NSE sectors stock pick for July and the 2nd half of 2009

As a generic comment, NSE is now some 35% higher than its low of in March. Therefore, value for money stocks are gone. 2ndly, I suspect that given foreign interest of late (posting net inflows and I think almost accounting for 57% of units dealt), a correction of around 10-15% is on the cards between now and October in keeping with the worldwide correction. Finally, we are not going back to last June's 5,000 level in a hurry. Idea should be to look at price over the last 9 months and compare to today. The nearer today's price is to peak over the period, the less the potential gain. Why? Fundamentals in Kenya are worse now than they were 9months ago.

Agriculture sector: Tea companies will benefit from current dry spells in pretty much every South Asia country especially India and Sri Lank (Kenya's tea rivals). Primarily, will benefit from valuation of biological assets. Your pick is from Kakuzi, Kapochuria and Williamson (the latte two are one and the same and I am not sure why they haven't merged). All three have already been noted and have hence been rising steadily. Best time to buy is once they are xd and well before the annual results are announced. I'd normally class Mumias as an agri stock but the power co-generation changes matters somewhat. Pick is Kapchorua, although it'd have been Kakuzi whose operations I'm very familiar with but it has corporate governance issues for days.

Commercial and services sector: Easy one. Safcom. I think it has 30% upside over the next 12 mo0nths. Compe in the mobile telephony market is in disarray once more with Zain up for sale, Orange changing CEOs and Econet, being well, Econet. Interestingly its trying to buy up programming and software capacity. Expect multi-media offerings. And of course, MJ is leader of TEAMS. I won't MPESA as this remains on licence to Vodafone, its parent. AK is now the most expensive share on NSE, otherwise would have been my pick at Ksh20 or lower. ScanGroup will suffer from Zain and others slowing down and general macroeconomic conditions. Pick Safcom.

Finance sector: Equity is till the stand out stock in this sector. It has lead market share at the NSE, will be very competitive in Ug and is expanding into Rwanda and South Sudan. DTB has a similar strategy in TZ especially as does KCB in the same countries as Equity as well as TZ. What distinguishes Equity from the other two is
· Strongly capitalised
· Historically nimble and able to grow from a low base (necessary regionally).
The other banks share to look out for is Stanchart. It has just completed purchase of First Capital (additional fees income loan arranging and any M&A activity) and will mostly certainly benefit from the forthcoming bond glut without any potential downside from bad debt write offs. Added benefit is its high dividend yield.

Industrial and Allied: Sector in a tricky time (fuel costs higher, anaemic export and domestic market). Stocks that will do well have already appreciated or stayed fairly steady during the bearish period. This sector is probably the hardest to gauge. Clearly, its hurting because of the perfect headwind combination of fuel/localised inflation and the macro conditions (anaemic export and domestic demand). Look for utility or utility like operators. But do note that KPLC and KenGen will suffer from the short rains=lower power generation=power rationing spell. So EABL is a utility-like monster with deep pockets and looking to expand regionally. It does look expensive on the basis of the last 9 months though. Maybe EA Cables, but it had issues as early as January. Mumias and co-gen? Maybe, but I have been unconvinced for a long period.

Avoid sector: Olympia should be fairly self-explanatory. I think it might another Uchumi in the making. Except it has no redeeming qualities. KQ, please google Virgin and BA to understand the dire straits this industry is in. I think oil prices will stay at current and lower prices over the next 12 months mainly because of the wider economy.

NSE weekly catch up- out of step

NSE has in the main been tracking western markets this year. With the odd variation here and there. And this week's 61pt is one of them. I suspect a portion of this is driven by the 25% post-spilt Equity drop. My own estimate was that the inflexion point for Equity spilt shares would be Ksh10, but Friday buy and sell volumes were not that different. So it appears that for now, principals are not reducing stakes.

Results:
ScanGroup-now with a stake owned by WPP one of the world's largest ad firms announced 29% PAT uptick on 2007 driven (translating to 20% in EPS), by 21% growth in turnover. DPS is 0.75, a little lower than prior yr. ScanGroup has a huge market share in Kenya (53%) and a third in TZ and Ug. And these markets are growing. Forecast for 2009 is 10% yoy growth. Btw, I predict ScanGroup will be fully/majority owned by WPP within next few years.
EA Cables was first off the block with quartely numbers. PAT was down 19% on turnover falling by 3%. One of the reasons given for this is a bit ambigous to say the least. Apparently LME prices fell. LME is ofcourse London Metal Exchange. So why would falling copper and aluminium prices be a bad rather than a good thing for a company that uses these are raw materials? I don't recall mention of any hedging in the annual results.

