NSE 7000???

As you know i believe the NSE(Nairobi Stock Exchange) is overvalued.However, in investing you must look at different views (you could be wrong).There are several factors that could lead the market higher:
1.Demand has shifted.(higher demand higher prices)

More people are getting into the market, thus demand for shares is increasing but supply is relatively the same.New players are still getting into the market i.e. directly, via unit trusts and investment clubs.Almost everybody i know is buying or trying to buy shares.

2.Price is influencing price

'Higher prices beget higher prices' someone said(cant remember who).As prices rise people buy more shares in the hope of getting on the train of higher prices.Their purchases fuel a further price rise...and the cycle continues.Notice ARM,Mumias,NBK,NIC have been showing this kind of behaviour.

3.African Markets

In comparison with other African markets(except South Africa) our prices(NSE) are still low in terms P/E multiples.Large companies are trading at P/E of 25 and above on the Nigerian Stock market NSE still has companies under 25 so there is still a ways to go.

I think NSE will cross 5000 mark this year.
Bull markets last longer than anyone expects and crash faster and sooner than anyone does.Few expected the Dow Jones to cross 11,000 in its last recovery and the FTSE100 to cross 6,000 but they did.

MY PORTFOLIO

Finally, 'a la bankelele and others here is my NSE porfolio:
-BAT
-KENOL
-TOTAL

Sold in last 6 months
-SAMEER
-EABL
-HFCK(regret selling it)
-KENGEN

Additions by year end
-Jubilee Holdings
-EQUITY
-STANDARD Group

Is the NSE Overvalued?
YES and here's why
The NSE is overvalued when you compare it to ther markets in terms of P/E ratio and dividend yields.
Take the current darling of the exchange KENGEN. the whole week people have been telling me what a great buy it is at sh.37/- 34/-.The P/E is 41. the Dividend yield is 0.67% REMEMBER; that you can only make your money on the Stock Exchange in two ways :

1.The Earnings at Kengen grow at a fast rate 40% plus a year.Consequently the share price appreciates. You get Capital Gains(price rises lets say to Ksh.60)

2.The Dividend grows at a fast rate lets say 50% annually.

How likely is it that KENGEN's turnover will grow at a rate of 40% every year for the next 3 years.Remember its turnover is sh.11 Billion and Pre-Tax Profit is Sh.2.6Billion. If the Turnover grew at that rate it would be at Sh 30 Billion and profit at sh7.1 Billion in 3 years.That will be larger than EABL in turnover.
I would say highly unlikely.

Then you are left with the second option, a high price that enables you to book Capital Gains.This is what is hapening now.But at some point the price has got to stop rising.Even a good company can become over-priced.Yes, you can pay too much for something.

Now don't get me wrong i'm not against KENGEN, i used to hold its shares and will buy them again at a cheaper price. The issue is that most of the co.s listed today can only make you money if the stock prices kept rising at current rates for the next 3-5 years(and dividends at least 20% annually).Look at ARM,Bamburi,CMC,HFCK,National Bank,KCB, EA Cables........... same story.

The NSE now is a traders' market not a value investors market so application trading tactics for success is necessary.

So, If the NSE is overvalued why is it still trading at high prices?
There are two factors:
INTEREST RATES: As long as rates remain below inflation and below 10% it still makes sense to buy a stock with 3% Dividend yield and 10% capital gain.If rates go back to double digits T-Bills will be popular again.

IGNORANCE: If people have no alternative investment avenues especially Fund managers. They 'll just keep pouring money into the market regardless of the valuations.After all in the short term they make a kill on the market, in the Long Run....heck it'll be someone else's problem.

There are alot of new players in the market who are unaware that the value of your shares can go up or down.They look at the relative price from Ksh.100 to judge the value of a share.The lower the price and the more often its mentioned on news-The higher the value.
These are the people driving the prices up

NEXT WEEK i will give you an alternate view on the valuation of the NSE.

They dont speak VISA.

