This time around: Kenya Stockbroker collapse, Report leaks, Credit Reference Live

Time for another this time around post which looks at stories that recur in the business environment

Mars Group Kenya: The an anti-corruption watchdog group is the wikileaks for Kenya, re-publishing hitherto top-secret government reports at their website.

Mars Group research and produce their own reports, but their archives contain a growing list of reports of corruption in Kenya that is worth checking out. This week they have reports done by PricewaterhouseCoopers for the government of Kenya on the collapse of Triton Oil Company and on the misuse of funds for Maize famine relief in 2008. Last month they also released the report on the sale of the Grand Regency hotel. The Triton report shows that:
- At Kenya pipeline company (KPC) the oil collateral agreement was poorly drafted and ambiguous. Also managers had great discretion, procedures were lax /there was inter-departmental conflict (oil was released without verification) and documentation was poor (since documents would get lost at KPC, financers would exchange documents then present them all to KPC at once)
- Triton was aggressive with financing and would arrange for shipment before they got financing. They were stuck at some point and KCB entered into a finance agreement for goods when the ship was already in Kenya
- Bad banking Ecobank have no claim against KPC, while the Fortis claim against Triton is suspect. Also Glencore had stopped financing Triton in June 2008 as they were suspicious about KPC fuel stock claims
- KCB and other financiers did not cooperate with the PWC investigators
- The debt owed to KCB may be substantially lower than KCB claims and they have provided little information to assist in verification of the Triton debt.
- Kenya anti-corruption commission should investigate further staff named in the report

GoK Bond The Government of Kenya is going to raise Kshs 14.5 billion for infrastructure via a third infrastructure bond. How does that compare to a similar bond a year ago?
2009: Kshs 18 billion ($240 million), interest rate 12.5%, minimum bid Kshs 100,000 (~$1,250), maturity 8 years, principal repaid in 2015, 2017, 2021. Funds used for road, geothermal, water projects
2010: Kshs 14.5 billion ($188 million), interest rate 9.75% tax exempt, minimum Kshs 100,000, maturity 8 years, principal repaid in 2016, 2018. Funds used for water, sewer, irrigation, road, and geothermal projects
The 2009 bond was over-subscribed and the only notable difference in 2010 is the lower interest rate offered. The CBK has decided the high cost of loans offered by commercial banks and perhaps by offering the same banks a lower return on government bonds; they will offer more competitive borrowing rates to the public

Credit Reference: February has also seen the licensing of Kenya’s first credit reference bureau – CRB Africa by the bank regulator, the Central Bank of Kenya. Following this, commercial banks have apparently commenced sharing information with the agency. Some of the rules governing sharing of data were highlighted when the credit reference rules were gazetted almost two years ago. These include
- Bureaus may share info only with a customers’ permission (which happens when you sign for a loan)
- They may only share information for business decision making (evaluate credit prospects) and must keep track of all information they share
- Customers are entitled to one free report a year, and within 30 days of a negative referral.
- If a customer complains, and bureau not able to complete an investigation of disputed information within a month, information will be deleted as request by customer
So what information will they compile?
- For individuals: Name Citizenship ID / PIN Postal/ Telephone Credit history (as reported) Court judgments (as reported) Referees
- For companies: Company registration details postal/physical/telephone Credit history (as reported), Court judgments (as reported), Guarantees
Shareholdings/directorships

Stockbroker collapse: This month saw the placing of another stockbroker under statutory management – this time its Ngenye Kariuki Stockbrokers [Last year in March it was Discount stockbrokers that was placed under statutory management]

Despite strong defense from the Kenya Association of Stockbrokers & Investments Banks - KASIB who say the brokers problems were manageable and did not warrant the intervention of the authorities the broker was in a weak financial position.
A summary by Faida Investment Bank, based on the published un-audited results of Ngenye Kariuki showed this
Half year June 2008 versus 2009
June 08 income 35m, expenses, 21 million, pre-tax profit of 10 million
June 09 income 3 million, expenses 10, pre-tax loss of 11 million
Share capital of 50 million, capital reserves of 251 million (which many brokers draw from the sale price in 2006 of Francis Thuo stockbrokers) [and the same amount appears as an intangible asset) at June 2009, the broker had an overdraft position of 63 million and receivable of 127 million which KASIB is laying at the feet of Citibank for withholding funds from the 2008 Safaricom IPO that are owed to several stockbrokers.

