NSE touches 3,000 next stop is 3,500

NSE is up 30% from the March lows and now has in-built momentum to at least go up another 20% by September or year end depending on when GoK starts selling t-bills.

Fundamentally, the picture is still the same, with firms and especially manufacturers looking at a grim 2009 in which they'll struggle to match 2008 perfomance. Most banks are looking at 40% tops yoy growth with significant loan loss provisioning to be done. BBK especially I suspect has either hidden talent for creedit scoring customers while hawking loans on the streets or this will be a grim yr.

Telecom sector (basically Safcom and AK), will almost certainly recover previous share pricepeaks (at least in the case of AK), on the back of expectations about how fibre optic will help revenue growth. Don't forget however that internet providing will rapidly become volume business.

The main driver for the NSE rise is that risk apetite is back. Many investors who got burned from around October have probably been able to pick up some liquidity and are now back in the market. I also expect to see focused attention from Western funds back into the NSE thus the rising boats effect on every share.

Which are the good buys? CT has a fairly good list. I'd add TPS, NMG and DTB from Aga Khan stable. And if you are feeling aggressive, pick up Centum given its portfolio will recover in line with the NSE.

NSE weekly - gently recovering

Equity pre-uploading of the extra 9 shares per account is almost up 90% from its Ksh9.3 low a month ago and as of yesterday close the index is up around20% from its low of the year. Still...how does one take a long-term view on the NSE given the econo-political side of the equation?

Results & Corporate Actions:

Kenol announced first results in its merged form and went up 20% on a 12 month basis. Note the ballooning finance costs partly due to the hostile business environment in Kenya. Generous DPS of Ksh3.50 payable in June. Oil industry can expect another tough year as it clears old stock and due to the economy.

Total its rival in the market, seems to have dealt better with its financing needs. PAT is up 34% on slight improvement in gross margins. Usual Ksh2.50 DPS will be paid in June.

ARM was up a disappointing 19% (and underperformed its budgeted Ksh442m), though fertilizer and its non-cement products are growing very well. Fuel and other input costs clearly played their part. DPS is Ksh1.25. Cement share in Kenya remains low so there is room for growth.

TPS had a terrible yr as expected with PAT down 46%. Notably however, turnover was only down 11%. Methinks 2009 maybe a flat yr owing to global crunch.

Centum confirmed writedown on RVR investment as well as effects of NSE falling (index fell 71% yoy to end of March). I suspect part of the problem looking at its portfolio is that it has a lot of filler i.e. stock that a good fund manager won't hold. A bit of a hospital pass for James Mworia from current NSE CEO.

PS: Are we going to catch up technologically in the NSE now fibre is here? Today you can't find one website where you can chart even the Index.

FTSE: breached psychologically important 4,000 mark.

Results season: Things to look out for

Most of the full year results will be released within this month and next. With this in mind, I'll be looking at for following in addition to the usual yoy growth in PBT, cash flow, debt.

Banks:

• Growth in other income: As long as CBK is determined to keep interest rates low and interest margins remain under pressure, banks need to diversify their income. Equity, KCB, StanChart and to some extent, NIC should see a very good year given entry into custody business by Equity and fx volatility for the other 3.
• Loan loss provision-most banks grew loans hugely in 2007 compared to 2006. Then the economy ground to a halt in 2008 and has since not really resurrected. My expectation is that loan loss provision which in ordinary times accounts for an average of 1% of the listed banks total loans will account for around 3% of the additional loans that were given in 2007 vs 2006.
• Risk management- given CBK's intentions on Basel 2and the world we are in now, this one will be of particular interest to me. Banks need to be clear about the risks they face and the contingency plans in place.
• About time HFCK showed some positive momentum.

Of the other financials, PanAfric will have benefitted from its associate's strong showing in Q3.

Industrials:

Impact of higher oil, electricity prices and a weaker Ksh/$ rate, makes it harder to call this sector. ARM is of particular interest especially keen to know if its gaining cement market share against the two. EA Cable's 2nd half should much be improved given copper prices have gone through the floor.

