Monthly Archives: July 2007

Economic Matrix


watch me inflate my salary while dodging taxes

This week has been spent learning the ropes of learning new core banking system. We are in a test module, posting transactions and simulating scenarios, testing what/if limits of the system. So I can award myself a seven digit salary increase, borrow ten times that amount, draw cheques, and even transfer funds from someone else’s account to repay my loan, all at the click of a button – a real Cool world.

This week our members of parliament gave us another bile inducing moment with yet another attempt to raise their salaries. These are people who live in an economic matrix where they believe that ordinary laws do not apply to them. They raise their own salaries (which other job can claim that?), pay a pittance in taxes, and are able to propose and play with myriad bills – that all concern other peoples money. From day one, when they blackmailed arm-twisted the then Finance Minister (2003) to increase their salaries they have been on a tear as the rest of the country watches. Now there’s a proposal to increased their number either through more constituencies or women seats. I’d like to see more women parliamentarians, but I believe i can already name most of the women MP’s who will sit in parliament next year – just add up all the defeated candidates and past women MP’s, and activists and you get an idea of the next group to get paid by the exchequer. As much as this parliament has accomplished – sexual offenses bill, CDF, education, health, anti-corruption etc. – this parliament will be remembered for salary increases and lack of quorum.

As a citizen, I applaud the economic gains made, but as a taxpayer I lament the waste that the increased tax collection has not been prudently applied. We don’t need more ministers or MP’s who live an economic matrix of their own.

Anyway, on to other news

Barclays
– has opened 32 branches since it’s change of direction last year
– You can pay for Kenya Re and other shares with Barclays Visa card at Sterling, Suntra, CFC, Ashbu and Discount stockbrokers.
– Barclays stretching personal loan repayments from 1 year to 5 years. This way, they will earn more money interest income while postponing some potentially bad debts (in duplum era) after co-op bank did the same earlier this year.

– CFC has an arrangement with postal corporation of Kenya to enable people to buy shares at post offices throughout Kenya. This is the third major attempt to extend a stockbroker’s reach after Suntra/Postbank and K-Rep/Ngenye Kariuki partnerships.

Equity bank to take up 20% of housing finance. Spruce up on the banking act, as this is not a popular activity with the Central bank i.e. banks owning shares in other banks. Still, it’s amazing how many records Equity continues to break. Last year, they attained the billion shilling profit mark; this year, they achieved that in six months

ICDCI stock to watch according to bloggers – Fintrade Capital and Smart Biz Africa

National bank: Having sorted out its non performing debt problem, will it become a target for Stanbic again, after CFC merger is done? Also Equity is a long shot

NIC: In the week it was dropped from the 20 share index (in favor of ICDCI), it was also the best performing stock after announcing a rights issue and bonus share proposal . This former Barclays subsidiary has been the leading provider of asset finance to individuals and corporations in Kenya.

Other

Kenya Airways receives the first Embraer 170 LR(two more to follow) plane which will serve Zanzibar, Mombasa and Dar es Salaam routes.

Nation media group has had another record profit half year and an interim dividend of 3/= to be paid. They launched the business daily a few months ago, but could they be about to launch yet another newspaper in September?

It may be called the Daily Star, and will come a few months after Kiss FM’s Nairobi Star. Both Business daily and the Nairobi Star (where’s the John Githongo column and news website?)have faded somewhat from public presence of mind since their high profile launches. B-Daily is a great read online, and should remain so.

The Minister of Finance talks about having virtual meeting to cut costs – perhaps like Vodafone which has an AGM page with webcast and voting items online

Award opportunity
opportunity for 5 dynamic African companies from either Burundi Rwanda Tanzania Uganda or Kenya to earn up to $50,000.

Kenya Railways (now RVR)

Besides planes, I am to a lesser extent a train buff who took many trips by train from Nairobi to Mombasa as a kid. During school holidays the overnight train ride was one of my greatest treats. It used to take 12 hours going through the dark countryside, waving at people, counting train cars, and memorizing stations. Later we’d have a good dinner and go sleep when it got boring to wake up in the morning, glad to have put the man eating lions of Tsavo behind us. A full breakfast in the dining car would then set the mood for more watching – looking out for for the first coconut tree, smell the ocean (and then Changamwe) before finally getting to the Mombasa station where my uncle would be there waiting to take us to Kwale for the rest of the holidays.

Needles to say Kenya Railways corporation became a run-down shell that is another story in itself. I’ve read enough stories of passengers stuck in the bush when trains break down or derail. Anyway you will probably hear about another trip one day, so when the Institute of Economic Affairs invited Mr. Roy Puffet, the MD of Rift Valley Railways I was briefly there to hear what was said.

