Performance
Centum, the second
largest investment group in Kenya by assets, reported a worrying 1.11% decrease
in pre-tax profits. TransCentury Group has the largest asset base in Kenya,
having overtaken Centum in 2011.
The half year
interim results show expenses increasing by 42.72% to about KES 200 million.
Income tax of KES 34.75 million was charged, compared to KES 8.37 million
credited in the half year to September 2010. With only 3.26% increase in
incomes and 10.09% on profits of associate companies, this explains the 6.20%
drop in profits after tax to KES 793 million. Cost to profit ratio* has
increased by 44.33% from 17 cents to 24 cents.
Quoted investments
had a fair value loss of KES 339 million compared to a gain of 406
million in the similar previous period, leading to contraction in total
comprehensive income by a staggering 60.12% to KES 386 million.
Real estate and
private equity are the most profitable segments of the company with total
returns of 15.5% and 11.1% respectively, against a -7.1% return in quoted
equity.
Operating
Environment
Rising interest and
inflation rates in Kenya have seen the equity market experience downward pressure,
hence Centum has sought alternative defensive securities, like fixed-income
securities. It has also led them to seeking profit from investments in equity
markets in the rest of Africa through subsidiaries. Its holding of quoted
investments has since been lightened by KES 3.5 Billion, as a significant
way to reduce investment in its least profitable segment.
The
Minister of Finance (Kenya) in his 2011 budget speech announced a raft of
important tax incentives for Real Estate Investment Trusts (REITS), creating
immense opportunity for Centum’s real estate sector. It has
since completed the acquisition of 100 acres of prime real estate along
Limuru Road and 300 acres of prime real estate in Entebbe Uganda.
Investment
Analysis
Centum is a
non-dividend-paying scrip but is expected to generate capital gains.
Share prices have
been increasing from a recent low of KES 13.00 to close (on 23rd April 2012) at
KES 15.80; 44% above its 52-week low. Centum's stock is
relatively inexpensive, with a P/E ratio of 6 compared to its closest peer
at the NSE, TransCentury, which has a P/E ratio of about 15. On comparing
Centum's net asset value per share (September 2011 half year financials) of
16.44 versus the current share price, the company is trading at a discount. The
price to book value of 0.96 is within acceptable limits.
Centum ranks first
as the most liquid security in the Investment category of the NSE. Volumes of
at least 50,000 shares were witnessed every trading day for the past week ended
27th April.
EPS has dropped
from KES 1.40 to KES 1.31. A bonus share was issued (1 for every 10 held) in
2011. 60 million more shares will be introduced, so one can anticipate a
further dip. Diluted EPS is also down 8 cents to KES 1.19.
Recommendation
It is a good BUY on
a long time horizon. The security is undervalued. Investors with a time
horizon of at least two years should accumulate this stock. In the short term
(2012) there is likely to be a lot of volatility on this and other counters, as
Kenya faces an uncertain election year.
*Cost to Profit
ratio = Expenses
Pre-tax Profit
Quote:
"A man who
carries a cat by the tail learns something he can learn in no other way."
Mark Twain
Mark Twain
