Category Archives: NSE IPO

Hilton, Intercontinental, KWAL Privatizations

Privatizations to be concluded by the Kenya Government by June 2013 include: 

  • The Industrial & Development Corporation (ICDC) will sell 26% of Kenya Wine Agencies Limited (KWAL) to Distell of South Africa and 4% to employees.
  • The Kenya Tourist Development Corporation (KTDC) will sell 40% of the 287-room Hilton Hotel, 34% of 389-room Intercontinental Hotel (both in Nairobi) and 39% of Mountain Lodge which is located in Nyeri and managed by TPS Serena, to fellow shareholders.
No IPO’s will result, but the remaining shares in KWAL may be sold to the public within two to four years if their performance improves.  

Reading the Kenya Airways Tea Leaves

Today is the last day of the Kenya Airways  rights issue in which they are seeking to raise Kshs 20 billion ($240 million) from shareholders.  The 35-year-old company is  one of the most-talked about companies in Kenya mainly as as a model of privatization gone right.

The airline which dubs itself The Pride of Africa has set out to branch out across Africa and cover every African capital, but has also had to fight a rearguard action from a handful of local airlines and gulf carriers.

The information memorandum is about 236 pages, but with most of the data in it one year old, relating for the financial year that ended in March 2011. Also, there have been no stockbroker reports about this rights issue.

Shareholders:

  • The company has 73,612 shareholders (old data)
  • The authorized share capital of the airline  is Kshs 10 billion (102) comprising 2  billion shares with a  par value of Kshs 5. 461 million have been issued and in 2011 shareholders had a return on equity of 15%.
  • Approval has been obtained from the stock exchanges in Tanzania (page 130) and Uganda  (page 127) where KQ” share are cross-listed.
  • The directors’ shareholding is listed (98) and they don’t own much in the airline while the CEO does not own any shares in the airline (odd as the marketing camping exhorts Kenyans to invest in the pride of Africa) and this does not bind the CEO to improve the share performance of the airline.
  • For any KQ shareholder who does not participate in their shareholding will mean a substantial dilution in their shareholding (93) and this has been enumerated in a court case where a shareholder sued the airline to stop the rights issue.

Rights issue:

  • Proceeds of the rights issue will be used to make pre-delivery payments (28) for aircraft  between June 2012 and March 2013  and pay down some unsecured loans.
  • The success level of the rights issue is to raise Kshs 14.4 billion ($173 million) (26)  and KQ will lower its risk profile (and maybe borrowing costs) by having a higher equity level (23).
  • Kenyans have to own at least 50% of the shares and the transaction advisors may refuse transfer of shares to foreigners that will violate that (p37)
  • Shareholders are being offered 16 new shares for every 5 held. They were priced at a discount when the offer was announced, but the market price is now the same as the rights price was at a discount, but now trades (Kshs 14.9) at  about the offer price.
  • The  rights issue will cost Kshs 620 million ($7.4 million) (p38) -comprising commissions of Kshs 310 million, advertising 66M, CMA Kenya fees 51M, underwriting (up to 47M), and lead transaction advisor 15M  ($180,000)
  • The issue is underwritten for only up to Kshs 420 million (93) and they are aiming to raise Kshs 20 billion.
  • Rump allotment: Qualified institutional investors (33) will be invited to buy shares at the discounted price concurrent with the rights issue , and these social security funds of Rwanda, Uganda, Tanzania, Burundi, pension & insurance companies in East Africa, financial forms in South Africa and other foreign institutional investors(230). Yesterday’s paper had a story that the IFC will own 7.4% of KQ after the rights issue. 

