Najivunia kuwa Mkenya

Above slogan is currently being used by the Kenyan government to promote its image amongst the masses. It means; ‘TO PROUD BEING KENYAN’. The context of the PR is to highlight the social-economic achievements under the new government after decades of mismanagement. Also following some blunders ‘Anglo-leasing’, the government want to counter much of the scepticism on whether these achievements have tickled down to the masses?

Thought should share this www.vioja.com/media%20sh.html (EABC) great authentic and undisputed talent from our Kenyan musicians. Undoubtfully, these guys shows with strong statutory framework the music industry just like the football and cinema industry's, are presently sleeping giants awaiting exploitation and have the potential to generate massive wealth and employment for the majority of the Kenyan youth population. Comparatively, the American music industry is worth billions of dollars similar to the British football worth billions annually both directly and indirectly employing many of the youth population. Despite such comparisons being extreme, they are justifiable since many Kenyan youths aspire to be as successful as those based in these countries plus we can a lot from such success.

Unlike our athletics where we stand, shoulder to shoulder with the world greatest, albeit constrained by lack of statutory backing and poor infrastructures, these three industries remain neglected leaving many youths aping the western culture despite their potentiality aided by the diversity of our tribes and ready-made consumer market. In the Diaspora, many are yearning for authentic stuff from home after realising that east or west home has the best. Interestingly, I have noticed that MTV are keen on the African market with programs such as ‘MTV uncensored Africa’ showing on SKY TV.

Way forward.

1 The African ambassadors should lead in promoting the music, cinema and football abroad.
2 Strong statutory framework should be put in place.
3 Educational or academy centres should be in place to identify and mould those with such talents, the three industries should not just be taken as extra curriculum activities.
4 The media should jealously play a vanguard role in promoting these three industries.
5 Incentives such as taxes, copyrighting such talents must be enhanced
6 Above would enable parents/peers to take the industry much more seriously.

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.

Kenya RE IPO-The Prospects

What does Kenya Re do? Insures insurance companies. Has 21% of the Kenyan market. Its main rivals in the Kenyan market are Africa Re, PTA Re and East Africa Re in that order. By law, all Kenyan insurers must re insure 33% of their business, 18% they have to do with Kenya Re. Kenya Re generates currently 63% of its net premiums from Kenya and 30% from the rest of Africa. By industry, most of its premiums are from industrial fire (46%).

How does it make its Profit/Loss? Re insurers make money from net premiums (new premiums received less new claims) ; income from their investment portfolios (rent; dividends; net proceeds from buying and selling these investments; interest; unrealised capital gains from shares and property revaluations) and then adjust for management expenses. 40% of its investment portfolio is in properties...

Strengths: Has a strong balance sheet. Got a "very good" credit rating last July (i.e. before the scandal broke). A credit rating is important in the financial sector as it internationally comparable measure of financial strength. Recognisable name in Kenya and in Africa.

Weaknesses: 

1. Corporate governance and internal controls led to scandal discovered earlier in the year where the now ex-MD and FD were engaged in amateurish pilfering (amount not fully quantified in the prospectus). Most of the BoD that was there during this period are still there. New auditor now appointed who may take a while to get to know the system. Most of BoD have loans from Kenya Re. KEY WEAKNESS.
2. Weak insurers especially in its key Kenyan market (20 out of the 42 are under-capitilised based on the recently issued criteria). 
3. Reliance on investment income (has usually seen almost as much growth from this compared to its core activities).
   
4. Non-property portfolio all Kenyan-based. It should be done to match its business exposure.
5. Despite the international ambitions, doesn't hedge its book against fx risk

Opportunities: The Kenyan economy will grow as will that of the rest of the Africa meaning increased business in volume and variety of premiums. International opportunities are still open to Kenya Re. A reduced property portfolio should surely increase its liquidity and make KRe more agile in writing new business.

Threats: 

1. Other re-insurers within Kenya (apparently most prefer foreign owned firms that are perceived as stronger). In its other markets in Middle East, stronger re insurers now targeting e.g. Takafu. 
2. Re insurer rates are under competitive pressure. 
3. Forecast for 2007 based on ropey fx assumptions (Usd fx rate of 73 when its been sub-70 for most of this yr and £ rate of 146).
4.  GoK still has a 60% holding thus political interference (of the KNAC- sort) may still happen.
5.  Large claims (e.g. the Tsunami of 2005 ) can and do have material impact on KRe's numbers.
   
6. Cessation rights (which give KRe 18% guaranteed premiums from each insurer) come to end on or before 2011

View 

For: KenGen IPo priced at 11.90 reached 40 on first day; Scangroup (10.45 hit 15 and is now 26); Everready (9.50 hit 25 on debut); AK (10 hit high of 15). Get the picture?

Against:

• Over-subscription because Kenyans are price/return conscious thus IPOs are God-sent. Expect 300%+ over-subscription on the retail allocation.
  
