Nairobi Securities Exchange IPO

The Nairobi Securities Exchange (NSE) launched its IPO on July 23. It runs up to August 12, 2014 and they are selling 66 million shares at Kshs 9.50 per share (with a minimum investment of 500 shares costing Kshs 4,750) and the NSE plans to raise Kshs. 627 million (~$7.3 million).

Excerpts from the prospectus and other sources. 

• The NSE borrowed Kshs 300 million from Kenya Commercial Bank to part finance the purchase of the Westlands building that now houses the exchange. (The interest rate is minus 2 the bank’s base rate). Part of the funds raised from the IPO will be used to repay the Exchange's mortgage debt.
• The Dar es Salaam Securities Exchange has completely divested from the NSE and CDSC.
• The NSE has about Kshs 1 billion assets and an EPS of 10.70. They had earnings of 622 million and a profit of Kshs 262 million in 2013. The NSE owns Kshs 20 million worth of  Safaricom bonds and Kshs 15 million of Housing Finance ones
• The IPO is budgeted to cost Kshs 40.8M
• Ahead of the IPO in which 194 million (M) shares are being listed, the Kenya Government and the Investor Compensation Fund each own 6.56 million shares and 22 stockbrokers each own 4.08M shares - for a total of 128.6M shares. 2.5 million shares are reserved for employees of the exchange (The NSE  has 38 employees and 5 senior managers). 
• KRA assessed and charged them Kshs 19m for 4 years of back taxes, of which Kshs 15m has been paid
• One of the options the Exchange is contemplating is to establish regional exchanges in Somalia, the Democratic Republic of Congo (DRC), South Sudan and Burundi 
• The NSE expects to introduce the REITs and ETFs, and there are also plans to introduce the a Derivatives Market this year. The NSE also plans to upgrade of the Automated Trading System (ATS) and the Bonds Trade Reporting System with some of the proceeds from the IPO.

Access Kenya EGM

This morning  saw what was likely the very last shareholders meeting of Access Kenya, as a public company. The Company Secretary reported receiving 11,207 proxies representing 85% of the shareholders at the extraordinary general meeting (EGM) that was to vote on the de-listing of all the issued 218 million ordinary shares of the company form the Nairobi Securities Exchange following a buyout offer that the board of directors had already endorsed and which 75% of the shareholders had voted in favour of.

A few of the retail shareholders present asked lots of questions about the deal, and it seemed they were unhappy that just over five years after they bought shares in the company at an IPO, after which the share had risen to 38 shillings, before dropping to Kshs. 4, and getting low inconsistent dividends, in between, they were now being evicted from the company.  

Some questions/topics raised:
- Why sell out for Kshs 3 billion (~$35 million) that could easily have been raised locally? The Directors 
- Was the a capital markets (CMA) rule on the minimum number of years that a company had to remain listed after an IPO? The directors said there was none, and the regulators had approved all decisions taken by the directors in the deal 
- Some shareholders said they had bought shares at about Kshs. 18, and were taking a big loss. Directors replied that Kestrel Capital, as an independent advisor, said Kshs. 14 was a good price to take and that Kshs 14 was a big improvement  from the Kshs 4 low in the past year, and Kshs. 9 when the deal was announced and shares frozen
- Were the needs of minority shareholders considered in the negotiations, and why didn't the majority shareholders simply reduce their stakes, instead of selling the company outright?
- Why was the offer to retail shareholders structured as a 'unconditional, mandatory one? The directors said that no one was being forced out of the company, and that any shareholders who wanted to remain could do so, and they will still receive annual audited accounts from Access Kenya..they noted that there were still some shareholders of Unilever Kenya which delisted  in 2009
- What is the fate of employees who own shares in the ESO..and will they be arm-twisted to vote the shareholders acceptances past the 90% threshold? The directors said Dimension Data were a $6 billion company who's parent was a $100 billion one with ambitious plans for Access Kenya and Eastern Africa.

The final results of the shareholders voted will be tabulated by Deloitte and released in two days - and payments should be made to shareholders in September 2013. 

NSE Moment: Britak, Transcentury, Kigali Bank, Stima SACC0

This week we were reminded that there's been no IPO at the Nairobi Stock Exchange (NSE) since 2008 (Co-Op Bank) and the events in the last few days were the fulfillment of initiatives that companies like Britak and Transcentury had initiated earlier in the year.

Britak: The British American Investments Company Kenya kicked off their IPO this week. The group had Kshs 9 billion in income, and pre-tax profit of Kshs 2.8 billion in 2010. With group assets of Kshs 25 billion, it is second only to the ICEA at 27 billion.

They are being sold at Kshs 9 with an allocation criteria of 30% East Africa retail, 30% foreign, 37% institutions, 3% employees, agents, and individual policy holders and can be obtained at British American branches, Equity bank , Standard Chartered (and partner Postbank), NIC, CBA banks and stockbrokers.

The minimum for retail investors is 2,000 shares (Kshs 18,000 while for institutions it’s 10,000 shares (Kshs 90,000 or ~$1,000). The IPO is budgeted to cost Kshs 320m ($3.5M) with estimated payments to transaction advisor 24M, sponsoring broker 6M, legal costs 9M, selling commission 87M, CMA 9M, NSE 1.5M, PR 67M, and advertising 90M.

Insurance Opportunities

Of the Kshs 5.9 billion to be raised, 1 billion will be for regional expansion (Tanzania, South Sudan, Rwanda), 1.2 billion will be for Kenyan operations (set up a frontier investment fund, new branches), 2.5 billion for the housing & mortgage sector aimed at affordable housing models, and 750 million will go to pay off a loan at CBA bank that was used to purchase shares in Equity Bank (Britak own 11% of equity and 16% of housing finance banks).

The Britak IPO runs from 12 July to 5 August and they have also reached out to bloggers, with forums and their own blog posts such as this tale of their CEO's initial investment.

However, there are some concerns that with their 45-year history and strong brand name (-pay Kshs 18 million a year to British American), this is a retail magnet IPO and the sale of 650 million shares (30% of the company) is likely to be over-subscribed, and the dividend paid (Kshs 200m in 2010) is likely to be safaricom-ish (small)

The company has also called for the Government to extend current tax incentive for newly listed operating companies to also include holding companies (like Britak)

Transcentury: The investment group which has had a spectacular climb and string of investments, most notably with East African Cables listed their shares at the NSE on July 14.

