For Last Minute Kengen Bond Investors

There’s a nice travel site called Kenya last minute that caters to the last minute travel planners. Similarly, taking up last minute offers is a trend that also spreads to investing and there is a lot of interest now in the public infrastructure bond PIBO (not BIPO) on sale from the Kenya Electricity Generating Company (Kengen) that closes on September 29 and targets to raise almost $200 million in exchanges for paying investors12.5% interest p.a.

Anyway what’s the rush? We have had one month to make a decision that covers ten years! And if this was a share sale, we’d probably see queues of potential investors lined up around stockbrokers offices holding bits of paper, cheques, ID’s etc. at least one of whom would look into the TV cameras and say something like “serikali ingetuongezea sisi siku moja tu” (the government should add one more day for investors). The offer has not pulled queues to the street corners, but its’ excepted to achieve its goal, as targeted marketing and forums are being held around the country

So what there to tell last minute investors? Blogger Kainvestor has a nice PIBO summary derived from the information memorandum almost from the day it was released and there’s no need to repeat the good points he has noted there.

Good for retail : with an over-subscription expected, the resultant allocation is likely to favour retail investors. The minimum investment has been set at 100,000 ($1,315) which is the same as the recent Kenya government infrastructure bond that was aimed at raising at raising 18 billion, but yielded 26 billion. Then, and probably now, the allocation formula was skewed in favor of retail investor compared larger investors and institutions.

source: CBK infrastructure Bond performance report (PDF)

Bad for retail: liquidity in the secondary market for Kenyan corporate bonds is low; while the NSE twitter feed (@NSEKenya) notes that the bonds segment witnessed trades worth Kshs. 1.15 Billion (on September 24) which is an increase from Kshs. 80 million worth of bonds traded yesterday, this was all in the government bonds segment, while corporate bonds are rarely traded; those who buy them, rarely trade them, so if a retail investor is looking to cash out early, odds are not good.

Also read another BIPO analysis from the Business Daily

Kengen & other Nairobi Bonds

Lots of questions abound about whether its time to invest in bonds at the Nairobi stock exchange. From late last year when Mabati Rolling Mills launched a bond, 2009 has really been the year of the bond with the clincher being the successful Kenya government infrastructure bond of February 2009.

Now ongoing now is the Kengen PIBO for which Kainvestor reviews the prospectus. It offers a 12.5% and the minimum subscription is 100,000 shillings (~$1,316)

Next expected next is a Safaricom bond, a Centum bond ( 2 billion), and more tranches from CFC Stanbic and Barclays. It’s quite a turnaround from 2007 when companies like Athi River Mining, Safaricom and Celtel Kenya (now Zain) all redeemed /repaid bond investors at a time of low interest rates.

Track all the corporate bonds at the at the NSE daily bond report and these include East African development Bank, Barclays, Faulu Kenya, Mabati, PTA Bank, Athi River Mining, Sasini and CFC Stanbic

Buy bonds directly from stockbroker agents, but if still unsure of the process, consider investing through bonds funds such as those from Old Mutual Kenya and Dyer & Blair Investment Bank - Kachwanya reports that investors can even access the Kengen Bond at ½ the prescribed price – paying just Kshs 50,000 (~$650) instead of the subscription minimum of 100,000.

Stocks versus bonds? in the long run, as shown by this stockskenya thread, shares are likely to out-perform bonds – even the generous 12% Kengen bond.

EDIT also on offer is Uchumi Bond/10% convertible shareholders’ debenture is on. Press reports say it was valued at 12 shillings each by KPMG and is available at a discount of 10/= to shareholders of the company. The funds raised will be used to restructure the balance sheet, which shoudl lead to the end the receivership, and re-listing of the company’s shares at the NSE.

Uchumi Financial Results

published by Specialized Receiver Manager – September 2009

Share Portfolio February 2009

Quarterly portfolio review after last snapshot in November 2008



The Stable
Diamond Trust ↓
KCB ↓
Safaricom ↓
Scangroup ↓
Stanbic (Uganda) ↓

Changes
- Best performer: Diamond Trust -8%
- Worst performer Stanbic – 33%, Safaricom -23%
- In: none
- Out: none, but sold a little KCB in January

Events & Outlook
- Performance: Portfolio is down 20% in the last three months while the NSE Index is down 25%
- Did not buy KQ and Kengen as expected, but that should happen in the next few weeks as prices continue to drop
- Sat out the Co-OP IPO and made just one trade in three months (sold some KCB in January). Are brokers generating enough income to stay afloat? I hope they don’t try and introduce new charges levied on dormant investor accounts
- Money markets: Got started in money markets by signing up with a CBA Unit Trust
- Bond markets: The Government of Kenya has lowered the minimum investment for GoK treasury bonds to just Kshs. 50,000 (~600)
- Investor awareness: The CDSC started sending out monthly statements by e-mail to investors, cutting out the postal service, and alerting investors each time shares are bought/sold using their account.

Electric Slide

Kengen: the Kenya electricity generating company will have its third AGM later this week – and while shareholders may be happy with a Kshs. 0.90 dividend they will also be asked to approve (i) 30% investment in a geothermal development company to be created by the Government of Kenya (ii) invest in a coal plant (iii) participate in other ventures – (perhaps buy into another IPP independent power producer?)

The proposals to shareholders are vague and without any spending amounts attached, they should not be presented to a vote. When the Access Kenya board got shareholder authority to make other investments, they capped them at Kshs. 200 million each - this one has none, and the third proposal doesn’t even limit Kengen from investing within the energy sector so it could probably buy a sugar company or tea company (for cogeneration?) with that mandate.

