Africa ready for business? Not politically.

A few days back, I attended a talk by a CEO of one of the investment banks. Someone there asked him the following question "given Africa is now being touted as the next emerging market, do you have any plans to set up base there?". His answer was straight to the point, "you are right that Africa is a soon-to-be-emerging market (he gave it 5-10 years), however from our shareholders' point-of-view, its political risks far outweighs any current ROC (returns on our capital)".

Currently, any interactive online Kenyan website is full of base politics i.e. politics of the lowest common denominator. One has to assume that the majority of the web visitors are fairly young i.e. the next generation of leaders. And this is their level of debate?

Wenzangu, kizuri chajiuza.

NSE: Recent Trends

The 6% fall last week was driven by the peculiar animal known as the entry of political risk. It has happened before. Between Oct and Dec 2002, the NSE rose 30%. In the UK, the early 90s was characterised by yo-yo movements as the FTSE investors feared a Labour govt getting the seat. Labour was then dimmed to be not very business friendly and always looking to hit population with some extra taxes. Even Clinton was victim to the same when he was first elected in 1992.
At the NSE , any GoK-run or affiliated stocks will likely take a pounding between now and Dec. These either have GoK majority share ownership or GoK has highest shareholding. Those stocks that have foolishly and closely aligned themselves with the current regime will also take a pounding. When one listens to ODM, you don't get a sense of continuity in the economics arena and of course business hates uncertainty in planning.

1. A typical business needs to do a budget that incorporates certain growth rates aligned to the economic growth rates.
2. For those dependant on GoK contracts, their will be worst-case scenario analysis, others dependant on continuity e.g. in construction will similarly take a pause.
3. Banks will invest in treasuries instead of lending and so forth. 
4. Worst-case scenario, diaspora may also play a wait and see game.
   

Politicians love making promises, but as I read the other day, they need to stop being surprised when someone expects them to keep these promises. Baba Judy said he'd serve one-term, he may get his wish.

In the meantime, my prediction is that the NSE will change by around 30% by year-end.

Joker card holders being revealed as UBS tanks...

As a Wealthy Manager, UBS is world renowned and the largest by far. This is no doubt helped by being from Switzerland, the country with the largest GDP per capita and one of the largest money laundering centres in the world.

As an investment bank however, UBS has always played catch up in  a game which less about numbers by about how many very smart employees you have working for you. The chasing after recognition in investment banking has brought several spectacular disasters because it always comes late and ends picking up the worst customers, riskiest plays et al. Hence LTCM, for which it took a big hit in 1998; DRCM (a hedge fund venture) for which it had to take a hit earlier this year.

Now with the sub-prime market issue, its taken the heaviest it so far leading to a huge loss in Q3. As a result, they've fired their head of investment banking, a very promising Welshman by the name Huw Jenkins and its CFO. This while the real players in the sub-prime and derivatives market,  Lehman, Goldman Sachs got away with just a splash of the mud. Citigroup, Deutsche Bank and a host UK banks are all rumoured to have suffered.

There is also a Kenyan angle here. I'd say upto 50% of the real estate investments in Kenya by the diaspora have been financed by mortgage equity. One can only hope house prices  do recover despite the tighter credit conditions.

Is Angro-Reasing about to be rumbled?

Story in the Guardian today. For Kibaki, the saying "it never rains, but it pours" seems to be apt.

Another classic one from Michael Moore

Going by the reviews of this http://www.imdb.com/title/tt0386032/trailers-screenplay-E32877-10-2 it seems that not everything that we should copy from the world’s greatest capitalist especially in relation to funding of the health care system.

Am looking forward to watching this one to see what Michael Moore has uncovered.

Featured company: DotSavvy

I like this website.

Guide to scorecard

This idea was just to counter the tendency among us Kenyans to vote like blindfolded drunks playing darts. Its also to hopefully move the debate from single-issue based polemics to a more rounded view of each prospective candidate.

So for each candidate, score them out of 10 (minus only allowed for corruption) for all 10 areas based on:

1. Their record so far: Review their past performances and utterances.
   
2. What they may do if they get to statehouse: Some of this will be found here for Kalonzo, Raila's is here and Kibz is here.
3. Score 1 & 2 against what our young nation needs and by comparing the candidates
4. Score 1, 2 &  3 by looking at their teams, because for sure none will deliver on their own.