KCB Dodges Triton Bullet?

Kenya Commercial Bank released their 2008 financial results over the weekend.

No. 1 but… KCB is now Kenya’s largest bank by bank assets and group assets, though Barclays still has a much larger book of loans and deposits, as well as higher profits.

Also with less than half the assets, Equity may be more profitable than KCB by 2010 if its exponential growth continues.

KCB assets were up 56% and profits 40%, with deposits up 28% and loans up 40% compared to 2007. 2008 was a balanced year for the bank actually performed quite well in Q4.

IPO Killer KCB has effectively delivered the final nail in the coffin of the Kenya Pipeline IPO by suing the corporation for almost $14 million of missing oil. The bank is also leading the case against Triton.

KCB beats expectations A January 2009 analysis by African Alliance pegged a Kshs. 2 billion hit to KCB profit and a pre-tax profit for the bank of Kshs. 2.2 billion - yet KCB managed to report a pre-tax profit of Kshs. 5.3 billion. AA also had an overweight recommendation with a price target of Kshs. 28.85 (at the time KCB was 21) and it looks very attractive at Kshs. 15.5 today.

Q4 watch In the September to December 2008 period deposits were up by 9% and loans by 4% - compared to Q1 loans which were up 4% and deposits 17%. KCB also built up quite a huge cash position with 39 billion (~$500 million) in bank placements at the end of the year.

2009 watch This year the bank has announced, a surprising decision to extend real estate finance to estate developers t the tune of Kshs 250 million (~$3.1 million each) and is also one of the few banks to continue offering personal loans in a very public way with media advertisements

More Nairobist analysis on KCB and KCB and Triton

Analyzing Kenya Pipeline

Pre-IPO Peek at KPC

Kenya Pipeline Company (KPC) is expected to be the next big privatization project to help plug the current Government of Kenya budget deficit. The IPO transaction adviser selection process is already underway for KPC and other state corporations

How much can one glean from audited accounts of the giant company? I got hold of a 2007 annual reports of the company – a rare big glossy booklet that mentions every project e.g. SAP, ISO, fibre optics, refurbishments in Western Kenya, Mombasa, Athi River, with lots of graph



KPC still mostly compares itself to other state corporations in terms of goals such as to raise capacity from 440,000 to 880,000 lire per hour by August 2008 - a massive project that later turned controversial and may have cost the last MD (Okungu) his job in January 2009.

Financials
- 2007 revenue of 8.8 billion shillings (~$117 million) (2007 was 8.45 billion and 2003 was 6.5 billion). 2007 Revenue comes from export services (4.3b) , local services (3.7b), and 748 million from kipevu storage fees
- Pre-tax profit of Kshs. 4.3 billion in 2007 (~$53 million)
- Earnings per share was 163 shillings [153 in 2006, 2003 was 29 shillings) – company’s shareholding is made up of 18 million ordinary shares of 20/= par each.
- Dividend paid out of 8.25 per share each year 2007 and 2006
- Cash of 4.5 billion (1.1 billion in 2003) of which 2.5 billion is in treasury securities (which they only started investments in 2005)
- Paid 2.2 billion in direct and indirect taxes and was recognized by Kenya Revenue Authority as a distinguished tax payer
- Total assets of 20.2 billion shillings (18.7 billion in 2006) –however fuel stocks of 13 billion shillings (384,509 cubic metres) that is owned by marketers is not include in their accounts. [2006 was 36 billion comprising 856,958 cubic metres]
2008 decline: summarized KPC financial accounts show revenue declined by 7% to Kshs. 8.2 billion and pre tax profit 54% down to Kshs. 2.6 billion in 2008

Auditors: Accounts audited by controller and auditor general, who hired Deloitte & Touche; who said the accounts were ok except to note that that 1.2 billion receivables (current assets) includes 348 million owed from an unnamed oil company that is the subject for a court case and for which no provisions have been made

Scandals: has been a cash cow for politicians for years with a high turnover of managing directors, manager and directors. Different parts of the report mention Kshs. 967 million pending in lawsuits, 404 million leasehold land unable to develop since it is gazetted forest land, 347 million from Oil Company, 314 million of obsolete spares, and Kshs. 221 million for a finance deal with Triple A that cost the previous MD (Ochuodho) his job. The company also provided Kshs. 382 million of services to National Oil Corp of Kenya (related company as they are both owned by the Government– do they pay all oil marketing fees?

