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.

Coherent policy

Inflation stands at a painful 26% and GoK is desperate to bring it down to manageable levels. Yet the same GoK authorises KPLC and Water boards to institute inflation bursting increases in their prices! Perenial droughts in some parts of the country continue to occur at the same time that other areas are throwing away grain...

While one's expectations of GoK must start from a very low level, it'd be nice to see an attempt being made to bring to bear some coherence to policy on some of these issues especially when some have such immediate impacts on the economy.

Who is up for the job? Certainly not Baba Jimmy going by this video. RAO already has his plate full, so perhaps one of dpms can have a go?

Equity Bank: The revolution and the law of diminishing marginal returns

From a failing micro-mortgage building society--->successful mould breaking microfinance--->very strong retail bank---> what next?

The law of diminishing marginal returns states that all things being equal, the rate of change will increase initially, will then level off before starting to decrease. After doubling profits continously since 2000, Equity investors and watchers will be waiting for 2009 to see if the bank is going to be able to maintain the furious rate of growth. In effect, with projected Ksh3.9bn for 2008, Equity would have to hit Ksh7.8bn for 2009 to maintain an increase of 100% in profits.

Impossible? Yes?

The bank is giving the target every shot and is now moving to answer the what next? question posed above.

1. Equity in 2009 and beyond will almost certainly be operating a model akin to the universal banking model that only CFC Stanbic has in Kenya or East Africa for that matter. The bank will be a:

• Retail bank: provider of the probably the largest selection of retail banking products. The bank is working to shush all the noises about loong queues in its branches. Its scaling up its mobile banking offering and moving ATMs to supermarkets and other outlets. It will presumably also try to bring in HFCK into the fold at last by offering it the distribution channel as well as products (Hekima Milele product being done jointly with Britak is ground-breaking in some respects).
  
• Investment bank: Initially I think this will just be the brokerage offering plus custody service layered on top. Its already doing the custody business very profitably (made something in the region of Ksh1.5bn from Safcom IPO). According to this piece in the Standard, it's talking to around 6 firms in the NSE about buying an investment bank licence.


• Insurer: Its already got a couple of products in the market. The next move might well be a formal distribution agreement with BRITAK which was until Helios came along, its largest shareholder. The fit in terms of culture is actually very good. The deal would only be a win-win if Equity gets a cut of upfront-premium and repeat premiums for distribution rather becoming an originator of insurance products because embedded values come into play.

Can the model work for Equity where its failed for many others? Please note that before Stanbic came along, CFC results tended to go up and down somewhat primarily because of its CFC Life business. In the west, the universal banking model is now besmirched given that the two largest writedowns have come from universal banks (Citigroup and UBS). Quite simply, it boils down to risk management and lack of management knowledge of investment banking. Risk management is something that Equity has had to work hard on and will need to do so to be a success. Nyaga and FT should be pointers of what can happen otherwise.

2. Regional bank: Though UML is small (83k depositors and around Ksh2bn in deposits), Equity' plan is to replicate its retail banking success in Kenya across M7's country. Its also advertising for hires to help open its first branch in South Sudan though I suspect that'll be very gradual business growth. The regional banking strategy will only see returns in the long-term i.e. 2/3 years time.

In the meantime, the bank will be looking for its brokerage and insurance businesses to bring the bacon home.

PS: My 2009 forecast is Ksh6.2bn i.e around 60% growth from 2008 close of Ksh3.9bn.

PPS: The shareprice perfomance over the same period will be affected by this messy announcement.

A review of Duncan Ndegwa's Walking in Kenyata struggles

As a quick preamble, there are very few useful books out there that give Kenyans a glimpse of how their government actually operate. Secondly, there are very few books that attempt to bridge the gap between the mythological beginnings of many a Kenyan tribe and their history pre the mzungu's invasion.

This is one of few that I have read that does attempt to do both.

As I suspect it is the case with many of my posts, the book could have done with extensive editing to give it some chronological order. I really enjoyed the first half of the book which looks at the history of Kenya at the beginning of last century has lots interesting detail on Agikuyu practices before we fell hook line and sink for mzungu-culture; very funny bits about growing up in those and especially when they first encountered whites and the various struggles against colonialism in its virulent stages when you could get shot for looking at a white lady!

The second half of the book suffers from neglect from a good editor. The story jump back and forth from the period after Uhuru to years downstream to the Kapenguria jail period and so forth. It does include a lot of nuggets. Moi apparently offered 7 GEMA Mps the VP post in 1978 before settling on Kibz. Kibz would have been minister of finance (to replace the perpetually drunk James Gichuru) earlier than he did but for his closeness to Tom Mboya (the two jointly did the 5 year development plan of 1965). His explanation of why his civil service commission allowed civil servants to own businesses is laughable and shouldn't go any further.

Ndegwa idolises Kenyatta, but in the end paints the old man as nothing better than a tyrant who punished those who didn't show absolute sycophancy. Recalling m-o-1's rule the Kanu circus of late 80s when Mps were treated like schoolboys, you can say he was just following mzee's nyayo.

Equity "IPO": what does it mean?

One of the key underlying and intangible requirements of stockmarket is continuity or stability. Anchor shareholders are important because they in effect represent stability. They do this by the fact that usually tend to hold onto their portion of shares thus in effect guaranteeing scarcity of shares a pre-requisite for share price growth. Every share thus needs anchor shareholders. Equity shareholders have been on tenterhooks this year wondering if its anchor shareholders would introduce millions of share into the market come 7th of August. The date came and passed with no reaction (except for CEO Mwangi's 0.3% that was released to comply with CBK 5% requirements for management).

The assumption was that most of them would either hold onto their portions or look for institutional substitutes. Now comes the announcement that Equity will instead float the shares of its foreign holders! So what is the difference? Does it include Hellios' holding (which its supposed to be holding for 7 years)? Even worse than a spilt, an additional float of shares will presumably mean that potential investors will have to be offered a discount almost certainly based on most recent price.

Bottomline: The additional free float might not be greeted as positively as Equity is hoping even if the share has stellar performance underpinning its future.
PS: My thinking is that brokers under the mistaken impression that more supply means more commissions for them are pushing for some of these moves. Lakini supply has to equal demand otherwise NSE will stay bearish,,,

The worst Kenyan tribalist revealed

There are various social ill inflicting the Kenyan soul presently that threatens the glue which holds the country together. Amongst them is the runaway grand corruption, impunity, poverty, insecurity etcetera. However, the elephant in the room which has existed and continuously swept under the carpet since independence, until it reeled its ugliness in 2007 bringing deaths and destruction is the tribal animosity.

Tribalism is defined as the possession of a strong cultural or ethnic identity that separates oneself as a member of one group from the members of another.

In today Kenya, tribalism has infiltrated every aspect of the society starting from the presidency to the civil society. Many opportunists more so the politicians have been quick to join the bandwagon in exploiting it to full potential resulting in the tragic consequences of 2007, nepotism etcetera.

Attempts to fight this evil is often met with counteracting arguments of siding with this or that tribe and worst of all as often practiced by politicians, one is accused of either defending or threatening the other tribe. The sad consequences are that having a united Kenya remains a mirage.

So who is the worst tribalist in Kenya?

This is the individual who believes that their tribe is superior, advantaged, resourceful, beautiful, intelligence than others. It is also one that thinks that their tribe must rule others. It is also an individual who judges other tribes or individuals in relation to their own tribe especially with concern to language, behaviour, customs or religion.

If you believe in more than 3 of the aforementioned statements, then you are the worst tribalist in Kenya. Just to note that chauvinist, racist, homophobic and religious haters are alike in holding derogatory beliefs about those unlike them.

Why have anti-corruption initiatives failed in Kenya?