• Delayed refunds: AK was text-book, KenGen was nightmare. KRe being GoK ,will sway towards the KenGen experience
• Diminishing marginal returns: Preference for institutional investors (means potentially there is lower upside in 2ndary market) and investor boredom may mean returns on the scale of 50-100% rather than 100%+

Kenya RE IPO-some analysis

Faida Stocks have done some investment analysis for this IPO. One thing to note, if you compare the Profit Before Tax on this research note with that on Kenya Re's website, you will notice that 2005 seems to be different. Don't yet know how and why.

Prospectus now available

Isn't there some requirement that an IPO prospectus has to be released some time before the application period? Barring last-minute legal hitches, application process is due to kick-off tomorrow!
For individuals and corporate investors: Wait until next week and if you a have decent broker, you'll be able to avoid committing funds only to get a 30-40% of your applied-for-shares. For those tired of the whole refund and application process, plenty of counters are looking attractive at the moment especially with this being the results announcement period.

NSE-Online trading a step closer...

The guys' behind mystocks.co.ke have now created a live stream from the NSE bringing us closer to the dream online trading destination. For those who keep a close eye on their shares (i.e. do analysis), it also shows buy and sell orders.
The only drawback so far is that their close of business prices don't tally with those of the NSE because while theirs is based on the price of the last traded volume, that of the NSE is supposedly based on VWAP i.e. turnover (in value terms) divided by volumes traded.

The other thing to note is that unlike previously where vendors paid a nominal fee, NSE will now be charging for this data as part as an income stream meaning that the vendors (eight.co.ke are the other), may start charging us investors for the same including the close of day prices. Hopefully the NSE charges will be reduced to reflect this additional cost to investors.

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.

Transport-Joined up thinking urgently required

As we aspire to register constant 10%+ growth rates, a major plank of achieving this will be an integrated transport policy that looks at developing all the key arteries of our economy:

Roads: Mainly targeting built-up urban areas. At peak times, it can take 3hours+ to get in and out of Nairobi a city of circa 3m people (this is similar to London a larger city by land mass and population (8m). Bypasses (as already proposed) could help reduce this by 20%. Wider approach roads into NBI, Mombasa and wider throughroads for growing towns e.g. Eldoret, Nakuru could work to increase traffic flow. Betterbuilt roads coupled with more frequent maintainance could give us cheaper roads. Finally, heavy good vehicles should economically be encouraged to move their wares onto...

Railway: China is using rail network to both open up and link its economy within and outside to the rest of Asia, but also because its a recognised cheaper mode of transport especially for freight goods. Goods to Mombasa that now take upto 12 hours from Nairobi  and much longer to Busia would take as low as 4 hours on a modernised rail track. The track is already there all the way to Uganda and just needs the modernisation of the trains. Trains could also play a role in reducing road traffic in Nairobi with links to Thika (and areas in between). RVR should consider issuing long-held convertible bonds to finance both the relaying or repair of tracks and leasing modern trains. Once freight goods reach Mombasa, they will require a well-functioning 

Port: With a growing economy surrounded by similarly growing but landlocked neighbours, there is no excuse for KPA not to aggressively plan and institute a 24 hour port to able to increase capacity with the growing economy. Alongside this should be an efficient and corruption free customs clearance. Given its profitability, GoK should consider floating a portion of KPA at NSE with the intention to use the funds to develop and equip the port for the future.

What is your vision?

Its often said that without vision, we fail.

Imagine, opening the door of your house and just walking or just getting into your car and just driving.Then multiply that by 365 days and however many years you've lived.

Having a vision is important in life as knowing where you are going when you get out of your house or into your car.

A vision doesn't have to be global or impact everybody or change the world, but it would be nice if it could change your life or that of your family, local community village et al.

Visions are expensive and time consuming, but so is anything that is of value to your life.

So what is your vision?

Payment on Delivery for IPOs

For the Kenya Re IPO, GoK/NSE has further favoured institutional investors by allowing them to pay only when their share allocation is confirmed something not offered to retail investors. This in addition to allocation them a portion of shares for which only they can apply for. Retail investors are complaining seeing this as further unfair practice on the part of the NSE /GoK elite. However, there seems to be several reasons to suggest that this may be a very wise move on the NSE's part.

1. Stability: Many investors (retailers as well as institutionals) have in past IPOs tended to liquidate some of their holdings and use the receipts for IPOs. This adversely impacts many counters causing the NSE index to fall. By giving this special dispensation to QII, it will allow them to in effect give some stability to NSE index during the IPO period. What about those counters with little institutional support? There are probably weak on fundamentals anyway...


2. Speculation: IPOs have been dominated by speculators who chasing the immediate post-IPO uplift in the price will withdraw savings, borrow and sell everything including their priced bulls to participate in IPOs. This has negative impact on the wider financial system and is compounded by effect of delayed refunds. Most of the immediate post-IPO uplift has come from QII and others going into the secondary to pick up shares. By apportioning an amount of the IPO shares to QII, the secondary market will become thinner thus lowering the immediate uplift from IPOs. This will act to discourage speculators.


