Kenya Airways: Still in The Red

This morning Kenya Airways (KQ) released their half-year results. Some highlights from the investor briefing.  

• Half year Kenya Airways revenue was Kshs 56.7 billion same as last year. 90% is from passenger traffic, and  60% of their business is in Africa.

• Kenya's largest increase in tourists was in 2011, and the numbers dropped in 2012 & 13 with the largest decrease was in 2014, just as KQ added great capacity. JKIA passenger numbers have been flat for the last three years and for the last three months, they have had to adjust their schedule from 24 to 18 hours as the runway is being repaired.

• Half of airline industry profit is in North America, where strong capacity, consolidation, combined with ancillary revenue and lower fuel costs has had a major impact.  The Middle East has low yield compared to investment, and Africa has 3% of global demand. 

• Shareholder equity has gone from Kshs -6 billion last September, to Kshs -33 billion this year and KQ is talking to the CMA on how to reverse this.   

• KQ has a turnaround plan, developed with Mckinsey, with 24 initiatives worth a potential $200M, that starts this month.

• Despite fuel cost coming down from Kshs 21 billion to Kshs, 13 billion, the half year loss went from Kshs 10.5 billion to 11.9 billion 

Some other numbers

• Revenue per available seat decreased from 6.2 to 6.14

• Cabin factor was up from 64% to 68%

• Carried 2.14 million passengersm up from 2.10 million

• Cargo tons were 35,405 down from 37,255

• On time performance was 75% (down from 77%)

• Finance cost was 3.4 billion, up from 1.5 billion

The new chairman of the Kenya Airways board, Dennis Awori, thanked the government, financiers, and suppliers for their support for the airline. CEO Mbuvi Ngunze said that the senate enquiry is ongoing and on Monday, senators will, for the first time, visit the airline.

Muranga’s Shillingi kwa Shillingi

Kenyan counties are expected to raise funds for some of their activities to and this is crucial as many counties will not able to fund their operations and programs with the funds allocated to them by the national government. 

Muranga County Government has an interesting vehicle called Shillingi kwa Shillingi (translated as shilling by shilling) through which they intend to mobilize resources from Murang'a residents (and the Murang'a diaspora)  by targeting a total of 100,000 people who will save an average amount of Kshs 3,000 ($35) per month towards a goal of raising Ksh3.6 billion ($42 million) a year 

The invitation states that the ultimate objective is to match every shilling received from national government with an equal shilling contributed by the people of Murang'a through savings, hence the "Shillingi kwa Shillingi" concept ... (and the) savings will be used in development projects such as real estate, property development, commercial power generation, agro-processing, trading and any other social and economically viable projects in Muranga and beyond.

There have been newspaper and TV ads for the Shillingi program which have been careful to sidestep a caution by the Capital Markets Authority (CMA) on unlicensed investment solicitations to the public, by stating that the Shillingi contributors are members who are saving (the more they save, the more shares they get), but they are not investors who expect a dividend.

This is a novel undertaking spearheaded by the Murang'a Governor, and one which more counties should emulate once they see how it works.  The investments will be overseen by a respected audit firm, Deloitte, who have been appointed as project managers and Safaricom Business are the ICT partner who will handle SMS registration and M-Pesa collections, but savings payments can also be made through Equity, Cooperative and Jamii Bora banks.

Why Unit Trusts are better than Bank Savings Accounts

A guest post by @smartyannette 

We all desire to save and/or invest at some point in our lives but we fail to accumulate the little extra we have or we lack adequate financial know how to do so. Obviously, we are more likely to save if we have an investment goal and that's why I think Unit trusts are a much better deal compared to saving accounts in banks.

Unit trusts are professionally managed collective investment schemes where investors pool their money. The accumulated funds are then invested in a portfolio of assets (stocks, bonds, bills, etc.) and the individual investors gain in proportion of their investment, if the value of the underlying assets increases.

Common Unit trusts are Money Market funds that invests in short term securities like Treasury bills, Equity funds that invest in a variety of stocks, Bond funds for bonds and finally Balanced funds that combines all these asset classes. The money market funds are considered low-risk and tend to have lower minimum balances. The others are mainly long term investment options. Gains from Unit Trusts range from about 8% to 16% per annum based on level of risk. In comparison, Commercial banks offer about 4% per annum and only fixed deposit accounts compete favorably, with some over 10%.

You should probably choose Unit Trusts over savings accounts because the former offer better rates of return. Also, If you desire to invest in the securities market, but want to avoid the risk of investing in one company then you may consider Unit trusts as a safer and more stable option. Unit trusts also enable one to invest in a variety of securities at once and get periodic interest unlike some banks that only award interest at year end. 

Investment Banks are specialized unlike commercial banks and you are more likely to easily access financial information and advice as well as brokerage services from the former. The recently-ended Capital Markets Authority open day expo in Nairobi showcased a variety of firms that offer their customers the option to invest in Unit Trusts.  They Include Old Mutual, Genghis Capital, Stanbic Investments, Dyer and Blair investment bank, Britam, Apex Capital, Apollo and CIC. The minimum balances are as low as Kshs. 500 at Genghis Capital and Kshs. 100,000 (~$1,200) for some of the other firms.

Most firms give a capital guarantee, meaning that the principal you put in is secure, but it is always safe to check. Management fees and initial fees also vary depending on the type of fund, and while some companies charge it based on the interest earned, others may charge it on principal. Some firms also allow you to access your money upon request via MPesa while others require you to wait for 3 business days for payments to clear. In comparison, money in a savings account is only an ATM visit away so chances of misspending are high.