Some snippets (I was late to the event)

New start: RVR is a 25-year concession between a consortium of companies and the governments so Kenya and Uganda.

RVR got off to a start in November 2006 and suffered 61 derailments that month. They have since slowed down all their trains as a measure to contain such incidents. They now average 10 – 12 incidents a month – from a combination of equipment, railway and human failures (including sabotage)

Financial & investment: So far the consortium has invested about $18 million The shareholding is 70% foreign (Sheltam, and an Australian company) and 30% local (Transcentury – 20%, ICDCI – 10%) and some financing was sourced from the IFC.

Some attendees later asked why Kenyans were not given a chance to invest in the company (like the Kengen IPO) to which the MD replied that there were not a lot of investors rushing to build railways in Africa (only 2 groups bid for the concession).

Equipment: RVR inherited 174 locomotives from Kenya (55 were working) and 44 from Uganda (25 operational) . also 46% of the 7,000 wagons were usable.

They have focused on getting a working fleet going. This has entailed reducing the fleet to contain only trains in good condition and they also got back 5 locomotives from Magadi soda. Fleet repair is slow as the company faces a lead time of 8 months for locomotive spares.

Their workshops were run down, with no tools or equipment, and many of the sheds had long been taken over by other businesses. The remaining sheds had leaking roofs, and when it rained they had to stop maintenance work for fear of electrocution.

Railway: Demand from China for steel has driven steel prices through the roof. There are few companies making railway parts (and African countries have a different railway size) so it takes about 8 months to deliver (they have to order 4,000 tons at a go) which is expensive. One engineer (from the UK) at the talk said that such a railway would be shut down with all the incidents if it was in Europe – the MD replied probably true but this was the state of things. He added that new rails were being laid on the Mombasa – Nairobi line after which the older ones will be taken out and used for other upcountry lines.

They will also close some stations (there are 50+ stations between Nairobi and Mombasa) and have installed communication’s and tracking systems on all trains and stations

Operations RVR have done quite well since they took over in November 2006 and move about 200,000 tons per month. While this has not changed much in volume from before the concession, they are achieving this with two differences (i) they are using a smaller fleet (ii) and they are collecting more revenue (from increased efficiency & reduced corruption in revenue collection) – about $6m a month. Their volumes dipped in December and April following flooding from the rains. The MD mentioned that they now take between 4 – 7 days to move cargo from Mombasa to Kampala – from 20+ days before, though some members of the Kenya Shippers Association disputed that there.

Other stakeholders

Employees those not retrenched by the company are all being retrained in safety and modern railway processes

Customers While there have been complaints about the slow movement from the Mombasa port (including by the Kenya Ports Authority) , the MD said that 50% of the 14,000 containers at the Mombasa port don’t have proper documentation.

He added that business people were contributors to this i.e. as a result of the past railway inefficiency, companies had taken to using railway train wagons at Mombasa as extra storage facilities. But when the railway movement improved, and cargo was now moved upcountry, the same businessmen took their time to offload goods, creating more congestion.

They have tried to contain prices and their charges ($0.05 per ton per km) compare well with , truck who have taken advantage of rail inefficiency to jack up prices.

Passengers & commuters: they will run commuter train services (in Nairobi) for 5 years, but this is one thing none of the bidders for the concession wanted to continue running – as it is a loss maker.

Kenya Railways: The corporation still exists and will oversee the concession on behalf of the government of Kenya, while also maintaining a register of railway assets. The corporation still has a great burden from the past – illustrated by Kshs 31 billion of debts (about $600 million). Including a 12 billion pension deficit. They hope to use land sales to pay off their employee (and perhaps supplier) obligations while also talking with the governments to waive some debt. They have also received 1 billion shillings form the world bank to resettle some residents in Kibera who live/work too close to the railway line (but this plan/financing is already 1/ ½ years behind schedule)

Summary: The MD mentioned that there was a lot of expectations about the now concessioned railways – some of which were not close to being realistic. He also added that they had fewer customers as a result of the slow uptake by the concession, but added that RVR had no regrets and that the governments of Kenya and Uganda were very supportive.

So, a rough but promising start by the company who now say they have enough locomotives working to achieve their 5-year targets. Will they be a celebrated success like Safaricom? We’ll know in a few years.

NBK and Econet restructure

National Bank: was the first bank to release half year results with assets up 25%, deposits up 22% and profits up 35% from June 2006. The big transformation comes from Kshs. 20 government bond plan which have now been absorbed in the bank’s financial statements. What does it do? While government securities are up 6X (from Kshs. 3.96 to 23.57 billion), it also chops 2/3 of loans off their books (drop to 27.34b to Kshs. 7.34 billion). The restructured balance sheet also helped profits as NBK reduced provisions from Kshs. 1b last June to Kshs. 350m at this half year.

