BARCLAYS Vs EQUITY

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

Click here to see the latest Financial results

Pros

-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....

Cons

-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

Click here to see the latest Financial results

Pros
-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 2007.compare 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.

Cons

-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)

Conclusion

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.

Click here- more studies on Equity Bank done by MICROSAVE can be found here.

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

http://www.wakilisha.com/peeps/nameless/

WHY KENYAN MUSICIANS R COMMERCIAL FAILURES

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.

2.Pricing

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 Amazon.co.uk 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

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.

HFCK

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

MUMIAS

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

SCANGROUP

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.

SAMEER

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

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

Bankelele also talks about inflation in this post

Banking Amendment Act 2006.. aka how greedy banks will have to slow down

An amendment of the Banking Act passed by Parliament and and assented to recently. Some of the measures provided in the legislation include:

-Giving Central Bank of Kenya(CBK) more powers to regulate the Banking sector i.e. some of the powers vested in the Minister of Finance have been moved to the CBK. -CBK to vet new and existing owners and directors of Banks.It can even ask existing owners who dont pass the muster to reduce their holdings to below 5%.

-The charges banks can levy on Savings,fixed deposit and 7 day call accounts to be restricted.

-The in duplum rule, that restricts oustanding amounts on bad loans to not more than double the Principal to be effected.i.e. Interest stops accruing once it is equal to the Principal amount borrowed.

Dont celebrate yet because the rules only come into effect once the Minister of Finance Gazettes them.

Look at this Letter of Intent and Memorandum from the IMF in 2004.Specifically item 22.You realise that we are merely implementing what IMF told us to do in 2004.
Click here for the IMF letter.

PS: I noticed that the IMF letter doesnt display when you go to the IMF site.
Type or Paste the following words " kenya+2004+letter+intent " in the IMF site search box, then click on the first search result item to get to the letter.

Picture of Fistful of Dollars courtesy of blackentrepreneurshalloffame.blogspot.com

TOP NSE INVESTORS IN 2006

I was mucking around on stockskenya when i came across this link.It is a compilation of the top 10 shareholders of various companies listed on the NSE.

The list is compiled by the Financial Post.It was made last year-so there are a couple of changes, if you use current prices to analyse it.

One thing you will note about the list is that wealth on the NSE is concentrated among a few groups.For instance, ICEA ,FCS and NIC bank are listed as separate bodies but they share the same ownership.

Here is the list http://www.financialpost.co.ke/Pdfs/TOP%20NSE%20MILLIONAIRES%202006.pdf.
RIGHT CLICK and SAVE as to save it to your computer.

Regret
I wish i had bought KPLC(plus not sold EABL before the split) when it was Sh6(about 4 years ago), i definitely would be on this list.
Buy and hold good companies and slowly build up your stake over a 5-10 year period. 1,000 shares of a company every year for 5 years = 5,000 shares.Inflation,bonuses and splits will do the rest of the work for you.

By the way other bloggers-Odegle and Kenya capital have covered it in their blogs.

THE SHILING AND MPAC

The shilling has strenghthened over the last year from a sh74 to the US Dollar to Sh69.This has been good news for importers since the cost of imports in Shillings has declined.However,for Exporters income in shillings has decreased.
Here's an example to show how the Shilling affects importers.Assume that X ltd(fictitious company) imports a steel bolt costing US$ 1000(and this price remains constant).The cost of the import when the US$/Ksh exchange rate is sh74 is Ksh74000 i.e.(1000 x 74=74,000)
When the US$/Ksh exchange rate is sh 69. The cost is Ksh 69,000.Thus the change in the exchange rate from US$/Ksh 74 to US$/Ksh 69 leads to a drop in the cost of importing the bolt from Ksh 74000 to Ksh 69000.
The strong shilling has mitigated the high oil prices in the last two months i.e. if the shilling had gone from US$/Ksh exchange rate sh 74 to sh80, a litre of petrol would have been around sh 90.

