Uhuru Kenyatta's appointment probably wasn't what the NSE was looking for. Firstly you ask yourself what kind of finance minister would you expect as a minimum:

1. Qualifications related to finance (accounting, banking, insurance, CFA)-political science graduate
2. Experience of finance and or business- no finance experience but run's father mammoth businesses (?)
3. Knowledge/familiarity/ appreciation of IT- nothing suggests he doesn’t have average IT competency
4. Specifically for Kenya, strong anti-corruption and dynamic credentials- he is establishment thru and thru and only seems aware of Gatundu...

One hopes we can all agree that our economy performs better if:

• Corruption is low/ered
• Rainfall is average or above for the time of the year
• And global economy environment is benign (tourism, FDI and remittances)

Those 3 are currently absent so you have to hope for a strong dynamic anti-corruption fin min. Mmmh…As for Muhinga, I said that if he was cleared, he should have his job back. He wasn't and that says it all.

FTSE: Bad economic data (unemployement just under 2m); recession confirmed has turned heat on the banks this week. Barclays was near 50p... Funny story about bad cost averaging by one of its directors.

Why shun tea (agricultural) stocks?

In their otherwise excellent H2 research piece, D&B have advised investors to avoid tea stocks. This in itself is unusual because brokers (stocks salesmen), will rarely advice you not to buy any share, never mind a whole mini-sector. Their advice was based on changing tastes, fx issues and inflated production costs. Is this sound advice?

Investors will normally invest based on their expectations of capital gain (price performance) and income (dividends). Expectations will change depending on their perception of how price drivers are working. These will be earnings growth; cashflow generation; market share; dividend policy; management and company structure and share liquidity to name but a few. The key word is how in control the company is over all these drivers. In the tea and agriculture sector in general;

1. Earnings are impacted by weather, world prices (fx), GoK policy, changing tastes. All these are outside company control and volatile but are also easily discernable. Its thus possible to do speculative plays based on observed weather patterns, global supply of the particular product and so on
2. Market share: For most at the NSE, they are in world market and with the exception of Rea Vipingo have a small market share. So Rea Vipingo comes into play here provide (1) is working well
3. Cashflow generation: This is probably the most volatile part of earnings for agriculture stocks based on (1).
4. Dividend policy: Most at the NSE are foreign-owned thus give generous dividends (dividend yields by Kapchorua Tea and Rea Vipingo are among the highest) as a means of income repatriation. Again this makes them attractive speculative plays as discernable by price movement as they approach FY.
5. Share Liquidity: They are foreign-owned thus all have a small float that in some cases means virtually no trades for months (Limuru Tea 70% owned by Unilever has traded twice in the last year).

Bottomline: Invest for speculative plays and dividends.

Briefs: Athi River showed a strong H1 07 ; BAT half yr was up slightly on prior yr, but also issued a profit warning as Kenya catches up with the rest of the world and starts to ban smoking; Williamson Tea and subsidiary Kapchorua realised improved FY PBT but predicted lower numbers for this year.

Unilever Tea Kenya Ltd, Kakuzi and Rea Vipingo Plantations

Unilever Tea Kenya Ltd
Unilever Tea Kenya Ltd was formally Brooke Bond Kenya Ltd, until 2004. It’s a subsidiary of Unilever,and Anglo-Dutch conglomerate. It’s the largest producer of tea in Kenya. The company has a total land holdings of16,223 acres. It has 20 tea estates, 8 factories (including Mabroukie tea factory in Limuru), and produces 32 million Kgs of tea every year. It’s the largest private sector employer in Kenya, employing about 21,000 workers in the peak seasons. It owns Limuru Tea Company Ltd – it acts as the agent in growing, manufacturing, sales and marketing of Limuru Tea Company Ltd. Unilever Tea Kenya Ltd is involved in tea research, sustainable agriculture, and produces black, green and speciality tea. It has a market in Europe, US, Middle East, Australia, etc. It’s a major foreign exchange earner, netting about kshs5.5 billion.

Financial Performance
As of 21^st February 2007, the company’s shares had an average market value of kshs91, and a dividend yield of 2.22%. The share market value has stagnated between kshs80 – kshs 90 for the last 3 years. Although the introduction of tea plucking machines in the tea industry should reduce overall production costs, thus increasing revenue, Unilever Tea Kenya Ltd is not keen to embrace the new technology (opting to remain labour intensive), and this might make it less competitive in the industry. It therefore seems like the market value of their shares will remain stagnant, or might be headed for a tumble. However, the recent increase in rainfall should result in high tea productivity.

Rivals
Unilever Tea Kenya Ltd is competing against companies such as Finlay’s, another large tea manufacturing company. Unlike Unilever Tea, Finlay’s are more open-minded about the tea plucking machines, which should reduce their production costs.

Unilever Tea relies solely on tea production, unlike other companies like Kakuzi or Sasini, who have diversified their production to other crops. It might be considered a good idea to diversify, as it would appear that the world tea market is saturated – this might have an adverse effect on the company’s future share prices. Having said that, the company recently won a Global Award for fight against AIDs (on 8/2/07), from the Global Business Coalition, plus it’s very friendly with the worker’s trade union (supporting them in their fight against tea plucking machines) – would that have any bearing in their share prices?.

Kakuzi
Kakuzi is involved in tea and horticultural plantations. 61% of its total revenue is from horticultural sales and 32% from tea sales. Kakuzi has 278 hectares of avocados, 850 hectares of pineapples (joint venture with Del Monte Kenya Ltd, running until May 2008)

Financial Performance
The present average market value of Kakuzi shares is kshs 42 (no dividend yield). In the 1^st half of 2006, tea production suffered because of drought, and a strengthening Kenya shilling; tea sales decreased by 16%, but horticultural sales increased by 46%, thus saving the day. The company made losses from high operating and financing cost structure. Future revenue is dependent on the weather and volatility of the Kenya shilling. The recent increase in rainfall should result in high productivity of both tea and horticultural sub-sectors, despite the strong Kenya shilling.

Rivals
Other companies producing tea in large scale e.g. Unilever Tea Kenya Ltd, Sasini, and others producing horticultural produce e.g. Del Monte.

Rea Vipingo Plantations Ltd
Rea Vipingo Plantations Ltd is the largest producer of sisal, domestically and regionally. The company has benefited from increase in sisal fibre price. It sells in bulk market and niche market. However sisal prices are unlikely to increase further, and so increase in future revenue can only be from increase in production.

Financial Performance
The present average market share price is Kshs24.50, and have a dividend yield of 3.27%. Revenue grew by Kshs1.10 billion in 2004/05, despite dry weather and a strengthening Kenya shilling. Operating profit increased by 7.7%, but net profit decreased due to increasing financing costs and a high tax bill. The main challenge of the company is ensuring that there’s enough water supply for the plantations. High rainfall in 2006 should serve to increase productivity – increase in rainfall and stabilization of the dollar will increase output and value of output, and therefore revenue should increase. Prospects of cutting down on plastic bag use would have a positive effect on the revenue of the company.

Rivals
Other companies producing horticultural produce, e.g. Rea Vipingo Plantations and Del Monte Kenya Ltd.