Mavuno Securities

Kenol

This company has grown its operations consistently over the past ten years or so. The main feature of this growth has been acquisition of petroleum assets that various multinationals deem to be non-core in various countries in Central and Eastern Africa. I must say that the network created thus far is quite vast and impressive. I've never understood what the rationale is in buying what others want to sell. Maybe its my aversion of politically connected companies. I suppose these days you can't claim political influence in this company and thus the probability of a backlash from Kenyan authorities continues to recede. Also as the company continues to grow its regional operations its Kenya concentration will diminish. I suppose if I get my mind round to it I'll eventually get an idea how this company maintains such a strong growth momentum. But the big question for me right now is who (and why) is supplying the market with soo many shares? I suppose we should be rejoicing as the stock has always been soo hard to get any improvement in free float would be a boon.

Thinking about Mumias

With the share price tanking as it is one has to wonder at what point should I jump in? Consider this, Mumias must have alot of old plant and equipment resulting in poor cost of goods produced. Since Kidero walked in I'd assume that he has figured out a medium-term plan to progressively improve efficiency and slowly lower cost of production per kilo. If you follow this argument and add the assumption that Kenya's domestic sugar market will continue to be protected and high domestic prices will pertain, then this stock starts to look even more interesting. Have we seen anything similar to this? I think so, EABL is more or less the same story of new management coming in and improving efficiency ratios leading to a consistent appreciation in the share price. Finally, add the fact that the largest shareholder is GoK with 20%! Mumias is a sitting duck for a takeover. Watch this space.

Safaricom Kenya: Is there a sting in this tale?

It seems the Safaricom share offer is a dead set certainty for sometime this year. Just thinking about it I realise it is ironic that for Telkom to thrive it needs to rid itself of Safaricom. The first step was taken last week when a consortium of local banks lent it Ksh.5.8bn to fund a long overdue retrenchment programme. This move potentially releases Telkom to compete for market share more aggressively. Also and probably more important the loan is secured with shares in Safaricom. It would seem the loan will be settled on completion of the upcoming Safaricom share offer using part of the proceeds. This is a major departure for government which typically wants privatisation proceeds channelled to Treasury and not re-invested in the companies.

Then factor in the enthusiasm that the Chinese have assisted the government in funding the core intelligence network of Telkom's CDMA network. Telkom in my view is the company to own in this industry. Safaricom will be sold to the market at its zenith. Face it why on earth would you continue to use a mobile phone service charging you upwards of Ksh.15 per minute when Telkom wireless is available at a max rate of Ksh7.70  per minute? Pure economics will land hard on Safaricom when subscribers flee to Telkom. Don't forget a strategic partner is still to be identified and when a suitable party is on board it will be battle stations.

So should Safaricom be a buy? Yes, however the wild growth rates of the past few years should be behind us. It will prove to be a good company as they get their act together. Over the medium term however, competition in the sector will intensify commoditising telecommunication services - pretty much what the Communications Ministry wants. That isn't music to an equity investor's ear.

A cooling breeze

The NSE 20 share index closed lower this week as market players continue to avoid pushing prices any further. The unfolding scenario is opening up opportunities in the market, if the market continues to lose ground over the next two weeks we will see share prices enter the BUY territory. I believe the current re-rating we are seeing was triggered by fund manager comments that stocks are over valued. It would seem investors assumed no share is under valued and have run in droves.

There is a lesson in all this, fund managers may be talking the market in the direction they want to see it - it is possible some guys would love to push prices lower to get a chance to load up. This is one of the oldest tricks in the profession. Don't believe all you hear, some shares are not that expensive. Then others are just beyond reason. Some little digging will point anyone to the real gems in this market. Reporting season will start in earnest next week, lets see if anything then will stem this slide.

Kenya Re's listing

interestingly the government has decided to go ahead with the listing AND at the same time try to recruit an MD and Finance Director. While I must admit the stock market has never had such an enthusiastic government as this one, on this one I'd urge caution. Plans are not always set in stone if something crops up you adjust your plans and avoid forcing things. In this case, the government discovered some financial mess that seems to involve the immediate past FD and MD. The two end up leaving the company and government still wants to have a share offer in April this year - just over 60 days away. Anyone who knows how long it takes to recruit would tell you you need no less than 6 months to advertise, interview, negotiate and have your new recruit complete a notice period. Then after that the poor MD still needs to figure out what he is dealing with and draw out a plan of action going forward. Maybe on this particular one it would be better to shelve the listing plans for one year. The clouds hanging over the company may just be enough to frustrate a full subscription despite the euphoria in the market at present.

On another note the market continues to cool down as people seem to be waiting for the next move. 2006 annual result reporting season will kick off very soon through to mid March and direction will become clearer as we move through the month. There might be a few bonus share issues or even another stock split. It will be interesting to see if people now accept these really do nothing to the value of their investments or will it trigger another intense round of speculative trading? Time will reveal. Nafikiria watu wanachanuka sasa.