3. Shareholder expense: Thanks to the free-for-all IPO system, KenGen held its last AGM at Kasarani Stadium and spent ksh80m on the various costs involved (printing and sending annual reports, dividend checks etc). This is not clever business. Moreover, having too many retail investors will accentuate any periods of volatility.

Finally, (and I am not in NSE's pay), MPs like journalists often refuse to let a good story get in the way of facts. Such is the case with yesterday's question time. James Mwangi (Equity's CEO) has never denied he worked for Trade Bank (its in Equity's annual report); unless he owns shares through his fellow directors, its not possible for him to hold 30% in Equity; Trade Bank was mentioned in relation to Goldenberg, as was Barclays, Stan Chart and others. As to people around Jimnah Mbaru owning 90% of the NSE, even a perusal on Hasinet's excellent company info will show you this is unlikely.

Diaspora: M-Pesa and Sambaza coming near you

Riding on its success as the first mobile service provider in the world to introduce money transfer services under the M-Pesa brand and In just three months, having managed to help clients transfer Ksh500 million ($7.4 million), across Kenya, Safaricom’s parent company Vodafone UK is now looking into launching money remittance from abroad via their mobile network.
Interestingly, I recently noticed that you can buy Safaricom calling cards in some shops in London and send the top-up to somebody back home which they can use within 1 hour of receiving it.
Talk of another great opportunity for the money making machine-that Safaricom has become.
However, the money transfer may be hampered by the inadequacies within the current legal framework in Kenya which does not cater for this service. There is also the issue of stiff competition from the existing money transfer agents.

Equity takes HFCK? More detail...EA Cables (TZ)

A bit more detail on the Equity/HFCK link-up now including Britak, Equity's largest shareholder. As an aside, Britak is planning an IPO in the next 18-24 months.

While this blogger has a very positive view of this deal, those fearing its impact on Equity bottomline ought to be aware that as Equity will only hold 25% of HFCK, HFCK's results will be accounted for as an associate in Equity's books. Equity will however have a controlling stake thus will be able to steer HFCK strategy and be in a position for a later takeover or equity exit

EA Cables seems to be working its magic in TZ, where its subsidiary is experiencing a turnaround in perfomance.

Renaissance coming to a Stock Mkt near you...

Those not already engaging some cash in the NSE, you'd better do so now because the West is seriously waking up to the possibilities... Renaissance Capital having made it into top 10 on M&A leagues tables in Europe (football equivalent is making it into European Champions League except this is in investment banking) also have their eyes on sub-Saharan Africa with Nairobi acting as their hub for .

They are hiring some of the best talent around (worryingly for shareholders of the soon-to-be CFC Stanbic, they are also headhunting from CFC) and have applied to buy Francis Thuo's broker licence.


In other news, the local NSE chatroom seems to have AWOL-ed without warning...

Safari?

Its funny, a couple of months ago, Apple got sued by the Beatles' representatives because their use of the Apple trademark to market Itunes infringed a copyright agreement they signed with the Beatles (their corporate name is Apple). So shouldn't somebody (Kenyan/TZ govts perhaps?) for their usage of the name Safari for their new web browser?

Rant-aside, having now test driven Safari, I actually prefer it in some ways to the Windows internet explorer. Its actually quicker in terms of functionality (so those with access to the Kenyan-type internet speeds take note), and seems to do some stuff very intuitively. Its also free to download if you have Windows XP. 

Check it out.

NSE: A preview of H2 07

July to Dec will likely be dominated by the slated IPOs namely Kenya Re, Safaricom and far-fetchedly, (NBK, Telkom) and the General Election. Analysing these and their likely impacts:

Kenya Re: As Kenya Re is using an AccessKenya type of IPO mode, this will lock out some of the speculative retail investors and will also reduce the upside expected. Its unlikely that Kenya Re will have a strong downward impact on the NSE. But bear in mind that with previous oversubscriptions, overextended refund periods, the retail sector are becoming increasing choosy about IPOs. Verdict: minimal downside impact on NSE index.

Safaricom: GoK will be under immense political and public pressure to do this IPO as a free-for-all i.e. similar to KenGen. If it does, the NSE may well see counters falling by 5-10% as liquidity dries up. But, will GoK allow the wider market to fall at the expense of putting smiles on the same folks? Yes/maybe. Bottomline: expect some impact on NSE counters

General Elections: Impact has been -ve in past elections with some correlation being seen when there has been uncertainty as to the new head of state. This time will be no different except that it should be clear within July/Aug how bad the impact will be on NSE. At the moment, the political consensus is that IF the ODM house gets itself in order and unites behind its candidate, there might be a real political contest in which case expect some downside on the NSE.