Their shares had been trading at an OTC exchange and were listed at the NSE at Kshs 50, which worked out to a P/E ratio of 38

RVR Coach

The Group also has a Mauritius convertible bond issued to finance the restructuring of Rift Valley Railways and investment in geothermal and other energy projects, but which also has the potential of diluting investors shareholding by over 1/3. (150 million shares available to bond holders over the next 5 years prices between 40 and 50)

Still, Transcentury has been am inspiration to other investment groups, albeit not as well connected to initiate projects with more risk such as energy real estate, and offshore. The introduction is budgeted at Kshs 20 million (220,000 - CMA 5M, NSE 1M, advisor 8M, stockbroker 4M) and the PDF prospectus is 'protected' so you can't copy sections of it.

Family Bank: Their long dalliance with the NSE is about to be fulfilled as their shareholders will next month approve a listing at the exchange. They will also vote on an ESOP for managers and 1 % transfer of shares of the company to the new CEO. It has since emerged that he is purchasing the shares at a discount as part of his employment package.

Stima SACCO: Away from NSE is Stima SACCO that is in the process of raising funds of about Kshs 500 million ($6 million) . They have advertised in newspapers (even on TV), which may land them in trouble with the CMA, for selling shares to the public without adequate information. At Kshs 100 per share, individuals can buy 200 shares at a minimum (Kshs 20,000).

Kenya Airways: Nothing yet from the airline who were expected to approach shareholders for new funds. The government has allocated funds to invest and defend their 26% stake an the airline which has since signed a deal for new Embraer aircraft to grow their African footprint.

Bank of Kigali: The Bank of Kigali is aiming to raise $62 million from new investors in an IPO that runs from 30 June to 29 July. The Bank control 25-30% of the banking sector in Rwanda; it had profit of 8.6 billion francs ($14 million) in 2010 on assets of 197 billion francs ($324 million) - equivalent to a smaller mid-size Kenyan bank

300 million shares are on offer, and the minimum is 200 shares per person at 125 francs per share ($0.075 or Kshs 18.65). They are open to cross-border investors and the allotment will be to 27% retail East Africans, 2.4% to employees & directors, 15% – East African institutions, 15% to Rwanda institutions and 40% to international investors.

The Rwanda government owns 66% of the bank, and the other 1/3 are owned by the social security fund of Rwanda. 16 billion francs ($27 million) will go to the Government for reduction of its shareholding and 20.8 billion francs ($34 million) will go to the bank to reduce its assets & liabilities maturity gap and grow its loan book and operations (from 33 to 60 branches). This will result in new shareholders owning 45% of the bank, the government 30% and the social security fund with 25%

Other: The IPO prospectus lists
- lawyers acting for the bank, number of cases they have and prospects of loan recoveries
- lawsuits filed against the bank by name (former employees, debtors opposing auction)
- list of subcontractors and related partners such as visa card providers, SMS partners, providers of credit reference and lines of credit etc.
list of properties owned and rented by the bank and rent amounts. Also Rwanda depreciate building over 5 years, after each revaluation

Risks & Exposure - one of the operational risks is scarcity of qualified personnel in Rwanda
- commerce restaurants & hotels account for 46% of the bank portfolio while construction was 29%. Also 11% of loans were to a single group and records of large are available for review to persons who sign non-disclosure agreements
- Kenya is the country's largest trading partner: Rwanda exports 33% to Kenya and imports 16% back.

Staff: - All staff are entitled to bonus and in 2010 this totaled 8% of profit, which that was shared by 441 staff (out of 454), and the average award was $3,200.
- The bank also runs an in-house dispensary and provides full medical cover to staff and 4 dependents
- The oldest director was born in 1960, the youngest in 1977. At senior management, the managing director is the oldest employee at 54, while the head of finance is the youngest at 31.

Reading the Safaricom Tea Leaves

Post two of three: Safaricom has been one of the most progressive companies in terms of investor relation’s management, largely because of the cost of their large shareholder base. They spearheaded move to avail electronic instead of printed annual reports and payment of dividend by m-pesa, as opposed to cheques which were unviable for many shareholder who had the bare minimum of shares. Another benefit of electronic reports is that they are easier for potential investors to obtain (some companies print as few reports as legally possible and they don’t circulate widely)

Inside Safaricom's 2010 A/R

Shareholders: - Safaricom has 787,363 shareholders down from 828,912 in 2009
- The Government of Kenya has acquired more shares in the company despite a stated move of divestment. This year they have 22 million more shares, going up from 35% to a 35.06% stake
- Overall there are more foreign buyers of Safaricom shares, but NSSF Rwanda may have exited
- Director Esther Koimett bought 517,600 shares, and chairman Nicholas Nganga has 850,100. Outgoing CEO Michael Joseph and Finance Manager Les Baille each own 2.5 million shares, while their replacements, Bob Collymore and Chris Tiffin have none
- Last years’ AGM (the first since NSE listing and prominently advertised as having no handouts or frills) was attended by just 2,182 shareholders.
- 180,000 shareholders got their 2009 dividend by m-pesa (mobile phone payment)

Performance - Revenue breakdown of the 83 billion ($1 billion) in revenue voice accounted for 75% (2009: 83.4%), with SMS and other data at 9.7% (2009: 8.8%), Mpesa at 9.0% (2009: 4.2%) and equipment sales at 4.4% (2009: 3.3%). Revenue growth was 8% for voice, 32% for SMS/Data and 158% for Mpesa n all categories was positive with voice at 7.8%, SMS and other data at 32.4%, 58% for equipment sales and 158% for Mpesa
- North Eastern Kenya region is growing by over 200% owing to improved security

Other Numbers - Earned Kshs 7.6 billion ($95 million) from m-pesa (up from 2.9 billion in 2009)
- Has Kshs 10 billion ($125 million) in cash and short-term deposits, up from 4 billion the year before. Safaricom earned interest income of Kshs 350 million in the year
- Borrowings comprise 6.28 billion from a consortium of banks, 2.3 billion from one bank, and 7.5 billion in corporate bonds
- Have 2,000 dealers and 200,000 retailers
- Pay income tax at 27%, compared to 30% before they listed at the NSE