I'm just back from Uganda. The country shows you what 20 years of Civil war and uncontrolled liberalisation can have on the National psyche.First of all coz of the war there are no long term established businesses. Most of the tycoons i.e. Mukwano, Wavamuno, Sudhir, Saleh...... really made their money in the past decade(with the exception of the Madhvani family).

Imagine if Kenya was at war in the past 20 years of course there would be no old time businesses & family businesses like Kenchic, Text Book Centre, Pattni Jewellers etc.Now that is downtown Kampala. It looks like Tom Mboya with exhibition stalls.Street after street is filled with buildings that are exhibitions. Imagine World Business centre on Tom Mboya replicated from Koinange street up to river road and you get the picture.

There are no large/significant indigenous enterprises, everyone is a suitcase Dubai/China importer so no one will oppose the mushrooming of such businesses.
However from the Sheraton Hotel towards the State House it looks modern a mix of Gigiri/village market and Hurlingham.


The big firms i.e. MTN,Stanbic, Shoprite are all owned by South Africans.I went into a Shoprite supermarket and apart from Farmers Choice and Del monte everything was air- freighted from South Africa.
The worst thing about the Shoprite supermarket was that i couldn't use my VISA credit card there. Then after buying on the way out i had to give my receipt to a watchman who tallied it with my shopping before i could leave the store.Can you imagine going to Nakumatt/tuskermatt/Uchumi then a watchie asks for your receipt before allowing you to go? That shows you how backward the country is.

Then i later discovered i couldn't use my card anywhere (unless it was an ATM), apparently they fear card fraud. so to use it in a hotel you have to be a guest.
If you cant use VISA in a country, then definitely regardless of what they say, they are backward.

By the way cars, land,and booze(even in a 5 star place are cheap).But electronics are way cheaper in Nairobi(i think coz of competition).Some Electronics traders dont bother going to Dubai, they source their stuff in Nairobi.

P.S. I looked at the latest Actuarial numbers and Uganda is one of the countries which as at 2004 had no indigenous Actuaries.

WARNING:THE INFORMATION BELOW MAY BE HARMFUL TO YOUR WEALTH.CONSULT YOUR INVESTMENT
ADVISOR,STOCKBROKER,BANKER,ACCOUNTANT OR OTHER PROFFESSIONAL ADVISOR ON THE COURSE OF ACTION YOU SHOULD TAKE.

SCANGROUP IPO-THE FACTS

I have just read the SCANGROUP prospectus. The following facts worried me:

-69 million shares are being sold.The Vendor(Bharat Thakrar)gets the proceeds of 60 million shares that is Ksh.584,176,501 while SCANGROUP gets the proceeds of 9 million shares i.e. Ksh73,883,843.

So the company is to expand and retire debts on Ksh.73 million and the Vendor pockets Ksh.584 million. Thats what i call capitalism.

-The group has a long term liability of Ksh 990,000 that is not properly disclosed on Page 92 of the prospectus.
We are not told to whom the loan is owed, the duration, the terms of the loan etc.
Remember Net Profit in 2005 was Ksh 148 Million

-SCANGROUP and CFC Financial Services Ltd-Which is the Transaction Advisor, Joint underwriter and Sponsoring Stock Broker- share the same Company Secretary one, Ramesh R. Vora. Is this a conflict of interest?

-SCANGROUP has 50% of the Ad. market can it grow further? Thats the way Barclays dominates the Banking sector

Inspite of the above facts , i shall buy the shares because the market currently favours IPO's .Hopefully,I shall be able to flip them after listing for a profit.

SMOKY VEHICLES TO GO

Did anyone read the Kenya Police tender notice in the Daily Nation on this Thursday 6th ?I did and one of the items they tendered for was :equpiment to analyse exhaust fumes to be delivered to the Vehicle Inspection Unit.

Given that a lot of senior Government officials have been talking about vehicles that smoke from their exhausts its safe to guess this is the new "Alcoblow".

But they may have to ammend the Traffic Act because the Act only outlaws visible smoke. Its silent on the chemical composition i.e. the level of nitrous oxides, particulates, CO2..etc

So if you have a smoky junk ,repair it now or you wont be able to drive it next year when the Government brings the new rules into effect.