Other highlights will be the interim results of various shares, especially Equity (can it double Q2 profits to justify current multiples being reflected in its share price?), EA Cables, NBK (will they get any uplift from the npl pay-off as alleged by some?) and KQ (any impact of accident?) and will Mumias give its long-suffering shareholders some +ve news by releasing improved FY 06 results. Also, in the frame will be M&A in form of CFC Stanbic who its clear they have done their homework in terms mitigating against BOC/Carbacid-type of hold-ups. As well as Equity/HFCK?

NSE: A review of H1 07

NSE closed down some 10% down on its 2007 opening position driven down by profit-taking by

institutionals, fear caused by closure of Francis Thuo and panic selling by speculative retail traders. Our group though kicking off investment half-way thru this period recorded an outperformance when compared to the index.

Muhammad Ali in Quotes

A man who views the world the same at fifty as he did at twenty has wasted thirty years of his life.
A rooster crows only when it sees the light. Put him in the dark and he'll never crow. I have seen the light and I'm crowing.
Age is whatever you think it is. You are as old as you think you are.
At home I am a nice guy: but I don't want the world to know. Humble people, I've found, don't get very far.
Boxing is a lot of white men watching two black men beat each other up.
Champions aren't made in gyms. Champions are made from something they have deep inside them - a desire, a dream, a vision. They have to have last-minute stamina, they have to be a little faster, they have to have the skill and the will. But the will must be stronger than the skill.
Float like a butterfly, sting like a bee.
Frazier is so ugly that he should donate his face to the US Bureau of Wild Life.
Friendship... is not something you learn in school. But if you haven't learned the meaning of friendship, you really haven't learned anything.
Hating people because of their color is wrong. And it doesn't matter which color does the hating. It's just plain wrong.
He who is not courageous enough to take risks will accomplish nothing in life.
I am the astronaut of boxing. Joe Louis and Dempsey were just jet pilots. I'm in a world of my own.
I am the greatest, I said that even before I knew I was.
I believe in the religion of Islam. I believe in Allah and peace.
I figure I'll be champ for about ten years and then I'll let my brother take over - like the Kennedys down in Washington.
I figured that if I said it enough, I would convince the world that I really was the greatest.
I hated every minute of training, but I said, ''Don't quit. Suffer now and live the rest of your life as a champion.''
I know I got it made while the masses of black people are catchin' hell, but as long as they ain't free, I ain't free.
I know where I'm going and I know the truth, and I don't have to be what you want me to be. I'm free to be what I want.
I never thought of losing, but now that it' s happened, the only thing is to do it right. That's my obligation to all the people who believe in me. We all have to take defeats in life.
I run on the road, long before I dance under the lights.
I wish people would love everybody else the way they love me. It would be a better world.
I'll be floating like a butterfly and stinging like a bee.
I'll beat him so bad he'll need a shoehorn to put his hat on.
I'm not the greatest; I'm the double greatest. Not only do I knock 'em out, I pick the round.
I'm so fast that last night I turned off the light switch in my hotel room and was in bed before the room was dark.
I'm the best. I just haven't played yet.
I done wrestled with an alligator, I done tussled with a whale; handcuffed lightning, thrown thunder in jail; only last week, I murdered a rock, injured a stone, hospitalised a brick; I'm so mean I make medicine sick
I'm the most recognized and loved man that ever lived cuz there weren't no satellites when Jesus and Moses were around, so people far away in the villages didn't know about them.
If they can make penicillin out of mouldy bread, they can sure make something out of you.
If you even dream of beating me you'd better wake up and apologize.
It isn't the mountains ahead to climb that wear you out; it's the pebble in your shoe.
It's hard to be humble, when you're as great as I am.
It's just a job. Grass grows, birds fly, waves pound the sand. I beat people up.
It's lack of faith that makes people afraid of meeting challenges, and I believed in myself.
It's not bragging if you can back it up.
It's the repetition of affirmations that leads to belief. And once that belief becomes a deep conviction, things begin to happen.
Life is a gamble. You can get hurt, but people die in plane crashes, lose their arms and legs in car accidents; people die every day. Same with fighters: some die, some get hurt, some go on. You just don't let yourself believe it will happen to you.
Love is a net that catches hearts like a fish.
My toughest fight was with my first wife.
My way of joking is to tell the truth. That's the funniest joke in the world.
No one knows what to say in the loser's locker room.
Old age is just a record of one's whole life.
Only a man who knows what it is like to be defeated can reach down to the bottom of his soul and come up with the extra ounce of power it takes to win when the match is even.
Only the nose knows, Where the nose goes, When the door close.
Rivers, ponds, lakes and streams - they all have different names, but they all contain water. Just as religions do - they all contain truths.
Service to others is the rent you pay for your room here on earth.
Silence is golden when you can't think of a good answer.
Superman don't need no seat belt.
The fight is won or lost far away from witnesses - behind the lines, in the gym, and out there on the road, long before I dance under those lights.
The man who has no imagination has no wings.
The man who views the world at 50 the same as he did at 20 has wasted 30 years of his life.
There are more pleasant things to do than beat up people.
There are no pleasures in a fight but some of my fights have been a pleasure to win.
To be able to give away riches is mandatory if you wish to possess them. This is the only way that you will be truly rich.
Wars of nations are fought to change maps. But wars of poverty are fought to map change.
We have one life; it soon will be past; what we do for God is all that will last.
What keeps me going is goals.
When you are as great as I am it is hard to be humble.
When you can whip any man in the world, you never know peace.