I propose 3 reasons

1. Kenyans don't associate GoK money and their money as being one: Out of around Ksh700bn annual budget, KRA collects around Ksh500bn. This is paid by most Kenyans who work or do business. So why don't most peeps care about how their money is spent? Here in the UK, I pay tax similiar in amount to my mortgage plus monthly shopping bill. That tax excludes car tax and local taxes. So I care very much about how the UK govt spends my money. In Kenya, perhaps because many of the elite are tax evaders or MPs, you rarely hear anybody decry wasteful GoK spending. That makes it easy for peeps to think they can get away with pocketing the same because Kenyans think its GoK money who cares. Corruption involving GoK money is as bad as someone carkjacking you, ngeta-ing you et al.
2. Too much fear or respect of those in authority: A culture od doing what the boss said pervades the civil service at all levels. And yet, its like peeps haven't learned from Prof Mbithi who when testifying at Goldenberg said he received phone calls at night asking him to parocess Ksh1bn plus payment for Pattni! And off he went. Today he is a disgraced man. Because of this culture of doing as you are told rather than demanding that you get the same in writing, corruption is easy to do because there is rarely any paper-trail. In such a situation, its nigh on impossible to one, ascertain that corruption has taken place and secondly, as difficult to find out who played what role. In that respect Githongo's tape-conversations was God-sent (notice its the same trick Kalonzo used on his own PA).
3. Politicisation of everything:Many will condemn corruption and the impact it has on our economy. They'll argue that peeps caught being corrupt, should be hanged and quartered. Wait until the suspect is of similar political affiliation...Oh there is selective justice, oh he is an angel and would never do that. Our politics being bereft of any ideology, principles or policies have surrendered to our lowest common denominator, tribe. That is why Kibaki can easily say that corruption will be a thing of the past and also query whose goat Njeru Ndwiga has partakrn off. Similar attitudes will ofcourse be the norm from the hoodlums who partcipate in mashada and kumekucha forums. They will shout when Kibaki and allies are caught with their hands in the cookie jar, but praise without hesitation Raila's allies such as the likes of Ruto of the NSSF-plots; Kosgey of the All-Africa games et al

There is hope that things can change. I remember guys telling cops off in 2003. And guys like Githongo pia.

Welcome back John Githongo

Kenya has few true heroes. Outside of athletics, we have very few peeps that you would want your children to emulate. Principled, with something positive to give to Kenya.

Only the truly corrupt in any shape won't be glad to have John Githongo back home.

Wednesday shorts

The forthcoming era of fast internet connections continues to garner interest from all. Its one of the reasons I fear for AK. Internet provision like mobiletelephony is initially expensive to provide due to high capex, but the revenue generation afterward is phenomenal. You lay the network and then chop it up into small bits that you mass market in such a way that you cover the amortised capex, staff pay, generous bonuses and maintenance costs. The rest is profit...And who is very good at mass marketing in Kenya?

I like this article's question on how World Bank came up with its Ksh70. The measure requires context and also has to be dynamic because today Ksh70 is not much for a day's spend.

Bolt by name, bolt by action! I've taped that 100m so I can re-watch again and again... Its the equivalent of the first time I saw someone patting a lion.

NSE-are we out of woods yet? Most likely until Co-op IPO comes along. Last week's recovery was not unexpected given that investors had oversold, but the issues remain. Supply and demand are still looking for equilibrium. In the meantime, I have Equity, KCB (by end of next week we'll which way with supply), AK and NMG on my stockwatch.

AK "average" at 38%; TPS unsurprisingly down

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

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

NIC so-so, KRe good upside for H1'08

In a way its good because those that disappoint are being compensated by those that surprise. NIC disappointed because KCB had a very good half (I tend to look at the base from which the company has coming from). Lakini when you look at the recent steps, you realise that a smaller branch network will hurt a bank when there is a liquidity crunch.

KRe, I expected worse results because of having to cover-off Jan/Feb claims, but it looks like its come away unscathed. Fundamentally, it looks like a business that was just looking for solid management. At current price, the share is clearly good value.

Friday Unknowns & Githongo for Ringera

In January, our great nation was on the verge of becoming a non-nation in the mould of Somalia. Yet, the lowest the NSE has reached this year was on Wednesday this week…

Safaricom is the largest mobile provider in East and Central Africa, with products that are mould-breaking not just in its sector but in Kenya. Yet at Ksh5.10, everybody who owns this was going to make a loss if they sold. So why wasn’t there 1bn shares being ordered yesterday?

When my wife was away, I did our weekly and discovered a shocker. Manyake accounts for 15% of our weekly shopping; carbohydrates (pasta, potatoes and rice) 6%; but 33% was fruit & vegetables. And you wonder about these headlines?

I can understand cultural reasons (ala the Maoris) and even lack of paper, but why do people tattoo themselves?

Last year, somebody who claims to know a lot about Kibaki told me that mzee didn't even want a 2nd term and its because of peeps like ka-roocy and the money-machines that were really pushing him to go for another term. His reluctancy was for two reasons; the referendum showed him Kenyans were ungrateful and 2ndly because his health was not good at all. So why all that bloodshed in Jan?

And finally, if we had got together as a nation and really knew what we wanted , Ringera would be back to the high court and Githongo would be asked to turn up at Integrity Centre on Monday morning sharp… as the new head of KACC.

NSE: Why the bear

First all, I wanted to disapprove the myth about Safaricom disproportionately pushing down the index (note here we are talking about the NSE 20 Share Index which is quoted daily). The table has the evidence. Please ignore the effect of volumes as the formula used to compile the index does.

Safcom has had some effect but so have other shares. Where its effect is real is in putting the integrity of the NSE further into question.

The other reasons posited have been:

1. Inflation: Reduced disposable income has meant investors cashing in some of their shares. In the absence of a breakdown of volumes by type of investor, I'd suggest this is likely. However retail investors form like 20% of daily volumes. The one area where inflation will have a bearing is on performance of companies across the board. Especially if one just focuses electricity and fuel inflation.
2. Diaspora: Credit crunched Diasporians haven't been sending as much cash home. But given the effect that this would have on the exchange rates, one can't see it. Notice that the £/Ksh and $/Ksh has been very strong since around March...
3. Temporary over-supply of shares: In addition to 10bn Safaricom shares, we've had in a short period, HFCK bringing in around 100m shares, NMG doing likewise (although its proportion of floated shares remains the same) and the forthcoming 225m from KCB. It’s a lot for the NSE to absorb in a very short period. For me, this is one of the bigger unseen reasons for the current slump.
4. Safaricom refund fiasco: Again, Ksh10/20bn does make a difference to the bourse transactions. Investors will tend to liquid their current holdings especially if they were investing in Safcom for speculative purposes.
5. Herd mentality: This is what ultimately turns a market correction into a bear. Especially if it,s not based on fundamentals.
6. Economy: Inflation+fuel infaltion+electricity inflation+drought+supply blockages+bloated expensive GoK+liquidity-resilient private sector=trouble

Bottomline: Its more a concurrence of issues that are driving the current bear session. And like the on March last year, no one reason will make it go away.

NSE bear/ correction: Survival strategies

First of all, a bear is defined as 20% fall in the general stock market over a period of two months. Yani, one it must fall by 20% or more and two, it must to do so over a period of two or more months. A market correction is defined as a decrease of similar magnitude (i.e. 20%) but over a shorter period during a bull season. So do we have a bear or a market correction? Judge for yourself...

Investing strategy will always be about timing. Are you long, short or speculative? Your strategy choice will depend on many factors but will probably boil down to how monetary challenged you are.

A market correction gives long-term investors a chance to look at how resilient their portfolio is. If it’s a resilient portfolio, it may fall but only by half or even less compared to market index. Short-term and speculative investors will probably use the opportunity to book their gains and look for more positions to take ready for the next bull rally.

A bear is a different animal altogether. Long-term investors typically find themselves having to buy and even (God forbid), sell. Typically, a long-term investor will sell to lock-in gains on stocks that were below their desired long-term return. On those already above desired long-term return, a bear market may in certain situations offer an opportunity to buy the same at such a price that the average buying price opf shares held on that stock is lowered. For example, say you are long on KCB having bought at Ksh169 in Dec 2006, subsequently added some at Ksh24 (after last yr's spilt). Right now, you are still very much in profitable territory. If it falls to say Ksh19 (say after the rights), you may want to buy some such that you are able to reduce your average overall buying price to KSh20.
For the short-term investors and speculators, the bear market sees many run-off unless they are keen judges of minute rallies. However, even they can find opportunities for example by anticipating corporate actions say results announcements that may lead to higher than expected PAT or even happily, dividends.

No matter your holding period, investors must use the bear/correction period to streamline their portfolios (code for sell) and of-course to think/look outside the box.