NAKUMATT: THE IPO................sooner than you think


Nakumatt has been in the headlines for the past couple of weeks for all the wrong reasons.
I'm sure by now the owners of Nakumatt know why Charles Njonjo has big stakes in listed companies like CFC Holdings or CMC, while Total man(Biwott) has his flagship investment in a comapany(Kenya Oil Co.) which is only 20% owned by the public listed on the Nairobi Stock Exchange.

On the other hand Meralli tries to list or co-own, his major investments with influential personalities.e.g. the MD at SASINI is a former high ranking civil servant.The other rich Kenyan, Mr. A.S.M. Ndegwa of First Chartered Securities, keeps an ultra- low profile.

The reason all this men behave the way they do is that they have learnt what all rich men have known upto and before John D. Rockefeller have known- "Everybody wants to be rich but nobody likes a rich man"

Yukos learnt this the hard way when President Putin seized and sold its assets.By listing a tiny stake of their assets the large investors get thousands of small shareholders , who not only ask stupid questions at AGM's but provide protection against Governments and individuals who want to aquire their assets unfairly.

Imagine the furore if the Government attemted to shut down CFC Bank or take-over Kenya Oil. All those shareholders who rush for the free packed lunch at the AGM will be at Nation Centre protesting. The sound bites that they will be giving the TV stations won't be pleasing at all to the Governmet which is headed by elected representatives(M.Ps). Of course, no Government would proceed with an unpopular course of action. So such institutions are protected from arbitrary Government actions.

For Nakumatt, to get protection against future State actions, they need to list a sizeable stake of the firm on the Stock exchange. Failing so, you will hear more 'revelations' in another couple of years.
My bet is that the Nakumatt owners being smart ones have thought the above scenario through and will list Nakumatt in the next 36 -48 months.(i'm willing to bet on this).

WHY YOU DONT NEED A SAVINGS ACCOUNT

Earlier this week, I talked to a pal of mine called Prof for purposes of this blog about an issue that’s been vexing me.
Savings Accounts are they relevant today?(pole it sounds like those Primary school debate questions: "Are boys better than girls?")

Here is what he had to say.

ME: Do you need a Savings Account?

Prof: Yes and no. Remember there are two types of savings:
TYPE1, you need savings in case you loose your job or have some other disaster you can use the money.
Type 2, you need savings as capital for investments, build a house, buy a car, retire, marry a third wife, become an M.P.............etc. (or any other dream you have)
Now, I assume that you have some money sitting somewhere in a bank account (type 1 of savings). I will address type 2.

ME: So savings are: (1) Transactional purposes
(2) Investment
Prof: Ahhh... (tapping his forehead)… you are getting the drift.

ME: For long-term savings beyond a period of 1 year, is a bank account good?

Prof: You mean a savings account or fixed deposit at a bank like NIC, KCB, Barclays, Equity...etc

ME: Right

Prof: No, because they give you a stupid rate of interest and your money gets a better return elsewhere.

ME: But prof, I thought an interest rate was good, any rate.

Prof: Ha.ha.aha…(coughing almost choking on his Tusker). Your ignorance amuses me. You have never had of inflation?

ME: Well....

Prof:Inflation simply refers to the loss of value of money over time. For instance a loaf of bread cost sh.15/= 10 years ago but now costs sh.25/=.

For more about inflation look at this sites:
-http://www.investopedia.com/ask/answers/156.asp
-http://www.investopedia.com/university/inflation

ME: So what has Supaloaf got to do with my bank account?

Prof: As long as you have your money in a bank account that is losing value every year, by the time you want to use your money it will no longer be of any value.

ME: I am lost prof.

Prof: Let me explain using the bread example. Assume in 1996 you had Sh.1500, which was enough to buy 100 loaves. (1500/15=100).
You kept the money in an account that earned no interest and had no bank charges (for illustrative purposes). Today in 2006 you have sh.1500 and the price of bread is sh. 25. Your money can only buy 60 loaves (1500/25=60). Unlike 100 loaves 10 years ago, a loss of 40 loaves in 10 years.

