Equity/HFCK boardroom myths; Mpesa in the UK

Despite all the talent and research time at their finger tips, both DN and Standard seem to have missed out on the fact that the Equity/Britak/Jimnah Mbaru fraternity owns 35%+ of HFCK. Basically, the 3 hold a controlling interest in HFCK. That they'd seek to have a BoD that is more amenable to their interests is no surprise. Is it wrong to do so? Not in Kenya. Note that unlike in the West where there are clear guidelines on the composition of Board of Directors and corporate governance generally, in Kenya, CMA/CBK/NSE are all silent on BoD. Hence, a lot of what happens in Corporate Kenya in terms of composition and BoD rules is copied from the West purely in the same way that we have democracy without the context. However, there should be rules that state that of the third non-executive directors, some should be non-shareholders.

Mpesa is in the UK. Not quite in the same, all path-blazing way that it has been in motherland, but more in an experimental manner. Of the 8 or so publicised agents in Greater London, only two were working the other day, and neither had a float to sustain a £250 send. Contrast that with Western Union or general banking presence. However, assuming you are sending school fees plus lets say farmer workers salary and need to do so urgently, then its recommended you use the Mpesa service. It costs £4 for anything upto £150 (compared to £21 with Western Union and £2 via normal bank) and will be with recipient's phone in Khayega in minutes (compared to 3 days for banks). Provident Capital have licensed some agents (the only operative one is E2 East Ham).

NSE Weekly catch up

NSE stayed flat this week as other markets motored forward. Mainly I suspect that Kenyans are not feeling the bourse like prior years. Cash I think is there, but we all need to see a more convincing political and economic forecast. Stock investment is about hope.

FY Results:

Eagads a coffee and tea grower, saw a vast improvement in turnover but also benefited from Ksh20m gain from revaluation to record profit for the year. The cash flow statement looks peculiar to say the least with cash from operations somehow going down by Ksh12m. No dps.

Kenya Orchards, reported a Ksh7m loss for '08 on the back of a Ksh10m operating loss whose detail is not given and 26% decline in turnover. Cash from operations was massively in the red presumably relating to the operating loss issue but overall cash was positive. No dps for the year.

Q1 Results:

KCB opened the Q1 show with a 3% PAT growth on prior yr. I have switched my remaining stake in KCB to AK on the back of results which were a puzzle. Like the fact that annual reports will be emailed to shareholders in future though.

Finally, HFCK is showing the potential one suspected it had. PAT grew by 1.5 times on prior year driven by massive growth in loans. I suspect Kenyans are switching from NSE to real estate in a big way and HFCK has really aligned itself to take advantage of this. Still not sure how Equity intends to help HFCK leverage on its brand and network but this has to be the way forward. HFCK has been very innovative in terms of products and distribution. One of the products out there is its Makao project management which I'd recommend to NRKs.

Rumours:

AK is a takeover target.

Macro:

Its either the supplementary budget got in the way of UK's serious imbibing time or the fruit never falls too far from the tree. Excellent work by MARS though.

FTSE & other markets:

Turned green for the first time this yr yesterday. Risk appetite is back. Dudes are unhappy gettting 1-2% savings rate. Plus depression, swine flu et al have all been overhyped so that when reality hits, there is relief. And this is the result.

Great leakage work by Tim Geithner on the stress tests. The numbers were no different from those reported by FT almost two weeks ago.

Intro: Mortgages in Kenya

A mortgage is a loan taken out to buy a house with the house acting as the collateral. This bears repeating. A mortgage is loan just like any other.

Basics:

For the borrowers

Things to consider are;