Commercial and Services:

With the exception of TPS (will have a horrible yr given its start), the rest should as minimum not see lower than 10% growth compared to 2007. CMC and Car & General have already come through very strongly and it shouldn't be different for the others. AK is of particular interest as it needs to show momentum ahead of the fibre optic arrival in Q2-it will also be interesting to see how its residential business is doing.

Forward looking statements:

NSE shares rarely do this, but it would be good if counters gave a view on 2009.

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.

AK "average" at 38%; TPS unsurprisingly down

AccessKenya announced distinctly average first half. Although sales were up 76%, cost of sales (which in its case would presumably be bandwidth) was up by a humongous 160%. Financing (basically interest charges on loans and overdrafts also increased by Ksh16m). Overall PBT grew by 39%. Removing the effects of the first two months but adding introduction of residential broadband and in an exponentially growing industry, the numbers are distinctly average. One wonders if AK will do a "ScanGroup" ahead of the introduction of undersea cable. My reasoning is that cash-rich businesses will do well in grabbing market share especially the crucial residential and small business sector and unless AK wants to come back to the market and do a rights issue, I don't think the Ksh400m it raised last year will go far...I've got it as a hold or wait and see counter.

TPS' numbers were not surprising. Most hotels had 20% occupancy rate in Jan/Feb and even March for some. Given that most of its clientele is still very upmarket, the results are very much in line and the shareprice for the last 2/3 months has moved to reflect that. Its still a good medium/long-term buy because if Serena can't manage in this industry nobody can.

NSE Stock Portfolio: 6 months into 2008

Generally, I haven't traded much this yr, not because of lacking opportunities, more because of a busy schedule elsewhere and an evolving strategy. From buying and holding for the whole presidential cycle, I am now more inclined to buy, and hold as long as the stocks are meeting the short-term mini-goals i.e. FY profits etc.

Bought:

1. During the January clashes: Equity@125, TPS@58 and Barclays@65
2. Nation Media Group@326 just before it announced its results
3. A few Safaricom during the IPO

Switched: after its Q1 results, sold-off my whole Barclays portfolio and switched into Equity@250 and Access Kenya@33.50

Overall Portfolio: Also includes ARM, KCB, NIC and EA Cables.
Overall trading from H1 2008: Very good returns....

Running the ruler over:

• Nation Bank of Kenya
• Safaricom while waiting to see if it'll get cheaper than ksh7.40.

PS: The above is my own personal stock-trading account. For KCIG, we outperformed the NSE for H1 2008

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.

Earnings Update

I know neither this govt nor any other has been known for their transparency, but one of the first tasks of a new CMA CEO should be to issue new guidelines on company reporting and relatedly-insider trading. After the credit crunch starting biting last yr, most investment banks and then more conventional banks did an earnings update that confirmed the impact the credit crunch was likely to have on their earnings. This is because it’s a requirement that any material change in earnings must be publicly flagged by all listed companies. Similarly, after a Xmas period that saw weak retail sales, many of the stocks in that sector have done earnings update where their figures will be different from those previously projected.

Post general-election violence and continued nonsensical rallies will affect many sectors. So far only Unilever and CMC have formally announced likely adverse impacts on their earnings. The absence of news from the rest has given way to rumors about the possible adverse impacts within TPS Serena seeing almost 10% shaved off its share price, while others maybe seeing erroneous rises. Some of the falls will be because there is insider knowledge about say the number of bookings that have been cancelled; number of loans defaulting etc.

On the contrary, being transparent about adverse impacts, means investors actually price this in early enough such that the eventual recovery in price will be much earlier than where they until the results are formally announced.

TPS: One of the stocks of 2008?

