Tuesday, January 13, 2015

KQ - Losses, losses and more losses

Ahhh, my bĂȘte noire never fails to fail...
*I support KQ as an airline but the poor decisions made by (some members of) the Board and Management have financially devastated KQ*

And Godfrey Mwampembwa aka Gado [on Twitter as @iGaddo] says what I could not in 1,000 words...

Source: http://gadocartoons.com/kq-10-billion-loss-blaming-ebola/

Strategic Investors - A brief local perspective

The term Strategic Investor is often bandied around and it seems many firms are looking for one.

What is a Strategic Investor?
Why have a Strategic Investor?
What the pros and cons?

I do not want to post a long post so I will try to be brief.

A Strategic Investor is one who:

  • Invests for the "Long Haul" [not a Speculator nor a Financial Investor] but can sell out if need be.
  • Provides additional capabilities, knowledge or access to superior technology.
  • Often has an additional (in-depth) relationship with the Investee.
Many firms have reached a stage in their lives when they need to collaborate with others to expand or improve their presence and products. It is not easy to go it alone in an increasingly complex world. It is not always about the money but often the need to access processes and technology which is owned by other firms.

  • The Investee does not have to recreate the wheel. Sameer Africa (previously Firestone Tyres EA) had Firestone/Bridgestone as the SI to run the firm, provide technical support and access to suppliers. Firestone/Bridgestone have divested from Sameer Africa but helped Sameer Africa create its own brand/designs under Yana. Sameer is looking for another SI preferably an Asian partner whose technology, designs and processes are more aligned to producing for a competitive and price conscious developing/emerging economy.
  • Cheaper financing. Unfortunately, due to structural reasons, the financing costs in Kenya are very high. Borrowing in KES currently ranges from 12-18% p.a. for many firms. Large foreign firms can borrow in USD at 1-4% p.a. which helps them finance equipment at reasonable rates for its Investees. Seaboard Corporation (USA) owns 35% of Unga Holdings and provides financing for both grain and equipment. In addition, it help Unga access the grain markets at a lower cost using its vast trading network.
  • R&D. Access to R&D is a vital competitive advantage. Many Kenyan firms cannot afford the R&D due to the high costs of funding labs or access to world-class researchers. Safaricom leverages the capabilities of Vodacom to introduce new products e.g. the phenomenally successful M-Pesa is licensed from Vodacom. Whereas some of the infrastructure supporting M-Pesa is being moved to Kenya, it was owned, set-up and hosted abroad for years by Vodacom for Safaricom.
  • Loss of 'control' to an SI versus charting out a path. The SI may be conservative or their thought processes are not ideal or well-suited for the local markets. Equity Bank outgrew both Barclays (it was Kenya's largest bank by a HUGE margin) and StanChart (once a strong #2) in Kenya after the SI of both banks throttled back on expanding in rural areas as well as jettisoning 'low-value' customers. Equity Bank picked up branches and customers to become a behemoth.
  • Loss of value for existing shareholders since the gains/profits are shared with the SI. I do not see this as a major issue since the SI may help make the pie much larger so a smaller share of a much larger pie is a larger piece for everyone.
A partial list of firms with Strategic Investors: [Data may need verification]
  • Scangroup. 51% WPP. Bharat Thakrar who once owned 80% is quite the visionary chap. Hats off.
  • Equity Bank. 25% Helios Partners. HP seems more a financial investor than what a SI is but HP provided EB with significant amounts of capital at the right time. James Mwangi is quite open to innovative ideas about raising capital and Financial Structuring.
  • Unga Holdings [the major subsidiary of Unga Group]. 35% Seaboard Corporation. SC came in when Unga was going through major upheavals.
  • CFC Stanbic. Standard Bank of South Africa.
  • KenGen, KPLC. I am reluctant to call GoK a SI but they do control the firms with 50+% of the ownership.
Not all firms attract a SI but often there are disagreements about value.

KenolKobil, once a fast growing Fuel Marketer badly stumbled due to a significant position in a combination of Fuel and Currency Derivatives had a potential SI (Puma/Trafigura) who backed out after seeing the rot in their books. According to the Board/Management the hunt is still on now that the books have been cleaned up.

National Bank of Kenya with significant GoK (Treasury and NSSF) ownership seems to be looking for a SI.

