It’s been a tough 50 days or so.
Buffett
Warren Buffett’s (he of the Berkshire Hathaway Inc) letter to shareholders for the financial year ended 31 December 2008 is out and for only the second time since 1965, there was a reduction in the book value per share of Berkshire (9.6% decrease per share to be exact. Contrasted with the S&P500 which declined by 37%, Buffett still outperformed the Index by 27.4%. Not bad given the tough times we are in.
Naturally, I was interested in the investments section of the letter. A closer examination indicates that basically, all the none-core equity holdings- you know –those that Buffett either has only recently acquired or probably does not consider really long term have depreciated in value. Here we are talking about investments like ConocoPhillips (which Buffett actually takes time to admit having been a mistake), Johnson& Johnson, Kraft Foods, Tesco and US Bancorp. Otherwise all long term investments are still way in the money.
Two main themes are important to me from this letter. i) value investing is mainly long term (as if i did not know this already) and ii) the belief that cash is king is short sighted. The one bit I can’t believe is what on earth Buffett could have seen in Irish banks. But then again, I have a few investments which would have my partners wondering what on earth i was doing with their money.
Death of a sub saharan fund
Its mourning time for me.
As readers may recall from my last post, mention was made of some big fish going belly up. Well, it’s now official. The New Star Heart of Africa fund has finally decided to throw in the towel. Apparently, “having temporarily suspended dealing on 9 December 2008, it finally became increasingly apparent that to reopen the fund to dealing would significantly disadvantage the remaining investors, who would be left with a residual portfolio of increasingly illiquid stocks.”
Who is to blame? .....the credit crisis, low trading volumes, illiquid markets and poor prospects for new inflows to the fund were it to reopen meant there was little likelihood of the situation improving in the short term. As a result, New Star and the fund’s depositary agreed that an alternative route must be explored to provide liquidity to investors. After due consideration, and in consultation with the Financial Services Authority, it was agreed the most appropriate course of action was to seek a winding-up of the fund. A process of communication with investors is underway with a view to winding up the fund and returning the proceeds to investors.
Duh!!!!!!!!
Are these not the factors that make sub Saharan Africa worth investing in at this point in time? In my opinion, these should not be presented as excuses to an investor. Of course the investor should not be submitting redemption requests as early as this. Recall that this fund was launched on November 27, 2007 shortly before we started blogging about our escapades in search of value in Sub Saharan Africa.
Make no mistake about HOA. This was a fund which had been set up to achieve long-term capital growth for “sophisticated investors” by investing principally in the securities of companies which in the opinion of the Investment Manager, exercise a predominant part of their economic activity in, or derive a predominant part of their income from, sub-Saharan Africa, excluding South Africa. Is there a part of long term capital growth that these sophisticated investors did not understand or appreciate?
This was also an actively managed fund for which the fund manager charged Initial fees of 5.25% annual fees of1.75%. On top of this, Performance fees (where applicable) were set at 20% of out-performance relative to three month – sterling Libor plus 3%. The fund fell 20.4% during the month of January. Now with a minimum investment of $10,000 and any additional subscriptions fixed at a minimum of $5,000, this clearly means that regardless of performance, the value of one’s investment will have significantly declined to such a low that I’d have expected any investor worth their salt to hold on at least until the market stabilises. After all, we all know that investment losses are not losses until we lock them in by liquidating our positions. But the tongue in cheek view of this grim situation, is that in substance, the fund manager has been paid fees for nothing since the launch of the fund. Surely value investors should avoid these situations.
Anyhow, now we know why our markets are taking such a big hit. It is these so-called sophisticated investors getting out of the kitchen because they can’t stand the heat. Thanks to them, we will continue to pick up bargains on the cheap in sub Saharan Africa.
National Insurance Corporation Uganda IPO
Following on from our last post again, the IPO of National Insurance Corporation of Uganda Ltd is scheduled for April 2009.
NIC was established by an Act of Parliament under the National Insurance Act 1964. In order to pave way for Privatisation, it was incorporated as National Insurance Corporation Ltd (NIC) in November 2000. In June 2005, the Government of Uganda successfully divested 60% of its shares in NIC to Industrial and General Insurance Plc (IGI) of Nigeria through an international bidding process.