Macroeconomy: World Bank projects 2-3% growth for 2009 while Africa Development Bank projects 5.5%.

Other markets: A nice study in contrasts with USE by Bankelele.

NSE Update: traders vs long-term investors

After the bull, the bear, a creature made in the ATS laboratories showed up briefly at the NSE from last Thursday but came to a screeching halt yesterday. Some are alleging circular trading. Did you see Kenol go up 43% on Wednesday on 500 shares? Others are crediting the feelgood factor engendered by Obama. Whatever the play, I expect the positions to be unwound in the coming weeks.

Who between long-term investors and traders profits more over a market (bull, bear, bull) cycle?

Standard is venturing into Radio.
Scangroup completed the sale of a stake to WPP.

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.

Media Season

The general elections heralds a great revenue harvesting season for newspapers and general media and this one is no different. ScanGroup, NMG and Standard should all benefit from the season. Price is not everything. Many of us when buying stocks will normally look at the price and say, aah, its too expensive. This applies very much to NMG. Despite rarely trading at less than 240 (with exception of brief market-wide blip in March/April) this year, the stock has found buyers impressed not just by its bottom-line, but the future Nation Media Group.  It has outperformed Standard over the last 6 months and ScanGroup over the last two.


 In one year, NMG has moved into UG with TV, brought a business newspaper into the country, launched a cheap newspaper Metro to compete with Nairobi Star, launched daily shorts of its NTV news on you-tube, removed entry requirement apart from its premium content. In any other year, this would have been unprecedented but coming in the same year as the general election, is awesome. In addition to the above, NMG also runs NTV, Easy FM and a publishing house. 90% of its revenue comes from newspaper sale and magazines. It now has presence in TZ and now has a vision for the whole of Africa. Despite some "issues" when new CEO joined, NMG saw 24% rise in its PAT for first half of the year compared to prior year and should comfortably beat its previous 3 years' annual growth in PAT.
Standard Group continues to lag in the shadow of its bigger expansive brother and perhaps some misguided steps. Despite this, the STG saw profits double in 2006. It also awarded patient shareholders 1;8 shares
which seem not to have materialised yet. The group also owns KTN, Baraza and PDS, a publishing arm. STG was upgraded into MIMS in Feb thus making its shares more marketable. STG has also invested in its state-of-the art printing press which should considerably reduce its printing costs. It has revitalised its management.
STG continues to suffer on several fronts however, staff turnover is high and its flagship TV arm recently lost a whole set of its stars to Citizen. Secondly, advertising revenue which it never had a great deal to start with has been reduced by its perceived anti-current regime stance (I wonder why?). However, increased circulation and viewing figures should give it bumper figures.

Lastly, ScanGroup. The group has since its listing gone on a spending spree, restructuring of its staff reward scheme to include loyalty shares aka employee share options and expansion to regional and continental markets depending and widening its product offering. Its shares suffers from nervousness about staff loyalty (very important in the adverting world where clients accounts will be managed by one or two creative-types) and generally too much supply of its stock. Again, this season should see increased advertising revenue and give it a typically bumper second half. Long-term, the group's activities this year should mean increased revenue in coming years though concerns remain on its cashflow.

More Interims

NMG's numbers are strong and bode well for the 2nd half when it should see an election uplift. Interestingly, its EAst African paper is doing very well too. Scangroup a fellow competitor for advertising had a solid first half. Scangroup tend to perform very strongly in the 2nd half as many companies will be advertising for the Xmas season and the coming year. Cash flow went into negative due to higher dividend payout and acquisition of RedSky. One thing I am not sure about is how well they are able to merge all these new companies they've been acquiring as well as grow regionally and into West Africa. The other concern is how well they will be able to keep the the account managers from RedSky.
Bamburi had a flat first half compare to last year. I am still not convinced they'll benefit (apart from scale) from their proposed merger with Portland. Construction industry will continue to be a growth industry, but they lack the agility and hunger for business that ARM have.
Express's PAT almost doubled in size and it looks as if their recovery is sustainable. The elephant in the room where they are concerned must be a rejuvenated Kenya Railway (RVR) which will be competing with them for the freight business from Mombasa to the rest of the country and to especially to UG. Jubilee had a fairly disappointing half. and i suspect that their reliance on investment income will continue to haunt them unless they can start focusing on the bread and butter insurance business. On the contrary, their rival PanAfrica had a strong half with all its insurance lines seeing strong growth, but had investment losses from associate wipe out all the gains. Perhaps they may benefit by hiving off this business?