East African Portland Cement has La Farge (48%) as a SI but the boardroom battles (GoK/NSSF have a significant stake too) have hobbled the firm.

Some firms have ditched a SI e.g. Athi River Mining which almost died in the 1990s had La Farge (Bamburi) as a SI. Bamburi contributed capital and a supply chain which saved ARM. Ultimately, after a clash in strategy with the controlling shareholder (Pradeep Paunrana and family), they bailed out leaving a lot of value on the table. ARM continued to grow by leaps and bounds and may soon be larger than Bamburi in EAC. What a reversal of fortunes!

Thursday, June 26, 2014

Week 26 of 2014 - Bonds, Loans and Banks

The flavor this week, though many months in the making, is mostly about loans and bonds.

Kenya's first ever Eurobond is a resounding success and raised USD 2bn. And at lower than expected rates. The $500mn, 5-year Bonds offered 5.875% and $1.5bn, 10-year rate offered 6.875%. Good show by Kenya's Treasury, its first ever non-politician Cabinet Secretary and the Central Bank of Kenya. It seems the World Bank has a positive outlook for Kenya with the potential production of crude oil by 2017 by Tullow may have helped. Tullow, like Kenya's Eurobond, is listed in Ireland.

I follow @sang252, an analyst on Kenya's Bond Market, and often use his comments and observations for my blogposts. He notes that local KES interest rates should drop slightly as Treasury doesn't need to tap into the local money market. That said, there is a lot of demand for cash from the private sector as it gears up for expansion.

Home Afrika (listed on the Nairobi Securities Exchange) wants to raise debt by issuing a Bond. Click on the link from Business Daily Africa.

This will not be easy since HAFR does not have the track record that Britam or HFCK have. Then add the disappointment with the quality of Financial Reporting and Disclosure by HAFR. HAFR Profit Warning for FY 2013. I doubt they can raise debt at the price & quantity of firms like Britam or HFCK since the risk borne by Bondholders would be much higher.

Athi River Mining (listed on the NSE) is Kenya's fastest growing cement firm but as with growth in capital intensive sectors, it needs cash, cash and more cash. And it plans a KES 25bn bond as part of a plan to raise $300mn [KES 26.2bn]. Read about it here. ARM has also issued Convertible Debt ($50mn) and is confident that the conversion will take place based on the performance of the shares on the NSE.

I expect ARM to manage the process well enough and raise the Funding via multiple Bond Issues or a single Issue but structured into tranches. Kenya is currently over-supplied with cement but ARM has expanded into Tanzania and Rwanda as well as other profitable but associated and opportunistic businesses in South Africa and Mali. If the various projects e.g. LAPSSET, Mombasa Port expansion, new roads, etc can be actualized then I expect a huge jump in consumption.

The ugly truth behind being a guarantor is raising its head in Kenya with the introduction of the Credit Reference Bureau. Have a look at this story of Obadhia Gitonga Micheu who sued Co-op Bank which blacklisted him with the CRB for alleged default on a facility for which he was a guarantor, blocking his access to credit for seven years. The suit raises pertinent questions on the liability of guarantors in the event of default. Kenyans routinely guarantee loans for each other, and sometimes clear arrears or have their assets attached after the borrowers default. OUCH!

It's not just the cement industry but also the food industry expanding at a rapid clip.

Bidco had announced plans to invest $200mn by 2017 then in May 2014 went ahead and announced a $23mn loan by IFC, as well as a syndicated loan of $13.5mn for a $46mn expansion project. The current shareholders of Bidco may raise the $9.5mn using bank or bond financing.

Kevian raised a long term loan of $7.5mn from DEG to expand its production facilities for packaging fruit juices. Recently, it added other products to its range to cater to a growing urban population. I figure it will also need loans for working capital needs and these are likely to be sourced locally.

Now this is an interesting one. One man's soup is another man's poison!
Kenya Commercial Bank (KCB) is in the process of refinancing a KES 3.3bn loan, which the County of Nairobi defaulted on, issued by Equity Bank (EQTY) to the County of Nairobi. Good move by EQTY which can write back the NPL as well as suspended interest for a boost to the 3Q 2014 results!

What a difference leadership can make! Alfred Mutua (@DrAlfredMutua) opened a 33km road built in just 3 months! From Capital FM comes this story. I believe Machakos County may be the first county to raise funds using a Municipal Bond if it continues developing its economy and infrastructure in a sensible manner.