The Government retained 40 % shareholding after privatization in 2005 which it intends to sell through an initial public offer. The listing of NIC is another milestone in the privatization program embarked upon by the Government of Uganda. The offer for the sale of 40% of the shares of NIC is aimed at providing the members
of the public resident in Uganda and foreign investors with an opportunity to own shares in a leading insurance company in Uganda.
In 2006 NIC was rebranded into a major corporate refocusing initiative and repositioned as the insurance company of choice in the insurance subsector. NIC has the reputation for exceptional competence in the delivery of customer-centric service and product innovation.
National Insurance Corporation Limited has witnessed tremendous growth since its privatization in 2005 due to the introduction of customer centric products and service excellence. Within three (3) years of privatization, NIC’s gross premium income grew by 100% from Ushs6.5billion in 2005 to Ushs13billion in 2008. Within the same period, profit after tax grew from Ushs981million in 2005 to Ushs2.3billion in 2007.
Asset base has grown more or less been consistent on average from Ushs50billion in 2005 to Ushs53billion in 2007
• NIC has an asset base of over Ushs.50bn
• NIC has the reputation of exceptional competence in the delivery of Customer centric services and product innovation; recent products introduced include the School Insurance plan and Employee Insurance Plan.
• Because of its strong asset base, NIC was able to settle the largest ever claim in the Ugandan Insurance Industry history to the tune of Ushs11bn to the Government of Uganda for the loss of MI-172 Presidential Helicopter
• To increase its presence in the region, NIC opened a subsidiary in Southern Sudan which was launched in 2007
• To bring services closer to the market, NIC maintains the largest network in Uganda with over 15 Branches spread across the country.
• In 2007 & 2008, NIC was awarded a certificate as the most innovative company in Product Development in the Uganda Insurance Industry
The above numbers compare well with peers in the industry. Case in point is Jubilee Holdings and Kenya Reinsurance Limited.
The corporation also does seem to have some really good re-insurers which is critical for any insurance company. These include:
Treaty Reinsurers: Lloyds, Africa Reinsurance Corporation, Swiss Re of South Africa, East Africa Reinsurance Company Ltd , Globe Reinsurance Company Plc, Hannover Reinsurance Company Limited, South Africa , PTA Re-insurance Company (Zep Re), Organization of East & Southern Africa Insurers (OESAI) Non Life Pool
Reinsurance Brokers: Marsh Limited UK, Aon Group, Willis, United African Insurance Brokers
My only hope and prayer is that National Insurance Corporation: - endeavours to maintain an up-to-date website unlike its peers mentioned above, doesn’t report investment gains and losses through the Income statement like Kenya Re to avoid the earnings volatility associated with in investments (much like Centum in Kenya which carries these through reserves)
Chances are that this may not happen given that management does not necessarily appear to have the highest regard for the general public. Any potential investor will want to know what exactly went on with the Ushs14Bn Makerere University pension scheme which in my opinion appeared a case of NIC wanting to fleece university pensioners, Much as we say the beginning of this conflict here http://www.globalaging.org/pension/world/2005/ugandauni.htm we did not see the resolution of this dispute so I guess it may come back to haunt them. But if the history of sub-Saharan IPOs is anything to go by, then I should expect the IPO to be successful whether or not these questions are answered. Besides, I believe that up to now, Safaricom Kenya investors still do not know who owns Safaricom.
For further information on NIC (U) Ltd, please see http://www.nic.co.ug/index.php
Noteworthy:
Cold Tusker has an interesting SWOT analysis on Kenya Airways (KQ) here http://coldtusker.blogspot.com/2009/02/kenya-airways-oversold.html. I must say its one of those investments where you're damned if you do and damned if you don't. So I leave that to ardent readers to consider. ...but remember that while Warren Buffett says he doesn't do airlines, he's the same dude whose portfolio includes Netjets http://www.netjets.com/ and Flight Safety http://www.flightsafety.com/
I would concur with ColdTusker that KQ at Ksh19.5 and a forward PE of 3 is a great long term buy. The only problem I foresee is a situation whereby KQ's management is hesitant to hedge the oil price in future as a result of the losses they have had to suffer due to the current ineffective hedges in place as the oil price tumbles.
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