ME: I see............

Prof: Lets say you earn 5% interest on your savings Account. But annual inflation is at 14% today. You money is losing value at the rate of 9%. That is (Inflation rate-Savings rate) i.e. (14%-5%=9%)

ME: So whats the way out?

Prof: You need to invest in areas where your rate of return is higher than inflation. That’s why the NSE is rising because inflation in Kenya is at 14% but Treasury Bill rates are less than 8%.

ME: So NSE has a bubble?

Prof: That's a question for another day. Let me put it like this, If the inflation rate remained constant at 14% but the Treasury Bill rate went to 25%, I don't think the NSE index would be at 4000 and above.

ME: So inflation is part of what is driving the NSE?

Prof: Yes, but we will talk about that later. Savings Accounts right.... that’s what we were on?

Me: Yes, I wanted to know what options to take on saving.

Prof: For, long term saving (over and for 1 year) I would advise two options:
1-Money market funds. Like the ones offered by Old Mutual, African Alliance and British American. They mimic a savings Account and have a high return around 8% and you can access your money relatively fast. Plus you don't loose your PRINCIPAL amount.

2.SACCOs- Some SACCO’s offer savings products that give you a rate of 10% per annum. The only downside is that you can't access your funds for at least 6 months.

ME: So I buy unit trusts and cozy up to my SACCO?

Prof: Right, just don't buy any unit with the words BALANCED and Equity in them because this are linked with stocks. Their values will fluctuate with the stock market. When the stock market goes up- so will they. When it goes down so will the equity linked units.

Me: What about...?

Prof: Almost forgot. Before you start investing have some Savings cash float in a Real Savings Account. (Just in case you need cash in a hurry) So that you don't liquidate your long-term savings or investments in a hurry.

Me: What?

Prof: Keep looking for any investment vehicle that doesn't jeorpadise your PRINCIPAL and can give you a higher return than inflation.

BAT LAUNCHES SITE

Finally, BAT has launched a site for East Africa.Can you imagine Nigeria had a BAT site before us?
Nice site well set out. Hope they add an investor section(for their local subsidiaries) soon.
http://www.bateac.com

ABSA- Coming soon to Kenya

ABSA-(South African Banking Group) has successfully raised R3 Billion to purchase Barclays Plc Sub-saharan operations including the Kenyan operations. Read more here.
Barclays acquired the majority stake in ABSA in 2005.

LORD OF WAR
Just watched Lord of War starring Nicholas Cage. Its about an arms dealer Yuri Orlov(Nicholas Cage) and his business around the world. Especially Liberia and Sierra Leone.The bad guy is loosely based on Charles Taylor. Good movie but has lots of the usual stereotypes about Africans: AIDS, ignorance, theft.......etc.

BARCLAYCARD $300?

I called Barclaycard to enquire about an online transaction. The Customer care staff informed me that Barclaycard(in Kenya) only allows online(internet) transactions upto US$300(without contacting cardholder). Above$300 the Cardholder must be contacted for authorisation.

So theoretically your risk for any online fraud is capped at $ 300. NOTE: I said theoretically because REAL LIFE EVENTS DIFFER from the best laid plans.

THE OTHER IPO WINNERS
The other day I went to my stockbroker to transact some biz (no not to buy KENGEN shares). I was surprised the queue and extra staff to handle the new IPO buyers. It struck me that the brokers are going to come out of this IPO thrice lucky:
1. They get to earn a Commission for all the shares bought through them.

2. They get to trade for 24 days on your money before handing it to KCB (receiving Bank). With a large sum of money you can do a lot e.g. Overnight Lending.

3. When the excess funds are refunded on May they can convince the “New Shareholders” to buy more shares and make more commissions

Hi People,
this space is about me and the way i see life.My views and prejudices. Plus some interesting bits about financial markets from a Kenyan perspective.