Value in Malawi - Get over Safaricom Kenya

.,,....................Rising inflation, rising interest rates, rising food prices....How far we've all come:

The performance of the various markets in 2008 doesn't tell so bad a picture compared to what's happening out there.

Nairobi Stock Exchange Loss - 18%
Uganda Stock Exchange Gain - 9%
Malawi Stock Exchange Gain - 15%
Botswana Stock Exchange Loss - 15%
Zambia Stock Exchange Gain- 18%

The much touted Safaricom turned out to be an excellent choice for speculators. Apparently, any one who managed to offload their meagre allocation within the first 2 months did manage at least 20% to 40% return. Since then, Safaricom has been playing only one role and that is to draw the NSE 20 index as low as it can get.

So I did some soul searching and realised that this IPO was merely meant to shed light on one of the key principles of value investing as preached by Warren Buffett. One of his key principles, and which he touts year after year in his letters to the shareholders of Berkshire Hathaway, only invest in companies you understand.

Seeing the value of Safaricom plummet to Kshs 4.6 or thereabouts, I did ask myself the following questions:
i) did I really understand the goings on in Safaricom (of course other than the basic airtime/telecom crap);
ii) did management of Safaricom provide all the information I would have needed to make an advised decision;
iii) did the company have comparative advantage in the long time?

At the time of the IPO, some of the answers to the above questions were positive.

Unfortunately, over time the answer to these questions have since become NAYs. Seeing the company engage in unending price wars, coupled with the fact that 'scarcity of the share' is almost non existent have convinced e that I would be uneasy if the market closed for 10 years with my funds invested in this company.

I have convinced myself that this was a mistake but its not the end of the world. We will be looking to exit this share as soon as it gets into positive territory. (Of course this is to uphold the No 1 rule of investing:-never lose money).

It is on the backdrop of this that I'm introducing the discovery of potential value identified in Malawi.

Apparently, the Telekom Networks Malawi Limited ("TNM") announced the commencement of its initial public offer for subscription of 1,290,450,000 ordinary shares of MK2.00 each from 7 October 2008 and closing 17 October 2008. Results of the IPO are expected on 28 October and listing on the Malawi Stock Exchange on 3 November 2008. The free float after this IPO will be 20%.

A couple of pointers caught my attention:
i) TNM expects to distribute between 40% to 60% in August and investors in this IPO will participate in the second interim dividend in December this year. I personally prefer to place a significant level of emphasis on the company's ability to declare and pay dividends because as we all know, the company requires cash to do this. Of course I reinvest my dividends as I so wish and thus enable the compounding effect to work its magic. With respect to TNM therefore, this will play an even bigger role in my investment decision because of the fact that Telecoms is a cash consuming (hence the presumed question mark)
ii) The company seems to understand the value of providing timely reporting and information the its various stakeholders.
iii) Currently one of two wireless network operators with competition from Zain.


As always, there are some negatives:
i) In the event of an over subscription, the shares will allotted at the sole discretion of the directors.
ii) EBITDA is growing but with reducing margins due to its aggressive marketing policy
iii) High operational risk due to rapid growth and development over a short time.
iv) Investors in Malawi need to be mindful of the restrictions with respect to funds restriction in Malawi. This is occasionally implemented by the government as part of monetary policy.

Naturally, if you wish to crunch the numbers, you're better off checking out the prospectus in detail as per the link highlighted above.

My take - Never miss out on a sub saharan IPO; and more especially not in these crunch times. Now, while this may sound like a positive review, the timing of the exit is what will determine any investors gains or losses........and using the lessons learnt from Safaricom, this is most definitely one for the short term.

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