However, the strong shilling will affect our key foreign exchange earners like agriculture , tourism and even manufacturing.It makes our tourist facilities more expensive.i.e. A hotel room that cost Ksh 20,000 when the US$/Ksh was 74, cost US$270 But when the US$/Ksh rate moves to Ksh 69 the cost is approximately US$289, a rise of US$19.Dont forget Agriculture and Tourism contribute a huge portion of our National Income.A weak shilling would be the best for these sectors.But a weak shilling would lead to an increase in inflation through higher oil/energy prices and the ripple effect to other sectors.
Higher inflation=Higher cost of living BUT a stronger shilling undermines our exports and makes it harder to set up manufacturing facilities for export oriented products and services.
STRONGER SHILLING OR WEAKER SHILLING that is the question.Which is the better one for Kenya?

Monetary Policy Advisory Committee(MPAC)

It is formed under the (Central Bank of Kenya) CBK Act to advise the CBK on Monetary Policy.The committee is composed of distinguished Kenyans who have a record of having accomplished something in their respective fields. i.e. Prof. Terry C. I. Ryan( A former economic Secretary),Mrs Sheila S.M.R. M’Mbijjewe(Former Finance Director at Standard Chartered Bank) and Mr. Wycliffe Mukulu(A banking consultant).Click here to see the MPAC's latest report.
The issue of whether we need a stronger or weaker Shilling is one of the issues that the MPAC is studying.See more in the MPAC report.

The report states that they will hold regular media briefings to inform the public on their work.

Rumours

Heard a nasty one this week to the effect that a certain fast growing Bank wants to release its Accounts for 2006 by January 25th 2007.Utter,utter non-sense,it takes a while for all the issues between an auditee(especially a bank) and the external Auditors to be settled before the final accounts are issued.

For a large bank this would take upto early March(If the year end is 31st December).Unfortunately,this kind of baseless rumors are what are driving some sections the NSE.I pity the novice investors whose decisons are guided by such information.

Here are a couple of stocks i'll watch in 2007 and why.

1. BAT
This company will surprise us with the growth in the export business.Exports have risen to more than 40% of revenue.
The Anti smoking Legislation will make it harder for new competitiors to get into its market.i.e. the cost of doing Tobacco business will rise
I also like its dividend yield at >people tend to forget the other side of investment gains is dividends Not only capital gains.

On the other hand, the market may well ignore it.At sh190- sh200 its too expensive for the average retail investor.

2. Equity
Going by the latest half year and quarterly results Earnings will double.The only darkside is the rising Non Performing assets.The performance is beyond the 40-60% earnings rise predicted by the management during the NSE listing.

It has good management and it still isnt all over the country.

3. KENGEN
I hope all those retail investors who bought start cashing out soon so that i can get in at a nice price i.e. under sh.26.

Its well run.The only problem is that its under the State Corporations Act meaning that a new Government in 2008 will lead to changes in the management

4. TOTAL
I expect earnings to decline but management may retain dividend payout at sh2.50 or Sh2.00.I'll increase the stake coz i love the dividend yield.
I dont know how the energy bill will affect the Oil sector.Will let u know once, i read it.

5. Standard Group
Perennial laggard but has impressive assets i.e. KTN Tv and the Newspaper distribution service.This is a company crying out for a takeover and management turnaround.
I will buy it speculatively,since i'm sure that in the next 18months somebody will make a bid for it.
I hope they set up an investor section on their website like Nation Media group.Otherwise, how will potential investors get financial information on the Group?

I only buy companies that are doing well/well managed in their sector and have room for long term growth(i dont worry too much about the share price as long as the P/E isnt too high).

CO2 testing for Motor Vehicles comes to Kenya

NEMA(National Environmental Management Authority) formed under the THE ENVIRONMENTAL MANAGEMENT AND CO-ORDINATION ACT, 1999 will now monitor Carbon dioxide(CO2) emissions from vehicles.
Legal Notice No. 131 published in the Kenya Gazette late last year, provides for this.This legal backing will ensure that CO2 testing for cars doesn't suffer the same fate as Alcoblow.

The Traffic Act only outlaws visible smoke from vehicle exhausts.The Legal notice sets out the maximum acceptable CO2 emissions for various vehicle classes.

The emissions testing law comes into effect on 1st February 2007.

The winners
Environmentalists-we can now have a cleaner environment.

Motor Vehicle mechanics-They will have to service vehicles to pass the test.More business for them.e.g. according to the rules your vehicle can be disqualified from the test for having a leaking Exhaust pipe.

Spare parts Dealers/Petrol stations -The Legal notice provides for licensing of dealers in fuel catalysts

Insurance firms-If they have their way they can have a roadworthiness test worked alongside the emissions testing programme.

