NSE Q1 Performance
Performance of conviction picks to April 8, 2011 (selected September 3, 2010)
From January 1, 2011 to April 8, 2011 the NSE 20 Share Index dropped by 9.73%. The Nigerian All Share Index dropped by just 1.47%, while the Ghana All Share index advanced by 6.40%.
In addition to the Middle East crisis, which has dragged Middle East and African stock markets, Kenya’s market has been further hit by rising political temperatures and poor rainfall. Unlike Nigeria, and now Ghana, Kenya is a net importer of petroleum products. The rising crude oil prices have had an adverse effect across several sectors of the economy. The combination of drought and high oil prices has pushed up inflation eroding the purchasing power of a vast majority of the population.
Performance of conviction picks to April 8, 2011 (selected September 3, 2010)
Jubilee Insurance
Price on pick date: 194
Closing Price April 8, 2011: 215
Gain: 10.82%
Kenya Commercial Bank
Price on pick date: 18.95
Closing Price April 8, 2011: 25.50
Gain: 34.56%
KenolKobil
Price on pick date: 9.30
Closing Price April 8, 2011: 9.75
Gain: 4.84%
NSE 20 Share Index
Level on pick date: 4,437.69
Closing level April 8, 2011: 4,001.50
Loss: (9.83%)
Each of the three picks outperformed the NSE 20 Share index over the last 6 months. KCB was the best performer beating the index by 44.39%, Jubilee moved ahead of the index by 20.65%, while KenolKobil outperformed by 14.67%.
Each of these three companies announced strong growth in 2010 earnings compared to 2009. The performance of these companies’ shares would likely have been stronger if the general market conditions had been favorable in the first quarter of 2010.
KCB reported a growth in profit after tax of 76%, Jubilee pre-tax profits advanced by 84% while KenolKobil's pre-tax rose by 34% in the year ended December 2010.
Kenya Airways (Watchlist)
We had placed Kenya Airways on a watchlist on November 1, 2010. The performance of the share has deteriorated significantly since then, falling by 26.82%. The NSE 20 Share Index has fallen by 16.83% since November 1, 2010 meaning that Kenya Airways has underperformed the general market by about 10%.
One of the key investment risks we listed, high fuel prices, has come to pass. Concern about the fast rising crude oil prices has put a damper on this counter. Aviation fuel is the biggest component of Kenya’s airways costs and a rise in the price fuel is sure to compress margins significantly.
In the medium term, Kenya Airways is likely to do well as aviation growth picks up in Africa and the airline consolidates its position as the leading African airline. The airline should be in a position to eventually pass on the price of fuel increases to its customers. Short term performance is likely to remain volatile as the extent of the impact of the fuel price jump is difficult to determine.
April 2010 long term value top picks
The top picks have been selected by taking into account a composition of liquidity, the current valuation and expected growth prospects. While other listed stocks could be cheaper on a PE basis, they have been excluded from this list due to a small float (minimal liquidity) or doubtful growth prospects.
Kenya Commercial Bank
April 8, 2011 closing price: 25.50
52 Week High: 25.75
52 Week Low: 17.30
P/E Ratio: 9.24 (Full year 2010 Results)
Investment case
Strong capital position (most capitalized bank in East Africa). The huge capital gives KCB a big advantage in lending huge loans. The current Central Bank imposed limit on the amount KCB can lend to an individual customer is Kshs 7 Billion. The substantial lending capacity has positioned KCB favorably to finance the ongoing infrastructure projects in the region.
The share is still cheap even after the recent rally. At a PE of 9.24 KCB compares well with Equity Bank, Standard Chartered and CO-OP Bank, whose PE’s are at 13.08, 13.19 and 14.16 respectively. KCB’s share price will need to advance by another 52% to match CO-OP Bank on a PE basis.
High dividend yield. The share is now trading cum-dividend. The Kshs 1.25 dividend translates to a yield of 4.90%
Biggest regional branch network. Well placed to leverage from the ongoing East African economic integration. The wide branch network facilitates mopping up of cheap deposits.
Risks
Stiff competition from more nimble smaller banks. Well run banks such as NIC and DTB are aggressively spreading their network across the country.
High cost structure: KCB has a high cost to income ratio compared to the rest of the industry; a small dip in revenues is likely to have a huge impact on the bottom-line.
Bad debts. The current harsh economic climate could lead to an increase in loan defaults.
Barclays Bank of Kenya
April 8, 2011 closing price: 63.50
52 Week High: 72.00
52 Week Low: 47.50
P/E Ratio: 8.14 (Full year 2010 Results)
Investment case
The share is now the cheapest of all the big banks. The current PE of 8.14 is a significant discount to the very similar foreign owned Standard Chartered which is now trading at a PE of 13.19.
High dividend yield. Barclays historically pays dividends twice a year. The most recent dividend was very generous coming after huge a gain on disposal of the custody business. At the current price, shareholders could reasonably expect a dividend yield of close to 6% in the coming year.
The four for one split announcement will enhance liquidity and affordability of the share. The increased affordability should translate to further gains post split.
Barclays incurred significant one –off staff costs in the first quarter of 2010. Since those costs will not recur, a strong first quarter performance on 2011 is likely.
Risks
BBK is on the verge of being overtaken by more aggressive local banks. KCB is now ahead by both deposits and assets. Equity Bank and CO-OP are likely to overhaul BBK in the next few years. The historical positive investor sentiment towards the counter is likely to wane as the bank loses its top position.
In the short term a huge supply of shares post split might keep the share price depressed.
Bad debts. The current harsh economic climate could lead to an increase in loan defaults. BBK announced huge loan provisions in the last quarter of 2010.
KenolKobil
April 8, 2011 closing price: 9.75
52 Week High: 11.50
52 Week Low: 8.90
P/E Ratio: 8.13 (Full year 2010 Results)
Investment case
The rising crude oil prices will translate to higher gross margins for the company.
Regional diversification. KenolKobil has spread its operations to several countries in East and Southern Africa. The spread to other regions should mitigate the regulatory risk the company faces in Kenya (its largest market).
Diversification into less regulated and high margin products such as gas and lube oil should improve margins and enhance stability of earnings.
The company is cheap at the current price. The PE of 8.13 is one of the lowest in the industrial sector (the average for the sector is 15.3).
Risks
The company is financing its receivables using huge short term borrowings. The current short term debt stands at Kshs 13 Billion (up from 4 Billion in 2009). A rise in short term interest rates can cause a huge dent to profits.
The huge receivables balance of Kshs 11 Billion (8 Billion in 2009) represents a big default risk. A delay in payment of this amount could cause severe liquidity problems. Non-payment could lead to significant losses.
The constant squabbling between the company’s management and the industry regulator keeps the share depressed.
Disclosure: I hold KCB and BBK shares
Quote
"An eminent businessman once commented that profit lies where the gap between perception and reality is the greatest. That surely applies to sub-Saharan Africa."
Ngozi Okonjo-Iweala, Managing Director, World Bank (Former Nigeria Finance Minister)
Ngozi Okonjo-Iweala, Managing Director, World Bank (Former Nigeria Finance Minister)