Staff - Launch ESOP in 2009 with 101 million shares and which will be issued in 2013. 2165 staff (88% of total) have joined the scheme
- Key management were paid 522 million (up from 438m)
- Of their 2,470 staff the company has an almost equal ratio of male and female employees

Fibre/Data Investments: - are investing 890 million into Seacom: they paid 316 million and balance of 573 million is to be paid over the next 5 years
- Paid 2 million to TEAMS for a 22.5% stake (other shareholders are GoK and Telkom both with 20%)
- Paid KPLC Kshs 116 million as part of 290 million for use their power network for fibre distribution over the next 20 years
- Bought packet stream data networks, for wimax,for Kshs 373 million shillings, and has lent Kshs 600 million to One communication (in which they own 51%)

Customers - their internal customer delight index had a measure of 7.38 last year against a target of 7.76
- Its true that premium customers get better customer service - there is a platinum line at call centre to service platinum (high end) customers on a prioritized basis (i.e. even by calling regular customer service free help line, ‘100’ they get through and served faster
- Safaricom business has over 2,000 customers including airlines, media houses, banks
- Mobile data is responsible for 90% of data revenue
- customer growth (their measure) Safaricom took up 65% of new phone lines in last year
- website: Safaricom the most progressive companies in online investor relations in terms of results and investor briefing posted on the web site and now dividend payments by mobile phone. It now uses twitter & facebook accounts, to promote its services and also try and (slowly) responsd to numerous customer service and product queries posted online

Rival disclosures: Safaricom’s main rival is Zain Kenya - and while it is not a listed company, the former Zain parent was listed on the Kuwait Exchange, and used to produce some extensive reports on their African operations - ranking individual countries by revenue, profit, subscribers - which was information that the local Zain office did not typically share. Similar information can also be gleaned from Orange of France about their Telkom Kenya operation.

Zain Africa sold to Bharti Airtel of India and while a financial quarter is yet to pass since the takeover, it appears they may follow the trend, as they are also a listed company with segmented reporting requirements. For Kenya in July 2010, they note that:

- Airtel Kenya has been given additional frequencies that enable it to offer 3G services
- All operators will have the right to borrow funds from the universal service fund (a fund that will comprise 1% of mobile operators annual turnover) and to use to set up infrastructure in the identified rural areas.
- Kenya companies are Bharti Airtel Kenya B.V. (name changed from Celtel Kenya BV), and Bharti Airtel Kenya Holdings B.V. (name changed from Celtel Kenya Holdings BV)

Reading the Access Kenya Tea Leaves

one of three
Over the last few years’ shareholders have voted to allow their companies to reproduce abridged financial statement summaries in the newspaper. One of the benefits of these resolutions would be to reduce costs of administering to thousands of shareholder, who previously were entitled to receive a full copy of a company’s audited results by mail.

Now companies have the full accounts on their websites for shareholders, to download, with a summary of the annual general meeting notice, dividend, chairman statement, and financial summary that appear in daily newspapers.

Limited numbers of the accounts are still printed and kept at the company premises, and distributed to analysts, partners, or to any shareholder who requests one. However most shareholders do not have Internet access or computers to read these PDF’s and may miss out on some details of events at the company.

Three companies are about to have their annual general meetings in the next few days, and have all converted to the digital format in lieu of printed copies. Kenya Airways and Safaricom both had their financial year-end in March 2010, while Access Kenya has had a good year (2009), but their meeting was delayed by boardroom wrangles which saw a new chairman brought in, and later by a drop in first half 2010 results (announced earlier this month).

AGM - Auditors Deloitte continue in office (new Chairman Mr. Ndonye was a long time partner there)
- Shareholders will be asked to endorse a concluded deal to buy out the remaining 30% in Openview, which they describe as a company that sells IT equipment to enterprises and corporate customers. Openview had sales in 2009 of 165 million, up from 147m the year before, but it seems the minority owners opted to sell the company to AK (their right under original sale agreement), and a settlement was reached where payment was made by share transfers, but they also agreed to pay Kshs 38 million to settle some claims by AK group biz daily

Notes - Dividend of 0.3 shillings per share will be paid for 2009, amounting to about Kshs 62 million
- AK still enjoys benefit of listing as a group by paying 20% in income tax compared to subsidiaries and other Kenyan corporates, which pay 30%
- Borrowings are up to 724 million (57m in 2009), but overdraft has been reduced from 166 million to 30 million. The group still has an overdraft position of 128 million. The loans are from NIC Bank and CFC Stanbic for both US$ and KES, with the bulk of this borrowing is in US$ which is cheaper (3%) is cheaper than the shillings ones (7%), unless the shilling depreciated significantly. Interest expenses for the year were 44 million compared to 6 million in 2008
- Communications solutions limited charged 370 million as management fee and owes 364 million
- Fibre: AK paid 106 million as investment into TEAMS (62.5 shares)

Shareholders: Has 32,674 shareholders and while there are some top shareholder changes, the AK ESOP has increased stake in the company

Website AK has an active presence on twitter, but is hounded by claims of poor customer service. Also from Twitter: The board has indicated there is strong interest in acquiring the company from three Telco’s but Safaricom have denied being one of them
-@bankelele reading vacationing @alykhansatchu in the star - safaricom share dips back below IPO price as CEO denies interest in buying access kenya
- @jgmbugua MJ is lying. I have impeccable information that they have approached AccessKenya at least three times. TKL, Airtel interested too
- @coldtusker @jgmbugua @bankelele Maybe in the past but does #AccessKenya add real value to @SafaricomLtd today? [I say no]

Safaricom DRIPs

On Thursday Safaricom announced the possibility of allowing investor to use dividend re-investment programs to utilize their dividends to purchase additional shares in the company.

Last year post was about DRIP’s and other ideas that Safaricom can adapt from Vodafone to manage their large shareholder base.

