Wednesday, February 28, 2007


In the Blue corner we have Barclays!! in the Red Corner we have Equity.Lets get ready to ruuuumble........... sorry got carried away, this post is on the banking sector.The best way to do it is to focus on two players everyone talks about:-Barclays Bank(BBK)-Old style bank, majority owned by Barclays Plc+ about to be taken over by ABSA-South Africa -a Barclays Plc group co.

-Equity Bank-Indigenous owned bank that has grown @ sonic the hedhog speed.EPS is up 120% last year.
Brief Stats as at January 2007
Barclays Equity

ATM's 80 105

Branches 60 42

Pre-Tax Profits in 2006 sh6.6Billion Sh1.1 Billion
Barclays Bank
-Large Bank+solid reputation
-Large wealthier customer base
-Steady dividend payout
-Large and diversified product base e.g BarclayCard credit cards,Wealth management,Trade Finance....

-Owned by Barclays Plc. so London will always guide major decisions.Compare that with Equity Bank that bought its IT software from the best vendor(according to mgt.)- INFOSYS of India.If BBK had to make a similar decision it would probably buy whatever software the Plc. uses

-Attempting to copy Equity Bank retail model.However, the clients they are going after may be sub-prime and they may not have the experience of dealing with them.NPA's may rise.By the way they're doing something similar to Equity in Ghana.

-Takeover of Barclays Africa by ABSA. I hope this doesn't distract the management of BBK from the task at hand.

Equity Bank
-Great banking model.Everyone is trying to copy it from BBK to Co-operative Bank
-Fast growing.Earnings are up 120% for 2006.A bonus offer has been given signaling further earnings growth
-Largest ATM network.equity has bought 100 ATMs read here for more.This should bring their ATMs to more than 200 at the end of that with 200 that Barclays will have at the end of 3 years.
-Aware of their market position and their competitors.So they have an awareness of where they are going and what copmetitors are upto.
-Low cost base.Equity can give you a loan of Ksh 10,000.I think the lowest Barclays can give is Ksh 50,000.Below that their(barclays) cost structure can't allow it.

-At some point the 100% growth will slow down.According to the prospectus(for the NSE listing) this will be around 2009.
-All fast growing banks have had to deal with larger NPA's at some point.Will this ever happen to Equity?
-Public perception-The public has always viewed the bank as belonging to one community.The other thing is that middle class/upper Kenyans believe that a white,hopefully) British man has to be at the back of any successful Bank.

My thoughts
I think Barclays should stick to its current clientele and try to make services better for them.E.g. Barclays had a cash/cheque deposit at Queensway that used to work. Not anymore.You have to go into the banking hall to deposit.

Barclays should try making its other services e.g Credit cards better.e.g.if you pay your card bill by cash-it takes upto 3 days to credit your Barclaycard.
I think the shift downmarket may slow Barclays' profit growth.Equity still has room to grow i.e. as they increase branches, the deposits will grow.However, at some point in the next 3 years growth will stabilise to normal levels and the management will have to consolidate the gains.At that stage is when management will be tested.
Equity has avoided the blunders of earlier Local banks i.e. depending on one group of depositors.i.e EURO Bank got most of its deposits from Parastatals.So, when politicians changed and deposits were recalled, there was no way out but down.

The other reasons why i'm confident about Equity's stability are:
-CBK supervison has greatly improved.CBK now monitors Banks much better.Before any results are given to the NSE or Public,CBK goes over them.To make sure all is prudent.
-Equity uses a 30 day period to classify loans as Bad or good.This is more conservative than the 90 days CBK regulation.(read the prospectus)

Where my money is
My money is on Equity,i think they will outperform the market in the medium term(3-5 years).i have bought it for capital gains.
Barclays is too big and if they grow bigger(from 60 branches to 120 branches),they might loose focus.I dont expect them to outperform the market in the next 3-5 years.But the dividends should remain great
Barclays is approaching the statutory limits of lending thats why dividends were low for 2006.(Earnings were retained in order to increase capital)

Barclays for the dividends, Equity for the capital gains.With the downward trend in prices it will pay to wait and add once the retail investors on the exchange panic and sell. But for equity buy at any price below sh.230/- because you get 3 shares for the price of 1(Cum-bonus).
Chill and pick Barclays at sh.60 and below.

For those who want to read more
"Understanding the Re-birth of Equity Building Society in Kenya" An interesting study of how Equity moved from an insolvent Building Society to a successful one and finally to a bank.This study was done in May 2002 but the issues raised are still relevant.