NEMA/Government-More revenue in form of fines and fees for the tests.

The Losers
Motorists

More costs to be incurred to comply with the rules.By the way the penalties under Section 140 of THE ENVIRONMENTAL MANAGEMENT AND CO-ORDINATION ACT, 1999 for non- compliance are stiff.Click on the highlighted words above to go the ACT.

Business

We now become one of the countries with a stricter environmental regulatory regime in the continent.

Implementation
I hope its done in a phased manner and not a haphazard way. i.e. NEMA doesnt wake up one morning and say we must all comply in a week's time or face prosecution.

Here comes 2007

Hi fellow bloggers and visitors.I have been blogging since March 2006.Its been a wonderful experience.Thank you for enriching my experience in blogosphere .

Another year ,another chance to ask out that girl you have been eyeing, buy those stocks you want ,start a new business,visit a new country,buy a new car/house,quit a bad job/relationship................................or anything else you have been too scared to do.

A new year means a new opportunity.Because you are alive.

Have a fabulous 2007!!!!!!!!!

SAFARICOM /MOBITELEA- ANSWER

Here is an interesting idea. The best way of getting rid of the questions regarding the identity of Mobitelea is through Vodafone Plc.
Someone (preferably Kenyan) should buy 100 shares in Vodafone Plc (UK listed company) and then ask the Board questions about Mobitelea-Safaricom shareholding at the next AGM(Annual General Meeting) in 2007.
The issue will be settled, quickly and cheaply without any Commissions of Inquiry and Task-forces being appointed.

By the way this idea is inspired by a story (which I cant verify). I heard that GREENPEACE (the guys and gals who used to chain themselves to ships and trains carrying toxic waste) used it.
Several years ago, GREENPEACE needed to ask BP Plc (the oil giant) a couple of questions about oil exploration and the Environment. They went to the management of BP but were unsatisfied with the answers they were getting.

Someone had a brainwave and decided, why not buy a couple of BP shares then ask the questions as a shareholder at the AGM.
Of course asking the questions as a shareholder had a better response for GREENPEACE.

Oh and if anyone knows more about the GREENPEACE/BP story in detail do tell.

RVR-Competitors better watch out

Finally, the payment was made and RVR(Rift Valley Railways) Consortium took over the Kenya Railways for the next 25 years.Other members of the consortium are: ICDCI and Transcentury Group.
Lets concentrate on Sheltam which controls 60% of RVR.The parent company of Sheltam Pty is 50% owned by GRINDROD LTD a South African Listed firm.Which curiosly pulled out at the last minute-allowing ICDCI and Transcentury to get a stake.Grindrod Ltd hasn't lost out, through Sheltam it still has interests in RVR(but INDIRECTLY not directly)

GRINDROD LTD also owns shipping service copmanies like Ocean Africa Container Lines (Pty) Limited and ISS-Voigt Shipping. A Grindrod group company has a stake in a Local shipping Logistics and freight company.Keep in mind anytime that you import or export Goods through the port you have to go through a shipping line or agency.Local examples are like;Maersk,Diamond Shipping services,Transami and Kenya National shipping Line.If you have ever imported a used car -look at the documentation one of the above names is likely to appear somewhere.

Also, Grindrod has the funds to buy into any local shipping outfit.Pardon me but lets digress further.It costs more than Ksh80,000 to transport a 40'Foot container from Mombasa to Nairobi by road.By rail its more than 45% cheaper But under KR it may take more than 3 days to get to Nairobi.By road it will in Nairobi within 24 hours.

Why have i set out all the information above?

To put it mildly ,Grindrod/sheltam are now the most significant transport and logisics group in Kenya and more so in our landlocked neighbours that depend on the port of Kilindini.Firstly,Grindrod has the ships/shipping lines and freight companies that can facilitate ocean based transport.

Secondly,It now controls the Kenya-Uganda Railway(through RVR and Sheltam).When this rail is up and running(efficiently).It will pose a significant challenge to road based transporters.i.e. rail tends to be cheaper and safer than road transport.