Promote alternative methods for shareholders’ to enhance value. Support a dividend re investment program (DRIP). Not everyone wants an M-Pesa dividend; some may prefer to buy 100 more shares in the company instantly, while the shares are still cheap (Kshs. 3.7 or ~$0.05 per share) and a DRIP will be a useful tool that keeps cash within the company and its owners. Alternately, if feeling philanthropic, Vodafone shareholders may donate their meagre shares to a charity - and why not to a school in Kenya that was Tahidi High last night!

Other IR Initiatives: This requires approval of Nairobi Stock Exchange share regulators, but now that the Mobitelea monkey has been shed, Safaricom is leading in the region in terms of investor relations = and their latest media briefing was put up at their website in one day, while their CEO's exclusive interview at Rich.co.ke is also up on the internet.

Other suggested proposals mentioned at the media briefing include share consolidation, and an employee share option program (ESOP), which however have a mixed record in corporate Kenya.

2009 Kenya Bank Rankings Part II

10. Diamond Trust (2008 rank 11) : assets of 44.9 billion ($600 million) and nine month profits of 1 billion ($14.2 million). Loans (28.6 b) grew faster than deposits (33.1b), but expenses also grew faster than income. Neck and next with NIC and I&M banks with 44 and 41 billion in assets in position 11 and 12 respectively.
9. Commercial Bank of Africa (7): assets of 52 billion and nine month profits of 1.39 billion. Deposits flat (40 b) but loans (28.2 b) are up 20% this year and with GOK paper up 77%, however income and expenses are lower than 2008.

8. National Bank of Kenya (9): assets of 55.2 billion and nine profits of 1.4 billion. The bank is in great demand with a planned further divestment by GoK which may attract significant interest next year. For 2009, NBK has had a remarkable 40% growth this year, with 27% loans (12 b) and 48% in deposits (41 b)

7. Citibank Kenya (8) assets of 55.6 billion ($742 million) and nine month profit of 2.3 billion ($31 million). while embattled in the US, Citibank had a slow down in growth of loans (22.7 b) and deposits (29.7 b) compared to ‘08 but will still record a healthy +20% growth for year 2009.

6. CFC Stanbic (4) assets of 83.5 billion and nine month profits of 981 million. Bank had no growth in loans (43 b) and assets, but sitting on a load of cash - almost 16b billion (~$214 million)

5. Equity Bank (6) assets of 92.4 billion and nine month profits of 4.2 billion. Equity is still one of Kenya’s fastest growing banks though the 100% growth margins have tapered off to more manageable 30%+ for loans (55 b)and deposits (63 b) as it expands regionally in Uganda and Sudan and continues to roll out unique banking products.

4. Cooperative Bank of Kenya(5) with assets of 98 billion and nine month profits of 2.9 billion. The bank continues its 20%+ annual growth a year after listing and has diversified into investment banking. However their re-jigged executive shareholding following n ESOP is a sore point to be debated further.

3. Standard Chartered 3 with assets of 122 billion ($1.6 billion) and nine month profits of 5.2 billion ($69 million). Despite my earlier negative outlook, stanchart was a late bloomer and has come on strong: significantly, unlike other big banks, stanchart grew faster this year compared to 2008 - with 18% growth in deposit (89 b) and loans (40 b) while profits are up by 40% as income is up 23% compared to just 5% for costs while spearheading technologial products & services to their customers. Also increased investment in government securities by 77% and holds ~ Kshs. 36 billion now.

2. KCB (2) assets of 163 billion ($2.17 billion) and nine month profits of almost 5 billion ($66 million). KCB group is larger than Barclays in assets (185 b to 168 b) but has a smaller asset base than last year. In 2009 deposits (133 b) and loans (93 b) are up over 20% but profit is up just 3% - income is up 11% but expenses are up 15%, as KCB continued its expansion, opening six branches in November and also expanding in Rwanda Uganda, South Sudan and soon to Burundi. The bank also continues to weather occasional storms against it sustainability with triton and now Kenya planters coffee union.

1. Barclays Kenya (1)assets of 168 billion ($2.25 billion) and nine month profits of 6.63 billion ($88 million) . Barclays shrunk by 2% compared to growth of 17% a year ago with lower deposits (123 b) and loans (96 b) compared to a year ago but with profits ahead of last years pace, perhaps boosted by GoK securities investments which are up 23% this year.

Olympia Capital 2009 AGM

excerpts from the last ½ of the meeting

Q&A leading into the 2009 AGM, Olympia shareholders had many questions revolving around the companies investment strategy, governance issues, disastrous foray into South Africa and prospects of escaping an Uchumi like future as the AGM was postponed, and happened a week later than scheduled.

Governance: - the AGM was delayed, the Board said, because the annual accounts were late coming out; one shareholder urged them to do better, not aim for the minimum corporate of 21 days only to avoid being late and incurring regulator penalties. CEO (Michael Matu) said they had noted this and had improved to the extent that the ½ year accounts were released in September, just over month after completion of period.
(lacking) corporate governance (missed this part where the auditor read out a statement that the company had no corporate governance in place. The auditor apparently made a similar remark last AGM, but that was omitted from the minutes of the meeting presented today - the directors mentioned they have engaged consultants and were embarking on corporate governance measures. One shareholder noted that the board had promised the same last year and no piece meal measures have been implemented to which the directors said they were doing this now and would brief shareholder in about two months
director loans increasing each year amount to 18.3 million – who, for what, what terms? CEO said he’s the only director and he has borrowed to buy house and car. Loan interest is paid and assets are charged to the company
insider board: One shareholder complained that 5 of the 7 directors had links to the parent company, so board was not truly independent
investor briefing -one shareholder presented the directors with a list of 35 detailed questions. The chairman suggested they have an investor briefing in about two months where all these and other shareholder questions can be exhaustively answered it will not be an EGM. CEO also promised to reply to all these questions via e-mail to the shareholder and copy his replies to the Capital Markets Authority whose representatives were in attendance
- at that time, the directors all also explain what measures they have taken in the area of corporate governance

Strategy Going Forward - For SADC (southern Africa) Olympia is still keen on the building materials market which is still strong. Even plan to go back into South Africa but without a link to Builders Warehouse – who handled 75% of their sales. They hope to revive and relocate the Natwood business to Botswana (Gaborone) from South Africa from where it will be easier and cheaper to supply their core markets in the Gauteng region (transport distances will halve from 600km to 300km)
- now going into Zambia on a smaller scale, and will look at Zimbabwe since economy is more attractive after dollarization
- part of problem was they did not make the management changes that they hoped to make; hire right people