Mumias: No longer sweet?

Following the second round of sale of shares in this company, the share price has taken a dip as those who bought at the offer price of Sh.49.50 started selling their shares. With sellers exceeding buyers the price sunk all the way to Sh.41.75 yesterday. It would seem that recent negative sentiments expressed by professional money managers on valuation have also cooled the market somewhat. I'd expect over the next 2 weeks the price will remain under pressure as those looking for a quick profit scamper. Thereafter the share will start to look attractive to investors.

In my view the current selling is opening a window of opportunity, particularly for those with a desire to hold large blocks. With a sugar deficit in the country, coupled with efficiency improvements on the cards for Mumias and low per capita consumption levels this company is still in an attractive position. The share price may now be getting into the zone where the serious buyers should come in.

ODM Kenya and the exchange

Various ODM Kenya luminaries have been quoted in the press saying the market activity seen today is drug money being laundered. More recently they say on coming to power after this year's election they will reverse all IPOs (or more specifically government sale of shares) undertaken under the present government. This is a troubling trend and has grave implications for property rights in this country going forward. I hope someone points out the great damage to the economy if these statements are seen through.

I'll speculate how the reversal can be achieved. One way is to buy all the shares back and revert to full government ownership. I'm not sure if this would be the best use of resources given that our hospitals and schools still need plenty more supplies. Another way would be to just nationalize the companies, ignore the current shareholders and just move in. Just have a look at Zimbabwe and see what that idea did to the economy.

I hope these are just statements made in the heat of the moment and nothing more. We are in an election year, politicians will be shooting from the hip and all manner of statements should be expected. My view is carry on with your life, do your thing as reason will prevail as the dust settles after this year's election.

CFC: Was someone in the loop?

Isn't it interesting that the share price rose steadily ahead of the announcement of the merger with Stanbic? Did anyone notice how many shares changed hands. If you've read the cautionary released by CFC, the price for the deal is to be determined in part by the 30 day average upto 18 Jan (inclusive). That is the period shaded in the chart alongside. Could there have been a leak?

It is important to note that these things are very difficult to keep under wraps even in the most sophisticated markets. Also it is very hard to prove that the rise in the share and increased activity is solely due to insider trading. It could all have been a rather innocent coincident.

PS: I'm not a techie so forgive me for the quality of the image. As I go along I'll figure out how to present clear, crisp images. Anyone with ideas on how to post an MS Excel generate chart feel free to educate me.

EABL half year results 2006 (Sh.148.00)

On Feb 23 EABL will reveal its 6 months (Jul-Dec 06) performance after the close of trading. I expect the numbers to be quite interesting and if the market pays attention should push the share price higher. Two things in my mind strike me as important:

1. Like it or not this government has placed significant emphasis on shoring up our rural economy. If you assume 60% of the population is to be found here, then any efforts in this regard will only be music to mass market companies. Rural farmer incomes have been improved through price support mechanisms and market guarantees. Add to that the subsidy provided to these families through free primary school education (and there is talk of extending it to secondary schools now). You can thus start to see the case of higher disposable incomes across the country. Remember Safaricom stated that the record profit announced recently was achieved thanks to increased new connections in the rural area? I think EABL is benefiting from this same factors and volumes in Kenya particularly must have seen some lift.
2. Another factor is a tax reduction on unmalted beer announced at last year's budget. The bottom line effect was to reduce the retail price per bottle of beer to the same as a bottle of coke. Now imagine how many of our rural folk would be enjoying a bottle of Citizen or Senator instead of Chang'aa? Combine this factor with the improved disposable incomes.

Well on the afternoon of 23 Feb, after the exchange stops trading we shall finally know. Methinks there is still a growth story here and we are still in the early days of an extended period of growth.

CFC Bank

Last week management announced that it had entered merger negotiations with Stanbic Bank, while Standard Bank of South Africa the parent of Stanbic has reached an agreement to buy out leading shareholders of the company. The resulting merger and take over will result in the creation of a new and relatively large commercial bank - listed on the NSE. Standard Bank has operations in insurance services as well as commercial banking in South Africa, while its international operations are dominated by banking operations. Standard Bank has set its sights on becoming a leading emerging market bank and in the processes has identified some key markets including Kenya and Nigeria in Africa.

The deal as agreed includes a price worked out as the average price over a 4 week period prior to the announcement. This market has just not learnt how to read a company announcement - for control Standard Bank did not pay more than the market price. So why on earth would anyone want to pay Sh.368.00 the close price or worse still Sh.900.00 per share? CFC at Sh.120.00 was already expensive well beyond its peers ..... In the end it will be good for market players to burn their fingers now and in future start paying greater attention to fundamentals. CFC is a great business, CFC the share at current prices is a poor investment. If only we could short sell in Kenya!