Banking
Bank with NBK, CBA, Stanchart, Co-op. In 2007, they paid off all bank loans (EIB, Stanchart, and CBA) amounting to Kshs. 500 million in 2007, but are still stuck with the 221 million Triple A loan.
- KPC recently signed a syndicated loan of Kshs 8.2 billion with CFC-Stanbic, Barclays, CBA, Citibank, and KCB.

Exports:
- Exports 58% to Uganda, 155 Rwanda, DRC 14% Tanzania 6% Sudan 4% Burundi 3%
- strong shillings bad for export sales
-pricing structure – more expensive at Eldoret and Kisumu means that the company loses revenue if other countries e.g. Rwanda, Uganda remove their oil at Nakuru or Nairobi depots
- 50% of their revenue comes from fuel exports, and With oil being found in Uganda, Sudan, and possibly Congo, is the pipeline capable and adequate to transfer oil from central Africa to the coast at Mombasa?

Others & Non core activities
- will Construct an LPG plant with private sector investors (including Kenya pipeline refineries limited, and now-collapsed Triton) in Mombasa at a cost $50 million and one in Athi River at a cost of $13.5 million by Bharat of India
- Other income includes Kshs. 8 million in helicopter income, and also disposed of 120 million worth of helicopters in the year 2007
- 50 million donated to ministry of youth affairs
- 6 acres worth of land worth 30 million in Nairobi was donated for a street children rehabilitation center
- Spent 114 million in advertising (by a monopoly) and 35 million shillings in legal expenses
- Has shares in petroleum institute of east African and consolidated bank
- Successfully changed their pension from a defined benefit to a defined contribution scheme

Outlook:
- Slight financial dip in 2008 will probably be attributed to the post election disruptions
- Capital spending could be significant as they are extending the pipeline to Uganda (Eldoret to Kampala). Also the company already spends quite a bit in pipeline rehabilitation costs, and won't a complete new pipeline (though more expensive) be a better solution?
- Needs a stronger management team led by a strong MD – like Kengen’s Eddy Njoroge (someone with a legacy to protect who will shun the wheeler dealers) and a stronger board (not just the Energy ministers' cronies)
- Could be a good IPO buy i.e. a cash cow pre-tax profit margins of almost 50%

Other Opportunities
- Bank of Africa: branch managers, assistant branch managers, operations assistants’ recruitment@boakenya.com by 5/2
- Consolidated bank credit manager, administration manager, apply to the Head of HR 51133-00200 by 31/1
- Housing Finance senior relationship manager (mortgage finance), portfolio manager, legal officer, human.recources@housing.co.ke
Dyer & Blair sales agents, and for several hundred other weekly jobs visit Kenyan jobs blog

KCB and Triton

KCB has been rather silent on the Triton matter even as the company’s share price took a mini hit and its profitability outlook was downgraded in some circles.

The last release from their website was in reference to the launch of a Sustainability Report of the group. It’s not online yet, though it will be, an interesting report with lots of rarely disclosed facts on the bank, mostly their corporate social responsibility (CSR) activities, and will be repeated every two years.

in the report
KCB Brand - has a 75% corporate reputation, is the most popular financial brand, and the 4th most popular in Kenya (after Safaricom, Kenya airways and Coca-Cola) according to the Steadman Group.

Silence on Triton can be explained by KCB’s customer privacy guidelines - the bank assures customers of privacy though stringent procedures and guidelines and undertake responsibility for any breach of confidentiality that may arise

Impact of Triton policy on responsible lending requires that the KCB audit committee meets twice a month, credit committee also twice a month to discuss risk profile of bank, and the risk management committee meet quarterly or when required

Corruption & Triton: KCB has zero tolerance to corruption, has 110 ethics champions trained to combat corruption. Also in 2007 KCB exited from transparency international (TI) bribery index, it prohibit political contributions (direct or indirect) from bank funds, and is founder member of Ethical Business Group Kenya?. Report states that 2 staff were dismissed and 9 terminated.