Snooze and Lose Your Investments

A few years ago, the Government proposed a plan to utilize unclaimed dividends for first proposed - targeting  these dormant funds and have them added to an existing (CMA) investor compensation fund

Shareholders of listed companies duly approved these changes into their company rules, with a bit of debate at more than a few companies annual general meetings (see Diamond Trust 2008 AGM)

Now there are daily ads in the papers urging shareholders to step forward and claim their  past dividends before they are transferred, not to the CMA investor compensation fund to a (Government) Unclaimed Financial Assets Authority.

Loose Notes at Blancos Restaurant

It gets even more serious with the Barclays Bank of Kenya this wee which also added that the new rule would rope in, not just dividends unclaimed for more than 3 years, but also 

- Bankers cheques & foreign drafts not presented for payment for over 2 years.

- Deposits held in bank accounts that have remained dormant for over 5 years.

- Safe deposit boxes that haven’t paid rental fees for more than 2 years.

This is an unfortunate adaptation of a well intentioned plan and It seems there will be no recourse for shareholders who have been incommunicado for what could be a simple reason of changing a post office box address. (Some people also abandon bank accounts, leaving the funds to run out in lieu of formally closing the account and incurring a (frivolous) bank account closure charge).

There are also dormant 'investor' funds frozen in bank accounts opened during the the pyramid scheme era that preceded the last election, but the bulk of the idle funds could be due to cases of people who died without wills (and the court are trying to sort out their estates) or other undetermined court cases in which none of the parties can access the bank account funds. 

Will the rule also extend to cooperative societies (Co-Op's), the contents of the safe deposit boxes, land companies, and private companies? 

Edit: Via Mark Mwangi, here's a link to the  Unclaimed Financial Assets Bill.

Shares Portfolio November 2011

Comparing changes to three months ago and a year ago, investor confidence has dipped further, and the Kenya shilling is even weaker, having fallen past the Kshs. 100/$ to the dollar before last week's drastic rate hike by the Central Bank brought the rate back to to 95, but which also pushed most commercial banks loan rates to 25%

The Stable
Barclays Bank ↓
Bralirwa Breweries (Rwanda) ↑
British-American Investments (Britak) ↓
Diamond Trust Bank ↓
East African Breweries (EABL) ↓
Kenya Airways (KQ) ↓
Kenya Commercial Bank (KCB) ↓
Kenya Oil Company (Kenol) ↓
Scangroup ↓
Stanbic (Uganda) ↔
Uchumi Supermarkets ↓

Review: The Portfolio is down 2% in the last three months as is the NSE 20 Share Index, which is also down 2%.
- Best performer: Bralirwa 24% (only share that has appreciated in this Qquarter)
- Worst performer: Britak -38%, Kenya Airways -25%
- In: Britak
- Out: None
- Increase: KCB, KQ
- Decrease: None

Other
Splits: None
Bonus: None
Dividends: Interim from Kenol, and Barclays, and it was pleasant to be able to encash a Bralirwa Rwanda dividend cheque over the counter at KCB in Nairobi - unlike with Stanbic (UG) Uganda, that takes about a month clearing and the bank charges can take a huge chunk out.

Events:
- Safaricom shocked with a 47% drop in half year profits to September 2011.
- Kenya Airways got shareholder approval for a rights issue to finance fleet expansion in the next few months (Said to be at Kshs 21/= which is about where the share is now.
- Tanzania has the Precision Air IPO and Tanzania Breweries sale but the mixed signals - welcoming/shutting out East Africans, and not getting proper approval from Kenya’s capital markets means there's likely to be little cross-border participation once results are announced.

Data: The NSE now has a shares app for Android mobile phones and signed a partnership creating two new FTSE NSE indices.

Shares Portfolio August 2011

Comparing changes to three months ago and since then, investor confidence has dipped following rising food & fuel prices, power rationing and a sliding shilling.

The Stable

Barclays Bank ↓
Bralirwa Breweries (Rwanda) ↑
British-American Investments (Britak) ↔
Diamond Trust Bank ↓
East African Breweries (EABL) ↓
Kenya Airways ↓
Kenya Commercial Bank (KCB) ↓
Kenya Oil Company (Kenol) ↑
Scangroup ↓
Stanbic (Uganda) ↓
Uchumi Supermarkets ↓

Review: The Portfolio is down 5% in the last three months while the NSE 20 Share Index is down 12%
- Best performer: Bralirwa 33% (this Q), then Kenol 22%
- Worst performer: Uchumi -39%, Diamond Trust -26%
- In: Britak, Safaricom
- Out: None
- Increase: None
- Decrease: None

Other:
Splits: Barclays
Bonus: Diamond Trust , Scangroup, and Stanbic Uganda
Dividend: KCB, Diamond Trust, Bralirwa, Kenol Scangroup, Stanbic
Events:
- Uchumi re-listed after five years of suspension.
- Took on the new IPO from Britak IPO (results on August 23), but passed on other new listings from Transcentury and Bank of Kigali. Meanwhile there are no privatizations on the table from the Government of Kenya
- NSE companies are making efforts to clean up their shareholder registers, with a view to applying dividends that have been unclaimed for several years to their reserves, otherwise they will have to be surrendered to the Government

Data: The NSE has stopped sharing free price lists, which now makes it harder to access daily market data. Meanwhile the CDSC has stepped up with investor awareness, and you now get a SMS notification of trades (shares sold/bought)

Real Estate Moment: Golf Resorts, REIT's & Collapsing Buildings

Much has happened since the last real estate post and there is a lot of construction in Nairobi with towering cranes all around in many directions. Here's an update of what's in, and what’s out in the real estate sector.