Thirdly,it can easily monopolise the import/export Logistics and transportation link in the country.(In 3-5 years once the Rail system is up and running)

EABL- Future Strategy
Why Diageo should sell out

Let me point out that the current management in EABL is doing a good job. This article is not meant to disparage or attack anyone. It merely offers a longer-term view (mine) of EABL's future. I am looking at the future 6 years away. EABL is doing quite well at present and the medium term outlook (3 years) is satisfactory. But I’m not so sure of the long term future

I think that the best thing to happen to EABL would be if DIAGEO Plc sold its stake to another Brewing company.

Why?
Diageo's ownership of EABL stops it from growing into new markets and strategic direction.

EABL has already grown as far as it can go in the East African market. As per the latest annual report more than 60% of the Group's profit is derived from Kenya. So it’s still Kenya Breweries/UDV Kenya where the profits are concerned.

The only other ways to grow are to:
(1)-Branch into new products like soft drinks.

By the way SABMiler Plc (South African Breweries’ parent company) is one of the largest bottlers of Coca-Cola in southern Africa. It acquired Amalgamated Beverages Industries- a soft drink bottler in the past two years.
The beer market is saturated. Have you noticed how EABL keeps launching and killing brands?
Pilsner Ice came and went so did Pilsner Ice light. Now we have Whitecap Light.

(2)-Move into new markets by acquisition and expansion.

This involves setting up new subsidiaries and acquiring new companies

How Diageo affects EABL's strategic direction
DIAGEO Subsidiaries
EABL cannot expand in Africa because Diageo already has subsidiaries all over Africa to cater for those markets. For instance, in West Africa Diageo have Guinness Ghana Breweries Ltd and a joint venture to market its brands in South Africa. So Diageo has covered east, central and South Africa. Where else can EABL go?
For Diageo Africa is well covered on a group basis (with its subsidiaries), but for EABL it's boxed into East Africa.

Currently, EABL is moving Tusker into export markets but competition in the European, Asian and American markets is tough and the gains will take a while to be seen.

Diageo's strategic focus
Diageo considers itself a spirits company that happens to sell beer i.e. out of its Global Priority brands only one isn't a spirit-Guiness.
EABL considers itself a beer company that sells spirits and other beverages

Hence, Diageo may not be enthusiastic about EABL's moves into other related sectors like carbonated non-alcoholic beverages.

What if we keep the status quo?
EABL will continue earning ‘nice’ dividends and a 7-10% annual growth but nothing spectacular.(assuming they maintain their market share)

Competition will keep intensifying in the region for EABL's market. For example, Keroche and others are targeting the lower end of the market. Carlsberg, Windhoek, Stella Artois target the upper end.

This may affect EABL's earnings.

The proposal
If EABL were bought by a pure beer company e.g. Carlsberg. Then they can chart moves for the group's growth in the continent and beyond. For instance, Carlsberg isn't as strong in Africa like Diageo or SABMiller Plc. It would use EABL to grow in the region.

Bottom line
Unless, EABL can come up with a new long-term (7 years plus) strategy the future will be challenging. New brands in the existing market only cannibalize existing ones. At the same time competitors are slowly chipping at its market share.

JUBILEE HOLDINGS-NEW STRATEGY?

Jubilee Holdings (JHL) is holding an Extraordinary General Meeting on 18th December.
The aims are to amend the Articles and Memorandum of Association.
Some of the proposed changes are:

-Allow directors of insurance firms that are not subsidiaries of JHL to sit on the Board of Jubilee Holdings (Article 75 amendment)

-Unclaimed Dividends and shares to revert to the company after 6 years and become part of its reserves. This is a smart move because if they are surrendered to CMA, it’s an outflow of cash from the company.

-To insert the following clause in Clause 3 of the Articles and Memorandum of Association:
(Extracted from Proposed Articles and Memorandum of Association)

“3. (z) To act as an investment holding company and to co-ordinate the
business of any companies in which the Company is for the time being
interested, and to acquire (whether by original subscription, tender,
purchase, exchange or otherwise) the whole of or any part of the stock,
shares, debentures, debenture stocks, bonds and other securities issued
or guaranteed by any body corporate constituted or carrying on
business in any part of the world or by any government, sovereign
ruler, commissioners, public body or authority and to hold the same as
investments, and to sell, exchange, carry and dispose of the same.

(aa) To carry on the businesses of consultants, advisers, financiers,
bankers, advertising agents, brokers and to carry on management and
agency business of all kinds and generally to render services of all
kinds to others.