1. Can you afford a mortgage? A mortgage will rarely ever be less than your monthly rental. By itself. Once you add council rates, utility bills, furnishing, maintainance bills (these will be there whether the boma is new or old), you'll see your monthly costs go up by a third of your rent. So you must look at the likely monthly repayments. Your mortgage repayments will depend on...
2. Price of property: Prices have rocketed in Kenya though the upmarket areas are now seeing a much needed cooling off. I think the key driver was the cash-only buyers primarily remittances and these are already falling off. However, the lower end of the market has sufficient demand to see it continue growing but I doubt we'll ever see the frentic pace in the upmarket areas. Websites that will get you a feel for prices are many but a few are villacare; estates.co.ke; hassconsult; nyumbanet and uzanunua. Many think that there is a bubble in the market and this may well restrict your resell price should there be a marked corection.
3. Your deposit: The higher the deposit you put down, the lower the loan you need to borrow. And of course the lower the amount you want to borrow, the more interest rate options you get. The key criteria is always, are you better off reducing your monthly mortgage repayments compared to earning a return in some other form of investment. Put another way, can you invest the deposit in another venture that gives you more than say the 15% interest rate that you will save by oputting the deposit down? However, its rare in Kenya to get 100% mortgages so some deposit will be required.
4. Interest rates: There are two things you need to know about interest rates generally, the current rate and the future expectations of where interest rates will go. There are two types of interest rate deals that are currently offered in Kenya. Current interest rates are set depending on amount you want to borrow and duration (term) you want to borrow for. Variable interest which basically means that it moves as general interest rates. So future expectations become of added importance. And initially fixed interest rates. I have put together a little table that I'll update from time to time.
5. Monthly repayments: From the above, you should now have the bits that will help you decide what type of house you'll buy based on its monthly/annual cost. You just need to plug the numbers into this Excel equation... = PMT(interest rate/12,term*12,property price less your deposit). Alternatively, go here and input the same numbers to get your monthly payment.
6. Location: This is a feature unique to Kenya where some banks only offer mortgages in specified towns. Reason is obvious.

For the lenders:

Important factors. With mortgages, its as important for the borrower to know what the bank will look for before lending.

1. Income expenditure gap: Most lenders want to know that should they have to or decide to jack up interest rates, there is enough of a gap in your income-expnditure to allow for this. So for example CBA won't allow repauyments that sccount for more than 50% of your monnthly income.
2. Loan to value ratio: aka LTV. Should be no greater than 80% or anticipated price correction at time of appplication.
3. Income mulitples: Simply put this is the ratio of your annual gross salary to mortgage amount required. Prudence dictates that this shouldn't be more than 4 times.
4. Screening reqquirements: Many banks tend to have more onerous requirements when they want to reduce lending and vice versa when they want to increase it.
5. Other mortgage set up costs: These are noticeably higher in Kenya and include stamp duty, legal, processing fees et al.

Final point.

• Take a mortgage to suit your stage in life. If you are young or have a young family, you'll surely be making a move to another house at sometime in your life. Therefore, consider a mortgage as you'd any other investment. Without getting emotional.
• Late edit: If you are in the diaspora, avoid if you can, taking a mortgage in Kenya and if you already have one, exchange it. The difference in interest rates is just too big especially now. Instead, borrow from a local bank at a lower interest rate and buy the property or pay off your Kenyan loan. Kama ni makaratasi, find somebody who can do this in exchange for your title deed and an agreement.

BTW: the word mortgage is of French origin and literally means dead pledge.

NSE weekly catch up: the next bull run

So, you've done your SWOT analysis, looked at recent share performance and finally you want to know how the share will perform i.e. when the NSE will have another bull run? Have a look at this 18 year chart for some clues. I believe without a shadow of a doubt that the NSE will only have another sustained bull run, if we have political changes that capture Kenyans' aspirations and imagination. Of a similar nature to the coming of the multiparty era of early 1990s and the Rainbow coalition of 2002. Why? Stock markets are about psychology (positive national mood has a positive effect on the stock market performance and vice versa). These changes also extend to the economy. Finally, those foreign investors who like to have some exposures emerging and frontier bourses will pick up on such changes and bring in their funds.
Bottomline: rather than averaging down and other bear tactics, why not invest some of that cash to change Kenya for the better? If 5% of the ksh690bn of the NSE turnover was invested in changing our politics for the better, we'd be far. And create the next NSE bull run.

Results:

Stanchart showed that you can be too cautious and it will hurt as PAT fell by 4% from '07. Its explanations about effeciency investments ring hollow unless there is a targetted revenue generation stream. Btw, it still remains the best share, dividend-wise (another Ksh5 will be paid). But also in terms of RoC.

Co-op: became the only bank so far that reduced its loan loss provision for 2008 (apart from HFCK). Many know that it has had previous history with bad loans so expect this move to bite it on the backside in 2009 or 2010. DPS of a whole Ksh0.10 was also thrown in for good measure.