Performance:

  • Despite revenue increasing from Kshs 41 billion to Kshs 55 billion  ($662 million) in the first six months of their 2012 year, operating profit for the 6 months was Kshs as 1 billion ($12 million), down from 2.4 billion  the year before. This was attributed to increased employee costs and new routes and the airline issued a profit warning in January 2012 profit wanting in January 2012 (68) citing the rising fuel costs which will impact full year profits for 2012.
  • For the full-year to March 2011 revenue of Kshs 85 billion (comprising passenger 75, freight 6.5, handing 1.4)  and had direct costs of Kshs 54 billion (comprising fuel of 25b billion, landing 8 billion, maintenance 7b, sales commission 2.7b), fleet ownership of 9 billion, 13 billion on administration (11 billion on staff).
  • Of the revenue, 54% is from African routes, 27% Europe, and 19% Mid-East & Asia (68) .
  • Their hedging policy is to hedge 80% of their fuel requirements for the next one year hedged and 50% for following months  (70).
  • Their debt-equity ratio in 2010 was 111% (borrowings of Kshs 20 billion against equity of Kshs 17 billion) and this improved to 88% in 2011.
  • Deferred income – includes compensation from a manufacturer (204 -likely Boeing)  of Kshs 2.5 billion and they also have deferred tax liabilities of Kshs 8 billion (203)

Banking: KQ has borrowing of Kshs 25 billion ($301 million) (201)  from Private Export Funding (PEFCO), Barclays and ABN Amro at rates of 4-6%  over 12 years and lien of credit for Kshs 20 billion (202). The loans are routed through Simba Finance, Swara Aircraft Finance, Chui Aircraft Finance and Kifaru Aircraft who are registered as owners of the aircraft  (81) (these are not subsidiaries) and will transfer their titles once the loans (secured through Eximbank) are repaid (201). KQ also drew new loan facilities in 2011 from Standard Bank, KCB and Barclays to pay for pre-delivery payments (87) . KQ also earns rates of 4 -6% on their deposits (198).

Staff:

  • KQ has 4,355 staff who earned Kshs 11 billion ($132 million) in 2011 (numbers in December are 4,672 (61).
  • KLM appoints the CEO, finance director and one director for each 10% they own (106).
  • Directors and key management were paid 223 million in 2011, with directors earning 78 million of that (175).
  • KQ is recruiting expatriate pilots to meet a shortage (65).
  • Have an Ab Initio pilot training program (pilots who had no previous flight experience)  that now has 87 pilots getting training in South Africa (61). KQ has an arrangement with Co-Op bank in which these students can borrow and pay for their expensive training of pilots and they have drawn Kshs 500 million ($6 million) (112).
  • KQ will hire a director for a new fleet delivery department and separate that from the technical department (61)
     

Fleet:

  • KQ operates 33 aircraft, 20 under lease (108) and has 7 spare engines.
  • Have Kshs 20 billion worth of leases (213)  and commitments to buy about Kshs 100 billion ($1.2 billion) worth of aircraft (212)
  • Paid deposits of Kshs 2.1 billion to Boeing (192) and Kshs 631 million for leases of Boeing and Embraer planes & engines.
  • Have signed purchase agreements for 10 Embraer 190, three 777-300ER,  and 9 Boeing 787 Dreamliner’s with options for 4 more (111)
  • Future fleet will comprise Embraers (for domestic/short routes), Boeing 737 (NG) next generation (for medium/Africa routs), and Boeing 787/777 for intercontinental routes). They also have board approval to acquire 12 freighters (53).
  • Sold 2 Saab 340 aircraft to Alandia as well as land in Nairobi and Lusaka, (108)

Customers & Passengers:

  • Flew 3.1 million passengers in 2011 and 1.8 million in the first half of 2012.
  • All KQ ground staff participated in customer service training at the end of 2011 (65)
  • The airline seeks to maintain & improve on on-time performance but this has been hampered by airport congestion, traffic jams unavailability of equipment and a lack of captains (65)
  • KQ plans to re-design their network to decongest JKIA by having more mid-day flight blocks, in addition to the current morning  & evening ones (58)
  • Passenger meals are by KLM catering and NAS (111)

Risks: Risks to the company include adverse publicity from terror alerts or attacks,  aircraft crashes (91) fuel prices (90) and the slow pace of Jomo Kenyatta Airport (JKIA) expansion (90) which impacts on time performance. They need the airport authorities to complete terminal 4 which will be exclusive for KQ with 7 parking bays nose-in, and also construct multi-level terminals, have a separate domestic terminal, and (later) construct a new (greenfield) airport and a second runway.

