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

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

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

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

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

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

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

NSE weekly catch up: 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.

Half Yr Results: Standard, Pan Afric, Kakuzi...

Despite a fairly political first half of the year (i.e. equals more newspaper sales all things being constant), Standard Group saw revenue rise of 9%, but higher expenses and financing charges saw PBT fall by 7%. Cash flow position remains negative. With that perfomance, would rather buy NMG.

Pan-Africa Insurance saw a particularly good half given the circumstances (I'd have thought claims would have gone up due to the destruction earlier in the year). Its premiums were up for the period by around 20%. This could be an indirect result of more people taking insurance. PAT was up by 798%, but this is due to unrealised gains from its very volatile APA subsidiary though PBT was also up by 32%. Still, I prefer KenRe in the insurance business.

Kakuzi as expected, perfomed badly. I am pretty sure the shenangigans earlier in the year where it was trying to sell some of its assets against vociferous opposition from minority shareholders has not helped. I avoid agriculture companies as I can't predict or keep up to date with weather patterns, global commodity prices, exchange rates et al.

Unilever Tea Kenya Ltd, Kakuzi and Rea Vipingo Plantations

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

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

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

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

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

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

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

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

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

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