(bb) To carry on any other trade, business or activity whatsoever and to do
anything of any nature which can, in the opinion of the Directors of the
Company, be advantageously or conveniently carried on by the
Company in connection with, as ancillary to or independently of any
of its businesses.”


Click here to download Proposed Articles and Memorandum of Association
Current Articles and Memorandum of Association.

MY OPINION
Takeover
Why would Jubilee allow a competitor to sit on its Board? Altruism? Noooooooo…
I think a takeover/merger must be in the offing. The Company needs to amend the articles so that they can carry out a deal in the next 6 months. Because the AGM is not more than 6 months away .The amendments can still be done at the AGM.
If the matter/opportunity was not urgent they would wait for the AGM.

Increased Scope of business
Doesn’t the additional clause 3(Z) read like the corporate profile for CFC Group?
Jubilee probably wants to grow like CFC group and expand into areas like Fund Management and Financial Services.

Expect a surprise from Jubilee Holdings Limited soon.

As a shareholder, i vote YES.

The EAST AFRICAN AGREES WITH THE SAFARICOM POST

The Current issue of the East African summarizes what was in my earlier posts on the Safaricom/Mobitelea issue.
-http://pesatu.blogspot.com/2006/11/extremely-simplified-safaricomvodafone.html#links

-http://pesatu.blogspot.com/2006/11/safaricom-mobitelea-ask-sarin-here-is.html#links

They have a better graph of the shareholder structure.

However, the graph showing the present day shareholder structure of SAFARICOM K Ltd. has an error. It shows Telkom Kenya Ltd. having a 60% stake in Safaricom and Vodafone K ltd with a 35% stake in Safaricom instead of a 40% stake.

The 87.5% stake in VKL by Vodafone Plc. and 12.5% stake by Mobitelea ventures is accurate.

The article also says that the Parliamentary Investment Committee (PIC) has summoned the Registrar of Companies and the Safaricom M.D. to explain the matter.

The following issues could thwart the PIC effort:

1.Mobitelea Ventures could be registered offshore, so no record of it may be at the Kenyan Company registry.

2.Safaricom officials may claim to only know about Safaricom Kenya Ltd. matters i.e. they are not Vodafone Plc or Vodafone K ltd employees. As such they can’t shed any light on Mobitelea or Vodafone Kenya Ltd. Shareholding.

It is akin to asking Gerald Mahinda(MD -EABL) to comment on SABMiller Plc's affairs because SABMiller Plc has a 20% stake in Kenya Breweries Ltd(an EABL subsidiary).He can't since neither he nor EABL are members of SABMiller Plc.

NB: the article is in the current Print Edition and may take a while to appear online.

EXTREMELY SIMPLIFIED SAFARICOM/VODAFONE SHAREHOLDING STRUCTURE-II

A fellow blogger Keith has mirrored part of the original post on his blog.He has also drawn a more LEGIBLE chart of the probable Shareholder structure.

CLICK here to go to TeleBusillis

My Investment style

I believe investing is a psychological game with monetary outcomes (you make profits or losses). To make money in the market (most of the time) all you have to do is take a position and wait for the price to rise. For instance, in the past 2 months you could have bought Barclays at sh250 and Jubilee Holdings at Sh180 and gotten out at Sh.600 (Barclays) and sh300 (Jubilee Holdings) now.

That’s the easy part, to get into a position you need guts/balls/confidence and to get out at a good price you need to tame fear and greed.i.e. You fear you are getting out at a lower price i.e. the price of the share may appreciate after you sell.

How do i buy a shares?
I consider the following four factors sometimes together sometimes in isolation. For instance, i recently added Jubilee Holdings to my portfolio. I only considered the Market sentiment and the numbers when purchasing it.

The four factors are:
1. Big picture
Meaning how the Economy and the sector will grow in 5-10 years and where that company will be then. I like it if the firm's sector is growing and the firm can corner a large section of the sector.

2. Management track record
If the management/owners have a record of delivering, it definitely makes the firm appealing.

3. Market sentiment
If the market undervalues a share or ignores good prospects in a company. That's the time to get in. Because markets tend to rise over time BUT not in a straight line. Like Kenol Kobil when it was at Sh.65

I remember when KPLC was sh.330 a share in the late nineties, then Sh.6 in 2002 and today it’s at sh.288 today.
At all those prices there were experts who could 'justify' that price with charts, Valuation models and research.