In
Cheap Cement: In July 2009, a 50kg bag of Bamburi cement at Kshs. 780 (~$10), and today it is about $8 thanks to new entrants in the competitive cement sector.

How to profit from real estate: Is a story by MP Cyrus Jirongo who has a colorful history, but writes about his real estate success and says it was not due to strong political links in the 1990’s.

Golf Estates: The latest is Sergoit Resort in Eldoret town . Others are Green Park, Thika Greens, Tatu and Vipingo Ridge.

Hotels: The East African newspaper has an article this week which notes that there are at least 10 new hotels in Nairobi are planned, which will add about 2,500 rooms to the City.

Luxury Apartments: Most vivid is the English Point Marina apartments in Mombasa that will cost above Kshs. 50 million (~$555,000). They have been running ads in a few newspapers (but some of which need to be put through a spell check)

Investment Groups: The Kenya Finance Minister's Budget speech in early June, proposed recognition to real estate investment trusts (REIT's) as an investment class under the capital markets act. Rules for REIT's include membership must be at least 25 people, no one member shall own more than 12.5%, and dividends will be taxed at 5%.

Universities: University campuses now occupy or own many buildings in Nairobi and other town - and when Standard Chartered Bank moved out of downtown Nairobi earlier this year, their building was sold and is expected to be leased to a University campus.

Social Media: @Kenarchitect (of the Architecture Kenya website) is one interesting person to follow on twitter, and here's a re-cap of observations on real estate happenings from around Nairobi in the last month:

- Watching (Special Programs Minister) Esther Murugi on @citizentvkenya saying that they've given IDPs Kshs 35k ($400) to rebuild their houses. What kind of house can you build with 35k?
- The more we entertain the myth of rural richness, the more we delay in getting the solutions for the city - A case for rural urban migration
- Kenya needs 410 houses daily. I have been supervising 350 houses for the last 2 years. 144 will be ready by Dec. Its a tall order.
- Tena estate sewage crisis, its too serious. NWSC must do something about it.
- Believe it or not, these rental houses in Ruaraka are way cheaper than those mud/paper walled rooms in Kibera. http://twitpic.com/57e9lr
- Bill to Tame Rogue Contractors http://wp.me/pUg5Q-pf
- Who owns Hotel Boulevard? With better decor and good service, they will give Norfolk a run 4 their money. http://twitpic.com/58omyk
- Architecture of Kiambu. 200 by 200 mm columns. Four floors. No slabs. But the building will not collapse....... http://twitpic.com/59ye50
- Containers are quickly gaining popularity as the new form of construction. Lets wait and see what the future has http://twitpic.com/5akxpm
- Would you live in a ten-storey apartment block? Many of these are coming up in Pangani. http://twitpic.com/5awxd3
- Winners Chapel on Mombasa Rd, will be the largest auditorium in Kenya with capacity of 30k. Crowd control?????? http://twitpic.com/5ax3nd I cant stop tweeting about this church set to be Kenya's largest auditorium. Its capacity rivals Nyayo Stadium. http://twitpic.com/5eph3n
- Kenyans rarely ever consult architects. The thinking is that we are expensive consultants. NCC does the approvals and enforcement. But corrupt inspectors use the inspection exercise as a money collecting scheme.....
- There were people between the slabs. Check the other photo, someone being pulled from under a slab. http://twitpic.com/5bj1gr
- Karen is rapidly shifting in2 a half acre neighborhood. Karengata seems to have given up the control fight. http://twitpic.com/5d6ytm
- #ChineseContractor, how do you do these massive retaining using blocks without reinforcement? #NewTechnology. http://twitpic.com/5hlbzk
- Wall clad at Rahimtulla Towers started falling off, they had to remove it all. Ugly spikes remain. #PoorDetails http://twitpic.com/5hmrjs It was a case of poor detailing an fixing by the architect and contractor. The tiles were falling and could have hurt people.
- Swimming in this cantilevered pool at Sankara is like displaying your 'items' to the street below. Would you? http://twitpic.com/5i21q7

Out

A building next to Nakumatt Wendani (via SavvyKenya)

Building Standards: There have been a few building collapses in the last few months, which has been followed by public complaints and Government promises of stern action to be taken including demolition of sub-standard or un-safe buildings. This column in the Standard points to process flaws in the building industry, noting;

It is not a secret the so-called site engineers and contractors shown on site boards planted outside upcoming buildings are mere decoys. The actual ‘contractors’ are some shady and opportunistic characters that promise to cheaply put up the floors required in two months and claim to know their way around City Hall

To get things done, they file different sketch plans and specifications with City Hall, and claim they can compromise on costs and materials without affecting safety and durability. That is why there are no lifts in all five-storey-plus buildings in Eastlands.

Farm land: Farm land is losing out to housing in prime agricultural parts of Central and Rift Valley. However, he's an opportunity from (fellow blogger) MainaT - land for sale- 145 acres, 2 kilometres from Namanga at Ksh100,000 ($1,110) per acre that is suitable for dairy or wheat farming or speculation.