"Machakos Governor Alfred Mutua has officially opened the newly tarmacked Makutano ma Mwala to Kithimani road, the first road to be constructed by a county government.

The 33-kilometer road was built at a cost of Sh650 million over just three months. The road acts a critical linkage cutting across Machakos county, joining Garissa road to the Machakos-Kitui Road."

Makes one wonder what the other 46 governors are doing!

Thursday, September 05, 2013

Precision Air, a Kenya Airways subsidiary, makes a record loss


Wow, things are going bad to worse for KQ as its Tanzanian subsidiary [KQ owns 41.2%] makes a record loss of around TZS 30,400,000,000 [KES 1,650,000,000 or USD 19,000,000] for 2012-13.



Monday, August 19, 2013

Egypt and Kenya - A look back. And forward.

A look back at a blogpost I posted on 11th April 2012 about the downturn in Egypt's manufacturing and how Kenyan firms can take advantage of the situation


Here is an article from Global Post about disinvestment from Egypt or at the minimum a slowdown.


As a member of COMESA, Kenya stands an excellent chance to take back markets lost to Egypt.

Whereas Kenya cannot replicate the beautiful & fascinating pyramids & ancient temples of Egypt, there is a market for tourists who want to enjoy the "Sun & Sand" and not Ancient History in a peaceful environment. It's a pity about JKIA but it should provide the impetus to expand Mombasa's airport to accommodate more flights direct from the tourists' source market.

Back to manufacturing. If Kenya can quickly create an inviting environment for increased manufacturing for export into COMESA, then that will serve Kenyans well for the future not only to counter Egypt but other countries including South Africa, China & India.

Egypt subsidized energy [electricity and fuel] for its export (including COMESA) markets but Kenya's focus on renewable [esp geothermal] energy will be a long-term advantage as Egypt faces hurdles in subsidizing energy for its population & industries. Subsidies will eventually fail and Kenya should stay away from these and concentrate on making the environment attractive for investors & industrial production.

Wednesday, June 26, 2013

Kenya Airways - Citibank projects a massive loss in 2013-14


Citigroup projects the airline to post a net loss of Sh3.1 billion in the current financial year ending March 2014 on higher costs that will wipe out sales.
KQ’s sales are expected to rise 15.3 per cent to Sh114 billion but Citigroup says expenses such as direct costs and net interest payments will rise to Sh118.5 billion, offsetting sales.
The national carrier is projected to return to profitability in the year ending March 2015 with a net profit of Sh618 million, on which Citigroup does not expect it declare dividends.

Wow! The airline business is tough and as Warren Buffett has said... stay far, far away!

I&M Bank lists as I&M Holdings


I&M Holdings re-listed on 25th June 2013 after a Reverse Merger.

City Trust, a then listed entity on the Nairobi Securities Exchange, acquired I&M Bank Ltd by issuing CTL shares to the shareholders of I&M Bank Limited.

After CTL owned 100% of I&M Bank Ltd, it changed its name to I&M Holdings which encompasses various banking businesses/subsidiaries.

I&M Bank - Kenya (100%)
I&M Bank - Tanzania (55%)
BCR - Rwanda (55%)
Bank One - Mauritius (50% Joint Venture with CIEL)

Congrats the Board of I&M Bank.

Monday, May 13, 2013

Whither Kenya Airways?

Whither Kenya Airways?

So after all the hype in 2012 regarding the Rights Issue by Citigroup, (Not-the) Standard Investment Bank and CFC Stanbic... KQ shares are trading at KES 11.35 which is 19% below the Rights Price of KES 14.00 ... I betcha that none of the 'advisers' were paid in shares but in cash. Ideally, they should have been paid in (locked-in) shares so they feel the gain or pain.

KQ is in a deep funk. Sad but true.

KQ acceded to the unions demands for higher pay/perks/benefits in 2010. The Board and Management [excluding GoK and KLM - represented by representatives not actual shareholders] which own 0.01% or less of the shares at the time agreed. They were NOT thinking like owners. They had no reason to.

Fast-forward to 2012. KQ restructures and right-sizes the labor force. I believe this was the right move to ensure KQ's long-term survival. The courts disagreed. I think many of the judges in the Commercial/Industrial divisions have little business sense.