Will the G29 follow Blackstone and do an IPO?

Blackstone IPO of 20% of their shares has got everybody (from China to Wall Street) excited today. Si Transcentury do the same for NSE? This would ofcourse mean lifting the veil over their dealings and particularly who the full 29 dudes are...

Equity takes HFCK?

If Riba's story is on the mark, this is great news for the banking sector and both sets of shareholders. This should be the turning pt allued to earlier for HFCK. For Equity, they go to the top of the Mortgage sector without breaking sweat. Any downsides? Only for Equity to the extent that mortgage business is capital intensive, the housing sector may be on a bubble and HFCK npls are around ksh6bn (have implications for capital).
As a whole though, its an awesome deal for both.

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.

The Safaricom Phenomena-ksh17bn PBT for '06!

Its now official. Its profitable (very), to do business in Kenya-just ask Safaricom. PBT rose 40% to ksh17bn, subscribers are forecast to reach 8million ( 25% of all Kenyans-not sure how they distinguish new and repeats subscribers) and Kimunya must be salivating at the prospect of doing the IPO later this yr.
The IPO is almost certain to be this year because you can just imagine the smile on voters as they walk into that voting booth thinking I got 100 Kengen Shares, 100 Safaricom shares, kweli Kibaki ni kingothi.

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!

Nairobi-seriously good to look @

Next time you read those Economist-type articles written by some misguided fools, send them these pictures for an alternative view (spotted courtesy of mimi tu). Alternatively, they can read this from the much more balanced FT.

Kenyans and pool investment

With limited research it’s difficult to establish the phenomenon of investment clubs both at home and in the diasporas. A good example of the clubs being referred here is the Tran century group. In the UK and US I have come across well-established groups such as Ubuntu, KCIG, ACP.
The idea of an investment club is borne from the need to pool resources, learn, minimise risk, maximise returns, networking and exchange ideas. Illustratively, the idea is widespread in the UK and there is a large number of clubs that have come together.
Despite the awareness within the Kenyans in UK, the concept has not translated into reality although the benefits outweigh the risks and would enrich individuals and the community disposal income.
From research, various barriers have emerged as to why this is the case.
Amongst them, include;
· Immigration issues
· Mistrust-supposedly this is informed by past experiences
· Fear of unknown
· Individual short term goals
· After quick money or short cuts hence the rush to the illegal pyramid schemes despite the risks involved
· Tribalism which is prevalent even in the Diaspora
· Ignorance
· Cultural practice- many assume there is job security in the west. Whilst advertisement and latest trends lure others more so the younger generation into spend now, save later lifestyle common in the west. In some instances, people have questioned the rationale of spending 2 to 3 hours researching or even sitting down in a club meeting.
· Commitments phobias-there are those that I have spoken to who are afraid to come together in a long term deal instead preferring loose partnerships.

Regardless of these barriers, coming together as either a group of friends or family vis-à-vis with unknown or strangers both have their pros and cons. Nonetheless, with both experiences, the latter is more advantageous than the former in terms of; professionalism, diversity, values, boundaries, contacts, educational opportunity, decision making, rationality, influence, skills, operations, management etcetera. Some disadvantages may include; egos getting on the way, lack of commitment, hidden agendas, bonding take longer, it also takes longer finding or identifying like-minded individuals.

Therefore with this in mind the question is, what will take to break these barriers and can Kenyans as with other communities (Chinese/Indians/Nigerians) come together.

Results Catch-up

KCB: saw 38% rise in Q1 after tax profits helped by strong loan growth (ksh16bn year on year (44%)) which drove 22% rise in interest income and 24% growth in Fees and commissions. Gratingly for those who like to see banks doing their intermediary role, KCB is driving loan growth forward without concomitant rise in loan loss provisions. KCB’s current momentum (it plans to open 10 new branches every year and expand regionally to Sudan, TZ and Ug in that order), explain the recent share spilt.
Equity: A doubling of income (both interest income and fees) led to a massive 226% rise in PAT from prior yr’s Q1 and led to questions about sustainability. The bank has now acquired a ksh6.9bn loan to help further expansion as it looks to enter the mortgage sector.
NBK: Saw Q1 PAT fall by ksh7m to ksh152m on falling net income. NBK has finally had ksh20bn of its Ksh33bn NPLs written-off by GoK. Though there will be no immediate impact, earnings will improve in the long-term as a cleaner balance sheet allows it to lend more. This will and is atracting speculators in the short-term.
KQ’s 15% drop in PAT for FY was a surprise when it shouldn't have been i.e. CEO Titus had flagged this earlier in the yr. The surprise was in the reasons for the fall (weaker dollar and fuel costs). The dollar is weaker compared to prior yr, but was only below the average rate of 72 for around 2 months of KQ's financial year. Fuel costs can be hedged to a large extent.
DTK: After tax profits doubled from year earlier with strong income on a growing loan book supported by only a slight increase in expenses . DTK is issuing a rights issue for its TZ business.
Its AKD stable mate, Jubilee also announced FY which grew by 51% on growth across all income streams. For its shareholders, there is a final dividend of ksh3.25 and 1 for 4 shares held bonus share issue to look forward to.
Finally, NIC Bank's strategy of niching the market seems to have paid-off in FY06 with PAT growing by 59%. NIC continues to innovate and its contrary strategy means it will make money at times when others may not. As with other growing medium-sized banks, NIC will need to recapitalise at some pt (possibly via a long-term loan or rights issue) as affirmed by Fitch ratings agency.