Cinema Halls: Like dry cleaners, repair shops, and cyber cafes, another business whose time seems to be passing is Cinema halls who have been struggling with low attendance and high prices (~Kshs 500) relative to bootleg DVD’s of new movies that cost Kshs 50 (~$0.55). (Read Biko Zulu’s article lamenting the end of cinema going era)

A couple of Nairobi movie halls converted to churches and meeting halls, and Silverbird Theatres went out of business a few months ago, leaving one main movie chain - Fox E.A. However, there are some investors who believe there is still life in movie theatres and the former Silverbird halls are currently being re-opened and screening new movies.

Tax benefits : In reviewing ways to bridge Kenya's budget deficit, there have been quite a few suggestions to re-introducing a capital gains tax in the country, which would also touch on real estate. Right now the state collects a stamp duty based on the value of property (4% for urban, 2% for rural) at the time property is transferred.

Derivatives in East Africa

On Monday May 16, Strathmore University invited Eduardo Schwartz a UCLA Professor and world-renowned lecturer, advisor, expert and author to give a talk on derivatives.

Introducing the talk, Strathmore Director Jim McFie talked of the plan for Strathmore to be at the academic forefront for learning on derivatives in Kenya, which they are doing with the Global Board of Trade (GBOT) – and that for Kenya to compete with Mauritius as a financial centre, derivatives markets will have to be established in Kenya.

McFie also mentioned a tendency for Kenyan parent to push their children into pre-formed careers at an early age, which was wrong, as he noted that Prof. Schwartz trained and started working as an engineer, before he branched into financial markets.

Prof. Schwartz was giving his first talk in Africa on the subject and chose to give a Derivatives 101 talk, even as he knew there were investment bankers, and officials from the Treasury and Nairobi Stock Exchange present. He observed that it would be difficult to set up such markets given the economic challenges here, but that ultimately, development of efficient market necessary for economic development

He noted:
- You can have derivative on any variable that can be measured without discussion between the parties - e.g. rainfall, presidential elections, sports.
- Popularity? Interest rate contracts are the biggest (390 trillion) followed by credit default swaps (which had rapid growth from 2006 ), then foreign exchange contracts, commodities and finally equity-linked contracts, in that order.
- In any Wall Street Journal, you get a quick reading of all the major forwards e.g. quotes for the UK pound - 1, 3, and 6 months forward, and futures prices of metal & petroleum (gold, silver), agriculture (wheat corn orange juice, pork bellies, rice) interest rates.
- Some arguments in favor for hedging: Companies can focus on main business and take steps to minimize market risks such as interest rates, by hedging, which also minimizes the probability for financial distress.
- Arguments against /dangers of hedging? Shareholders are well diversified and can make their own decisions, it may increase risk to hedge when competitors do not (Southwest Air), and it is possible to take large positions with very little money (traders can change from hedgers to speculators)
- You can get more reading of alocal perspective on derivatives here

While he was said he was shocked that there no forward market in foreign exchange, in Kenya, there are forward markets for currencies, and for some commodities like flowers and fuel, which are done in private arrangements with partners, buyers, and customers, but mainly through large banks. They are not exchangeable, and there is no capital markets mechanism now for this.

(via airliners.net)

The most memorable one was Kenya Airways fuel hedging which they have employed for a number of years during rising fuel prices, but which resulted in a loss of Kshs 5.6 billion (~72 million) in 2009 (more)

With time there could be a few more to deal with gaps such as the current situation where farmers are hoarding maize harvests to draw the government out into paying more for the crop.

Shares Portfolio May 2011

Enjoying the fruits of some good 2010 performance in an uncertain 2011

Comparing share performance to three months and a year ago.

The Stable
Barclays Bank
Bralirwa Breweries (Rwanda) ↑
Diamond Trust Bank ↑
East African Breweries (EABL) ↑
Kenya Airways ↓
Kenya Commercial Bank (KCB) ↑
Kenya Oil Company (Kenol) ↓
Scangroup ↔
Stanbic (Uganda) ↑
Uchumi Supermarkets ↔

Review:
- Best performer: Bralirwa 11% (this Q), then East African Breweries 10%
- Worst performer: Kenol (-4%)
- In: Barclays
- Out: Safaricom
- Increase: Kenya Airways
- Decrease: None
- Performance: The Portfolio is down 1% in the last three months while the NSE 20 Share Index is down 7%
- Uchumi, which is out of receivership, has finally got the green light from the CMA to re-list at the Nairobi Stock Exchange, though the date and conditions of re-listing have not been specified.
- Safaricom’s 2010 results which will be released on May 18, are widely expected to show a drop in revenue and profit owing to the price wars in the mobile sector.
- Kenol resumed its battle the Ministry of Energy after a quiet period as motorists grappled with an unexpected shortage of petrol (This inspired an innovative site called Find Fuel . The Kenol AGM was live streamed and can be found on YouTube.

- Stanbic Uganda had reduced profits owing to bad loans combined with staff & IT expense increases.

Events & Outlook:
Looking forward to
- Dividend payments from Diamond Trust, KCB, Scangroup, Stanbic (Uganda), Kenol
- Bonus shares from Diamond Trust (1:5), Scangroup (1:5), and Stanbic Uganda (1:1)
- New share listings: There's been no word yet from Transcentury and Britak. During the quarter, CFC-Stanbic spun off their insurance arm – CFC Insurance which is now listed on the stock exchange, and will soon to be joined at the NSE by CIC Insurance.