RVR deal goes off the rails, NMG, CFC excite

When the Rift Valley Railway deal was announced, I said that i thought that a 25 year term was economically suicidal. Rail if handled as a business, could be a cornerstone of our economy's regeneration helping generate revenues and support the growth of the our landlocked neighbours, our productive Western and Rift Valley provinces that don't have roads to match their productivity and help ease the wear and tear rote on the Mombasa-Nairobi road by HGVs. To surrender the business away to entities some with dubious history and others that are entangled in messy legal entities for 25 years without any back-out clauses smacks of desperation and will cost us in the next few years. Already, the first results show that under the new RVR tutelage, KR is underperforming in various areas with KPA having to publicly complain about yet-uncollected rail cargo, RVR are still in court with their former partners and they off course haven't paid all the fees to GoK. It is messy and I forecast that the whole deal will have to be reviewed in the next 18 months. The other point to make is that there are very few of the big tenders in any sector that this govt has done well in and I wonder whether we need to call on our "partners" World Bank/IMF to help streamline the way we evaluate these deals so that we get the right candidates.
While I was away, various companies rushed in their results to comply with the end of March rule. Several stood out. NMG with a k12 dps was awesome and those wise enough to look at price growth potential as well as dps will have NMG's shares. For me, this is the only media company worth holding over the long-term given its expansion goals. CFC is one I expect to hear more of. The 06 results show that it can do well on a standalone basis; PAT grew by 68% driven by growth in customer loan book (30%), govt securities and fees and comms. As the only universal bank in Kenya today, CFC will show momentum in the 3-4 years as it streamlines its ops. Its likely merger with Stanbic to create a top 5 bank will be the icing on the cake for its shareholders. Finally, there are rumours that Express is eyeing an strategic international partner presumably to give it capital assistance that will expand its reach. From being a loss maker 3 years ago to an international business is quite some turnaround. ARM, ScanGroup are others that announced FY06.

ScanGroup's 50% stake in RedSky

Just for our records, I have copied and pasted this from Dyer & Blair's website.
"SCANGROUP ACQUIRES 50% STAKE IN REDSKY

Scangroup Limited has acquired a 50% stake in Redsky, a local advertising company. It has also entered into a further agreement to acquire a further 35% of Redsky subject to no regulatory approvals being required, according to the Chairman of the Board of Directors, Mr. David Hutchison.

The deal holds the following synergies for both groups:

For Scangroup:
Redsky’s client mix includes firms in sectors in which Scangroup has had no significant presence such as the telecommunication and automotive industries.
Redsky is the advertising agency for Safaricom. Mobile telephone operators in Kenya today have the largest advertising budgets. Indeed, Celtel and Safaricom have had a combined advertising exposure of over Kshs.1.3Bn in 2006 according to Steadman & Associates.

For Redsky: Redsky benefits from Scangroup’s regional presence, media buying and planning expertise across several African markets, allowing their clients to tap into public relations, event management & experiential marketing expertise from Scangroup.

Additional information: Redsky was formed in 2005 by Lynda Holt and handles advertising for: Safaricom, Beiersdorf, DT Dobie, Stanbic Bank and Sara Lee.

Scangroup Limited is the first marketing services company to be quoted on the NSE and is holding company for advertising agencies Lowe Scanad Kenya, Uganda & Tanzania, Thompson Kenya and Grey East Africa, McCann Kenya, FCB Tanzania, media planning and buying companies Media Initiative East Africa and Universal McCann, public relations company Scanad Public Relations and event management and experiential marketing company Draft Worldwide.

As part of the acquisition, Mr. Hutchison and Mr. Thakrar will be nominated to the Board of Redsky which Mr. Hutchison will chair. Other directors include Lynda Holt and Erik Van Vliet the Creative Director of Redsky."

Of note, is the fact that McCann is already part of ScanGroup, however as several of you mentioned, it will only be a good deal if ScanGroup can keep RedSky' staff happy so as to keep the client accounts.

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.