Is an East African Community viable or achievable?

The analysis is primarily based on what has occurred so far and what is envisaged and will evaluate EAC on LE PEST context.
Economics: Theory says that by coming together and lowering customs, you increase trade between the countries. By allowing free movement of labour, you’ll essentially get lower labour costs as the labour pool increases. There will a bigger market for the companies within and externally attractive and giving EAC some clout. Bigger means economies of scale in terms of pooling of resources and know how. Against this, note that all 3 countries suffer from extreme infrastructure dilapidation, underdeveloped and unequal economy growth rates and markets; have no real manufacturing bases either for value-adding activities on local resources or FDI-related. As for the reduction customs duties and free movement of labour, it’s possible as Nation Media would tell you to have non-monetary trade barriers. You could also add into the mix:
Taxation- there is a move towards harmonising this starting with VAT, however corporate and personal taxes are bigger more complicated pieces.
Monetary policy-important because it does impact interest rate which in turn impact exchange rate and inflation. Having a common currency will test monetary policy.
The donkey/horse analogy: Will Kenya (being the larger economy), have to slow down its pace so that Ug/TZ can catch up? Germany’s re-unification and subsequent 10yr recession is a prime example of what happens when you merge two unequal economies

If an EAC entity is ever to work, then the economics has to work and should probably be the litmus of a future EAC.


Political: A political union would probably go as far as the East Africa Assembly has gone i.e. a talking shop that is far removed from the realities on the ground. It should however lessen the tribal politicking that we have in Kenya and to some extent in Ug.
This piece is probably the most difficult to envisage because our politics are in dire straits in all 3 countries. In TZ and Kenya, democracy is skin deep and even shallower in Ug. Thus a union will effectively be merging problem political entities.

Social: Do we share commonalities that can bind us together? We all speak (to various degrees) Swahili and are neighbours. And erm, that’s probably it. Anecdotally, at university, we had a mixture of the 3 main nations and really got on well with Ug-ians. It probably helped that many had been to Nai and had generally travelled. The other point is that many Ugandans and Kenyans are well educated with a grasp of external issues that many not be as present in TZ.

Technology: As with general infrastructure, there is a lot of potential ala underdevelopment. The good thing, all the countries face the same challnges and can hopefully develop common solutions. this is however capital intensive.

Legal: TZ, Kenya and Ug share legal systems inherited from a common colonial master and these have with few exceptions, remained broadly the same. Rwanda amended its Belgian inherited constitution in 2003 and now has a constitution that is context specific i.e. tailor-made for Rwanda especially the innovative Gacaca Courts. Burundi is operating a transitional constitution that marries its Belgian with customary laws as well as forward-looking amendments such as 30% inclusion of women in the legislature. Given these backgrounds, it’s a sure bet that a new constitution would have to be written initially maintain national vetoes. Cue more banana and orange campaigns.

Environmental: The major cities in all 5 countries would become magnets for the various countries populous that will no doubt be looking for greener pastures. Given the chronic lack of planning in Nai, Kala, TZ (the benefit of the move from Dar to Dodoma is still unknown) means more slums are likely and general pressure on resources (especially social amenities). And who will oversee NEMA-type activities?

Bottom-line: Two wrongs don’t make a right. If there is going to be a successful EAC entity, let’s develop it piece by piece starting with closer economy integration alongside the technology/legal aspects and build up to the political piece over time.

Marriage and Kenya's economic wellbeing/future

This article got me thinking about something that is an increasing phenomena in Kenya, but is rarely talked about amid all our many other problems. To what extent does the increase in divorces and single-parenthood impact our ability to forge forward as an economy? Although no real data is readily available on divorce rates in Kenya or even trends, anecdotally, its obvious that this has increased as has separation/desertion. As afar as singleparenthood goes, available data suggests this around 25% of all families which is not as bad as USA (34%).
Sheer economies of scale would suggest that stable married/come-we-stay couples would be able to earn more and create an environment under which children would flourish and be successful. The inverse is not always the case i.e. that single parent families and divorce couples don't lead to successful children, but it does mean that the success path for the children is much more difficult.
The question is, is Kenya supportive of marriages?