- Why list?: The newspapers, this week had advertisements from the Capital Markets Authority (CMA) highlighting tax and other benefits of listing shares or raising capital in Kenya. These include;

Newly listed companies will enjoy reduced corporates taxes if;
(i) They list 20% of their shares, they will pay 27% income tax for the next three (3) years on profits (while other corporates pay 30%).
(ii) List 30% and pay 25% tax for next 5 years on profits.
(iii) List 40% and pay 20% tax for next 5 years on profits.

Tax exemptions;
- A tax amnesty on omitted past income
- Dividend taxes paid to venture capital firms
- Income to employee share option programs (ESOP’s)
- Interest income on long term infrastructure bonds

Also all East African nationals are treated as ‘locals’, not foreign investors in allocation of IPO shares and get (lower) withholding tax on their dividends. These and other tax deductible expenses including payments for credit-rating, listing & issuance costs, and some exemptions from stamp duty, can be found at the CMA site.

Real Estate Moment

Homes Expo: There was also another real estate expo at Sarit Centre last week - and some of the price ranges observed included

- Two bedroom apartments in kahawa are Kshs 5 - 6M
- 3 bedroom in kileleshwa/kilimani Kshs 16 - 17M ($200,000)
- 3 br Athi River are Kshs 5 – 7 million ($70,000 - $90,000)

Other property prices of interest seen there, and also away from the expo include
- Tatu City and other ongoing developments like Migaa and Thika Greens which are modern estate communities that encompass shopping malls, schools, community centres, club house, sporting facilities/golf course, medical centres etc.
- From Regent - twelve (12) units of 2-br flats in Umoja for Kshs 16 million ($200,000)
- New office space in the Nairobi area ranges from Kshs 10,000 to 15,000 per square foot - and at Morningside it's 12,000 per sq foot ($150/sq.ft)
- In the newspapers was a 9-storey building for sale, which is located in the central business district of Nairobi with 99 year lease, is fully leased, and brings in annual income of Kshs 20 million ($250,000)
- From Kenya Valuers are some of the priciest real estate prices seen including; an acre of land in Kilimani for sale at Kshs 180M ($2.25 million) and another at Kshs 225M ($2.8 million), a 4=br house in Muthaiga for Kshs 150M, a 6-Br in Windsor for Kshs 180M, and a 5-br in Runda that rents for $7k/month.

Mortgage report: Was released by the World bank and Kenya's Central Bank - and it showed that KCB and Housing Finance are the leading banks in the sector with about 4,000 mortgages worth Kshs. 17 billion ($212 million) each . Barclays have 742, CBA 238, Prime 651 and First Community with 157 – which presumably offers only sharia complaint products. Mortgages rates average at 14% up from 12.5% in 2006 - and there were 6,000 new mortgages in 2009 up from 1200 in 2006.

Developers Club: KCB Kenya’s largest bank and leading mortgage company has a developers club for local developers and held a session this week in Nairobi.

Some Highlights
- Mumo Musuva, an architect with Planning Systems talked about this being a very exciting time for Nairobi, currently ranked No. 102 in the large cities of the world with a population of 4 million and which is projected to become No. 73 with a population of 8 million - and with 60% of the country population below the age of 30.
- He’s also lead developer with Tatu City and they are going to use digital management & GIS, detect when someone leaves a tap open, cut off the utilities of tenant who don’t pay, collect rates and deploy that to infrastructure etc.
- He lamented the low quality of most real estate buildings & projects in Nairobi as developers have been chasing quick returns (ROI) – these will change to world standards including environmental designs as the requirements of working with large tenants are evolving.
- The definition of real estate is changing from owing a house or building to it being seen as a commodity - and this is evidenced with the current investment for speculative purposes and eventual roll-out of REIT’s.
- There are massive opportunities for developers in Rwanda, Uganda, south Sudan which KCB can finance.
- They also launched a new KCB property guide will feature developers. The bank also expanded its mortgage offerings (available at their 168 branches), to loans for Kenyans in the Diaspora at 7% in foreign currency as well plot & purchase construction loan - unlike with previous arrangement where one had to pay off a plot loan before commencing construction
- The developers forum which has 300 arranges fact finding trips abroad to China, and possibly South Africa, & Brazil - and Joe Mungai of Tamarind Properties advised any developers to take such trips before embarking on any large projects to learn concepts like construction for low end housing, waste treatment & gated communities.

REIT’s: The Capital Market's Authority (CMA) is undertaking a review of the Real Estate Investment Trust (REIT regulations ) & rules that formulated they in 2009. They will get feedback from developers and real estate institutions on product demand, tax rules. D/L is March 25 2011

Getting Local Funding for ICTs in Kenya

Local funding for ICT's is the genesis of a Report on ICT (PDF) released by Kenya’s Capital Markets Authority. It was funded by the Rockefeller Foundation and drawn by Strategic Business Advisors (SBA).

The CMA had set up rules for Venture Capital firms, but there has been little uptake despite the offer of 10-year tax holiday – and VC firms operate in the East Africa region, but many are based in Mauritius and other countries. In seeking other ways of enabling ICT's to obtain local funding in the region, a taskforce was setup (chaired by Richard Bell of Wananchi) – and which comprised 25 people drawn from the government, technology, venture capital, private investment - and featured input from Kenya, Uganda, Rwanda, South Africa and Tanzania.