Labour matters
- employees got an average of 39 hours of training a year
- Base salary is equal regardless of gender: for subordinates (male is Kshs. 36,057, female is Kshs. 33,984) clerical (m 58,434 f 63,600), section heads (m 85,770, f 87,684) managers (m 192,090, f 161,138)
- staff include managers (630 males to 287 females), most of whom are aged 30 – 50 years (492 m, 212 f)

Environmental
– all loan projects are required to obtain environmental (NEMA) certification
– KCB will strive to reduce water consumption (estimated at 191,000 cubic meters p.a) reduce energy consumption (5.782 million kwh, consume 312,000 litres of diesel which emitted 248,000 and 838 tons of carbon dioxide respectively)
– KCB will strive to recycle paper, scan documents – encourage customers to uptake e-services (use less paper), participate in tree planting and reforestation,

Empowerment of Kenyans
- loan base rate of 12%
- KCB has 71,000 e-customers (receive information by electronic means - which menas less paper consumed)
- Create wealth nationwide - branches can procure 33% of product in local areas, and KCB has 9 full branches in sparely populate areas
- provide agricultural loans (mavuno for tea farmers and brookside for dairy operators)
- in education sector, partner with AIESEC and the palmhouse foundation

Triton ends well? for KCB: The Triton matter may be a forgone conclusion if the Daily Nation article about an out of court settlement between Government of Kenya and its financiers (KCB, Fortis, Ecobank, Equatorial banks) is true - and that the government (i.e. taxpayers) may pay the financiers off to not go to court over their funds lost with Trition and teh Kenya Pipleince Corporation (KPC). The silence will mean that unsavory happenings at KPC will (maybe) not be exposed further, clearing the way (hopefully) for an IPO of the troubled company.

Mostly Safaricom: 2 days to IPO

Prospectus is out

but before that
- The Kenya Capital Investment Group has a nice post to guide Diaspora investors considering the Nairobi Stock Exchange (NSE) for the first time
- Which broker to use for Safaricom? Check out the Business daily on Friday March 28 for a guide to stockbrokers – the good, the bad, and the rogue. Afrika investment bank is the newest (previously was Ashbhu Securities) I-bank now.
– beyond Safaricom I Co-op bank announces plans to list, which is a great overdue addition to the NSE
– beyond Safaricom II and if the Finance Minister is by chance short in his bid to raise money from the privatization process, I’ve always maintained that he should go after another prime company; Kenya Pipeline - with pre-tax profits of Kshs. 4 billion (and EPS of 163), ripe for a split and a listing
– loans for shares: Joining equity bank in offering 100% financing is family bank, oriental and national bank so far. I may change my stance on loans for shares if I see a bank with a clear policy of loan prepayment, in case say 80% of the cash is not utilized – so an investor is not left with a loan to squander, instead of shares to sell
- Investors will be able to use pesa point ATM’s to pay for IPO shares
- Housing finance signing with Safaricom’s M-Pesa for money transfer last week shows how traditional companies like Western Union have been overtaken by changes in the banking industry.
– Writing in the Financial Standard (Tuesday) Jonathan Somen, CEO of Access Kenya (the last ICT company to be listed) calls Safaricom a good short term buy as they have performed prior to the arrival of France’s Orange (formerly Telkom Kenya) and India’s Essar (through Econet)
– Africa Alliance has opened an IPO center in Nairobi - open from 7am to 7 pm
– DYK: You have to apply to use the Kenya flag on any product? Safaricom have received permission to use it on scratch cards, the Tea Board of Kenya to display it on tea packets, and Nike International (through their lawyers) to sell it on hooded jackets!
- Pay for mail; CDS will for the first time require IPO applicants to pay Kshs. 30 for mailing each confirmed allocation.