Investments - Dunlop is profitable this half year, though had not yet installed new plant they bought to replace their exiting 1970’s plant. However with what they know from the Botswana tiles operation, they know how they can multiply their products & sales in Kenya with Dunlop once new plant is installed. From Botswana they supply South Africa, Zimbabwe, Angola Nigeria and Mozambique. Answering a separate shareholder question, mentioned that factory land had been given to Dunlop to support their balance sheet, but transfer had not been effected since they were awaiting confirmation that there would be no stamp duty to be paid on deal
- Mather & Platt, they bought out centum’s shareholding, but are yet to beef up the management there
- A shareholder (who was transaction adviser on the rights issue of 2007) said he was surprised to see how share transfers were disclosed in 2009 accounts. CEO said that at the time of rights issue, shares were allocated pending investments later made. E.g. Olympia had no cash to take up Heri rights issue, but Avon advanced Olympia cash against balance sheet . In answering a similar question CEO said of their strategy – when they see opportunities, but have no cash they arrange for third party to buy shares and agree to re-sell them to Olympia at later date
- No due diligence in describing Natwood investment, CEO had mentioned that they paid ½ the funds but later their due diligence showed that there were come issues within the company and a shareholder questioned if any initial due diligence was done at all. CEO explained that if company went after blue chip companies, they would pay premium prices, but they chose to go after viable but distressed companies and in this case they had consulted advisers and lawyers before natwood deal.

Shareholder votes - One director was re-elected, but COO Mwangi Wamae opted out of re-election to the board.
- ESOP though directors said employee share options plan (ESOP) will be a key tool to attract top managers for the various companies, shareholders voiced concern that this was the wrong time to bring up an ESOP, with the board governance not in place. Directors argue that the ESOP approval was separate from the implementation noting that - they have had an ESOP in Botswana for 3 years with no shares issued, and that the CMA (Kenya) would not be discuss and approve an ESOP unless shareholders had approved it. Since this was a formality it was approved.
- A dividend of 10 cents was approved. Chairman joked that this was the same as Safaricom was paying

Summary: Olympia CEO and Board pulled it off (again) - reassuring shareholders that the company was sound, strategy & governance would improve, they had a plan to take it forward and that the worst (of the SA foray) was behind them now.

Reading the Olympia Capital Tea Leaves

Holding company - Olympia Capital’s annual report is one of the most jumbled I have seen in a while - it has contradictory statements, dates overlap, and profit/loss amounts that may have led to some regulatory trouble in Botswana where the company was also listed.


recap
Performance: their accounts were qualified accounts by the audit firm DCDM who noted that the company did not comply with IFRS – where they should have consolidated a subsidiary (Plush - to be liquidated) in their accounts; the auditors however added that this omission did not have a material effect on the performance numbers since Olympia wrote off all related amounts

Disastrous SA investments
capping a disastrous foray into South Africa – whose dismal results the directors blame on the recession in that country
- owned 74% of Plush products limited which ceased business and will be liquidated as their bankers (Nedbank) moved in – the SA equivalent of a receivership?. Olympia wrote off Kshs. 103 million from Plush – 86 million investment and 17 million in loans
- With another company, Natural wooden products, they expected to buy (and who they lent money), but this will not materialize; they don’t expect to recover monies and have provided for it in full
- another one Natwood owes 63 million
- The report notes that Olympia provided a total of Kshs. 115 million for SA investments that have not contributed to profits since investment while the elsewhere is a note that discontinued SA operations will cost Kshs. 200 million

Investment/subsidiaries
- own 12.5% Heri investments (valued at 71.6) million and mentioned they got a good dividend, thought its unclear how much was received
- A subsidiary, Dunlop, bought a tile making plant at a cost of 54 million – but it has not been installed – and the company may have to get a third party to install or operate it – or may even have sell the plant!
- Owned 7 million worth of Safaricom shares at year end

Other
- Some directors & top shareholders have reduced their shareholding
- There are so many internal deals /within-the group based on valuations or estimated of directors
- There are no director profiles in report
- Corporate governance: Olympia created two board committees audit & nomination, and investments committee – but these did not meet during the year (this company needs a competent independent investments committee after its SA foray!)

Upcoming AGM
should be interesting to attend
- The AGM will be held on 25th September
- Auditors signed accounts on July 31, but the reports have been sent to (2,685) shareholders just two weeks before meeting
- Shareholders will be asked to approve a dividend at a critical time for the company (Olympia will pay out Kshs 4 million)
- Bad timing for the directors to ask shareholders to approve creation of an employee share option plan (ESOP), fund it, appoint trustees, issue shares etc.
- Increase share capital from 40 million to 50 million by creating 10 million new shares of 5/= each – this adds up to an additional 50, not 10 million!
- DCDM will continue as auditors.

Scangroup AGM

Excerpts from the 2008 Scangroup AGM, Q & A session held today at KICC.

top issues were dividend cheques and bonus shares

Misplaced shareholder cheques: The question was posed by Mr. Shah, who’s probably the second most famous public shareholder after Mr. A W Chami and who had waited for nine months for a dividend cheque error to be corrected, and was faced with bank charges of several hundred shillings for his efforts.

In response company said they were working to sort out shareholder cheque and unclaimed dividends issues
- Said the figure was now down to 3.2 million shillings. (which if unclaimed after a few years, will go to CMA)
- Passed some blame on to stockbrokers who have not reconciled some accounts since the IPO
- On cheques, they have an arrangement with their bankers (CFC), so customer could cash their cheques for free can (at the CFC upper hill branch)
- Said electronic (EFT) payments had not been successful because a lot of information provided by shareholders was wrong.

Bonus shares; several shareholders argued for bonus shares. Chairman replied times that – it was not the right time, they will cross that bridge when they get there, when they need to they will adjust their capital, will look at fund raising at that time (shares were not the only avenue available)

CSR company is weak; Chairman replied they are doing more this year including some work with IDP’s.