On-going construction at Jomo Kenyatta International Airport, Nairobi

But they also note in risk mitigation that:  Support from the Government of Kenya for the airline is another important positive factor, which allows the airline to compete successfully. Lenders’ and investors’ experiences with flag carriers and airlines in general across the world create an expectation that carriers tend to find some way to keep operating in difficult circumstances, and this usually involves the state in some form or another (63)
 

Litigation: KQ has suffered two fatal crashes and there are still cases and investigations that stem from those two in Cameroon (2007)  and Ivory Coast (2000) . There are minor passenger and staff cases, but also a long-running claim by Kenya Revenue Authority for indirect taxes (page 107)

Competition:

  • KQ is largest in Africa with 42 African destinations compared to Ethiopian 40, South Africa (22) (p47)
  • Comparing airline traffic (62) between Africa to the world, the top is South Africa, Egypt Air, Air France, and KQ is 8th , just behind Ethiopian and Emirates while for traffic between Africa and Asia, KQ  is 6th behind Emirates, Ethiopian, Qatar, Egypt Air.
  • KQ enjoys some advantages by having a young aircraft fleet, while other countries don’t have working airlines. It competes in the region with Ethiopian & South Africa, but these airlines have distant hubs in Johannesburg and Addis, while Gulf carriers pull traffic away from the region with their long haul aircraft and cheap tickets (64).
  • KLM owns 26% of KQ and KQ owns 41.23% of Precision Air in Tanzania (72) after their own rights issue which reduced KQ’s shareholding from 49%.

NSE Moment: Britak, Transcentury, Kigali Bank, Stima SACC0

This week we were reminded that there’s been no IPO at the Nairobi Stock Exchange (NSE) since 2008 (Co-Op Bank) and the events in the last few days were the fulfillment of initiatives that companies like Britak and Transcentury had initiated earlier in the year.

Britak: The British American Investments Company Kenya kicked off their IPO this week. The group had Kshs 9 billion in income, and pre-tax profit of Kshs 2.8 billion in 2010. With group assets of Kshs 25 billion, it is second only to the ICEA at 27 billion.

They are being sold at Kshs 9 with an allocation criteria of 30% East Africa retail, 30% foreign, 37% institutions, 3% employees, agents, and individual policy holders and can be obtained at British American branches, Equity bank , Standard Chartered (and partner Postbank), NIC, CBA banks and stockbrokers.

The minimum for retail investors is 2,000 shares (Kshs 18,000 while for institutions it’s 10,000 shares (Kshs 90,000 or ~$1,000). The IPO is budgeted to cost Kshs 320m ($3.5M) with estimated payments to transaction advisor 24M, sponsoring broker 6M, legal costs 9M, selling commission 87M, CMA 9M, NSE 1.5M, PR 67M, and advertising 90M.

Of the Kshs 5.9 billion to be raised, 1 billion will be for regional expansion (Tanzania, South Sudan, Rwanda), 1.2 billion will be for Kenyan operations (set up a frontier investment fund, new branches), 2.5 billion for the housing & mortgage sector aimed at affordable housing models, and 750 million will go to pay off a loan at CBA bank that was used to purchase shares in Equity Bank (Britak own 11% of equity and 16% of housing finance banks).

The Britak IPO runs from 12 July to 5 August and they have also reached out to bloggers, with forums and their own blog posts such as this tale of their CEO’s initial investment.