Safaricom IPO and other opportunities

Safaricom IPO: The calendar is on for the sale of 25% of Safaricom shares to the public and the government of Kenya (who are yielding part of their 60% ownership) have advertised for a lead transaction advisor, lead sponsoring broker, (4) co-sponsoring brokers, legal advisor, reporting accountant, PR firm, advertising consultant, receiving bank, and a share registrar for the IPO. Details at investmentsecretary@treasury.co.ke D/L is 16 July. There have been complaints about firms offering such work for free to gain prestige

Safaricom call center. The company is also seeking to outsource customer service for prepaid subscribers to an external firm (Current traffic ranges from 10,000 - 20,000 calls per day). Details from dngobia@safaricom.co.ke and D/L is 11/7

other happenings
Pipeline finance: The Kenya Pipeline Company seeking financing for the Nairobi-Mombasa and Nairobi-Western Kenya (Nakuru, Kisumu, Eldoret) segments amounting to Kshs. 7.5 billion ($107) million over the next 2 years. D/L is 31/7

Housing: The National Housing Corporation offering 890 3-bedroom flats in Langata phase II ranging from 3.9 to 4.1 million each ($55,000 - $58,000). The corporation is also selling 38 maisonettes in Kiambu phase ii at between 3.2 and 3.4 million shillings.

Barclays
- Good : The bank has hired external debt collection agents – outsourcing a time consuming tedious function.
- Not good : The only thing worse then taking a personal loan to buy shares is using a credit card to buy shares. An investor is already in the hole, and needs his shares return 30% a year, just to break even. Using a debit card may be ok though, but factor in the card fees.

Education
- New Aga Khan University campus to be set up in Nairobi
- Moi University to soon offer a masters degree in banking & finance

Media
- Desperate Housewives start next month on KTN. Hope they don’t butcher the show like they did with the Soprano’s (heavily edited, shown at 11 PM on Sunday night and often out of sequence)
- The Naiorbi Nairobi Star (new daily newspaper from KISS FM team ) hit the streets today with a lot of fanfare, but does it have legs?

Kutwa Tuesday (June 12)

IPO Wanted


To plug a hole in the budget

Kenya Pipeline is in the news again – this time suing the Kenya Times group. The company has an enviable profitable track record for a Parastatal which makes it a ripe prime candidate for an IPO but mostly gets saddled with bad news for all the wrong reasons and controversial. A dose of public shareholding will lead to greater transparency & accountability and less political football at the company which is more profitable than Kengen (It earned 3.9 billion (pre tax) in June 2006, up from 2.4 billion in June 2005 (Kengen reported 3.8 and 1.8 billion pre tax in those years)

Kenya Re earnings
Point brought out by MainaT’s comment - what was Kenya Re’s true profit in 2005?

Post TED: Kenyan wildlife
The Economist analyses hippos and cheetahs

opportunities

Jobs
- Director of internal audit at East African development bank. Apply through KPMG at esd@kpmg.co.ug by 20/6
- Investment Climate Facility for Africa: Finance Director, Director, Strategic Knowledge, Projects Director, Director, and Legal/Regulatory Affairs. Apply through PWC at recruit@tz.pwc.com by 15/6
- Project manager at inmobia. Apply to job@inmobia.com by 12/6
- Research assistants at kemri-wellcome. Apply online
- Management trainees at Kenya wildlife services. D/L is 22/6
- Chief internal auditor at Kenya women’s finance trust. (D/L is 18/6)
- Nielsen: IT system manager, research executives. Apply to hr@acnielsen.co.ke by 16/6
- Safaricom: senior manager financial systems & analysis, site acquisition officer, senior learning & development officer, senior buyers (communication, technology - 3 positions). Apply to hr@safaricom.co.ke by 15/6
- Group head of ICT at UAP insurance (D/L is 21/6)
- urgent cargo: credit controller, sales executives, HR & admin officer. Jobs@urgentcargo.com by 22/6
- wilderness lodges (owners of keekorok) head of marketing, internal auditor. Apply to recruit@adeptsystems.co.ke by 22/6

Awards
- Africa women entrepreneurs (from Ethiopia, Kenya, Rwanda, Tanzania Uganda) get voices heard and be recognized. Nominations to be submitted to the Cineartsafrika website by 29/6
- East African community students essay competition. D/L is 19/7

Partnerships
- Become a Citi hoppa franchisee. Cost at 50,000 per bus and get details at info@citihoppa.com
- Become a Keringet water distributor. Details at keringet@water.co.ke
- Get a mobile phone kiosk Sasanet. Details at sales@sasanet.co.ke

Vote The electoral commission of Kenya has reopened voter registration from June 11 to July 10 for Kenyans wishing to vote in the elections expected in December 2007.

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