As for the areas,  the Economy is key because nobody eats democracy.

• Growth: Which candidate's policies and team will grow the economy? Kalonzo's tax policy may sound good, but what impact will it have on the economy?
  
• Corruption: Whose record and policies will have an impact on this evil?  They can talk all day about zero tolerance or truth commissions, but what sort of company do they keep? What impact will their anti-corruption policies or lack of, have on the economy? Hence the minus score...
• Allocation: How well will their policies ensure fair allocation of the revenue and economy generation? How will majimbo deliver if local govt hasn't, why can't Kibz get CDF to work?
• Efficiency: What will their spending plans mean for the economy? Free this and that costs money. Building the VP his own house is not good use of money...

With the building blocks in place, how about the supporting pillars;

•  Democratic space: Stand on free media, delegation of GoK duties, accommodation of opposing views.
  
• Infrastructure: What plans do they have for our transport network, ICT? How about past successes or failures in this area?
• Security: How will they measurably reduce the "ngeta" culture creeping into the nation?
• Reforms: Show one radical idea that will for example get our civil service working, reduce the 1m+ judicial cases out there?
• Leadership: Can they create a compelling, inclusive and influential leadership? How do they compare with other two?
• Charisma: Do they have it? This is a soft one in recognition of the fact that Kenyans probably vote on this one most...

A rational way of voting?

Having seen/suffered (delete as appropriate), the effects of our voting emotionally in 2002, isn't time we tried a more rational approach for example using a balanced scorecard?
You could each of the candidates out of 10 (10 being the highest) on how you think they will on each of the following and then go into the booth with something approaching thought.

Banks H1 -Updated

Update of this post. DTK either has very high quality loans or more plausibly, needs to increase its loan loss provisioning. CFC has the highest proportion of its income from Fees & Commission (perhaps from CFC Financial Services?), and the 2nd highest insider loan proportion after the govt-owned KCB.

Credit Crunch, Securitisations & Wall Street

In investing like in poker there is always a sucker, if you don't know who it is , then its gotta be you! As Wall Street firms announced their results this week, that became a lot clearer. Lehman so a 3% yoy fall; Morgan Stanley 7% fall; Bearn Stearns saw a downturn 61% but Goldman Sachs scaled the heights with a 97% increases yoy.

This Economist article is very good for the layman who wants to understand what the recent credit crunch has been about.

Politics save Northern Rock; Lehman delivers na KenGen?

At the rate savers were withdrawing funds (£1.5bn a day), you can see that NRock with £24bn was due to run out of the stuff soon. And no politician likes to be associated with such public failure. Least of all one who has just become PM and wants to hold election soon like Gordon Brown. The decision to cover all deposits introduces moral hazard of the kind not seen before because bankers are being told to take risk without bila worry. Fractional reserve lending strictly allows a bank to lend £8.8 out every £10 you deposit with it. Lakini now a bank will be able to lend even their branch because there is govt coverage.

Lehman Brothers took a 47% hit on its Fixed Income (that's where its CDS and ABS income was put) and still managed to only miss breakeven by 3%. Fixed Income used to be 50% of its earnings, so you can imagine the fear they had. As I always say, Investment Banking is the only business where you make money as the market is going up and everyone is buying stocks, commercial paper and derivatives and when the market is going down because they are all selling their stocks and looking to unwind hedged positions.
Bear Stearns is next. They are even more into CDS and ABS than Lehman.

Anybody else see KenGen's nasty surprise coming? And to make it worse, after increasing their dividend from last year when they are on their investing cycle, they are thinking of increasing their borrowing. This is might now be a very long-long term stock for some.
After this factual commentary on Equity' performance, I suppose they will be accusing Rina Karina @ Faida of being on Equity's pay. Sometimes, Equity reminds me of Professor Wangari Maathai, unappreciated in Kenya, radical and innovative in some ways, eccentric in others. But showered with accolades internationally.

Share basics

Once you've decided to invest in shares and have set yourself some goals, the next task is to select some shares to buy.
These are some of the basics I apply.