Anyway Kengen has undertaken a lot of geothermal work with three olkaria plants and is it really necessary for the Government with strained recourses to create another parastatal at this time? Shareholders who were also spooked by plans of a secondary listing of shares and plans to hive off a geothermal company from their assets two years ago will also not be happy to see that the plans are. still active.

KPLC: The much heralded VAT reduction in electricity bills has not amounted to much. It was effected in the November power bills, but the reduction in VAT from 16% to 12% appears to only cover the fixed charge of a Kshs. 240 per meter – so the savings amount to just Kshs. 9.6 per consumer.

Bad News Bears

Correction Window: At the beginning of the month it was Crown Berger shares that did a swan dance on some pedestrian financial results and last week it was the turn for Portland cement (EAPC) shares to take a drastic dip in value with the announcement of reduced profits.

This has generally been a tough year for manufacturing stocks and the next few days should see year end results of both Kengen and KPLC who have been battling over tariffs and leaving consumers suffering and manufacturing companies & industries threatening to shut down or decamp owing to high electrical costs.

There are some shares on the NSE that are perceived to be under-valued and some that are over-valued (don’t pay dividends, appreciate on speculation, limited trading activity) - and the announcement of financial results (with the waiver of the 10% daily share price rule) gives the market the chance to correct/adjust share prices. But will these share drop? Do they have any reason to? Their P/E ratios are already so low.

Already Safaricom CEO Michael Joseph has said that the price dip of Safaricom shares have no impact on the company’s performance (their quarterly results will also be tricking in soon)

Looking back on Kengen & Total

Total
In October last year, Total Oil held a cocktail party to reassure shareholders after some dismal 9 month results.

Now that the 2006 results have been finalized, here are some other things shareholders were told at the event.
- Company experienced difficulty with upfront payment of taxes and ineffectiveness at the oil refinery in Mombasa
- Total had made a provision of 100 million shillings for an oil marketing case, but that very day the high court had ruled in their favor.
- The Chairman (Mr. Nguer) promised that the results at the end of the year would be much better than the 9 month ones
More comparisons to Kenol: he said that Kenol share price was 115 shillings in April and 109 on that day in October, while total had similarly changed from 44 to 37/38. He also said that while their operations were down 9%, Kenol’s were down 30%. [Today March 2007 – Kenol is 85 and Total 30]
- Commenting on Mobil oil exit and entry of Tamoil (of Libya) to Kenya, Nguer remarked that the sector was stable but that oil marketing was unique in Kenya and some multi –nationals could not understand this.
- On threats by Minister of Finance to fix oil prices, he said he did not see the country going back on its 1994 deregulation of the sector prices

Kengen
The surprise announcement last week that geothermal development company would be hived off from Kengen prompted a look back at the company’s pre-IPO prospectus. And sure enough in the future outlook for the company, the Kengen prospectus does mention the state will set up a geothermal development company to undertake high risk activities such as exploration and drilling. It will be financed by appropriations from parliament and will take over Olkaria from Kengen

Also that:
- Regulator (ERB?) will be empowered to set the price of fossil fuels bought by Kengen i.e. diesel. This is likely to affect independent power producers.
- New rural electrification authority. Any impact on KPLC?
- Kengen to bill KPLC at 2.36 not 1.76 per kWh which has become a hot button issue in this election year

All Kengen

What
All about the Kenya Electricity Generating Company (KENGEN) IPO through which it will transform to a public company that will be listed on the Nairobi Stock Exchange (NSE).

Opens: Monday March 20
Closes: Wednesday April 12
On offer: 659 million shares (par value 2.5sh) at 11.9 sh per share (minimum lot is 500 shares at 5,950 shillings)

How & Where to buy shares
All share buying now starts with the opening of a CDS account with any stockbroker, and after March 20, you can register and pay for your allocation of shares. In addition, several banks and credit institutions will even finance purchase of Kengen shares.

Over the next month, all their offices will be full of investors opening CDS accounts and placing orders for shares. Customer service for retail investors is marginal at best at most stockbrokers, but it will be even worse during the IPO period as overworked staff rush to beat the deadline.

However, I have a bias towards stockbrokers/investment banks, which enable online account management and trading. These include;

Dyer & Blair
Faida
Francis Drummond

Why buy?
Some KBW analysis of Kengen here.

Pro: Kengen is already profitable, still a monopoly, and energy sector shares are hot right now. E.g EA cables, KPLC.

Con: Have a single customer (KPLC), is a capital intensive company that can be affected by drought, will still be 70% government-owned & prone to interference (e.g. KPLC), lop sided IPO that favours employees, and past large IPO’s have taken many years for investors to achieve high returns e. g. KQ and Mumias.

Still, upside is good, but only as part of a balanced portfolio. I recommend an investment of not more than 1/3 of shares in Kengen, and everyday I caution people who are setting aside their entire savings/investments to buy Kengen shares to, in addition, seek value in other companies as well.

In the week since the Kengen IPO was announced, other companies have lost their share values as follows; Express -14.29%, Rea Vipingo -13.82%, Sasini -13.04%, Housing Finance -13.01%, Sameer Africa -12.94%, Diamond Trust -11.73%, National Bank -11.45%, Athi River Mining -10.27%, Uchumi -8.66%, Total -8.28%, Mumias -7.88%, and Kenya Airways -6.91%.

What Else?
Shares of the new Serena will be listed on the NSE staring tomorrow (March 15).