An interesting article in THE BANKER about Barclays Plc and its plan for Barclays Kenya(Found the link on Kenya Capital).Click here

Thursday, February 22, 2007

Please note that the Headline says 'Commercial failures' NOT Artistic failures.Plenty of our guys and gals have TALENT nobody can doubt. The Mceeing skills of Kantai or Abbas/kubaff are up there with Common and NAS.Nameless,Owiyo,Eric wainaina all have Talent.
Compare that with Jay-Z who continuously copies 1980s tunes and raps over them.e.g. He re-did the 80s classic 'I just died in your arms tonight ' in 2006.It was originally done sometime in the mid-eighties(cant remember when) by Cutting Crew. P-diddy covered tunes from Notorious by Duran duran.However Jay-Z is on the Forbes most Wealthy Celebrities list and no kenyan musician is on it(last time i checked).

My issue is that no kenyan musician seems to have broken into the international platinum/gold selling category like Makeba,angeline Kidjo.Plus, none of our musicians seems to be making huge profits from music.Most of their money seems to be coming from endorsements and side-gigs like being Radio-presenters.

Here's why i think they dont make the money:
1.Poor marketing and Distribution
I heard this line about the music biz that it's '99% show and 1% talent'.Just ask Britney spears.If u can sing thats great, now for the 99 %.
A typical Kenyan musician(lets call him muzik) does a song on fruity loops then sends the CD to Kiss/Capital/Easy and it gets airplay.The song's hook is catchy and its on top 10 at 10.After 2 months of continuous airplay. Muzik decides to release his album.Too bad no-one is going to buy it.We've heard his song everday on radio for two months for FREE.Why pay for it?
The enterprising listeners with TV/FM cards on their comps have recorded it off radio and are selling Bootleg Mp3s of the 'Hit'CD.

Our man Muzik's CD is priced at sh.800 (Bootlegs are selling for sh.200).Its only available at Nakumatt, that shop at the JUNCTION and some shop on Mama Ngina street.If u live outside Nairiobi- tough luck.
Predictably Muzik's CD only sells 1000 copies and he blames the pirates for killing the Local music industry.
Let me tackle the above issues:

Marketing-Muzik should never have given his tracks airplay without the CD hitting the shelves.As people hear u on radio, they can go out and buy the CD. Thats whay Jay- Z , ne-yo and the other Western musicians do.
Local musicians should set up a country-wide distribution network so that once an Album 'drops' u can buy it anywhere in Kenya.Lack of availability of a musician's Cds is a business opportunity for the 'pirates'.This distribution network is the KEY to the success of Bongo Flava in Tanzania

Pricing- Most TZ/bongo musicians sell their Cds/Casettes for about or less than sh.400.Kenyan musicians dont do Casettes they only produce CDs and retail at more than sh.700 orSh.1000 for that kind of money u can buy an R-Kelly or Beyonce on add sh.200 and ship it to Kenya.There're still Kenyans who listen to Radio Cassettes(in the 21st Century) so as a local musician you must have casettes.

The other factor is;
-Lack of commercial awareness
Local musicians do commercial endorsements but dont live the product.e.g. Most formula 1 drivers endorse the manufactures' car off-track.So u will never catch them driving anything else.e.g. Mc-laren drivers endorse Mercedes cars.A good example of this is when we had a re-launch of a new marketing drive for a soda with a contour shaped bottle.Little was heard of the soda but a lot was heard of the drinking exploits & otherwise of the musicians called to endorse it.They(musicians) shouldnt be surprised if the next re-launch of the soda sidelines them or takes a global star.

Till they shape up their marketing and distribution local music outfits may not achieve commercial success and one-hit wonders will be the norm.
P.S. am not playa-hating nameless.He's just the most recognizable Boomba musician.Since, this is the genre am referring to-had to use his pic on a critical article

Wednesday, February 14, 2007

NSE... ......

NSE has been moving lower for most of January.The'spectators and comentators' have been calling it the January effect.I call it a lesson and an opportunity.The unbroken two year rally had engendered a group of 'Investors' who believed that share prices only move in one DIRECTION-UP, UP and further UP.

Here are some counters whose high valuation baffles me.Remember, there are only TWO ways to make money on stocks:

1. CAPITAL GAINS-Buy low sell high or short a stock( buy high sell low and pocket the difference) Or Buy a share at Sh 50 and Sell at sh 100.