But NBK is not out of the woods yet. While the gross non performing assets from 34b to a more manageable Kshs. 5 billion this is still about 75% of NBK’s loan book which, as the MD mentioned at the AGM many cases are still stuck in court.

Econet: After three years of being persona non grata, Econet has been given the green light by the government to roll out operations and its network. In the three wasted years that Econet has wrangled with shareholders and the government, much has changed. Celtel has engaged super-profitable Safaricom in a war for customers even as Telkom wireless has become a viable alternative to an extent that the need for a third mobile operator may have passed. Also what happened to anyone who applied for jobs there? For Econet, not going to be easy to assert themselves and with networks so expensive and unless they get new shareholders and partners with investment resources and regulatory muscle.

Equity muscle: strong back to get heavy hitters like the Minister of Finance, the Central Bank of Kenya and the Nairobi Stock Exchange to come to your defense. Econet should talk to them

Investor outreach: Following in the steps of the Suntra – Postbank partnership, stockbroker Ngenye Kariuki has partnered with K-Rep bank to offer stockbroking services at the banks branches.

Happenings in North Eastern Kenya: The Kenya Revenue Authority sets up shop at Wajir Airport as the Kenya power & lighting company plans to open up stations in Mandera, Wajir, and Garissa.

Who needs e-mail? : The postal corporation of Kenya plans to increase the cost of corporate mail boxes and sending most letters (small/mid size envelopes), to reflect the increased cost of doing business.

Takeovers: James Finlay takes over Homegrown (flowers), and Krystalline Salt acquires the Mombasa salt works company

Government pork : Jaindi Kisero points some out uncertain projects that are going to be funded by tax revenue including 1.3billion to purchase a ranch in Nyeri District to settle squatters, 400 million to settle hawkers, 200 million to purchase shares in De La Rue, Sh 140 to buy shares in Panpaper, 641 million for coffee debts, 664 million for pyrethrum debt, and 15 billion for Telkoms’ tax arrears

Education
– Teachers over-borrowing: The Teacher Service Commission (TSC) has told banks it will stop allowing check-off loans. They fear some teacher have over-committed themselves i.e. borrowed so much that they take home less than 1/3 of their salary after all deductions are made. (One teacher is not happy about the change)
– Universities: Two new universities to open soon – KCA University at Ruaraka and Presbyterian University at Kikuyu. Also both Kenya Methodist University and University of Nairobi will open campuses in Mombasa as Kenyatta University opens one in Kitui

Odds:
– MP Jakoyo Midiwo has sued to wind up the Kenya Times (Media Trust)
– Former managing director of Mugoya, James Mugoya Isabirye, is wanted by the Kenya police. The receiver manager has also offered a generous reward
– Why does the High court have a summer vacation (from 1 august to 15 September)?

Jobs
– Action Aid: head of finance Somalia
– Equity bank: credit managers, bank managers. E-mail jobs@equitybank.co.ke by 28/7
– First community bank: IT product specialist, audit offer, business relationship officers, corporate relationship assistants, private banking officers, credit administration officers, trade finance assistant managers, tellers, head tellers, customer service representatives. Apply to fcb_vacancies@ahmedabdi.com by 30/7
– Knight Frank: senior valuer, property manager, residential sales manager, site acquisition agent. Email info@ke.knightfrank.com by 27/7
– Sub editors at the Nairobi Star newspaper: Apply to jobs@nairobistar.com by 31/7
– Spencon: head of internal audit, senior internal auditor, internal auditor, business analyst, marketing & communications assistant, group contracts manager, contracts manager, IT/ERP professionals. E-mail recruitment@spencon.net by 10/8

Kenya Re Prospectus

A to Zz

Applause: A clap and sympathy hug to the Kenya Re advisors, just as I am typing this at 3 a.m.; they also had to burn the midnight oil to update the prospectus and keep everything current. Still there are a few typos there and errors there

Auditors? : prospectus has statement from pricewaterhousecoopers, but not KPMG who are the Kenya Re auditors. And their statement was signed on May 28 (so was their audit/investigation reason for the delay)

Directors : or lack thereof. There’s no mention of the former managing director and finance director (how can former directors have 2.5X the loans that current directors have?). Instead there are mentions that no current directors had no unusual dealings with the company

Dividend: Kenya Re has been paying 1 shilling per share previously, but they project just Kshs. 0.25 for 2007 (out of an EPS of 0.89)

Earthquake: yesterday and evacuation of high rise buildings gave me a chance to stroll down and get a copy of the prospectus

Employees: are only 115, but they get a raw deal and have to buy a minimum of 2,000 shares like everyone else. Plus they were almost retrenched.