B&B surprise for H1 2008

After growing by a paltry 7% in the first quarter, Barclays Kenya turned this around with 24% growth for the whole of the first half. BBK says it made Ksh1.7bn in Q2 alone. So I was curious to see how it had done this. Income was slightly higher perhaps driven by more business days in Q2. The main driver was actually lower other operating expenses in Q2.


Bamburi also had a super half coming in 21% higher than the same half last year. These are very good numbers for two reasons. External factors were at their for sometime in this half. Fuel prices rose dangerously and ofcourse the Janaury political clashes would have cut-off the supply lines to customers. Hima, its subsidiary in Ug, also suffered from power rationing. Secondly, its bitter rival Athi only grew by a disappointing 24% from a lower base. This despite the fact that ARM has a more balanced income generating portfolio of products.

RIP Bernie Mac.

D&B new website, new sheriff in town & KPA IPO

In practical terms, D&B's earlier website was good because it fairly easy to navigate. What has always been my issue with D&B is the speed and quality of its customer service. Hope that is also given a new coat of painting.


Hope Mwakwere realises there is a new sheriff in town. He is officially the worst performing minister in the history of Kenya. A complete and utter waste of taxpayer's money. If there must a be a minister from the coast on the PNU side, lets try somebody else. I think if there was ever going to be an effective PM-post, then it'd have a required a strong personality who can set an agenda for how and what the post should do. If only GoK could also think about reducing the cabinet numbers, we'd be well on our way.
Why not list KPA? Apart from reducing the political dimension somewhat because investors won't put up with people like Mwakwere recommending who should its CEO, it'll give another fund-raising option.

Mind you, with the way Safaricom is going, Kenyans may steer away from GoK OFS in future. I am worried that its rate of depreciation may mean I have to re-write this post. Although supply has been cited as the biggest issue, I'd actually say its the realisation that it doesn't have a goods investor relations team. Econet has been pushed back and I doubt if it'll have the cash to compete and neither will Telkom. Still, I've sold my small holding just in case things go below IPO price (or rather below Ksh5.10 which is the breakeven point).

Tourism: The next target of the corrupt

There are 3 cash-rich sectors in Kenya today. Retail especially supermarkets although these have hold an equal amount in working capital. Banking is other. But in terms of pure cash, I think tourism is in a class of its own especially when the traffic is buoyant. Its Kenya’s second foreign earner after the diaspora bringing in around Ksh50-60bn.

Many have cottoned onto this, but also the fact that there is limited number of huge cash-generating lodges, hotels, camps that can be built given environmental constraints that mean for example only a certain number of camps can be set up in Mara.
Unfortunately or fortunately, the business set-up in Kenya currently lends itself to corruption. My recommendation is that GoK should in effect be an enabler (providing the legal setting, infrastructure and so forth), but shouldn’t be an owner of hotels or camps. Otherwise what is currently brewing under the cover at KTDC will become GRH repeated over and over many times.

Need for a long term multi-disciplinary solution to the school crisis

It is still unclear as to the exact causes of the current ongoing crisis in mainly public secondary schools and whether it will spill over to the primary schools now or in the future. Amongst the issues blamed for these crises have been drugs abuse, indiscipline, poor management and cultural crash etcetera. These crises were previously common place in public universities and colleges, God forbid their graduates some who are now secondary school teachers are involved or transferred their experiences to the schools as it would complicate the finding of a solution.
What is emerging is that the current issues are historical and multi-faceted hence important to address them holistically. Put into context they also signify a society and systems at a cross road in tackling the past, present and future.
In addressing the school crisis, numerous proposals have been put forward albeit too late in the day. The fallacious one by the education ministry has been the formation of yet another commission on top of the previous countless one’s whom recommendations remains unpublished. Another proposal came from the tourism minister on bringing back the outdated corporal punishment notwithstanding it would contravene the Children Act 2002 and the UN Convention on the Rights of the Child 1989 which prohibits such measures. Not to forget that even during its hay day when I was at school, corporal punishment did not resolve these crisis nor stop strikes occurring. The opposite effect was suppression of grievances, rebellion, communication and relationship breakdown with teachers. The worst case scenarios, quite common those days were the physical and psychological traumas inflicted by rogue disciplinary masters via arbitrary punishment. There was also the heart-retching punishment of children with physical, developmental or intellectual difficulties such as dyslexia, Attention-Deficit/Hyperactivity Disorder or Autism. Admittedly, many have argued that present day violence and dysfunctional systems directly correlates with the experiences of that era.
Tellingly, such a proposal also disregards the various research findings on appropriate child moulding onto a physically, socially and emotionally secure and healthy adult. John Bowlby (1957) the father of attachment theory between child and care-giver points the key to moulding such an adult is consistency compassion, affection, understanding, sensitive, listening and empathy. More recent studies by Gaffney (1997) and Andero (2002) similarly conclude that the effects of corporal punishment are intergenerational and last for years, with the family and society at large paying the price for teachers' actions as individual often develop fear rather than respect for authority.
Worryingly, the minister’s proposals demonstrate the government scarcity of ideas and lack of adequate preparedness in responding to major crisis facing the country. Need I mention the 2007 violence, Mau forest amongst others. It is also an indictment of failure to learn from history as these crises are not new.
However, there has been laudable solutions put forward one such from the rightful education minister who is however the assistant minister for Higher Education, Science and Technology a position widely known to hold little sway or veto in policy development and implementation. He looks at the students grievances from a social rather than medical model, that, it is a society problem not just the students or schools.
Such a solution relates to the revolutionarily preventative and cost effective approach that has produced effective results elsewhere through the integration of multi-disciplinary professions in primary and secondary schools. These professions includes Educational Psychologist, Social workers, Behavioural support specialist, designated nurses, police liason officer, child Psychologist or Psychotherapist, mentors and Parent support specialist. These professions should be readily available or attached to the schools on an accessible ratio. Their role would entail undertaking a holistic SWOT assessment of the social, behavioural, physical, psychological, family, financial and educational needs in partnership with the troubled students, their teacher and parents. Thereafter, the drawing up, coordination, monitoring and management of an intervention support plan both at school and at home.
Critics of this approach may however argue that it is a westernised model and impractical but, this can be modified to fit into the Kenyan context. Others might point to the implementation cost forgetting that a stitch in time saves nine.
Thus it is imperative that this revolutional approach is implemented to narture good future leaders from our schools rather than continue to lavish our current leaders in extravagancy in the midst of desparing crisis.

Below is the assistant minister's response.

Thanks for your honest view Bwa Maina.

Kilemi

Hon. Dr. Kilemi Mwiria (PhD),M. P. Tigania West & Assistant Minister,Ministry of Higher Education, Science & Technology,Jogoo House " B", Harambee Avenue,

NSE Latest

NBK grew by 38% compared to first half of 2007. SCB stood still despite an incredible first quarter which was driven by FX presumably due to Diaspora trasnfers into Safaricom IPO.

Speaking of which, Safaricom is now firmly in my territory, but I am not buying because the supply volumes are averaging something like 10m shares which way to much bearish-sentiment on the counter. Surely it must be good news that Econet won't now happen until September (possibly not at all this year according to Kainvestor)?

An investor was caught napping and bought NMG at Ksh332 after the share had already spilt. What I didn't understand is why given that dealers do still enter the share order, they didn't spot this and just divide the order by 2 or at least counter-check with the investor.

Despite 197% growth from H1 2007, Equity proved what a speculative Stockmarket we have by giving up almost 20% a week after its results announcement because investors feared that its principal shareholders would move their cash into bonds and farming once their lock-in period ended. Some are also confused as to whether the lock-in period ended on 31st of July or will end on 31st of August...

Tuesday's Shorts

Oh KQ. This summer, I needed to book direct flights urgently and to fit my pocket. So I noted that KQ were offering good prices and tried its new booking facility. After going through all the various pages, I got to the paying web-page. And discovered, there was nowhere for one to insert the 16-digits of the credit card! Incredible...

RVR seems to have done something right at long last. Puffet always looked like he didn't have a clue where he had landed.

We said it. Hiring professional wailers to moan about Kimunya mumunyaring, but then we all missed the crucial point that Grand Regency was now owned Libyans. And then the professional defenders of the establishment come out with stuff like, GRH was never public proponent. CBK is a public institution that held a property in lieu of unpaid debts. Thus by extension GRH is a public property. This week, I sincerely hope parliament finds Kimunya to be an incompetent liar and more importantly that GRH is public property that should be auctioned publicly to the highest bidders.

