Diamonds in the rough

It is official, 2 highly watched Kenyan banks are due to cross list on the Uganda Stock Exchange and several investors are wondering what the effect of this cross listing will be on their investments.

We do know that the cross-listing process will provide more sources of capital for KCB – hopefully even cheaper and will also play a part in improving knowledge of the 2 banks amongst investors.

In my experience, stock brokers in Uganda are reluctant to deal Kenyan stocks because of the associated exchange differences and the need to assure their clients that nothing fishy went. Usually they prefer that Ugandan clients deal with their forex differences and place their orders in Kenya Shillings which of course doesn't appeal to them.

Case in point are the already cross-listed stocks currently on the USE. Jubilee (JHL), East African Breweries Limited(EABL) and Kenya Airways Limited(KQ) are stocks to reckon with which have been delivering value for quite sometime now. (Don’t tell me that KQ has taken a pummelling recently).

See http://www.use.or.ug/inner.php?cat=trdstat&subcat=mktinfo

On the basis of the above, I would not foresee any significant changes in the banks share price at least in the short run. In as far as the key obstacle, which lies in the fact that the USE is not automated (still paper based), it will take sometime to realise any impact of the cross-listing.

There is also the problem of timing difference as the trades take some time to execute resulting in significant price losses/gains during the execution period. And after all the hullabaloo surrounding Safaricom, only the serious few like myself are really into this kind of thing.

Elsewhere, word has it that Uganda Clays shareholders have okayed a split which will reduce the share price from the current Ushs10,160 or whatever it shall be when the split is effected by Ushs100. Now as you may already know, this stock has been my secret gem in Uganda. I believe this is the best split yet.

Main Menu: Diamonds in the rough
Meanwhile, while snooping through Kenya, some gems appear to exist which are free riding into value territory while every one is focusing on Equity Bank and Safaricom Ltd.

BAT Kenya Limited and Total Kenya Ltd just unleashed brilliant results for the half year ended 30 June 2008. You’ll ask me, what’s so good about that?

I particularly love BAT Kenya because it is so in line with my core concept of value investing. Of course this one is not for you ethical investors. Don’t crucify me as at the moment, I do not own any shares in BAT Kenya. This may change any time.

Kenya recently implemented two changes which the naysayers will tell you should really do damage to BAT Kenya’s bottom line and ultimately their ability to deliver value in the long term.
Kenya recently introduced hybrid taxation in his 2008/09 budget, which they said was intended to improve the fairness of the taxation system. On top of this, one would ideally expect the ban on public smoking to also take effect. Additionally, there’s the line about illicit trading and smuggling of cigarettes.

It is generally well known that

i) the government can not do without the Ksh4,000M that BAT pays in taxes (both income and excise)
ii) the public smoking ban has been tried and tested in neighbouring Uganda and even the United Kingdom with interesting results.
iii) The market reacts and adapts to such legislation and other occurrences. After all, smoking is an addictive luxury. (Yes I said luxury). Or should it be utility???
iv) The biggest obstacle, in Africa, will naturally be the will to implement.

I do not intend to reproduce the numbers as these are already available in the public domain but suffice it to say that BAT is a stock that keeps on delivering value year on year and as with the key tenets of value investing, cash-flows and particularly dividends never lie. Honestly speaking, what’s wrong with this cash flow statement especially given that we all know equity markets are taking a beating the world over? PS focus on that cash flow statement.

http://www.nse.co.ke/newsite/pdf/Announcement%202008/BAT%20Half%20Year%202008.pdf

Yes operations generated less cash than we would expect.

We must note with respect to BAT Kenya, that the dividend yield is not necessarily based on special events or payouts. As a result, there is every expectation that the company will keep up on its dividend payments

As I have always believed and blogged. stocks which provide a high dividend yield will almost always provide a lot more value (in the long run of course) in comparison to other stocks and even the entire market.

Various investors in search of value without the same degree of volatility associated with growth stocks. BAT Kenya has consistently provided an income of 8% or more plus capital appreciation.
And the icing on the cake is that the company has positive earnings growth and the volatility/risk associated with certain stocks especially on the NSE is avoided.

I definitely expect BAT Kenya to keep on improving on these dividends in order to maintain the yield as the share price increases.

As for TOTAL Kenya Ltd, I’ll let the numbers do the talking:

Share price: Ksh 30 - Ksh 33 (rounded)
PE Ratio: 10
EPS: 3
DPS: 2.5
Yield: 8%

Again, the naysayers go on and on about inability to pass on the increases in the oil price to consumers. However I say that this applies to the entire oligopolistic market. Someone somewhere in the industry has got to rise above the rest. I believe this will be TOTAL simply because they have demonstrated over the years, that management have what it takes to keep on delivering value over the years through managing inventory, transportation and keeping financing costs to a minimum. Otherwise, the sustainability of these sumptuous dividend payments would not be possible.

Wish list
i) If only Uganda’s parliament would pass the electronic trading bill, relevant parties sign the dotted line and electronic trading is realised in East Africa
ii) Dare Salaam financial markets were liberalised and foreign exchange controls relaxed


New Vision Rights Issue: How to Participate.
Shareholders: To participate in the Rights Issue, you will need to fill out a Provisional Allotment form and together with the payment (to be made to Standard Chartered Bank Uganda– the Receiving Bank) send your form to an authorized broker.

New Investors: Rights are currently trading on the USE at Ush500 ($0.25)
In both cases, do contact a broker of your choice to help you with the whole transaction. (page 80 of the Investors Memorandum has a list of all the authorized brokers).
For more info, please see:http://www.enteruganda.com/brochures/nvrightsissue.html

DISCLAIMER: This blog does not constitute investment advice. Though utmost care has been taken while preparing this blog, I do not accept liability for investment decisions made as a result of this blog

While we were away

We've been away during the past 1.5 months during which we were reviewing various markets results of which will be posted later this week.

So what has been happening during the last month or so?

Sub Saharan markets have taken a beating over the past 1 month as a result of the infiltration of sophisticated fund managers. As we all know, these tend to lay claim to scrutiny of stocks in search of profitable stocks. Well, the East African triumvirate presented their budgets
Rights issues took centre stage with Housing Finance Company of Kenya and Kenya Commercial Bank (which is currently ongoing).

One more is scheduled by Uganda’s daily The New Vision. This had all inclinations towards being value for money. The New Vision is offering 25.5 million additional shares at a discounted price of sh1,100 to shareholders during the period from July 10 to August 13. The current share price is Ush2,510. Is this a 56% discount???. Apparently the rights are trading at Ushs350 which despite slightly knocking off on the discount, is still commendable value.

National Insurance Corporation (Uganda)’s IPO appears to have resurrected from the dead. Information is still scanty regarding this but my usual reminder is that it is pretty difficult to go wrong with IPOs in Sub-Saharan Africa.

On a sad note, a rumour going round is that the Crane Bank IPO will actually not happen.

At the board meeting of Baroda Uganda, a 10:1 share split was tabled which was approved.
As I write, Uganda Clays share split is scheduled for Monday 28 July 2008. For a share trading at a price of Sh10,150, splitting this between 100 to 1000 times would really enhance the liquidity of this share.

Can you believe the Tanzanians secretly listed the National Investment Company Limited (NICOL) Dar es salaam Stock Exchange (DSE) mid this month. For all the tools of macro-economic management, it is quite sad that the exchange controls were deemed the most appropriate. The trade off between the benefits of foreign direct investment .