HFCK's PAT was up 86%. Equity midas touch rubbing off on it perhaps?

Kakuzi also pulled a shocker with profit growth of 47%. And not only attributable to revaluation of tea leaves. DPS of Ksh1 to be paid in May.

FTSE: Finally got my second lot of Barclays's shares at a decent price. Otherwise very choppy waters as investors are fatigued by the bad news' stories. Mainly from across the pond.

NSE Update- technical hitch gives way to bounce

The NSE was a one way bet, until the "technical hitch" on Thursday. Even the papers had the quotation marks around the technical hitch. Equity for example had 1 share in demand for every 8 suppplied on Wednesday. On Thursday after the " ", the ratio was the almost the same but opposite. For Equity, this sounds okay given it had just announced very good results, but AK, KCB, EABL and others didn't announce their results on Thursday. 2ndly yesterday was a surprise, because although Equity announced its results on Thursday morning, the 10% rule was lifted yesterday. In any case, my take is the two days rise was aimed at Co-op IPO and investors (as opposed to speculators/traders), should eiether step in slowly or wait for a full week of solid volume rises.

Results announced in the last week:
KCB- up 69% yoy driven by strong F&C and strong jaw effect between costs and income. Flat vs. Q2.
DTK-up but can't locate its results
KQ-down 63% yoy, but a commendable perfomance in respect of growing revenue in the first half despite everything. It must get its customer service and hedging right to recover. Really needs a new CEO.
ARM-up 15% yoy on similar turnover growth. Cash flow a bit stronger after loan.
Equity- up 277% yoy for the 9 months driven by Safcom IPO and Ksh0.2m higher than my forecasted fall from Q2.
HFCK-up 36%, Equity has a 20% stake and is in my view, unlikely to take a bigger chunk of HFCK for the time being.

Elsewhere, EA Cables appointed James Mworia, a young guy from TC as its new CEO (apparently).

Friday Evening Shorts

I am a student of history because one learns a lot by studying history. Reading the series on late and feared Kinyottu and especially his “work” around the Kenyatta death and also reading Scott Mcellan serialised memoirs, you realise that one, there is a lot of criminality that goes on under guise of national security; maintaining stability et al. Then you find that a lot of these guys in power treat those positions like private ventures. And then the sort of information-hoarding that goes on to allow these manoeuvres to be done.

Oil is finally on its way down after the markets cottoned onto the bubble that was being artificially pushed up by oil traders. Long-term, oil prices will go up because current estimates are that in China alone, car ownership will grow from current 600,000 to 2.9m by 2015, lakini the current doubling of prices within a yr has no basis.

Who rates rating agencies? Good question by the FT ...

ESOPs are all the rage among the listed firms at the NSE. As in the UK/US markets. But different drivers. At the NSE, it’s cleverly trying to buy employee loyalty by tapping into the new found love of shares…

One my prayers maybe answered as Kenyans turn their love of politics to shares. Stockskenya was down this afternoon as guys tried to find out their Safaricom allocation. Mind you, stockskenya and Nation which I think are the two most popular Kenyan websites seem to be suffering lately either from too much traffic or just slow IP connections I don’t know.

AGMs-Bankelele alongside BDA has been some stirring work for us in the Diaspora on this. One of the more eagerly awaited AGM’s is the Equity one. There will be three issues that investors will hopefully bagger the board on. A cheeky about the intentions of the principal shareholders i.e. will they extend the lockdown? I don’t actually expect this to have much of downward impact apart from that caused by perception. Reason, it’s very difficult to sell 20m shares in one go at the NSE. 2ndly, with Wanjiku’s bank share edging towards KSh300, can we have a 1:3 share-spilt? Thirdly, 6 months down the line, how is it going to revive HFCK? Fire Ireri?

Finally, whatever happened to financialpost-at least the online version?