1. Knowledge: How does the company generate revenue? i.e. what does it do, where does it do it and how does it do it? What are its strengths and weaknesses compared to rivals and given what it does?
   
2. Financials: For a non-banking/insurance company, I'll look at what is the percentage increase in turnover/sales; costs/expenses;  financing costs; PBT; PAT; EPS (PAT divided number of shares); current liabilities/current assets. How has net cash flow moved over time and why? Compare these to its rivals if there are any at the NSE. For the banking sector, see this post and another to follow. For insurance sector, look at growth in premium income and investment income.
3. Forward looking: Review the company-specific research and news stories from here, here, here and kathalika for future developments and strategy going forward. Also build up understanding of its market by looking at opportunities and threats that are represented by changes in rivals' fortunes, legislation, economy, social and political changes.
4. Share price: Decide on an entry and Exit strategy before you buy the share. Both should be determined by your expectations of future share price performance. For guidance on this, look at past share performance with mystocks being particularly good at this and then extrapolate based on knowledge build in 1-3 above.
5. Quantity: If buying for long-term (thus have gone through 1-4 above), avoid hedging your bets by buy a few here, there and everywhere. We've all heard the story of the hyena that couldn't decide which path to take to the meat and ended up with two shorter hind-legs. Buy a few quality shares whose perfomance you can track over time and buy in huge quantities rather than buying some now and adding some later on.

NSE-Slow climb; KenGen bad & Mumias good

Despite forthcoming elections and uncertainties thereof and the rumbling train of Safaricom, investors continue to pour into shares. Most of this is driven by the on-going results season and should peter beyond that.

KenGen, announced disappointing numbers. Whether the impact of the tax is one-off or is on-going (they have a deferred tax charge of Ksh5.6bn which will have to be released back into the P&L over time. Given their heavy investment programme, I think its bit irresponsible of them to increase their dividend payout. I guess GoK needs the doh. The fall in its share price will probably reflect this
City Trust announced excellent full year followed by a sweetener dividend Ksh3.75) and predictably a 1 for 4 bonus issue. For my money, this stock has had more insider-dealing than any other this year.
Good news for holders of the Mumias (dudes when you going to have a website?). The COMESA waiver has been extended another 4 years!
EA Portland also released FY and saw flat PAT and PBT with sales not really improving from prior year. I guess shareholders at least have the likely merger to look forward to.
Safaricon still has that whiff of controversy everyway you look. Now Vodafone are threatening to delay the IPO unless GoK signs some agreement. My view is it shouldn't happen until we know who is Mobilete aand there is some agreement as to how Mobiltelea will compensate Kenya for its shareholding-corruption was involved so that is that for me. If the IPO does go ahead, lets have all 25% being NSE-listed. The argument about foreign exposure is neither here not there.

That was that for Friday

As predicted, the FTSE was a sight for sore-eyes today. Northern Rock closed down 32% for the day and 82% down for the year. All banks and property-affiliated stocks took a hit. And you even had financially savvy bankers queuing outside their branches at 9 am this morning waiting for it to open so they could withdraw their funds. The search is now on for :

1. Somebody to buy Northern Wreck (as its being called)
   
2. Scapegoats who range from the FSA, rating agencies, Bank of England, investment banks i.e. anybody but Northern Crock management
3. Somebody with a good torch to follow all these derivative financial transactions around the banking industry so that everybody knows how much they need to adjust their accounts by.

In other news, because of the recent market downturn, Barclays is now unlikely to be able to afford ABN Amro. Its offer was in its own shares...

Tuesday is the next key date-Lehman Brothers, a top 5 investment bank and one of the prominent players in the CDS and MBS (mortgage-based securities) markets announces its Q3 results...

Corruption: Another dark day

After last weeek's "do nothing" reaction to the Kroll Report, Wednesday's decision by Parliament to unilaterally give clemence to corruption committed before 2003, should not have come as a surprise but it did.


The funny thing, Kenyans being Kenyans, we'll probably return most of these people to parliament for another 5 years...

Credit Crunch: 1st big scalp

As with Countrywide in the US, Northern Rock, UK's 5th largest mortgage lender has gone cap in hand to the Bank of England for some cash to see it through the next few months.