Did you know that TPS' shareprice has outperformed NMG over the last three years? Of the Aga Khan shares, only Jubilee has done better.  So why do I think it will be a stock to watch for 2008:

1. It should start seeing the benefits of its regional approach with tremendous improvements in its Zanzibar, Ug and lately Rwanda businesses
2. Tourism in Kenya is up 36% on year-to-date compared to last year. And projected to explode in the next 5 years (1m to 5m tourists-read Fintrade's article on the same)
3. The Serena offering in Kenya is increasingly targetting the growing middle class in Kenya with weekend excursions; 2/3 day fairly-well priced offers to go see game at Maasai Mara et al
4. A lot of administration has now been streamlined-its possible to now reserve your stay online. This has led to cost cuts.
5. TPS are projecting to double PBT for the year (based on their first half performance) and probably the same for 2008.
6. TPS is of course the only hospitality/tourism stock at the NSE. Despite a 1 for 5 bonus issue in June, the share price is today back to its pre-bonus issue price.
   
7. Interestingly, TPS are offering all their shareholders a 12.5% discount for any bookings this year.

In other stock news, Equity announced its Q3 numbers (with 98% yoy growth, although slightly down on Q2). As did EA Cable (they had a 24% increase yoy, but are getting stung by aluminium prices). Its good to see the effort they are putting into diversifying their revenue from Kenya -its  a good political hedge. It also a bit of a shock to see Kenya Orchard (they produce some very yummy strawberry jam)  announce their results. They do need a decent accountant however.

Interims announced this week

In order of performance vs. expectation:
TPS: PAT doubled in H1'07 compared to last year as the group consolidated its lead in the Kenyan and TZ markets. TPS has also acquired hotels in Rwanda and Burundi and is using this to sell "Destination East Africa" tour packages. Barring anymore adverse travel notices and with improved road network, TPS Serena being the only tourism related stock on the NSE allied to AKD ownership should be a must-have. Despite a bonus issue, share price is nearly back to pre-bonus levels. Has exceeded expectations.
EACables: A 45% growth in after tax earnings is good going given the continued rise in base metals. EA Cables has just completed its new factory. This will enable it be in a position to provide fibre optic cables to the new market. Its also looking at entrenching its top position in East Africa while expanding to South Sudan and Central Africa. Watch this space.
NBK: Leapfrogged Equity to announce its results first. No major surprises in terms of rise in PBT of 34%. Closer scrutiny of P&L and BS did reveal several puzzles. PBT rise was primarily due to lower loan loss provision (because of fewer loans?) and Fees and Comms. Interest income fell by 20% due to lower rates compared to last yr. The bank has a very small loan book. The real puzzle was that after repayment of 20bn npl by GoK its 33bn NPL has fallen to 5bn? The new initiative announcements are also fairly dull. If a bank is going into mortgages or rural areas similar to 5 others, it has be able to say this is what will distinguish us from say Equity in the rural area or Stanbic in mortgages. There is also the risk of over-paying to snatch customers from existing banks or getting lousy customers in the case of mortgages.

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

TPS announce FY06, -ve momentum trading @ NSE

TPS announced impressive numbers for FY06, but only so far one can say given there are no comparatives for FY05. Reason is they are apparently difficult to do given changes from '05. Would have been handy though. TPS are the only tourism-type listed company so it would have been interesting to see just how well tourism is doing.
About momentum trading-this I believe is single biggest thing that is impacting the NSE apart from institutions shyness, Francis Thuo fiasco and speculators. Momentum trading is where investors flock to buy into a particular market just because everybody else is. When it comes to selling, they also sell at the same indiscriminate rate. This affects not just retail investors, but also institutions and is particularly acute in an economy like ours where they are not many liquid assets to invest in. It means that the NSE can go up and down like a yo-yo on even when the economy is heading upwards, companies are investing and seeing huge profits and money from the diaspora and the like is still pouring in.
The suggested OTC market, floating of longer-term bonds will help in mopping some of the latent liquidity in our economy that is just floating around looking for investment opportunities that give adequate returns. As will increased competition in the banking sector using price (account charges, interest offered and charged).