Marketing company that does not market! can the company do some advertising so it becomes well known?; CEO replied that they pitch to corporates and there’s not a marketing person in East Africa who is not aware of the company or its affiliates.

ESOP; It was good to have discussions at this AGM on the company’s employee share ownership plans (ESOP) – as CEO Bharat Thakar explained that the board had approved for 6 million shares a per year to be availed through the ESOP to key revenue drivers and to ensure that senior managers were very well incentivized. All managers get targets, which entitles them to some options at the end of the year. The Chairman added that that the shares were not free, were paid for by managers to the company and were priced on the date of acceptance i.e. market price. The report 2007 report noted that was ESOP set up under a trust deed in February 2008 but that no options have been granted so far, though shareholders have approved 15 million shares.

African ambition different shareholders challenged the board their ambition to be the biggest media buyer in Africa by 2010 when they (i) didn’t have the capital (ii) had dormant offices in Malawi, Mozambique, Zambia and Nigeria. The first shareholder was actually asking the company to give bonus shares/increase float (from the current 160 million shares, to at least 250m) while the CEO answered to the second - that all the offices were active, (except Nigeria) and were used for billing companies in those countries.

Cross listing one shareholder asked them to cross list as their market was also Uganda and Tanzania. Chairman said it would make sense at the right time, but it was also very expensive to do.

Super sleuth one eagle eyed shareholder pointed out, and the company confirmed the error; that the top ten shareholders (printed in the annual report) had 66, not 50% of the company shares

Goodies lunch offered, at KICC grounds, but no details.

Next CMA minefield

Employee share ownership plans (ESOP’s) are define by the CMA as unit trusts. They are ideal for high tech small companies, but when establish companies roll them out without clear rules, it’s a cause for legal concern, but more so for shareholders of these companies.

They make sense in high tech small companies who need to retain key employees (Access Kenya, Scangroup), but what does a large company like KCB, NMG and HFCK (who have all applied to set up ESOP’s) need them for? Equity Bank has had one for three years and when they listed in 2006 said they’d get CMA approval as soon as possible (yet to happen). If the company does well is it a collective effort and managers and staff should be rewarded with increases and bonuses from their existing contracts.

ESOP votes should not be pressed on unsuspecting shareholders without certain disclosures such as; whether shares will be bought from the public or allocated from the company, vesting rules and participation requirements, whether they are for company executives or non executives (which may be more palatable to shareholders) and trustee/management information of the ESOP?

As at April 2007, CMA licensed ESOP’s were 6: EABL, Kenol, Athi River Mining, Access Kenya, Scangroup and Safaricom.

Access Kenya AGM

Access Kenya (AK) held its first AGM since listing on the Nairobi stock exchange (NSE). Here in alphabetical order is a brief recap.

Most of the questions were answered by Chairman Michael Somen and Executive director David Somen

Accounts: there were two balance sheets and P&L’s in the accounts which caused some confusion, but it was explained that one set was audited while the other was included to guide shareholders on the position of the company taking into account recent consolidations (Openview was acquired).

Blogger moment; as I was finishing my lunch, executive director David Somen was greeting shareholders and charring so I asked him about the company’s prospects: He said it's a good for investors and that AK was the second best performing share on the NSE after Equity Bank. On acquisitions he added that Kenya was not easy as most of the ISP’s of significance were not local entities, so they may look regionally for growth.

Collapsed brokers: two shareholders raised the matter of shares being sold without owners consent at different times - but each time, the chairman deferred them since they did not relate to AK shares

Computing industry one shareholder complained that the AK report was scanty on the industry (computing, ISP, technology etc.) and that the company should in future incorporate a management report on their performance in the industry. The chairman said that would be done.

Directors’ fees: while one shareholder considered it quite large, directors replied that they had actually reduced the fees 20 million from 50 million shillings before to be in line with other listed companies.

Dividend one shareholder complained that it was not enough and the company had undertaken too many corporate social responsibility (CSR) activities, diluting the dividend. The question got a lot of applause and the Chairman said they would take that into consideration in future (heavy CSR was also an issue at Standard Chartered AGM a few years ago). Another shareholder noted a dividend current liability amount, which the directors indicated was a payment owed to the directors of the company they acquired after the year end (Openview?)

Extraordinary votes
Increase share capital: from 250 million to 500 million this would give the company room to maneuver in terms of acquisitions, bonus, share splits. In answer to another shareholder, D. Somen clarified the CMA/NSE approval was not required to increase the share sin a company, but only at the time of listing
Acquire companies: up to 200 million shillings. Directors clarified that the companies falling under this clause were rather small, none larger than 5% of AK’s worth, and it would not be prudent to call an EGM (costing 1 million to 3 million shillings and several weeks time) each time this happened. Following other questions about due diligence, target companies and costs, the directors assured shareholders that all decisions would be made with a view to maximizing shareholder value and they would inform shareholders fully about acquisitions. The increased share capital would enable them to take on new shareholders whose companies they acquired. They have talked to several, but not ready to sign any deals yet
ESOP; vote to allocate new shares (about 1.35%) to the employee share ownership plans (ESOP). directors explained that it would enable them to maintain their unparalleled staff retention in the industry and that all 250 employees were shareholders which improved their commitment to the company. D. Somen explained a bit about the scheme which options were exercised over several years and ensured employees stayed on to reap the maximum from AK. This week the Nation Media Group announce plans to create an ESOP – that would be about the 3rd largest shareholder in the company, its time more oversight was given to the professional investment management of ESOP’s

Goodies: tote bag with cap, notepad and access Kenya pen. Lunch box from the Stanley hotel (beef sandwich, apple, orange, piece of chicken, Keringet bottle, soda)

Post election violence directors reiterated that they did not expected the early 2008 events to have an impact on the company’s outlook for the year which the anticipated to be 50% - 60% growth

Venue: was the Nairobi Arboretum and I heard many shareholders complain about its (i) inaccessibility – not public transport/or shuttle organized by company (ii) no directions - once they found the ‘park’, it was vast forest with no indication as to which corner the event was being held

Verdict: apart from the location, was a nice first outing for a newly listed company. It pays to have a strong chairman, able company secretary (Fiona Fox who is leaving the company after the AGM) and directors who can readily and confidently answer questions put to them by shareholders – 70% of which are mundane and/or repeated at every other AGM.