Because its majorly a lender than a deposit-taker, they've always relied on a very liquid and cheap overnight market. However, apart from being an aggressive lender, the mortgage business is now out of favor, and the bank found itself having to pay a higher premium each time.

As I suggested earlier, things are also thick for a parent bank of one Kenya's largest banks, but at least Bank of England would be prepared to bail them out to prevent a systemic financial crisis.

Expect big falls on the UK banking sector tomorrow.

Credit Default Swaps

CDS as they are more popularly known is basically a form of insurance that cushions your losses should your borrowers default. Default can be
they stop repayments, they go bankrupt or even companies restructuring
e.g. Uchumi getting a strategic investor.
In return for the protection, the CDS buyer will pay a periodical premium for an agreed period or until the credit event occurs.
Its a useful financial instrument because it in effect creates collateral on a loan that you may learnt. The main buyers tend to be regular lenders
such as banks who may want to reduce required regulatory capital against a borrower
and thus be able to lend more. For the CDS seller typically another bank, but also (lately hedge funds, insurance companies, any sucker coming late to the party) will receive the premiums and in most cases will not have to payout.
The above is a plain vanilla CDS aka single-name CDS, so-called because the reference borrower will be one known company or even govt bond. Today there also multi-name or default baskets which are basically a CDS composed of different corporate bonds (ranging from 5 to 125+ in a CDS index) on which you as protection buyer would take a bet on whether there will be a default within the group or not. A special variation of this type of CDS is the nth to default CDS. Here as a seller of the CDS, you get an opportunity to choose after which number of defaults you'll have to payout. The difference with the multi-name is that your payout for the nth to default is unlimited to the actual name that defaults.

The product should have an appeal to the fast-lending Kenyan banks and especially those who lend to corporates, the only downside being the usual trust issues.

TransCentury finally join the 21st century

I like their website too. Minimalist to the nth degree. Its also refreshing to see that all the staff are fairly young. The interesting thing would be to see how leveraged they really are if as alleged they make most of their acquisitions using their shareholding as collateral.

Reading accounts getting easier

Doing accounts for UK companies with a US listing must have been a nightmare over the last few years. In addition to reporting under the new IFRS reporting standards and on US GAAP (generally accepted accounting principles), some also had to do UK GAAP if the CFOs were the pedantic type. So 3 three accounts for one company.

Sense seems to have prevailed and the SEC will now allow UK companies and others to file their US accounts under IFRS. This is primarily driven by the fact that London is now more attractive for IPO listings than ever.
Its also good because, this will really help speed the acceptance of IFRS worldwide which should in turn mean that we as investors can now be able to compare companies across countries seamlessly.

I believe some Kenyan companies are already reporting to IFRS.  Jimnah was recently complaining about the lack of foreign buyers at the NSE.

Having all listed firms do IFRS is one way of attracting these buyers. Over to you Jimnah/CMA/KRA...

Week 36 @ the NSE

NSE went up 200pts in the week driven apparently by peeps who got their refunds and decided to splash out on the rest of the counters including KRe-that was clever move to announce the results just after listing. Some of the counters are now showing signs of the exuberance that was there about this time last yr. Exuberance can be another word for manipulation or good tidings being expected. The following have puzzled and made sense:

NIC-had already gone up by almost 70% from the price on July 25th confirmed plans to do rights followed by a bonus. What I don't understand is why if they are going to be selling the rights shares@Ksh70, peeps are running around trying to get some at Ksh180. Why not just wait post-bonus. Not complaining though...
DTK-in contrast, guys haven't really chased its shares despite it being a better prospect in my humble opinion
EABL-This tends to be a fairly dull share, capital gain-wise but this week has moved up after announcing a bonus issue and a tasty dividend. With the amount shares it trades, watch it go back to its customary 2 pts up 2 pts down post this little excitement
AK-one can appreciate the excitement about its recently acquisitions (Today Online and Open View), one should however also prepare to exit as soon as Telkom announces its strategic partner and or the cabling projects start giving firm dates of arrival on our shores.
KPLC-no comment, except look at preference shares (debt), transmission losses, GoK vote-buying tactics et al. If GoK wants the share to be more tradeable for wananchi, let it offload its equity so two birds in one go because it will remove the political risk attached to KPLC's share performance.