One of the solutions considered was impact investing which the Rockefeller Foundation has championed as a new asset class that will draw the private sector into making socio-economic investments that solve age old problems.

Some Findings:
- ICT's do not attract local funding in East Africa and while it is easier for large Telco’s to get money, it is early stage firms who require funding the most ($10,000 - $150,000) - this is where most mobile software development firms fall owing to the low barriers to entry.
- Most ICT companies are Small & Medium Enterprises (SME's) - who face the same challenges as other SME’s – including low collateral, skills, capital etc.
- Investors also face challenges such as difficulty doing due diligence, lack of sector information, red tape (it took 8 years to set up one particular VC firm)- and while there are angel investors, there is no angel investor network

How & why to get local funding into ICT
- Education and policy reforms with insurance, financial, and other investor groups in regards to the ICT sector
- Regulatory changes; easing of regulations for ICT firms to raise funding locally, and encourage more IPO’s. Many firms invest in Asia because it gives clear exit strategy through IPO’s
- Support technology incubation, mentorship and angel networks
- There will be a multiplier effect; once foreign investors observe the investments and returns that locals get, they will probably replicate that ten times over

Will this happen? Will local pension and insurance regulators relax their rules to allow the funds they oversee to be deployed in the risky world of local ICT? These same regulators have spent years tightening the screws to clean up wasteful spending in real estate, and loopholes through which retirement funds were lost.

The report is a start, and it lay out the path to local funding of ICT's. These investments are very risky as is real estate which insurance, unit trusts, and SACCO's are edging back in to.

Award Season

Capital Market Awards: These took place late in January 2011 and were organized by Think Business who also organize awards for the banking and insurance industry. The awards gained notoriety when they started a few years ago when the regulator capital markets authority (CMA Kenya) complained about their implied association /endorsement as a result of the name.

Some of the winners this year included;
Custodian of the year: KCB
Bond deal of the year: Housing Finance
Stockbroker of the year: Genghis Capital
Fund manager of the year: Genesis Kenya
Legal transaction advisors: Hamilton Harrison & Matthews
Unit trust: British American (which was launched 5 years ago)
Research team: Kestrel capital
Lead transaction advisor: Dyer & Blair
Investment bank of the year: Dyer & Blair

D & B director Jimnah Mbaru mentioned that they had used Hamilton Harris & Matthew in most of their deals, and had been represented in several deals including NIC (Uganda), Bralirwa (Rwanda), CRDB (Tanzania) and the largest was KPLC in Kenya which was a complex deal. He added that its not just technical know-how that wins them deals (everyone had talented transaction employees) but it's a more about relationship management and understanding people, politics, social economic (and that many runners up had recruited staff from D&B). But he also spent 5 minutes telling what looked like it was going to be a very funny accounting or golf joke, only that it turned out to be one everyone knows as it ends with a lawyer answering 'how much do you want 2 + 2 to add up to?'

The CMA awards were mostly deserved, but there are a few glitches that were evident:

- The organizers insisting on presenting awards (best performing NSE company won by British American Tobacco) that were not voted or verified by the auditors (who stated this before the award was given)
- Some categories listed had no entries (IPO of year, Chairman of year, PR transaction advisor), or two winners in same category (CEO of the year shared by Nasim Devji and Martin Oduor Otieno) and some prizes winners not showing up.

Other Awards up for grabs
- Poptech: Nominate a Poptech Social Innovation Fellow
- Property Awards: Organized by Property Expo Kenya, these take place on February 24 at Sarit centre and will award property developer of the year, real estate agency of the year, mortgage company of the year and real estate journalist of the year

Other Media Awards include
- Diageo Africa Business Reporting Awards
- East African media awards by East Africa Business Council

Matatu IPO

There was a small advert in the Nation this week for a private placement to raise Kshs 600 million ($7.5 million) as investments in the public service vehicle (PSV) transport business.

The promoters, PSV Investments, say they have already investment in PSV’s commonly known as matatu’s through transport companies, savings & credit societies (SACCO’s), and individual owners. They are selling 6 million shares at 100 shillings each, with a minimum investment of 5,000 (~$62) for individuals and 100,000 (~$1,250) for institutions, and the Vice Chairman is Dickson Mbugua who’s often on TV defending the Matatu Industry as an official and a spokesman. It opened on May 17 and closes on July 3.

The PSV business is one which has had difficulty getting organized investments because if the poor reputation of the business. This is because of the reckless driving habits of drivers, gangs involved in management, insurance claims & losses.

(this matatu ran me off the road this morning, and I had to drive on the pavement to avoid an accident)

Nevertheless matatu owners are able to obtain loans from some banks but who limit their exposure by financing less than they would for an individual e.g. where a bank may finance 80% or higher of a vehicle cost, for a matatu that’s only about 50% with the owner paying the different. In some cases they also shorten the repayment cycle to weekly installments, instead of monthly, to prevent diversion mismanagement of cash as a matatu generates (and spends) most of is cash on a daily basis.

SACCO’s have a reputation for running the best matatu business, and listed transport company, Express Kenya, has also invested in the PSV business via KBS and Citi Hoppa, as detailed at last year’s invested in PSV business, as discussed at their 2009 AGM.