So now we have KQ with a PBT Loss of KES 6bn vs the Rights Proceeds before fees/commissions of KES 14bn [miraculously just 0.06% above the minimum requirement] for 1H 2012-13. The 2H 2012-13 Results are due and I doubt they will be pretty.

Will KQ require another Rights Issue in 2014?
Will Kenyans participate in the next Rights Issue? [KQ needs 50%+1 ownership to meet many of the bilateral agreements]

Prisons or Asylum/Refugee Camps - A business? Why not?

Well, if one can make a business out of Asylum/refugee Camps, then why not?


My (preliminary) thoughts:
The Brits pay Kenya(ns) $1,000 per month per refugee. 

House them in a building built with Bamburi cement, roads built by Kenyan [more likely the Chinese] firms using Kenyan engineers and labor.

Provide them with food grown (and processed) by Kenyan farmers (and agro-industrial firms); clothing and linen made by a Kenyan firm [EPZ] and labor; basic medical care provided by Kenyan doctors, nurses and support staff; pricier care can be billed to the UK authorities; hire Kenyan wardens to guard them. The rungus could be made in Kariobangi. The bullets in Eldoret. The batteries for the torches in Eldoret. The patrol cars assembled by AVA in Changamwe. The petrol [probably local production in 5 years] supplied by KenolKobil.

Kenya(ns) can build the refugee center in a remote part of Kenya that cannot be farmed [arid] and is far away from any major town [I can provide multiple examples]. If they send us 1,000 refugees at $1,000 per month, the gross revenue is $1,000,000 per month. That is $12,000,000 per year at KES 84/$ = KES 1,000,000,000 per year. Not many firms in Kenya have that sort of annual revenue! 

Add the benefits Kenya Airways gets from flying family members, British immigration officials, lawyers, etc to/from Kenya to visit these refugees as well as staying at Kenyan hotels, eating at Kenyan restaurants and using other services like phones [Safaricom, Orange, Airtel, Yu], internet, photocopying and faxes. Many Kenyans can start taxi services to/from Nairobi/Eldoret/Mombasa to the Refugee Centers. Western Union, PesaPal and M-Pesa can set up branches at the Refugee Center as can Safaricom/Airtel/Orange/Yu. 

Asylum seekers need paper. Lots of paper. Forms, IDs, cards, etc that can give River Road the boost it does not need.

Look at this as a business and toss out those xenophobic and neo-colonial balderdash out of the window.

Rights Issues - 2013

The season of Rights Issues [last seen in early to mid 2012] is back. With the pre-election political temperatures rising in late 2012 into 2013 and the subsequent economic uncertainty led to high(er) interest rates, a volatile KES and low share prices, the fundraising at the NSE was muted.

Now that the Kenyan General Election is over for most candidates, other matters started taking center stage including the (eagerly awaited) naming of Cabinet Appointees by President Uhuru Kenyatta and the Governors settling into their offices. As calm has settled in, the business of business takes precedence.

Uchumi Supermarkets is coming to the NSE for its 2nd Rights Issue but unlike the 1st Rights Issue, this one is likely to be more successful. Uchumi almost collapsed but Mr. Jonathan Ciano has done a good job in bringing it back from the (almost) dead with the help of shareholders, debenture holders & suppliers.

Rights Issue Date: 3Q 2013 (Estimated)
Size of Offering: KES 1.5bn
Price: 15.00
Quantity of Shares Offered: 100mn
Likelihood of Success: High

*Update: It seems Uchumi may go for a KES 2bn Rights Issue up from the KES 1.5bn after seeing the high demand for its shares.

National Bank of Kenya (NBK) that almost died [technically insolvent] was given a lifeline [subsidy] by GoK and white glove treatment by CBK moved along slowly over time to re-establish itself, and stop the bleeding, under Reuben Marambii, the erstwhile CEO. It has a new CEO, Munir Ahmed, who will try to grow NBK into a respectable player. For now, NBK is assured of government business thus allowing it to steal a march over its competitors. This is the first time that NBK has come into the market for a Rights Issue.

Rights Issue Date: 3Q 2013 (Estimated)
Size of Offering: KES 10bn
Price: TBA
Quantity of Shares Offered: TBA
Likelihood of Success: Moderate to High but depends on pricing

One can expect more Rights Issue, Listings and New Issues in 2013 leading into 2014.