Where Kenyans fear August, I worry about July. A few years ago I lost my grandfather, who brought me up. This July I lost my father-in-law and our family lost close a close family friend. Then my pastor who is barely in his 40s was discovered to have cancer of the kidney which necessitated being taken out. Its also a time that reminds me that a life is very short. As such one must do what they've set out to do and not leave it for tomorrow because tomorrow may never come. And spend less time on quarrels; negativism; or the past.

EA Stock Exchange

If this does come into effect from January next year, it could have the same effect as the NSE's automated trading system and introduction of CDSC. With upside and downsides. Nevertheless exciting. Imagine trading in Bongo-land who are notoriuosly fearful of the Kenyan avarice.

Speaking of which, I think I'll test how easy/difficult it is to trade at the DSE. National Microfinance Bank is about to do its IPO from the 18th of August. I tried buying its shares last year when I saw it'd be listing, but the CEO politely told me to wait for IPO. So here we are...


NCD is a sort of a microfinance bank, but unlike most of this found in Kenya, its currently majority government-owned. Gova will be selling 21% of its holding so that the shareholding will be:



RABO Bank (Dutch community-type bank)- 34.9%

TZ Gova-31%

Public-21%

NICOL (a mostly investment company that listed recently)-6.6%

Exim Bank TZ (i.e. is a parastatal)-5.8%

TZ Chamber of Commerce blah blah-1.7%

Stellar Numbers from KCB for H1 2008

KCB posted KSh2.46bn PAT for the first half of 2008, 67% higher than prior year. Of the big 4 (BBK, Stanchart and Equity being the others), KCB is the only one that looks to be keeping up with Equity (though the later has now surpassed it in terms of PAT having posted by khs432k more :-)). Interest income was higher driven by KSh20bn growth in loans as well as interest from t-bills (up Ksh7bn). I assume it also benefited from Safcom IPO commissions (Ksh1bn in "other income"). Cost/income ratio has improved though from among the highest in the industry to around 65%.
Price comment: My number one rule when investing in a stock is usually the growth rate of its PAT and how sustainable this is. With these kind of numbers, KCB still remains a buy as it moves into Uganda, Rwanda & Burundi and expands in TZ and very successfully in South Sudan.

Prior to the announcement on NBK, I was running it through my investment thought process, but I think this makes much harder to decide on the way forward. The upside is that reduced GoK involvement is very welcome as it'll mean getting a strategic investor who can hopefully ease it Marimbi out. The downside is that the proposed increase of shares floated on the NSE will have similar effect to a that announcement on KenGen. Ultimately, will have to take a position either way.

BDA article

We did a little interview with the BDA.

Safaricom IPO aftermath: where do we go from here?

On the face of it, Safaricom IPO should have been a slickly deliveredIPO with investors getting their shares in their cds accounts justbefore 6th of June and refunds ready or EFT-ed into accounts within afortnight. How? Well, this was the largest and most anticipated IPO inEast and Central Africa. It had been trailed for months and its listingwas known for a good two months. Yet today, we are still faced with theusual IPO double-whammy of :
1. liquidity crunch due to refund bottlenecks
2. overcapacity leading to massive order mistakes

To quote Lenin "what is to be done?".

• DVPs for everybody through all the banks: Saying that we introduce dvps for everybody via the current system is of course not sensible given Kenya's current legal loophole (sorry system). Imagine brokers trying to chase retail investors for Ksh2,000 through the legal system? It won't happen. On the other hand, using banks that already have the expertise in lending and can thus act as guarantors would effectively seal the incentive for investors to abscond. This would be useful in others way to:
• Increase the number of banks that act as receiver banks. I was shocked when I saw Citibank was lead-receiver when it really doesn't have the experience in Kenya of handling the volumes involved. To my mind, it was a bit like attempting to fit a camel through the eye of a needle. By involving the whole banking system, we again have the required capacity and distribution network to allow investors from all corners of our great nation to participate. It does also mean that the liquidity in the banking system doesn’t get sucked up by several chosen banks which might also not have the capacity to re-distribute this liquidity. For reference purposes, look at how good Equity handled Safaricom IPO.
• Capacity utilisation: our brokers can't function during normal trading and find even a small IPO like AK a chore. By bringing other players who are (a) better regulated and (b) handle higher volumes and have the infrastructure to handle the human footfall and the admin work; we thus build up the capacity. And if brokers feel threatened, they can get a cut of the commissions.
• Finally, lets not compromise on integrity. Seeing the kind of move MSI has pulled off in Safcom IPO has not gone down well especially in the context of buying shares for "3rd party" clients when HNWs in Kenya couldn’t do the same through their brokers.

Economy in the midst of headwinds

After the clashes earlier this year, some of us our confident that because of the resilience of our private sector, the economy would get back on its feet very quickly. 6 months later:

1. Inflation in the 20s: Has meant less disposable income as families have to spend more on the basics or most likely, reducing their consumption of these basics.. This means less can be invested or saved. If there is less being saved/invested, you effectively have less capital for new projects as it now costs more to get the funds. 2ndly, reduced consumption means companies earn less or pay more to get higher turnover. Lower margins mean lower profits. Inflation can be reduced by aiming at the cause. In this case, we have reduced supplies of goods to supermarkets, grocers and so forth due to the destruction of the North Rift. Crops will take a while to grow and maybe disrupted by patchy rainfall. Hence GoK importing things like maize. 2ndly, GoK can increase interest rates, but so far I think the inclination is not to do so.
2. Safaricom IPO-induced liquidity crunch: Out of the Ksh236bn raised on the IPO, I'd conservatively say that 30% was done via loans which would have meant taking out a lot of liquidity from normal lending activity. Another 50% would have been a mixture of savings and investments and the remainder from shares. With quite a portion of this still stuck in the banks, the economy is experiencing some liquidity crunch. This is forcing banks to pay more on the interbank lending. Several have already raised interest rates on loans. For now, refunds will need to be speeded up but going forward, IPOs must be done differently.
3. Electricity: Last year, at the height of the annual tariff squabbles between Kengen and KPLC, coldtusker and myself argued that the solution was for GoK to go ahead and allow KPLC to charge consumers more straightaway. Electricity generation is too important to be left to GoK and KenGen should be allowed to earn so it can re-invest. However, political expedience (i.e. suicide) came in and GoK agreed to pay KenGen instead so that voters didn't runaway. So this year, what should have been done last year has been introduced at the worst possible time. If the increase to individuals is anything to go by, some foreign companies will definitely eb reconsidering their location in Kenya. A doubling of electricity costs is nothing to be sniffed at, What should be done? Well, its a good decision but the timing is all wrong and I think GoK should consider continuing the subsidy for this year at least so that the economy gets back on its feet faster.

Equity exceeds high expectations, NMG, Safaricom

When we were doing our maths over at stockskenya, we all agreed that having done Ksh35bn of Safcom IPO, that alone would give Equity around Ksh1bn additional income (commission and interest). We then added Ksh0.7bn (which it got for Q1) to give us around Ksh1.8bn for half yr (i.e. similar to the whole of 2007). Equity tramped that and did Ksh2.5bn after tax. Any concerns? I hope the non-performing loans are conservative because given the state of the economy currently, these may yet rise unless GoK can successfully be able to reduce inflation without interest rates rising to growth-reducing level. Shareprice comment, the press announcement didn't mention dividends or a bonus/spilt shares. Thus price may coincidently not rise by as much as it would have even though the annualised P/E is now only 22. I think its a good move not to increase the liquidity of the share currently. I hear there might be a listing at USE.

For once, NMG has been left behind and is only now updating its website. The new look is ok although I notice it seems to contain fewer stories than the previous effort. Still, welcome to mid-2000s Nation.

Safaricom is now in my range as I think the supply coming from FFIs has been milked out for now and the share won't fall further unless Econet and Telkom do very successful launches of their services in the next few weeks.

Equity Bank's H1 2008 Results: The art of the posssible

They were so good, KBC, Reuters did a spread. Bought some today at Ksh301.

Back later with the detail...