Private placements are riskier in terms of entry and exit, and I’m dealing with two unique placement cases now: one with an investor who wants to exit from a minority shareholding, but at a greater price than the majority shareholder will pay and another placement in which the promoters have been incommunicado for six months after urging investors to buy into a company. It’s not clear if the CMA is aware of this or if there is a transaction advisor or prospectus for the company.

Kenya Stockbrokers 2009 Financial Summary

Like at the end of august when they started providing their interim unaudited results Kenya’s stockbrokers and investment banks have continued with this now, and thanks to the CMA/regulator they have largely gone ahead and published their full year audited accounts for 2009 by the March 31 deadline.

Investments Banks: Best were Kestrel Capital (income of 148m and profit of 24m), Standard IB (income 121m, profit 40m) and Afrika IB (income 40m, profit 20m). Shock was CFC Stanbic Financial Services (CSFS) with a basket of income form brokerage, advisory, fund management and interest totaling 137m but still lost 108m after paying salaries of 123m highest in the industry. The same was seen at Renaissance (Income of 113m, lost -147m after paying 106m salaries) Equity IB looks like a mi-step for Equity Bank (high profile staff hires have since departed) and it had virtually no income (6.7m unrealized investments), and lost -57m in 2009. The disclosure separating client cash from bank cash are illuminating, and one can see that IB’s all have high debtors and creditors, resulting in some like Dyer & Blair carrying overdraft positions and the 44m paid in financial costs contributed to the -88m loss. Best off directors are Kestrel, Renaissance, Genesis and overall of the 19, ½ lost money

Stockbrokers Best was Genghis with income of 31 million and broke even with a ½ million profit while, Reliance, and newcomers NIC Capital, Kingdom and ABC Capital all lost money. Ngenye Kariuki did not file as it was placed under statutory management. Most of the five remaining stockbrokers have 251 million in intangible assets to prop up their balance sheets (which range from about 300 to 450 million) and significant amounts of receivables.

Fund managers: best was Stanbic Investments with income of 398m and profit of 124m, and then Genesis with income of 126m and profit of 31m then Co-Op Trust with profit of 19m. Other higher income earners, but who lost cash in the year included AIG income of 192m (lost -46m), British American Asset Managers 122m (-38m), Old Mutual Investment Group 168m (-5m) and Old Mutual Assets Managers 150m (-35m). Overall of the 14 asset managers, 50% were profitable including Aureos, Co-Op Trust, ICEA Asset Managers, Investeq while Stanchart and Zimele just about broke even. Unit Trusts Old Mutual Investment Group 7.6 billion (5 funds), BAAM funds manger about 5.7 billion (5 funds) , African Alliance (IB) 1.4 billion (5 funds), ICEA 782 million (3 funds, Stanchart 303m (2 funds), and Zimele 390m (2 funds), Dyer & Blair IB 50m (2 funds), Standard IB 11m (3 funds) Fund managers recently formed their own fund managers association lobby group separating themselves from KASIB for stockbrokers and investment banks.

Investment advisors: only one left is Tsavo after Dry has converted into an investment bank and Jani have withdrawn their license. Tsavo had commission income of 13m and a profit of 6m

Conclusion: The pictures has not been pretty, but this painful period of disclosures will hopefully lead to an improvement of their governance and management to stop the pattern of having one stockbroker collapsing every year by highlighting issues of high receivables and payables, insider borrowing, directors pay etc.

With the improved activity at the stock market in 2010, the pattern should be better than what they reported. This is a good time for IPO's and for companies to raise funds 2010-2011 for reasons known elsewhere and this will benefit the stockbrokers who will perhaps have a better 2010 than 2009.

CRS frustrating NSE Investors

There’s a fascinating banking book called Blood Money about how Swiss banks collaborated to with German army to rob Jewish citizens during World War II – and after the war they made it very difficult for survivors to claim money or assets in their vaults, denying it was there it was in their custody or by asking survivors to provide documentary evidence that their (deceased) relatives were even customers of those banks etc.

I’ve had a few unpleasant encounters with custody registrar services custody registrar services (CRS) of late that need to be vented out. (Note they haven’t harmed anyone as far as I know )

CRS are registrars they handled registry matters for several Nairobi Stock Exchange companies like blue chip Bamburi, BAT, East African Breweries (EABL), Kenya Airways (KQ) Nation Media Group (NMG), Barclays (BBK) and others like Centum, Express, EA Cables, Crown, Sameer Africa, Olympia, Rea Vipingo, Kakuzi etc.
CRS has a tortured history. It was formerly a unit of Barclays bank, known as Barclays Registrars (BARS), but BARS got embroiled in what was massive insider fraud case ( chronicled here) a few years before stockbrokers become the no. 1 villain. Barclays then sold the unit to former employees and new shareholders (called CAPSEC). They remained in Barclays Building before moving to their current offices at Bruce House Nairobi, which still has a Barclays like feel.