2. DIVIDENDS-Get paid a portion of the profits at the year end.
It has no competitive advantage in its field i.e Any new product or innovation that it launches can be easily copied by its rivals with deeper pockets like S&L(a KCB subsidiary),Stanbic,Barclays.They must find capital for long-term lending.their best bet is to fold into a bigger bank(merger).Otherwise dont expect a dividend cheque any time soon.

Dont forget its competitor in the mortgage sector EABS folded into Akiba Bank.So if you bought it at sh.60 hope it goes to Sh.100, you may have to wait for a while.

I think the banking sector in Kenya will morph into two groups through mergers/acquisitions:-

(1)Large full- house finacial groups encompassing everthing from insurance to Fund management/stock-broking.Potential candidates of this model are: Barclays,Equity,KCB, JHL/Diamond Trust/Habib

(2) Specialist Banks with an edge in certain complex or key fields.Potential candidates are: STANCHART,CITIBANK

EmergingAfrica has a nice post on the Banking industry consolidation here.
MjengaKenya talks about Barclays+Equity here

Latest results show why Agricultural firms are so volatile.The Long term factors affecting its Sugar production are unlikely to turn positive soon.These Factors are like:-
-Land-As the farmers sub-divide farming land amongst their progeny, planting/harvesting costs will rise.
-Labour costs-Unless they mechanise harvesting of cane, these costs will only go one way-UP
-Plant/factory maintenace-Ever heard BAT or Bamburi complain that they had costs in their factories' that are unexplained? EXACTLY, So how come they cant explain where all the ineficiencies are coming from?
BAT/Bamburi always specify the exact cause of the inefficiency

-Weather-Bad weather i.e drought affects cane production

The only bright spot is the Distribution Network which is good and extensive.Sold my shares at a loss, waiting to pick them up at a lower price in the future.
They also dont have a website(in this age of blogs)
P.S. the employees and farmers only took 40% of their Allocation in the secondary IPO.The Allocation is here on Riba's blog
It's in an industry where any of the current and former employees can start a similar outfit and in 12 months take all their business.For instance, the Value of REDSKY(recent Scangroup acquisition) isnt in its physical Assets but the Creative minds and contracts that REDSKY has.

Thats why Warren Buffet and other Long-term investors rarely have large stakes in such companies in their portfolios.

Ask yourself if there are any barriers to entry to the Scangroup business sector?. In a firm with physical/tangible assets e.g. EABL new talent can be found to run it.But a firm with soft/intellectual resources/assets e.g. ADvertising the Human Resource is the Asset , it leaves thats it.
Too much compe' from imported tyres.I think they should relocate their production to EGYPT(under COMESA), after all Colgate-Palmolive,Cadbury and others cant be wrong on this.

News to use
By the way the NSE has upgraded its site.Good Job! Mr. Mwebesa and everyone else at the bourse.

OVERHEAD at a Brokers' Office
When your client's stock portfolio is underwater. You tell him it is a Long-Term Portfolio

Friday, February 09, 2007

Inflation & You

I decided to talk about inflation because there are a lot of numbers thrown about on a regular basis about it and people dont seem to be able to understand or interprete them.
Inflation simply refers to a rise in prices.

Why worry about inflation?
The first rule of investment is to protect your principal investment.Inflation silently eats away at this principal.To keep it at bay, your investments should earn more than the overall inflation

For example, in Kenya your investments must earn at least 13% per annum in dividends+interest+capital gains to maintain their monetary value.

If your investments aren't doing this on average(over one year or over 2-3 years) you are done(Wealth creation wise).

There are two main measures of inflation in an ecomomy:
1-Overall inflation-the rise in prices of all goods and services in the economy.

2-Underlying inflation(Core CPI in the USA)- rise in prices excluding food and energy/fuel costs.
Economists measure underlying inflation. the Monetary policies of most Central Banks target underlying inflation.For instance, in Kenya (Central bank of Kenya) CBK's aim is to keep underlying inflation within 5%

The Problem In real life your real cost of living(eating,sleeping and working)includes food and transport but when measuring inflation for their monetary targets economists leave out these items.
For instance,the Overall Annual Inflation is 13.94% and the Underlying Annual inflation is 3.88%.

How it affects you
Over the past couple of years Economists have been issuing statements saying that inflation is under control.However, the average Kenyan has been grappling with rises in food and transport costs.The economists are 'right' in their own way since, they are looking at underlying inflation which has been within the Monetary target for a while.

By the way,UK economists failed to predict the January 2007, rate rise by the Bank of England in a spectacular way.Read more here