Athi River half year result disappoints:

The half year results were a bit of a shock. I expected to see 30-40% growth bearing in mind the reconstruction effort. Instead, cement sales were flat (reading between the lines), working capital requirements increased meaning it didn’t sell as much as it was producing. Annualised EPS of 4.60 means 7% yoy growth for the full year, basically lower than Bamburi’s 2006/7 growth. The spilt of the businesses will show the continued growth in fertilisers and lime and may actually have a downside because most of us have been buying the stock because of the ongoing boom in construction industry.
I expect to see investors selling off Athi River in the short-term until they are able to compare its half numbers with those of Bamburi when it announces late July or early August.

With most of the FFIs having downloaded their Safcom holdings, investors will probably play a wait and see game while awaiting the entry of Telkom Orange and Econet in August and September.

PM Raila and co hit London

Nice surprises: Kiraitu Murungi has a nice sense of humour. I can see how he gets into trouble. He mentioned Kenya was thinking of investing in nuclear energy. In the UK with guns already trained on nuke-loving Iranians. Wetangula was very articulate. Also seeing the crowd easily won over (there some boos when Michuki entered but the crowd clapped for his otherwise boooooring speech). Not so much a surprise but s reminder, Raila is best when handling tricky questions/mad people as he did jana. Oh yes, Raila is more presidential than Kibz in my humble opinion.

The one that got away: Uhuru Kenyatta didn't make it. There were vicious rumours about him stopping for a couple of bevvies before coming to the meeting but a High Commissioner guy overheard the rumour and said he was in Geneva.

Nasty just nasty surprise: The woman who had an Atwoli moment i.e. opened her mouth to prove all doubters wrong. She started off Oginga supported Kenyatta, but he was robbed, and a very nice crowd suddenly got rowdy and started trying to help her. But a like a suicide jumper, on she ploughed, “in 2002, you helped Kibaki blah blah”. All she missed out was that” kikuyus never vote for non-Kikuyus”. So Raila had to take her through a history of Kenya. Two of Raila's bodyguards were asleep. It was funny because it was them and a UK gova's security guy. He was standing while they chose to sit. And they were both asleep. Najib Balala reminded us he still as arrogant. Guys were just saying hallo, we are Londoners we don't need handouts. Muppet. Finally, does really take Raila, Michuki, UK, Wetangula, Kiraitu, Elhmi and Mutula and their PS, and others to come and hunt for investors?

NMG share spilt confirmed

Spilt shares start trading on 11th of August with books closing this Friday. Moderate share growth and a fat dividend makes NMG a share to hold for the longterm. Don't all rush in now.

Total announced a doubling of profits for the first 6 months, with turnover growing by 30% (petrol-pump prices I'd say given its probably able to sell old stock at seriously good margins); but the key driver was much slower growth in costs.

EA Cables was pretty flat despite a good first quarter. Me thinks exit time may be very near. The Kenyan business which is still the major business driver is simply not performing as well as I thought it would be given the construction work still on-going. Still, I can hang onto the shares until mid 2009 to see if fibre-optic will have the impact I have included in my forecasts.

Is your broker about to undergo a liquidity crisis?

In business, cash is king. In banking, capital is king. In ibanking/brokerage, capital and leverage are king and queen. In layman terms, if a broker can't pay you when you sell your shares or doesn't buy shares in a timely manner, then its because its simply doing too much business compared to its capital.


In the light of this, I looked at this table and you can tell which brokers will or have been attracting a lot of complaints based on slow dispersal of funds to clients.

The golden rule here should be that a broker shouldn't be doing more than 100 times their capital because if there is run on a particular stock, they simply won't have the funds to pay-out clients in time which will in turn lead to panic selling and further withdrawals.
Look at Nyaga, Discount (CMA had an issue and so have investors who frequent our local chatterline), Apex (I haven't heard many complaints but again that is way too much business for its capital levels). I also fear the same for Ngenye. Are D&B's capital numbers correct because that means its heavily under-utilised.

So to add to this post, make sure you get sight of a broker's accounts and especially how much turnover its doing against its capital.

Children and discipline

Growing up, I never thought that the day would come when I as a child could report my parents/grandparents to social service or the police if they disciplined me. By discipline I mean a good whipping against misdemeanours.
Today Kenyan parents in the UK are faced with precisely that situation. Having grown up being disciplined and for most, massively benefitting from it, it has come as a shock to them to hear kids as young as 6 saying "you can't beat me, I'll report you to the police"!. Many seeing their kids starting to go off the rails have resorted to desperate measures. Many fool their kids into travelling home with them and do a catch up exercise in whipping.

In Kenya itself, teachers were of course banned from caning kids several years back and the fruits of this policy are now being harvested currently.

Although it might be simplistic to argue that a good whipping is the solution to the current on-going riots in our schools, the whole issue of discipline at home and schools for our kids must be revisted. If you think of a tree, it must be pruned and supported when its small so that it can grow straight and strong. Similarly with our children, you can't just support them, you also need to remove nasty habits from their character so they grow to be the man or woman that they have the potential to be. How you remove those habits and behaviours is of course up to you, but indiscipline will for example mean your child will never understand when he/she must be do painful stuff like study all hours or go running to remove extra tire around the waistline or wake up early and stay late completing a certain task at work.

Ofcourse, its not easy being the disciplinarian if for example earlier in the year you were cheering on as so and so rioted, burned or slaughtered your perceived opponents.
And yes, issues such as study/play balance must be looked into.

But "spare the rod, spoil the child" is saying that rings true today as it has over many generations.

Classic Dilemna: Diamond Trust or NIC?

Both mid-tier banks with niche markets, but are now gearing up to generate revenue from areas they previously didn’t do. DTB from East Africa coverage, NIC from brokerage.
Both with almost matching P/Es and dividend yields.
Both medium-level performers i.e. neither bullet-train performers like Equity nor duds like BBBK.

Bottom-line: it’ll come down to:

1. First quarter (2008) performances-i.e. survival rate against significant external environment “ishoos”: NIC 31% YoY; DTB 60%
2. My expectations of rest of year: NIC will book significant upside from Safaricom IPO and NSE consequent volatility in stock-trading; DTB will reap from is expansion into EA.
3. My expectations for the duration of the presidential cycle: NIC- I like the online banking venture (yes it’s limited by internet penetration, but think post-fibre optic). Also, possible close association with ICEA. DTB-I like the expansion into Burundi, proceeding TZ (where DTB is majority shareholder of subsidiary); Ug (holds 27%). Both are expanding branch network so as to increase deposits.
   I normally prefer investing the capital in the stock with bigger prospects, but on these two, I may just have to spilt the capital.

Hmmm. Interesting minister we have for National Heritage

Happy 90th Birthday Nelson Mandela

An African we can all a learn a thing or two from.

Thursday shorts

I guess the fact that she has been doing the job fairly competently (and anybody would be compared to Ntamani) should have and has given her a head start for the real position. Insiders will be happy because they are familiar with Stella Kilonzo, but for us investors, I think the preference would have been for an unconnected but knowledgeable individual to guide the markets to the next stage. In anycase, its good to have a lady at the top and I hope she positively surprises...

I thought KQ would tank in its full year PAT given the problems its had (accident, customer service, Virgin), higher oil prices and so forth. Lakini, I think the stronger shilling in the 2nd half of the its financial year helped (I believe KQ normally hedges against a weakening shilling) as did its oil-hedging (fuel expenditure was flat yoy). If you take into account 30% flight occupancy for the Jan and some of Feb, the numbers are very good.

Safaricom continues to find its way downwards. A strong case of not letting in FFIs who think 20% in three months is excellent return and bolt as soon as they get it. I still haven't taken a position. I check bids/offers courtesy of rich.co.ke and they still don't make pretty reading. The price will get to a stage I just have to go in. Safcom has much better fundamentals than a whole slew of other counters. I still recall the fears many had about AK last year.

Fascinating story brewing here. ARM is the young soldier, the pick of the 3 cement counters. But Bamburi is the aging gorilla with 15% stake.

RVR: rewind

18 months ago when this deal was sealed, several of us bloggers had a debate on pesa-tu's blog and its fair to say that I was probably the only one querying certain aspects of the deal. It was a deal that was written to fail and has only been rescued by an unusually vigilant railway regulator. 25 years is a long-time to give somebody to turn around a business even in such a capital intensive industry such as rail. Imagine all RVR had to do in the first 1 year was to maintain the same level of service as before and with headcount reduction it would have made good returns even with Jan's disruptions. Well well...