My beef with CRS is this; they now are the ultimate custodians of shares, who put shareholders of KQ, BBK, and NMG etc through hoops to get anything done at their sixth floor office. CRS are supposed to do the following for their corporate clients (registration of share transfers, processing & distribution of dividend payments, share register maintenance, unclaimed dividends processing) but in doing so:

• They ask for documentation that is none of their business – and which is not required by the Capital Markets authority (CMA), Nairobi stock exchange (NSE) or central depository & Settlement Corporation (CDSC).
• They are not the frontline of customer service but act like they are, and yet no shareholder chooses to do business with CRS. People buy shares from stockbroker or banks and provide their documents at that point where they are comfortable providing any information that the bank or broker requests, but not to CRS with whom they have no affiliation with
• They are lazy – and ask for every document to be notarized (i.e. rubber stamped) by a lawyer on their panel. In other words, they assume you’re guilty first and need to be proven innocent. Truth is any bank or government office will do business with you if you show a national ID and give them a photocopy – not CRS, they send you to the lawyers.
• They are inconsistent, and any attempt to deal with them will usually require several visits back and forth in search of the extra documentation they can arbitrarily request .
• They are so risk averse in modern times. E.g. Safaricom with their registrars were able to register over 180,000 Safaricom shareholders to receive their dividends by mobile phone or m-pesa dividends – they did the registration at supermarkets and bus stations. I’m sure KQ would like to be able to do the same for their 72,000 shareholders, but if they used to CRS, shareholders would probably be asked for a blood test or fingerprints first!

The conventional wisdom for dealing with them is that you have to go and argue your case because its like being at the US Embassy and asking for a Visa - Simple for some, but not easy of you’re a student or resident living overseas (Diaspora) or a grandmother living far from Nairobi (a typical rural based, retail shareholder)

So what sill it take for CRS to shape up?
- More complaints to the over-burdened CMA or NSE held-desks?
- Appeals to the respective company secretary’s
- A shareholders petition to EABL, KQ, NMG, or BBK and others about the need for a more responsive and customer friendly registrar?

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.

Rules for Kenya Internet Trading

Continuing with the pace of more regulations to strengthen the securities industry in Kenya, the capital markets authority (CMA) has availed at their website even more draft regulations for public discussion that cover internet trading, disciplinary actions, takeovers and licensing. In addition to those rules for public offers they have;

Internet trading
- Kenyan organizations or those which target Kenyan investors need CMA approval
- Source of platforms: they may own, gets from eth exchange (NSE) or use other platforms if CMA approves.
- Those who already have should re-apply – licenses are renewed annually, and are canceled automatically if one stops being stockbroker, network or exchange
- All platforms should Ensure confidentiality, safety of data (no manipulation, virus etc), back up plan, maintain audit trials Encryption and firewalls, Prevent duplication of orders
- Stockbrokers can sponsor chat rooms
- Traders to Report monthly on number of users, transaction averages, and system downtime

Disciplinary Processes
- Proposes creation of disciplinary committee that follows civil law e.g. sharing of evidence, call witnesses, cross-examination
- Committee can warn or censure firms or persons or can suspend or revoke licenses

Take-overs (intended to sort out carbacid-type deals)
- Board of company being targeted for take over must hire an independent financial adviser
- Offeror to make public announcement, if there’s unusual movement in target company share price
- No withdrawal of offers unless the CMA rejects it; also the target company has 3 weeks to decide
- If takeover fails, have to wait at least 12 months before making anther attempt - specifies format of takeover documents and reply documents to be filed with the authorities

Licensing (for securities exchanges, stockbrokers, investment advisors)
- Stockbrokers (share cap 50 million or~$670,000) to disclose their information technology, and comply with ration for overdrafts, borrowings
- Agents can only work with one stockbroker, and may not handle client funds
- Dealers (share cap 20 million or $267,000) to disclose their information technology, and comply with ratios for overdrafts, borrowings and investment portfolio liquidity
- Investment advisers (share cap 2.5 million or ~$33,000) their portfolio may not exceed Kshs 10 million ($133,000) otherwise may have to become fund manager to handle larger business
- Fund managers (share cap 10 million) and Investment banks (share cap 250 million) must also disclose their information technology, and comply with ration for overdrafts, borrowings

send comments to ceoffice@cma.or.ke

This Time Around

1. Sustaining Pastoralists: Three years ago, in January 2006, there was a government plan to assist pastoralists by encouraging farmers with abundant pasture and water to buy animals from pastoralists and keep the alive during the prolonged dry season.

In September 2009, Kenyan TV screens have had, images of dying cattle being rushed to the slaughter houses where they will be bought by the government from ranchers at a cost of almost $105 each. But with cattle dying before they can be properly certified for consumption, the government of Kenya through the agriculture finance corporation; now decided to revive the program (details here); the livestock- off-take program targets private ranch owners with surplus land capacity to purchase animals from 22 drought-hit districts.

2. Compensating Investors Nyaga Stockbrokers eventually collapsed in September 2008, despite an earlier bailout that was intended to keep the stockbroker alive when news of its troubled reach the front pages of local newspapers.

The last time a stockbroker collapsed, investors had been compensated from the sale of stockbrokers seat which yielded about $3.5 million. But in 2009, the value of a seat is not considered to be much, hence the need to dip into the investor compensation fund – and late in September 2009, we got the final tally from the capital markets authority - spelling that it would (and teh CMA has paid out 90%) to 27,829 investors a total of Kshs. 302 million shillings ($4 million) from the investor compensation fund (said t have 426 million)
- Payments below 50,000 shillings will be made to a total of 25,135 investors
- Payments of above 50,000 will be made to a total of 2,744 investors

3. Reviving Uchumi In June 2007, Uchumi Supermarkets set out to tap investors for funds through a shareholders debenture loan that was not too successful.
They are now back in 2009, asking for the same funds this time, with much improved performance and the prospects of the company getting out of receivership and being re-listed at the Nairobi stock exchange much better.

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.