NSE catch up

There are many good reasons to still buy some NMG shares. There is an additional one with when one has a look at its investor briefing . Having young leadership should make its mark on a business and I hope I don’t speak too soon when I say that 18 months after his appointment that started off with nation-gate, Linus Gitahi is making his mark on NMG. It has a very clear vision “Media of Africa for Africa”. Clear leadership is also being seen at Business Daily. Yes it’s had its goofs, but even at Ksh50, I had to get a daily copy when I was home. Nation despite being the victim of usual anti-kikuyu BS, has on someday something like half the content as adverts. The job supplement looks like NMG goes picking anybody who wants to advertise. Over 3-4 years, one can’t go long on both capital (share appreciation growth) and income basis (one of the best DPS at the NSE). Placed alongside SGL and Scangroup as media-type stocks, NMG is still way ahead.

The fate of KQ should now become an issue of national concern to rank alongside the direction of KMC, KPA (IPO-please) and KPL. In retrospect, Titus Naikuni, KQ’s CEO joined KQ (Feb 2003) when the hardwork in terms of getting on it a profitability curve had already been done. since things started astray at KQ, he has tried typical MBA-speak things i.e. sacking a manager here and there; closing off some business routes, dismissing big accidents and mishaps (135 for last year). Continually however, all I hear from any of its passengers is “never again”. Isn’t it time the buck stopped at the CEO’s desk?

It is entirely correct that questions have been asked about Equity share price and the extent of insider trading. It does happen at Equity, but its very widespread at the NSE and even the UK, National Bank’s share price went to 60 from 40 last June prior to Kimunya confirming GoK’s paying off Ksh20bn debt. Other classics are EA Cable, BBK to name but a few. The UK's FSA suspects that upto 30% of M&A deals have some insider-trading going on. The problem is far worse for Equity because some of this negative press overshadows what is a remarkable performance by a “made in Kenya for Kenyans” solution to banking. I was shocked to see that Equity is financing Access Kenya’s shareholder offer of home-internet. Equity offers a variety of loans to the one group even I fear lending to. Small-scale farmers. And so forth. The moral of the story is that investors must buy on fundamentals alone and do so for medium to long-term gains. When you have BBK on a P/E of 20.42 despite PAT growing at annual rate of 8%, then buying Equity at a forward P/E of 21 looks cheap even at current prices.

And whatever one can say, buying HFCK at anything over k35 (i.e. P/E of 54) is not fundamentals-based. Yet.

I like the look of Access-Kenya. Pre-2007, the group had less than 1,000 corporate clients (this is now just over 2,000). On the back of this, its doubled turnover and bought some interesting players into the group and having had the measure of the market (40,000 corporate clients in Kenya and only 12.5% have internet; something in the region of 325,000 households that can afford internet and only 5% have internet) are now set to take advantage by investing in fibre-optic at source and its delivery to end user households. Still, its website isn’t exactly the best even in Kenya is it?

Banking Sector Marches On

CFC Stanbic is now a reality. Watch out BBK and Stanchart, these guys will soon be competing for corporate clients with a very portent offering of banking, insurance and investment products.

NIC are in the midst of their right issue-priced at very good Ksh70 with an additional bonus share to come once they are through with the rights issue. NIC are an innovative bank who potentially have a very bright future ahead but need a partner , not necessarily another bank but another financial institution, on whom they can leverage distribution.

DTK are also shortly starting their rights issue again at a discounted Ksh70. This is not as attractive as the NIC and DTB's future lies in two things happening. One, the finance minister doing away with these you stick- to- insurance and you-to-banking kind of divisions so that a bank can
 offer insurance and investment products across the counter. And secondly, their being able to integrate successfully with Jubilee and Habib Bank.
In other news, Equity continue their expansion (how are they doing it?) with opening of branches in Kisumu and likely partnerships as far as Zimbabwe. And as a clincher, have now 
been allowed to take a bite of HFCK heralding the much anticipated Equity-HFCK-Britak
financial institution (possibly buying into some of the smaller brokers?).

And to read any blog you'd think Kenyans ate and slept politics!

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.

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.

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!

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...