It's almost certain that this deal will have to be re-written, handed over to someone or incredibly be going back to square one. The tragedyof it is that we really need a functioning railway transport system. I'd go as far as to say that our economy is not going to grow consistently until we figure out and implement a comprehensive railway policy so that we have a transit system in the major towns and links to our neighbours and throughout the country.

Hopefully, the solution the PM-headed team who seems to have realised how important the cross-country links, will come up with a clear policy on the following:

• Short-term goals: to get Kenya-Uganda railway to level that meets the cargo clearance levels at the Mombasa port. This will in turn generate the requisite revenue needed to meet...
• Medium-term goals: upgrade equipment (tracks, wagons) so as to bring them from 19th to 21st century. In turn generating returns to allow us to meet...
• Long-term goals: modern railway system for Nairobi and perhaps Mombasaas well as a system that successfully criss-crosses all our provinces so for example there would be a line to Lodwar, Meru, Kakamega and so forth.

Share options

Up until 10 or so years ago, very few companies paid any bonuses. Financial engineering in the financial industry heralded the true arrival of huge bonuses, with ibank employees working as sales people. You'd hear of guys getting over a KSh2m after tax and doing all kinds of crazy stuff. Then came the dotcom era ushering in 100% share option-bonuses that were used to retain highly qualified staff who were in effect the only asset of the dotcom firms. It then dawned on sharp-witted accountants that share options were in effect being used to hide the true cost of human resources by most companies and the proportion of bonuses offered as share-options was reduced. Still, today almost all private sector companies do offer share-options either voluntarily or in the case of banking sector, upende usipende. In Kenya, more and more of listed companies are offering share-options.

It’s thus an opportune moment to review the full story of such compensation. Share-options are a very good idea during a bull market when employees know that the value of their shares will grow. It then works as a loyalty weapon.
Alas, during the bear market the opposite occurs. Imagine if you'll somebody working in the financial industry who earlier this year received say 500 shares priced at 15% discount to the price in early February. Today, shares of most financials are down by around 40%+ from that point and if he/she also got shares last year probably down almost 70%. So would there be a point in staying with a company in that situation?
Coming up next... the next stage in share options where companies will be offering shares based on what they hope are their trough prices...

Info: Safaricom & Brokers

They say knowledge is power and never more so than at the bourse.

Kudos to Nation for publishing this list of the FFIs who applied for Safaricom shares. Clearly someone at Morgan Stanley International has dealt with adverse publicity before and knows that you don't sink head first into the sand at the first sign of trouble. Funnily enough, rather than disapprove that Alcazar Capital didn't get a huge allotment of shares, the information showing that Morgan Stanley International got almost 10% of all shares that were being listed is almost going to open a proverbial can of worms. MSI didn't get these shares for itself. That much you can bet on. It'd have done so on behalf of unnamed clients (primarily the HNW ones). Which is where Alcazar comes in.

Thanks Ssembonge for bringing this to my attention again. I had seen previously it but thought it was just for beginners. One piece of nugget stood out though. The information on broker capitalisation. Based on the new CMA proposals that were announced as part of the budget, all brokers must have capital of Ksh50m or more and Ksh250m for ibanks. On those two measures:
Brokers: Sterling Securities fall just below and Discount confirm all those rumours about its being weak. Given the amount of business they transacted in 2007, Ksh30m is nowhere enough. I am willing to bet that Francis Drummond (correction its an ibank), Crossfield, Ngenye Kariuki and possibly Bob Matthews also fall below. Crossfield are already a takeover candidate for Tsavo Securities which wants to convert into an ibank. Bob Matthews (already doing with DTB) and FDs' turnover suggest they should both look for a banking partner.

Ibanks: All but D&B, CFC and Standard Investment Bank are well below the Ksh250m threshold. Some such as Suntra are already doing private placements, but 4 others may need to bring in new shareholders or look for anchor shareholders in the financial sector. My preference is that they do private placements and give Kenyans to own a piece of ibanking.

National Bank of Kenya: Bigger scandal than GRH

In the 1980s and 1990s, the M-o-1 regime completely lost it. Guys had to be rewarded and were rewarded as if Kenya was the mzee's property. Land was no longer enough. One of the then new gifts given then was "nenda NBK umbie mzee amesema upatiwe pesa" literally "go to NBK and tell them mzee said for them to give you money". Naturally these had to be recorded as loans, but loans with no collateral. By the late 1990s, these were so bad that GoK considered closing down NBK. At the time Nyachae a no nonsense type of politician was Finance Minister and realising things had haywired completely released a list of 87 politicians and their affiliated companies who were behind NBK's problems as they owed Ksh8.7bn (around ksh30/Ksh40bn in today's money). Getting hold of that list today is virtually impossible to do but I know it includes:

1. Sam Ongeri;


2. the late Kipkalya Kones;


3. Joshua Kulei;


4. the late PC Fred Waiganjo


5. the late Munene wa Kairu (my former MP) who owed just over Ksh300m


6. to 87. who I'll name as I collect the names...

These loans are it seems the ones that were written-off by GoK in its Ksh20bn bond to NBK. At the time of the deal to write-off the Ksh20bn I was shocked because my understanding was always that NBK didn't have significant portfolio of bad debt emanating from parastatals. What it means is somebody took money from NBK under duress, spent it and then had GoK pay-off the loan on their behalf!

And peeps are complaining about what looks like a bargain (though unprocedural and untransparent) deal for Grand Regency?

PS: While searching for the 87 names, I stumbled upon the original Ndungu-repport otherwise known as the List of Shame that was tabled by Musikari Kombo sometime back. Very very interesting read...

Another ibank on its knees

No not in Kenya, but in the US.
In the weeks before it was offered to JP Morgan for two dollars, Bear Stearns was proclaiming to all and sundry that it had the capital to survive as shorters leaked rumour after rumour about the opposite. In eerily reminiscent scenes, Lehman Brothers the next largest ibank, has spent this week having to reassure markets that its financially stable. Shorters (investors who bet on a shareprice falling) are having none of it and have been leaking rumours about its counterparties running from doing business with it. Jana the price closed at $14, half its book value. A large part of the reason for this is its Q2 announcement where it revealed that it had $60bn of mortgage assets. Were these to be written-off, they would leave it with around $40bn of assets, not enough to trade profitably. Fannie Mae and Freddie Mac, may also need cash injection to survive.

In the UK, B&B, one of the large mortgage lenders will almost certainly need some concerted help either from the UK gova, or the banking industry otherwise its down. RBS is selling every piece of furniture to raise capital but will probably pass muster.
All because of too much of a good thing...

NSE-not playing by the rules...

Pre Safaricom IPO, everybody expected shares to fall as ma-investors rushed to get ready for the massive IPO. It happened on the first few days after the IPO announcement but then steadily rose upwards. Post-IPO, the opposite was expected to happen as investors got back their refunds and also additional investors came into the market. The NSE has been going down instead. So what is going on?

The conventional reasons would be inflation (more cash to spend, less to invest); political uncertainty (only a factor over the last two weeks); delayed refunds (I'm not sure what the scale of this is now as it seems to have gone off the media radar and there are fewer complaints at stockskenya).

The more unconventional answer that i posit is that Kenyans don't play by the rules. As Phillip Ochieng in his Sunday column said, we've imported systems and structures that require us to obey certain norms which we've neglected to do.

• Pre-Safaricom IPO, the select few (QIIs who got d-v-p privilege) were able to hoover up shares on the cheap as retail investors sold so as to be able buy into IPO. This propped the NSE (strangely enough it rose 300 points from 29th of May and peaked on June 6th the Friday before the Monday of Safcom's listing). The d-v-p is thus an unfair system if you are retail investor.
• On Safcom itself, its clear that in 2 or so months time, institutional investors (yes the QIIs) will probably be able to pick up this stock at around Ksh7 or less from discouraged retail investors. Here, retail investors and others who have been chasing KenGen-type profits are not playing by the rules. Many couldn't tell you why shares go up or down, how good an investment they are making et al. All they are interested in is the fact that there is easy money to be made if you go in and come out quickly.
• You then have stock situations such as Equity going up rapidly in a couple of days leading to its AGM on 27th of June. Investors rushed in thinking there was going to be a bonus/spilt announcement at the AGM. Lakini, companies can only announce before going to the AGMs so that they cab be approved.. Simple things we all need to learn by doing a bit of stock research.
• Finally, rights issue. This week, there have been complaints about HFCK allocations. Rights issues like other share issuance methods should always have clearly spelt method of allocation where there is oversubscription. In Kenya, this is rarely spelt out therefore opening the door for large investors (QIIs again) to be improperly over-allocated. Not playing by the rules again...