Investors who bought at sh.330 still don't have their money back (KPLC didn’t pay dividend in some years). Those who bought at sh.6 are marveling at their 'intelligence'.

Right now the market favours stocks that have low absolute price i.e. below Sh100 and low issued shares -less than 100,000,000 issued shares e.g.. Jubilee Holdings. My current style is geared towards this.

When the market changes so will I. You can never bet against the market.

4.Numbers
Is the Balance sheet healthy? Does the Cash flow appear healthy? Is the firm's debt sustainable? I also look at metrics like EPS, P/E ratios.

Influential Investors
These are the people who influence my thoughts on investing

-Carl Icahn- I love his tactics

-Warren Buffet-Everybody loves his style. But he is an extremist when it comes to saving his money (borderline miser). What’s the use of being a Billionaire if you can’t have a Gulfstream?

-George Soros -Famous speculator. Only guy to have ever fought against a Central Bank and won big i.e. US$2 Billion. He’s never afraid to lose.

-Richard Rainwater- Got into Cell phones in 1979 and Oil in 1998 when they were considered ‘dead’ sectors. CLICK HERE for a BUSINESSWEEK article that disparaged him but he got the last laugh.

Dr.Gakombe - Few know that he once was a shrewd investor on the NSE.I'll tell the story someday.

MY Portfolio-Click here to see it

EXTREMELY SIMPLIFIED SAFARICOM/VODAFONE SHAREHOLDING STRUCTURE


CLICK here to see the chart on
http://telebusillis.blogspot.com/2006/11/more-on-safaricom-and-vodafone-kenya.html
*OR DOUBLE CLICK ON THE PHOTO TO SEE IT CLEARLY


This is a very very simplified Diagram(some information is left out) drawn from information obtained from the Annual reports of Vodafone Plc. as at 31st March, 2004, 2005, 2006. However, its sufficient for illustrative purporses.

Between Vodafone Plc. and Mobitelea Ventures stake in Vodafone Kenya Ltd (VKL), there may be several holding Companies and legal entities (Special Purpose Vehicles). I have ignored this in the simplified chart.
The 87.5% and 12.5% refer to the assumed eventual holdings in VKL by Vodafone Plc. and Mobitelea Ventures through the various legal entities they control.

87.5% control of VKL translates into 35% effective interest of Safricom and 12.5% of VKL translates into 5% effective interest of Safaricom.


There are three facts you must keep in mind when looking at this chart:
1. According to Safaricom, the Shareholding is 60% Telkom Kenya Ltd (TKL) and 40% Vodafone (K) Ltd which is true.

2. According to Vodafone Plc. Annual Reports, they acquired 5% indirect interest in Safaricom from Mobitelea Ventures in 2003.NOTE; they said INDIRECT INTEREST not DIRECT interest. Meaning that Mobitelea Ventures has an indirect interest in Safaricom.i.e.they don’t directly own shares in Safaricom but in another company (VKL) that owns shares in Safaricom

3. The only way to have an indirect interest in Safaricom is through Vodafone Kenya Ltd (VKL). TKL’s stake is still the same as at the time of the Original Agreement in 2000.

Conclusion
Shareholder agreements are legal and still stand since the agreements are between TKL and VKL, not TKL and Vodafone Plc.
The aggrieved parties are Vodafone Plc’s shareholders. TKL isn’t since it agreed a 60:40 split of Safaricom and it still has 60%. Vodafone Plc. diluted its effective interest to 35% from 40%.

Why we are barking up the wrong tree.
The transactions are between Shareholders of VKL (it’s a Private Company), Vodafone Plc and Mobitelea Ventures.TKL, Safaricom Kenya Ltd are strangers to these transactions.

Therefore only the shareholders of the involved parties VKL, Vodafone Plc and Mobitelea Ventures can answer the questions or be aggrieved.

SAFARICOM/ MOBITELEA- Ask Sarin
Here is my two cents on the Safaricom issue.