Fluff to ZZZZ: insurance is a boring (through lucrative) business. And a good chunk of the prospectus is taken up by narrative on the insurance sector, reinsurance sector, and how Kenya Re is supposed to make money. Association of Kenya Insures should get paid for how much of their content (a 2005 report) is used in the prospectus

Investments: Kshs. 3.3 billion in property, 615m in mortgages (doubled from 2005), 2.2 b in quoted shares (1/3 is KCB, ¼ is BAT, 1/5 is Barclays), 2.1 b in government securities

JKIA: Kenya Re has land along the passenger terminal road at the airport where it plans/hopes to put up a hotel for transit passengers.

Kenya National Assurance: an attempt to roll it (KNAC 2001) appears to be largely responsible for increase of the IPO cost by over 100 million to a budgeted Kshs. 289 million shillings. (Kengen budgeted 400m to raise 7.8 billion). Increased advertising costs (over many months) was offset by reduced printing costs

Mortgages: Kenya Re does not come to mind when you think of mortgage companies, but they do offer finance to home buyers esp. of their residential properties like Villa Franca and South C houses.

Projections: or lack thereof. I remember the Equity listing prospectus had several calculation methods to come up with the value their shares. This one is scant, but maybe they were thrown out of whack. The fact that the prospectus pegs the US$ at 73 shillings shows how many months ago it may have been synthesized.

A Qualified institutional investor: is financial institution or investment funds (expected to buy 100,000 shares minimum). So is this, like a US IPO, where an investment bank can parcel out shares to preferred select clients?

Real estate: a big investment of Kenya Re and almost half the portfolio. But not how upper hill properties are worth much less than before owing to increased availability

A Share certificate: is still an option for IPO investors here – some people still don’t believe in CDS or trade their shares (buy and hold for dividends and AGM)

Valuation: see projections

Verdict: Kenya Re is Parastatal that lucky to be where it is today (it was almost sold a mere Kshs 400m song in 2002). It still operates under the notorious state corporations act and is not immune from politics and politicians, and was subject to machinations by former directors that seem to have delayed IPO. Still it’s a good Buy, but after the IPO, and when it lists on August 28.

Earthquake week

1 ½ years ago a single tremor was a big story. Now they are coming every few hours – today we felt them at 11:50a.m. 1:30p.m, 2:35p.m. and 3:05 p.m. what’s going on at Lake Natron TZ?

Dud dividend Got my biggest dividend cheque ever (i.e. most digits) i.e. a 25,000 Uganda – a payoff from the Stanbic Uganda IPO. But it is almost impossible to cash it in. Stanbic Nairobi look at you like you came from outer space, while my other banks tell met it will cost more than it’s’ worth (about Kshs 1,000) to clear. Remember that next time you go buying shares in Uganda or Tanzania I wish there was a good dividend reinvestment program in place. – I may endorse it to my stockbroker even though there’s not a lot of shares I could but for that (Eveready perhaps?). Any suggestions?

edit Sent in my reader Drop My Load who comments:
Stanbic have issued an email that goes like this:

Dear All,
A few banks have requested me to ask Stanbic Bank Kenya to come with a solution to paying the KES equivalent of the Stanbic Uganda Divident cheques. Stanbic Bank Kenya team has since gotten a solution that I would like to share with you.

Below is a statement from Stanbic Bank Kenya, which we would be grateful if you pass along to the relevant branches and clients who invested in Stanbic Bank Uganda.

” In case of non SBK customers who choose to deposit their dividend warrants in the accounts in other local banks, these banks will route the cheques through SBK for collection in the normal interbank way for foreign cheque collection

The collection period will be 14 days and we shall credit the proceeds by the 15th day. The charges will be – amounts below 1000 will cost ksh 100 and amounts above ksh 1000 will cost ksh 150.”

Ask your bank, they should be able to help.

Strange banking: It’s always a sensitive thing to write about banks since they have customers – some of who are likely to panic and withdraw their funds. But there’s no danger of that with fast growing and strong Equity Bank. Just days before their listing in 2006, one of their directors resigned – could this be the reason?

Loan shares resurface: I&M becomes the first bank to hawk loans to buy Kenya Re IPO shares.

Milk tremor: KCC has overnight raised the price of their plastic milk pouches (500 ml) from Kshs. 22 to 26 (%18). More plastic tax aftershocks?