Where are the NSE/CMA going to get Ksh900m to compensate Nyaga's clients from?

Was Kimunya a good Finance Minister?

Last word on this Kimunya-thing then we move forward. Kimunya served for 2yrs so we probably won't see the effects of what he did or didn't for another yr. Still we can review his actions while in office on a scale of 1 to 5 (5 being very good).

The finance ministry should always be judged on 4 areas:

1. Fiscal Policy (2.5): Taxation has remained stable though growth areas such as ICT more should have been done including encouraging an ICT zone (similar to EPZ areas near Athi River). Bringing MPs into the taxation bracket is an overdue idea. Controls on spending have been dreadful on the other hand. The spending waste in ministries such as the defense ministry, OP; returned money from Roads should all be things of the past. I'd have expected him to hold firm on all the pay rises to the civil service. In effect, government overspend/inefficiencies in its various guises has been one of the indirect causes of the current sky-high inflation. Listing of several government holdings rescues him from getting a low 1 on this criteria. As does introduction of CDF managers.
2. Monetary policy (1): He benefited from Mwiraria's loosening of monetary policy (lower banking reserve ratios, reduced government borrowing). He didn't push hard on getting banks capitalization raised and in any case Ksh1bn is a paltry amount given most banks are way above that now. He has failed to create a functioning monetary policy committee with a benchmark interest rate to guide money markets with.
3. General Economic Stewardship (2) : Here again, he has benefited from Mwiraria's work in the first 3 years. He has not in my opinion done enough to control inflation which was rising pre-2008 and which will affect the economy going forward. He has not done enough to show what are his priority economic sectors and obviously tailor economic-policy to the same.
4. Capacity building (1): He got Mulei fired unprocedurally and replaced him with a nit-twit; has severally tried to put political appointees in place to oversee CBK; has overseen the collapse of two stockbrokers; has failed to establish a strong financial regulatory regime that covers all the facets of the industry (stockbroking, insurance, banking and saccos) and of-course did nothing to control the spread of the harmful pyramid schemes. NSE remains a dreadful mess as does CMA and again these were all under his watch. Finally, Goldenberg, De-la Rue... all remain unresolved.
   

In conclusion, AK has done ok, but most of the upside was from Mwiraria's hard graft.

Wednesday Shorts

If you like bears, then you’ll be enjoying this season. The FTSE officially entered Bear territory jana after falling 20% since its peak late last yr. Things are so gloomy, guys are already leaving well paid unsecure jobs (aka in fixed income divisions of investment banks), to lower paid but more secure retail banking areas of the financial industry. Investing in shares is now an extremely money-losing proposition in the UK/US markets unless you are prepared to do the hard graft of research-that or invest in utilities and oil companies. And it'll be for the remainder of 2008 and most of 2009.

What is the difference between a strategic goal and a strategy?

NMG shareholders voted on a spilt at the end of May, yet the giant media group has yet set a date for when this will happen. A case of the famous 1 for 8 bonus shares by Standard group repeating itself perhaps?

Safaricom finally breached the KSh7 psychological barrier yesterday and with supply at almost 6 to 1 against demand, the bottom is not yet been reached so I continue to watch from the sidelines. However, if it does reach below Ksh6, then I must strike come what may.

And so it came to pass, that in the year 2008 of our of Lord Jesus Christ, one Amos Kimunya being of sound errr mind and body, stepped aside and thus lived to see another day. The truth is, our politicians are clowns down to a man and woman. And so are we Kenyans. On the day Amos resigned, everybody seems to have missed a statement from the Libyans which in effect confirmed that they had bought GRH. So the bigger underlying issue has not been resolved-the lack of a transparent sale of a public asset.

So its seems are Americans, I’d put this alongside the “I prefer this bush to Bush” T-shirt.

Safaricom not another Everready

With Everready IPO, some investors can actually say they doubled or tripled their investment. No such luck with Safaricom which was so over-analyzed and possibly manipulated that only the quick-witted managed some 50%+ gains.
Since then, supply has easily beaten demand for the Safcom due panic-selling out of fear that the price may go below the listing price. The difference between Safcom and Everready are readily apparent when one views their books at IPO time. Everready was had been showing falling cash-flows for some yrs before the IPO. Despite the dodgy cashflows, Everready has somehow maintained dividend at the same level. Not the same with Safcom. Safcom has reduced its borrowings to a managable Ksh6bn and is easily able to pay-off as much of it as possible from huge-cash generation.

Post the IPO, Everready has continued to suffer at the hands of Chinese imports and perhaps its own inefficiencies. Safcom on the other hand will play its cards well and manage to keep at bay competition from Celtel (who by the way is due to pay off its floated bond next yr); Econet (to the Indians have something Celtel hasn't tried) and Telkom (mired in financial difficulties despite GoK paying off a huge chunk of its debt). One can't be blasé and imagine that competition won't get some Safcom customers, on the other hand Safcom is not standing still and will continue to broaden its income sources (including Mpesa, internet and various mobile-related offers such as mobiletv, games et al).

At just over Ksh7, the stock is very well-valued (P/E 20 as of Friday against an NSE average of around 20) although I'll wait to see which way it moves if it does touch the psychologically important Ksh7.

Kimunya: Go for the sake of economy and the markets

I'd rather die than resign...they are targeting you...
These are the words one expects to hear from someone who is on their 6th or 7th decade; missed out on classes due to father insisting on him going to herd the cows and hasn't done a decent job all his life. Not a so-called young Turk like Amos Muhinga Kimunya. Its just a job unless the guy can't make without being Kenya Finance Minister and saying you'd rather die than resign is taking hyperbole to sickening levels.

The markets are suffering (Ksh/UK rate fell by Ksh10 last week and NSE has some nervous moments) because the now expect upheavals and of course the economy will suffer if for example imports become more expensive because the shilling has weakened.
Kimunya should at the very least step aside and then if he is exonerated, we'll (even if I don't rate him as an FM) fight for him to get his job back.

It has been funny though watching some of the leading lights in the Kimunya resign campaign. The likes of "Youth for M-o-i" Jirongo should never grace an anti-corruption campaign in Kenya or elsewhere (apart from Zimbabwe maybe)...

Credit Crunch: Lessons & the future

In around October last year, somebody asked me when I thought the writedowns would peak and how I saw the industry moving forward. My answer was that writedowns would be peaking in Q1 2008 with mortgage origination kick-starting in Q2 2008. How wrong/right was I?

Writedowns seem to have peaked in Q1 with UBS even setting up a SPV for the purpose. Hwoever other ibanks like Lehman have subsequently written-off their highest amounts after this ($2.8bn for Lehman). However in general, all the ibanks and other banks with significant ibank business have now writtendown most of their losses. Citigroup and Merrill Lynch will most likely writedown $10bn more, but that should be it.

As for the origination business, here I was totally wrong and the business of securitising mortgages adding some gilts and assigning the package with a AAA credit rating is either finished or won't start for a few years.