HFCK Rights Issue-its turning point?

If this piece in the East Africa is true, HFCK's rights issue due next month will be the event that clearly tells us what the future holds for the mortgage lender. As the only standalone mortgage lender in Kenya, HFCK has struggled to hold on to its market share as stronger more liquid banks continue to enter the mortgage market. The fact of the matter is that, HFCK has no future as a standalone entity given its low profitability, ongoing NPL burden and of course a more competitive market.
Last year's aborted takeover move by the G29 drew investors attention to its potential as a takeover candidate. Potential suitors would be other banks with interest in gaining entry into this sector notably;

1. Equity-but it might prefer to grow its own mortgage business organically
2. KCB-perhaps to build on its S&L venture, however unlikely given its own expansion plans
3. G29-given the share price is almost back to the level when they applied, and their reasons for wanting to buy HFCK remain valid, they might do so now. Of note, is that Jimnah Mbaru, one of their founding members holds 7.32% of the HFCK according to most recent data from Hasinet.
4. Foreign bank-not sure what would be the rationale unless to access HFCK's branch network and customer base as there are banks with either a wider network or larger customer base.

In any case, if the worst case scenario does occur i.e. rights issue are not taken up by its largest shareholders (CDC, govt (NSSF), shareholders should only look out that they don't get stampeded as they exit the share...

What next for Kenyan roses & greenbeans?

Kenya is the 2nd largest exporter of flowers in the World and the 2nd largest supplier of vegetables to the EEC. Horticultural products now account for more of our agricultural exports than coffee and only second to tea. The industry employs over 135,000. See more here and there.

Watching the BBC the other day it occurred to me that Kenyans could find that they are no longer able to export agricultural produce to the EEC and other western markets. The multi-pronged attack on our horticulture exports is being done by three seperate but powerful lobby groups. The environment green team who have now coined the carbon footprint to signify the environmental impact of human activity. In the case of horticulture produce, they are saying that transporting this produce from Kenya by air has a serious and detrimental impact on environment. Then there is the Soil Association which has just sent out a consulting document arguing that Kenya's fresh greenbeans among others should not be classified as organic because the length and distance over which they are transported means they can't be organic. Organic produce is any produce that is grown by natural means i.e. sans fertiliser or modification and such earn a premium price because is seen as being more healthy.The final lobby group are the UK farmers who are saying that these produces can be grown in the UK and hence supermarkets should be promoting UK grown over the foreign export. Never mind that the reason the UK produce is to do with higher production costs.

The question is who is fighting the corner for our produce? Not our ambassador Muchemi who I have never seen being interviewed when Kenya has featured. The only lobby group that seem to be doing anything are anti-poverty NGOs like Oxfam, who correctly argue that if the issue is reduction of CO2 emulsions, putting a light bulb off saves more than foregoing fresh greenbeans from Kenya and is in any case counterproductive as it has impact on poverty reduction mechanisms. In the absence of effective politicians, lobbyists and the media have now become the drivers of change in countries like the UK, US and some of their EU brethren. Isn't it time for Kenya/Africa to create a lobby group that will fight our interests in western capitals?

Portfolio Management

What is portfolio management? What constitutes a good portfolio? A portfolio in my opinion constitutes any form of investment or savings that is geared towards generating returns and or income today or in the future. Portfolio management should then be the alignment of your investments with your financial goals over your chosen time horizon. One’s approach to share trading (if its part of their share-trading), should generally inform how you manage your portfolio. As with share trading, defining and getting basic essentials is a must. So for example, ask yourself;

• What do I want to buy?
• What is my risk/reward appetite i.e. what risk will I take to get my required income/capital growth?
• Why this investment-i.e. do I understand it sufficiently?
• At what price?
• I my after growth or and income?
• How do I maximise this growth/income?
• What proportion of my disposable income do I want to put in this investment?
• What are the opportunity costs if any, of this investment compared to others?
• For how long, when/why/how do I sell the investment?

One can then use this when considering various classes of investments, so for:

1. Savings: Ask yourself, what do you want to save for, how much do you need to save and for how long? You then need to look at rates on offer, accessibility (most banking industries will put a premium on a long-term saver who doesn’t require short-notice access to their funds). In some banking industries (notably UK), rates on savings are available tax free and thus taxation comes into the equation. Finally, choosing to save may mean that you miss out on higher returns in shares, thus there is an opportunity cost.
2. Bonds: Unless they are inflationary-linked, bonds (and especially gilts) are no different from savings. Again the key here will be length, amount of disposable income that you need to tie-in to this type of investment and rates offered (corporate bonds will generally offer higher but riskier returns). Because of the minimum amounts that one has to commit for bonds, the inflation risk, the opportunity cost in terms of alternative forms of investment is higher.
3. Unit trusts: These are funds that invest in a variety of shares (usually listed ones), economic sectors, countries or other tradable commodities and instruments. By their nature, they are allow you to diversify your risk, give you access to markets that you won’t otherwise be able to access and for the cash rich, time poor or otherwise financially illiterate, manage your cash. One buys into a unit trust thus getting units based on the price at the time of the investment. Before buying, look at the UT's costs and returns over say year to date or last calendar yr against similar UTs or other investments. UTs are off course risky even when investing in a cross-section of instruments (including fx, commodities, bonds and shares) and will often have a minimum amount that one has to invest. The opportunity cost is thus higher given losses can be incurred and that one might be better off investing in specific shares. Certain UTs will also entitle you to periodical dividends, tax free capital gains and these will need to be taken into account. Further, UTs also have entry and exit fees as well annual management fees that will in certain countries account for as high as 10% of original amount invested and this thus needs to be borne in mind because it will in most cases mean one has to stay longer to be able to make the returns. UTs are generally recommended for giving one access to forms of investment that one can’t ordinarily access.
4. Shares: Primarily will generate capital gains as well as dividends. These are covered elsewhere in this blog. However, there are opportunity costs, should one invest in a particular share as opposed to another, is this time better than 6 months from now, are money markets/bonds a better opportunity? Should one go for dividend yield, absolute dividends, capital gains or a mixture?
5. Land/Plots: This will apply more to Kenya than elsewhere. Prime issues to consider are liquidity (will depend on location), holding period, usage (farming, holding asset, future real estate development, own home), legal constraints e.g. on subdivision or certain developments. The opportunity cost of buying land will be driven by these issues e.g. if land is bought on an illiquid locale with intention to build future own home, price appreciation will be low and it maybe better to invest the cash elsewhere. Where the land/plot is used for farming again are there better more liquid alternatives?
6. House Ownership/Mortgage: Yes liquidity is important to note, but whether in a developing or developed economy, house ownership of any form remains a lucrative albeit capital consuming investment. Where there is sufficient capital to build one’s own home, or where paying a mortgage for the same, the opportunity cost is broadly the same. Taking into property appreciation (annualised) plus intangible benefits such as the comfort of owning your place, does this more than outweigh annual mortgage/rental costs? For those developing real estate (to generate rental income and capital appreciation) as a form of investment, are there better returns in more liquid and less involving forms of investment?
   Overall, portfolio management requires that every formof investment you undertake gives you the best returns in that class and that you consider liquidity, investment horizon and opportunity costs.

Worth Sh30m per year?

Classic from the STANDARD!

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

A cost-benefit approach in Kenya?

Recent initiatives by the GoK have led to some head scratching. Free secondary tuition fees is to some a missed opportunity to re-look at the Education needs of a growing economy e,.g. why not put this cash into a state of the art ICT university? Spending upto Sh10bn to upgrade JKIA may be more expensive than say upgrading one of the smaller airports and thus enhancing air transport within and out of the country. So how does GoK arrive at decisions?-probably it’s all about affordability. Cost benefit approach is not just about the monetary aspect but the macro-economic, social, political and environmental impacts. So for:
Constitution changes: We've spent sh8-10bn and 15years+ of agitation and still have nothing to show for it. However, if the original question had been what are the socio, economic, political, legal and environmental consequences of updating our constitution through incremental changes rather than one large overhaul maybe halfway to some achievements.
Anti-corruption drive: The impact of the failed drive to bring down corruption and convictions in major corruption cases is enormous in monetary terms, but also socially (it becomes an acceptable form of achieving your aspirations in life); politically (the corrupt want to get in power so they can continue to be corrupt, once in power don’t want to leave because of fear); environmentally (willy-nilly allocation of land and other resources thus no Ngong/Karura forest, Nairobi dam is a sewer).
Million political parties: Failure to create thresholds for forming political parties means politics becomes a way of life for many, it’s commercialised, no ideas-parties.
Lack of separation of powers: Means judiciary and its decisions are compromised and outcomes of cases have social impacts (e.g. bribing a judge to favor you in a marital dispute case), politically (e.g. politically-instigated corruption cases); economically (commercial decisions).
Stalled power sector reforms: As China, South Korea and others have found out, its far harder to increase energy generation capacity, institute conservation measures once your economy id in full throttle. Continued subsidisation of energy generation will eventually slowdown economic growth, as will the slow implementation of a separate rural electrification company
Urban policy: 50% of Nairobians live in slums and this may continue in other large towns as well. To a large extent, this is due to no urban policy looking at issues such as urban economic push (i.e. developing rural-based industries to slowdown rural-urban migration), services, housing policy and will have social (insecurity, social breakdowns); economic (concentration of wealth-generation in Nairobi conurbation) and environmental impacts (smog, polluted rivers, air quality etc).
And such an approach need not been lengthy or be costly, cabinet ministers meet every week and we do have an economic planning ministry.