Safaricom Shareholding as at 2000(Vodafone Plc) Press release(link to it)
Telkom Kenya 60%
Vodafone Airtouch 40%

Safaricom Shareholding as at 31st March 2006(Vodafone Annual Report)
Telkom Kenya Ltd 60%
Vodafone Kenya Ltd 40% .Vodafone Plc **35% effective interest in Safaricom
Mobitelea Ventures ** 5% Effective Interest in Safaricom

*Vodafone Plc holds Management control as per a Shareholder Agreement.
*Vodafone Airtouch Plc changed name to Vodafone Plc.

**Vodafone Kenya Ltd assumed to hold 40% stake directly for both Vodafone Plc. and Mobitelea Ventures

Vodafone Plc Annual Report-31st March 2005. (Extract)
“Safaricom
On 10 January 2003, under an agreement with Mobitelea Ventures Limited, the Group
completed the purchase of a 5% indirect equity stake in the Group’s Kenyan associated
undertaking, Safaricom Limited (“Safaricom”), for approximately $10 million
(£6 million), increasing the Group’s effective interest in Safaricom to 35%.”

As you can deduce from the above, the Telkom stake has been constant at 60% but the Vodafone Plc stake appears to have gone from 40% to 30% and then to 35%. It’s Vodafone giving up its Shareholding and not Telkom. So no problem/loss to us Kenyans.

Meaning that if there any questions about the ‘new’ Shareholder, Vodafone Plc and Arun Sarin (CEO) may be a good place to start. Hope this stops the misinformed bloggers out there putting out wild theories (e.g. ColdTusker).

The other thing is that Safaricom is a Private Company i.e. pre-emption rights apply.5% of it is Carte Blanche to stick up Vodafone for a large sum. Why hasn’t the owner of this stake sold it to MTN or Cegetel after giving Vodafone an impossible offer? This is what I would do if I was Mobitelea.

The reason can only be that Mobitelea Ventures is partially owned or is known(to Vodafone) and acts in concert with Vodafone Plc in regard to Safaricom. Note: The Annual Report says Vodafone Acquired an indirect stake in Safaricom. Therefore, control must be through another legal entity i.e. Holding company.

We must be careful as a country not to act in a manner that scares away investors. See how Russia’s attempts to right past Privatization wrongs i.e. Yukos affair have affected investor outlook. Everyone is afraid to deal with ethnic Russian investors. Because you never know when the Government may slap you with millions in back taxes and take away your joint venture. Just ask BP.

Hence, what investors call Political Risk for Russia is up.Russia has Oil,Gas,Guns and the Bomb.They can stomach the risk, i dont think we can.

Retirement Benefits Authority (RBA) -Open Day

Yesterday, i went to the RBA event.I've been going for them since last year.
There is a lot of improvment before; there used to be only 2 or so Fund managers and the rest of the exhibitors were Insurance Companies.But yesterday's mix was sort of representative of everyone.

I made by own ranking of the best stands based on two factors; how they presented info to the public and how the staff and the information given(brochures) explained the issues to me/you.

Ladies and Gentlemen...............Drum roll please...The:
Best Exhibitors
AIG Global Investments (East Africa) and Genesis Kenya Investment Managment Ltd.
I couldn't decide on one, both had good people manning the booths.The information they gave was relevant and informative ,not superfluous.I know the basics so i don't need a pamphlet defining what a pension scheme or Trustee is.

Most Improved
ICEA group i.e. they have redefined their Fund Managment and Pension scheme subsidiaries.They now have ICEA Asset Managment Ltd and ICEA Trustees Ltd.I think they will make waves in the next 12 months.

Most Notable Newcomers
Amana Capital Ltd and British American Asset Managers Ltd(BAAM).
With Amana's Personal Pension Product there's no excuse for not having a Pension.They have products with monthly contributions of less than Ksh 2,000

BAAM have similar products(mutual funds) to African Alliance but with better marketing and i would say better execution of the Mutual Fund concept.

Best Concept
ICEA Trustees Ltd.-The Trustee services are worth looking at if you have a high net worth and want to leave something for the next generation(your kids).Alternatively, you could be rich,generous and want to set up a Scholarship fund a' la Rhodes Scholarship or Rattansi Trust.

Just read the Kenya Gazette- half of it is legal notices relating to Succession cases for Kenyans who died without wills.

What i learned
You cant touch your Pension Funds until you are 50 years old(Last year's Budget made the rule).But you can move it from one scheme to another.