The implications have been/will be acute:

1. restructured industry: at a macro-level Bear Stearns is gone leaving 4 big ibanks. Of the 4, two will probably have to find financial godfathers who can provide cheap funding. At a micro-level, the experience of having a colleague who sat next to me just come upto me and say "all the best, I'm off" (I actually thought he was taking the afternoon off until I saw him do the same to several others); of having a meeting with somebody, getting to my desk, give them a call and just find out they've left (i.e. just been made redundant) not once but twice within two days, will stay with me for a while.
2. deleveraging: will be the main focus for at least some part of this year not just for ibanks, but for normal banks. Many are reducing their balance sheets, raising capital via rights and private placements and concentrating on advisory rather than underwriting business
3. straightjacket mortgage lending: many banks can no longer afford to go to the wholesale market because funding is expensive (100 basis points higher than base rate in the UK). They are thus lending based on deposits, cue fewer choices of mortgages (2,400 mortgage products compared to 8,900 sametime last year). Products such as 2yr fixed-rate mortgages (a staple of the UK market) may well disappear for the foreseeable future. The mortgage industry is already less competitive
4. Macro-economy: demand has been sucked out of the housing market, meaning falling prices. Falling prices mean fewer households taking equity-based lending, reduced spending. Combine that with rising inflation due to oil and commodity price inflation and recession will just about be avoided in the UK (but not in the US). Because of deleveraging and inflation, world economy will generally see a slow 2008 & 2009.

Sobering...

So who is going to replace Mugo Kibati @ EA Cables?

By all accounts, Mugo Kibati is an exceptional chap. According to this rather sugary profile by Generation Kenya, he has been a first in many arenas. And this explains my worries about who can fill his boots @ EA Cables. The company has many challenges not least increased competition to supply KPLC and the rest of Kenyan construction market. Its expanding extensively and that requires a committed and seriuos CEO.

Recent price fall in the counter reflects the nervousness about this situation.

Excursions to Emerging Markets

Over the last few yrs, I've been investing in the BRIC countries. For 2006 and 2007, the returns were good with 40%+ gains in both years. Due to a lack of time to research on specific counters, I've done my investing via unit trusts. Gradually, I've expanded the scope to cover specific stock markets in the BRIC countries also with good returns. This year, I extended my coverage to commodities as well as unit trusts investing in frontier markets (Middle East and Eastern Europe).

As of end of June, I disposed off all these with exception of the frontier markets. Reason? All the other markets are now attracting a lot of attention from Western funds. From my experience such a market should tell you several things;

• Firstly, its maturing and most of the serious gains will have gone.
• Secondly, Western funds are speculative by nature and any sign of trouble, they bolt (aka the "hot money" phenomena). If you are either ignorant or don't have the bandwith in your day to pick the trends, you are left holding the losses until the next spurt of interest. China and India are still the most aggressively growing economies in the world, yet are now still serious declines as Western funds flee at the sametime

Going forward, my strategy will be to invest in the frontier markets selectively until they start appearing on the radars of western funds...

Thursday Shorts

Kimunya's story reminds me of certain 8month vice president who went down the grease pole as fast as he had climbed it. But is there more it than meets the eye ? I now think so>>>

If there is a stock that enjoys strange type of goodwill, Mumias must be it. Despite fairly flat perfomance over the last few years, investors continue to build into their buying decisions, fast growth for this stock based on:

1. its sale of 25-35kw to KPLC,but how much additional PBT is it generating from it?
2. the Tarda project which is now the subject of much international attention via media outlets and will not in any case bring home the bacon until 2010 and onwards. If development kicks off this year and funding is found
3. The strong protectionist lobby that has led to Comesa going underground. Now the quotas will be reduced steathly. Yet politicians are crying foul instead of focus on making sugar production in Western Kenya effecient.

Kalembe Ndile is a larger-than life character in Kenyan politics that is dominated by such. And somebody has framed a couple of good jokes at his expense.

Stockbrokers on the spotlight

In the past several months, hardly a day has gone by in the mainstream media and blogsphere without a barrage of condemnation and discussion centred on the conduct and performance of the Kenyan stockbrokers.

Due to the above and bad experiences from my inefficient stockbroker currently at risk of suspension, I went in search of a better brokerage firm in terms of online a/c, timely executions, communication and dividends payment, regular updates, cost effectiveness, portfolio management, quality research etcetera.

Aware of bankelele’s 2005 survey on where to buy shares, I emailed N.S.E listed brokers in addition to agents and others offering similar services. I further researched on other people experiences more so those in the Diaspora and regular visitors on stockskenya.

My search had mixed results generally disappointing from the stockbrokers.

Amongst the bad news was that from the brokers emailed on the list above, few responded to my email even after a reminder in 4 days, I must list the prompt ones; D&B, Faida, AIB and Genghis. Some listed emails were undeliverable.

Also, the overwhelming view from my search was that despite the sensitivity of this sector, its regulatory framework is weak and ambiguous. Resultantly, conflict of interests in the sector is blatant and remains unaddressed despite its hindrance role.

Further bad news was that the brokers and banking systems works parallel rather than harmoniously to each other causing delays, loopholes, duplications and exposure to fraudulent activities.

The search also found that lack of transparency and accountability was widespread as few of the brokers publish their financial statements and many are family owned. Hilariously, my failing broker director/secretary/treasurer is the husband/wife/son.

The good news is that there are many new kids on the block such as Tsavo, Hisanet, Renaissance, and Genghis though most are agents or investment advisers or fund managers. For the agents, despite constrains of working under problematic brokers, ambiguous regulatory framework and limited resources, most are doing a marvellous job though at an extra cost which could probably be eliminated if they are registered brokers. From the responses received, many have updated and efficient online services/research and timely execution and communication.

Another good news is that some of the brokers have started to shape up due to the heat generated by being on the spotlight and have improved on their customer services.

Uncharacteristically, the government appears to have belatedly heeded the investors concerns and recently announced measures to restore their confidence and the stockbroker’s integrity within 3 years, albeit thinking from its own improved service delivery initiative, should have been in a 1 year. Through the Finance Bill, the measures include; powers to search and confiscate rogue traders assets, increasing operating capital and separation/capping of ownership/management.

Ears on the ground
Yet to be confirmed rumours have been doing rounds on Equity bank entry into brokerage sector via a takeover or partnering with an existing firm. Knowing their thirst for opportunities and loaded pocket, something must be cooking.

Next on the spotlight
Due to the lack of a strong investors lobby group, all must work extra hard to get and keep both C.M.A and N.S.E on the spotlight. The former is well known for not responding to investor’s complaint or executing the mandate to protect investments. Hence, an autonomous body is urgently needed.

The Latter albeit slowly improving on their image of an exclusive rich members club, more must be done to address investors dissatisfaction with insider trading, lack of timely and transparent companies reporting as well as lack of timely dividend payments amongst others.

Most importantly the N.S.E must urgently commence on demutualization and online trading to eliminate unscrupulous brokers who are spoiling it for everyone.

Euro 2008: Best Tournament in years

With better communications, its now possible to watch international tournament in South America And the Africa Cup of Nations. With that in mind, I've to say that this year's Euro 2008 really exceeded my expectations and was as close as I’ve to come watching practically every game in a tournament. Teams seemed to have the freedom to just enjoy playing without the pressure one sees infect players at the World Cup. This was especially surprising in the knock-out stages. Typically, teams would in the past score one goal and shut shop for the rest of the 90 minutes to protect that goal. Cue tedious back-passes etc. At Euro2008 each knock stage so 2 or more goals and event the Spain-Italy game still saw plenty of chances. 4 teams (Spain, Holland, Turkey, Russia) really played real football and percentage teams (Italy, Germany, Greece) i.e. teams that are built on defensive play, were either sent packing early or didn't compete against the real football teams.
I hope more international tournaments are played this way. I think its no coincident that no British team was at Euro 2008-international football requires a bit more guile than kicking the ball upfield and being able to run up and down the pitch.

NSE results catch up

Olympia announced 14 months worth of results. The results were a huge anticlimax for some of us who had even considered investing in this counter. PAT was up 10% compared to FY 2006 which is meagre considering the growth in turnover (tripled on a comparative basis). The other concern was that the wafer-thin margins seem not to have improved. A Ksh1.3bn turnover brings in Ksh70m of gross profit therefore the company must have very inefficient processes or may be acting as an importer/distributor. I suspect guys will continue flooding into the stock because of its SA link anticipating good tidings due to the world cup in 2010.

Centum on the other hand has had a very good 9 months given the underlying volatility at the NSE and should be on course to come in slightly higher than prior yr. Not a counter I've thought of buying into given it does something similar to what an individual investor does only on a bigger scale.

Williamson Tea (as is usual with agricultural stocks), this yr booked a loss of Ksh98m following profit in 2007 due to strong shillingi and depressed world tea prices (strange given all other commodities are up). This year might not be much better owing to drought in some of the tea-producing areas.