Of IPOs, OFDs, HFCK & Bears

Kimunya confirmed NSE's worst kept secret, Kenya Re won't happen in March but May and KenGen's 19% offload is being brought forward to next month. Kenya Re will most likely be the equivalent of the grocer who hides rotten oranges at the bottom (why are they taking on KNAC's assets at this stage of the game?), but at 60m shares will still be oversubscribed. KenGen's offload is a few months late or 1 year too early i.e. the timing is wrong. Reason-the tariff fiasco with the govt having realised too late that it had created a rod for its own back by committing on a prospectus to pay KenGen their real cost of production. So far, Treasury is covering the gap between what KPLC can profitably pay to KenGen and the amount KenGen needs to profitably continue to produce electricity. Govt is in such a mess that they paid a consultant to tell them that yes, you'll have to ask consumers to pay for the real and higher cost of producing electricity-many could have told the govt that without charging them! Without some confirmation of this, investors should stay away from the offload and buy the shares at k10-15 in the secondary market later this year.
HFCK announced their FY06 results, PBT was up 56% primarily on lower staff costs (does that mean its not growing any more?) and lower loan loss provisions (good-HFCK nearly went bankrupt from carrying too much of the stuff). So not driven by revenue growth (1% up on FY05) and there was no dividend. There is still confusion over strategy. HFCK now wants to fund construction of properties. So it will be carrying two types of risks in its books-property not sold and then when its sold, it'll obviously have the more conventional lending risks. This is a market that KCB seems to be way ahead in so this investor doesn't see how HFCK will survive as a standalone entity to see out Frank Ireri's 5yr strategy. The strategy will require financing of around k13bn which I am not sure the proposed rights issue will bridge-perhaps a better idea would be to float a 25 year bond.
The current correction/bearish sentiment at the NSE is a perfect opportunity for the long-term stock investors most who will say its a necessary rite of passage that imparts important lessons for one to be successful. There is sympathy for those that were hoping to use the NSE bull run to raise short-term funds which there is quite a few in the current investor population, but not for the get-rich-quick crowd. For the rest, use this period to accumulate in stocks you believe will grow your capital in the medium to long-term.
Kenya Bankers Association revealed that Ksh20bn of the bad debts in the banking system is held by 100 defaulters-shouldn't they be letting all financial institutions know who they are?

HFCK-To do a rights issue

Article in the Standard todayhttp://www.eastandard.net/hm_news/news.php?articleid=1143964210. In the short-term, this should see the share price, but it may fall after the rights issue as the NSE absorbs the extra supply of shares. I maintain a BUY on this share despite the high P/E ratio. The housing boom in Kenya continues and will for the foreseeable future. More importantly, I still think that HFCK would be a very good buy for one of the large banks that wants quick access into the mortgage sector.

NSE in 2007

The dos:
Buy Barclays because:
I think this share is presently under-valued against peers on price alone-PE ratio is among the lowest in the banking sector. This is partly due to the recent increase in shares
Investors will always go for it as a quality, well-managed, stable-dividend policy stock-especially important in uncertain periods such as Election time
Their move bank into the unbanked is timely given the current economic growth. Areas such as Ngong (where it’s re-opening its branch) have really grown and continue to attract solid commuting middle class.
It remains a status symbol for the aspiring middle class in Kenya

Don’t BUY because:
· The move into the unbanked combined with recent increase in loan amounts to 2m/= represents risk especially in terms of potential NPL
· If rumoured integration into ABSA doesn’t pay-off or is prolonged, the bank will loose out to upcoming banks such as Equity
HFCK-
1. I see this as a takeover candidate especially given its prime position in the Mortgage market. Expect this in the next 12-18 months, otherwise won’t happen
2. Frank Ireri, the new MD talks a good game and is young enough to want to make a mark
3. The housing market will boom if economic growth is sustained
Against this:
1. Share looks overvalued compared to banking peers (P/E of 83+ compared to KCB-36; BBK-18; DTK-29;Equity-36) i.e. investors may already have factored in the likely takeover premium
2. The economy take-off maybe premature
3. Non-performing loans may rear their ugly head
4. Ireri maybe poached by a peer bank
KenGen
· If the economy growth is sustained-this stock will mirror that performance
· The ongoing rural electrification programme means on-going market growth whether the economy grows or not
· Ongoing investments will continue to pay-off in future
· The P/E ratio at 16 is very good compared to other shares in the bourse
· Eddy Njoroge has steered the company well
· The likely addition of 19% shares means lower govt share
· Its monopoly position

Against this:
· The ongoing price saga with KPL means the stock will stay saddled with political baggage
· Govt remains the majority shareholder-always a recipe for corruption and political manipulation
· The economy growth maybe unsustainable
· The company may struggle to find alternative sources of power-or they may prove too costly
Express:
One for the future…