New media stocks at the NSE

Until Safaricom gets listed later this year, take a glance at Access Kenya and Scangroup - two recently listed, new media companies at the NSE. They both say they are market leaders (none of their competitors are listed), both set out to increase market share organically and by acquisitions, and their shares cost about 30 shillings ($0.48) each, three times their IPO prices.

This month, Access Kenya are gearing up for their first AGM since their 2007 listing, while Scangroup will be having their second; and while Scangroup (SG) will have a vanilla AGM (no special business), Access Kenya (AK) have a lot more going on as they will seek approval from their shareholders to;

- double their authorized share capital from 250 million to 500 million shillings (500m shares) [giving them capacity to acquire companies, split shares, or raise capital in future]
- allow the board of directors to acquire companies up to 200 million shillings (~$3 million) without having to call for an expensive extraordinary general meeting of shareholders
- allocate more shares for the company’s ESOP (employee share ownership plan)

How else do the two companies stack up?

vision:
SG vision - to be the leading marketing services company in Africa by 2010
AK vision - be the premier provider of high quality internet and other technology services to corporate and high end residential customers

shareholders : SG 44,193 ; AK 29,434 shareholders

2007 performance
SG: turnover of 4.7 billion, profit of 353 million, cash generated 165 million, assets of 900 million. EPS 1.48 and a dividend of 0.90.
AK: turnover of 882 million, profit of 171m (dividend of 0.30), cash generated of 133m, assets of 748 million (had 600m in cash, much of it unutilized from the IPO). They also have separate consolidated accounts that include the financials of Openview business systems which was acquired after the IPO.

Employee Retention key for new media companies:
SG: ESOP approval of 15m of the company's 160m ordinary shares. Staff costs were 561m including 7m to directors and key managers.
AK: ESOP that had 7.25m shares of 203m ordinary shares has been exhausted and another 2.75 to be added this year. Staff costs of 131m including 53m to key managers and directors,

Other
SG: Has a lot of subsidiaries, from acquiring customers and competitors whcih is part of their strategy. 64% of their revenue was from Kenya with the rest from Uganda and Tanzania. Their CEO was on CNBC Africa TV last month saying their focus the year would be expansions to Zambia, Ghana, Mozambique, and Angola – probably by securing contracts with mobile phone companies in those countries.

AK: was charged a management fee of 52 million shillings by subsidiary companies (shades of Sameer group companies?).
Also Access Kenya’s annual report is heavy on the marketing side with a special offer for shareholders to apply for Access Home - the fastest guaranteed residential broadband(Nairobi and Mombasa) for Kshs. 6,000 + VAT per month - a 20% discount for shareholders. One time costs include 8,500 installation and equipment of 25,000 (and VAT, though I thought all computers equipment was VAT free). An added extra for shareholders is that the package which (including 1st month) costs a total of Kshs. 45,820 (~$725) can be financed with an Equity Bank 1-year loan (but monthly repayments of 4,391 work the loan out to cost about 25%) – the offer runs till end of May , and installation to be done in June & July.

NSE Briefs

Scangroup: It was a pleasant surprise to pick up the newspaper this morning and see results from Scangroup (company earnings usually break at theNSE site) for the year ended in December 2007.

Turnover was up from 3 billion to 4.7 shillings billion, and profit after tax was up from 279m to 353 million shillings (27%) as were EPS (1.48) and dividend per share of Kshs. 0.90 – which is not bad for a share that was oversubscribed 3X just 16 months ago.

KCB: Good and not so good news form the notice of their upcoming AGM (May 9). The company will be cross-listing it shares in Uganda and Tanzania but also proposes to carve out an employee share ownership scheme (ESOP) from the creation of new shares in a proposed rights issue (reserving 150 million of the 400 million new shares). ESOP shares are controversial unless they are bought from the pool of existing, issued, shares.

East African Breweries AGM

The 2006 EABL AGM was held at Safari Park Hotel in November 2 at 11:00 a.m. Registration was a breeze – with almost as many proxies as shareholders and it was a very quick AGM thereafter with the agenda– approval of accounts, dividend, directors’ election & remuneration and auditors – all done within a half hour. With a full board le by Chairman Jeremiah Kierieni and MD Gerald Mahinda, all directors except for Evans Mwaniki (KQ chairman)

New finance director C. Caldwell was added to the board while Wanjiku Mugane was also re-elected. However, two directors, the Chairman and Richard Kemoli, who are both over 70 years, have to be endorsed each year to continue as directors.

I had thought of putting a shareholders vote over the matter in the interests of opening up the board to younger people and women but I felt that I would have been lynched. Needless to say, no shareholders objected on account of their age.

AOB
The Chairman had urged shareholders, many of whom who – in addition to proposing or second agenda items – also congratulated the board, made speeches or tried to ask questions, to refrain till after the agenda was done. One of the first was on the race with Safaricom and the Chairman assured shareholders that the company would strive to wrest back the top earnings crown from Safaricom. Early on it appeared that there would be very few questions, but here are some of them:

- Increase dividend and bonus shares: is a recurring them at all AGM’s and EABL also had its share. There were many variations of the same question, some shareholders talking of previous board who had been more generous. Chairman explained that they can’t increase dividend for a few small shareholders as everyone get an increase. It was also troubling to see a graphic in the annual reports that showed shareholders receiving 20% of payments from the company earnings while 70% goes out as taxes to the government.
- Minority interest: There’s a huge payment of profits for minority interest that doesn’t compute in the list of shareholders. MD explained that South African Breweries owned 20% of Kenya Breweries and Diageo owns 54% of UDV. KBL and UDV pay dividends to these two companies and whatever is left now goes to EABL shareholders.
- CSR: are you meeting your commitment to devote 1% of profit to corporate social responsibility? MD said CSR last year was allocated about 45m and this year will get about 80m. However, like at the Standard Chartered meeting, CSR is not a popular topic at AGM’s. One shareholder, while commending EABL and Nation media group for helping with famine relief and other disasters, they should put shareholders first - and he went on to lament how the company has never acceded to repeated shareholder wishes for more dividends or bonus shares.
- Are all shares fully issued re: ESOP? MD explained that shares for the ESOP are acquired from the market
- Why have sports sponsorships declined? Chairman replied is that they still sponsor a lot of sports such as soccer and horse racing – but the funds are disbursed from HQ for better control and monitoring.
- Missing or discontinued beer brands; MD replied that they discontinue slow moving brands like pilsner ice and senator special to put more effort into others like white cap light and citizen. He also said they would announce such decisions to the public in future.
- Hot Button: Barclays Bank It started with a misunderstood question from one shareholder who wanted dividends to paid as cash in rural areas for those who don’t have bank accounts. Chairman answered that the company had a program with Barclays bank where dividend cheques were banked without commission. One manager was there from Barclays who unsuccessfully tried to explain the issue. More questions were shouted out leading the Chairman to ask that they talk to the Barclays man after the meeting had ended. I went through this problem a few years ago – many shareholders want to cash their dividend cheques immediately - and while this is free for Barclays account holders, there’s a fee of a few hundred shillings if you don’t have a Barclays account. (also bank’s also make some easy money when new investors choose to cash their IPO refund checks immediately – for a fee of course)
- Goodies cap (pilsner), t-shirt (sengenge), lunch box (chicken, sandwich, juice, yoghurt, water, cake, apple, orange, egg)

Equity Bank Listing: A to Z

About Equity Bank, will have a secondary listing on the Nairobi Stock Exchange next month at a price of Kshs. 70 per share. I located an information memorandum (prospectus) a at thanksgiving celebration /prayer /dinner the company threw for 3,000 Nairobi customers at KICC last night – and went through it do decide on whether to buy the shares next month.

Commissions: Banking at Equity is not cheap, and this is the situation in the entire the micro-finance sector – and Equity will probably have to lower some of their bank charges. Their account opening minimums are very low, but some of their charges e.g. cheque clearing are rather high compared to other banks who are now targeting Equity’s customers.

However lowering charges may not be an easy option since, these form a greater portion of the Bank’s income (52i%) than at its peers (CFC 33%) NIC (24%) and D-Trust (30%).

Employment: Despite the staff high turnover, the bank is a good, fast growing, employer that has gone from 354 employees in 2003, to 884 in 2005. It has 35 branches, (14 in Central province, 8 in Nairobi) and over half of them have opened in the last two years.

One issue I disagree with in the memorandum is that Africap agreed to sell 50% of their shareholding in the Bank to staff. But the truth is that staff were forced into buying these shares. The staff trust (unregistered staff ESOP) now owns 5.52% pf the Bank’s shares, same as Africap.

Listing costs: Floatation was much cheaper than a new IPO. Equity’s listing is budgeted at 28 million compared to the Kengen IPO at 401 million and KCB rights issue at 104 million. The CMA and NSE get their fees (8.1m and 1.5m here respectively) as they did from Kengen (24m, 1.5m) and KCB (6.1m, 0.5m) and most of the savings come from not having to pay stockbrokerage and advertising costs. Equity has budgeted 11m for the financial advisers and sponsoring brokers; compare this to Kengen who paid 101m for advertising & 118m to brokers and KCB who paid 13m for advertising, 6m to brokers, 37m as agent commissions, 9m for postage, and 11.5m for printing etc.

Loans: Equity has been keen to grow their loan book ever since they became a bank to keep up with their ever growing deposits. They have five times as many depositors as they do borrowers and while this was acceptable at a micro-finance level, it is important they grow their interest income.

They doubled their loan portfolio in 2005 from 2.9 to 5.5 billion, but NPA’s likewise doubled from 246m to 519m. Their loan to deposit ratio is now 72% (June 2006) which is comparable to CFC (76%), NIC (85% and D-Trust (785) at the beginning of the year

Management: The MD, current Chairman, and former Chairman, are among the largest shareholder in the Bank - and along with employees (in the ESOP) are barred from selling their shares for the next two years.

Marketing: Equity is now a Bank and should focus on marketing as a bank, not a micro-finance institution. The more, the MD shouts about how the Bank is not about one community, being very liquid, excellent global capital rating, not depending on government deposits etc, the more it makes one think about those very issues. Imagine if Adan Mohamed said the same thing about Barclays every time he was on TV. The focus should shift to marketing the bank’s customers, products, and convenience.

Nakumatt like: I’d compare Equity to Nakumatt in terms of their fast growth and they also own very little property (branches).

Ownership: Confusing to say the least, and it would be good to know why the management took such a convoluted route - from building society converting to a bank, converting deposits into shares, private placement to finance the bank’s share capital, and finally the issue of 4 bonus shares for each 1 held that created the 90m shares, that will be on offer in August.

Pesa Point: Equity has signed and agreement with Pesa Point to link their ATMs.

Verdict: In 2005 the Bank returned a pre tax profit of 501 million, which translated to an EPS of 3.77, up, from 2.51 the year before. (Dividend was Kshs. 2 per share, same as in 2004). The Bank is on track for another year of record profits of 800 million before tax and could pass the billion shilling milestone next year.

The memorandum contains joint statement by Dyer & Blair and Suntra Stocks that values Equity shares (par value 5/=) using the DDM method at Kshs. 91.4 shillings per share, PBV at 64/=, and PE method 63.4 shillings per share. The advisers reckon that this compares well to CFC, Diamond Trust and NIC banks, who they consider to be Equity’s’ peers listed on the NSE

Yes, Buy Equity: But not immediately. It will take a few months for the share to settle since, the current 2,800 shareholders of the bank will have to open CDS accounts and immobilize their shares before they can be traded. In 2006, 2.5 m shares have been sold in the OTC market. A share split is likely but it is also prudent to ask if the Bank is growing too fast.

HFCK ESOP

At the company’s AGM later this month, shareholders of the Housing Finance Company of Kenya (HFCK) will be asked to approve the creation of an employee share ownership plan (ESOP) unit trust. This plan will benefit from a tax incentive for ESOP’s announced in the budget speech last month and follows in the steps of Kenol and EABL as a way to motivate and retain employees.

To avoid causing friction, the ESOP shares will be bought from the stock exchange and will not dilute existing shareholdings. No mention yet if there will be a separate plan for executives.