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.