However, there are some concerns that with their 45-year history and strong brand name (-pay Kshs 18 million a year to British American), this is a retail magnet IPO and the sale of 650 million shares (30% of the company) is likely to be over-subscribed, and the dividend paid (Kshs 200m in 2010) is likely to be safaricom-ish (small)

The company has also called for the Government to extend current tax incentive for newly listed operating companies to also include holding companies (like Britak)

Transcentury: The investment group which has had a spectacular climb and string of investments, most notably with East African Cables listed their shares at the NSE on July 14.

Their shares had been trading at an OTC exchange and were listed at the NSE at Kshs 50, which worked out to a P/E ratio of 38

The Group also has a Mauritius convertible bond issued to finance the restructuring of Rift Valley Railways and investment in geothermal and other energy projects, but which also has the potential of diluting investors shareholding by over 1/3. (150 million shares available to bond holders over the next 5 years prices between 40 and 50)

Still, Transcentury has been am inspiration to other investment groups, albeit not as well connected to initiate projects with more risk such as energy real estate, and offshore. The introduction is budgeted at Kshs 20 million (220,000 – CMA 5M, NSE 1M, advisor 8M, stockbroker 4M) and the PDF prospectus is ‘protected’ so you can’t copy sections of it.

Family Bank: Their long dalliance with the NSE is about to be fulfilled as their shareholders will next month approve a listing at the exchange. They will also vote on an ESOP for managers and 1 % transfer of shares of the company to the new CEO. It has since emerged that he is purchasing the shares at a discount as part of his employment package.

Stima SACCO: Away from NSE is Stima SACCO that is in the process of raising funds of about Kshs 500 million ($6 million) . They have advertised in newspapers (even on TV), which may land them in trouble with the CMA, for selling shares to the public without adequate information. At Kshs 100 per share, individuals can buy 200 shares at a minimum (Kshs 20,000).

Kenya Airways: Nothing yet from the airline who were expected to approach shareholders for new funds. The government has allocated funds to invest and defend their 26% stake an the airline which has since signed a deal for new Embraer aircraft to grow their African footprint.

Bank of Kigali: The Bank of Kigali is aiming to raise $62 million from new investors in an IPO that runs from 30 June to 29 July. The Bank control 25-30% of the banking sector in Rwanda; it had profit of 8.6 billion francs ($14 million) in 2010 on assets of 197 billion francs ($324 million) – equivalent to a smaller mid-size Kenyan bank

300 million shares are on offer, and the minimum is 200 shares per person at 125 francs per share ($0.075 or Kshs 18.65). They are open to cross-border investors and the allotment will be to 27% retail East Africans, 2.4% to employees & directors, 15% – East African institutions, 15% to Rwanda institutions and 40% to international investors.

The Rwanda government owns 66% of the bank, and the other 1/3 are owned by the social security fund of Rwanda. 16 billion francs ($27 million) will go to the Government for reduction of its shareholding and 20.8 billion francs ($34 million) will go to the bank to reduce its assets & liabilities maturity gap and grow its loan book and operations (from 33 to 60 branches). This will result in new shareholders owning 45% of the bank, the government 30% and the social security fund with 25%

Other: The IPO prospectus lists
– lawyers acting for the bank, number of cases they have and prospects of loan recoveries
– lawsuits filed against the bank by name (former employees, debtors opposing auction)
– list of subcontractors and related partners such as visa card providers, SMS partners, providers of credit reference and lines of credit etc.
list of properties owned and rented by the bank and rent amounts. Also Rwanda depreciate building over 5 years, after each revaluation

Risks & Exposure – one of the operational risks is scarcity of qualified personnel in Rwanda
– commerce restaurants & hotels account for 46% of the bank portfolio while construction was 29%. Also 11% of loans were to a single group and records of large are available for review to persons who sign non-disclosure agreements
– Kenya is the country’s largest trading partner: Rwanda exports 33% to Kenya and imports 16% back.

Staff: – All staff are entitled to bonus and in 2010 this totaled 8% of profit, which that was shared by 441 staff (out of 454), and the average award was $3,200.
– The bank also runs an in-house dispensary and provides full medical cover to staff and 4 dependents
– The oldest director was born in 1960, the youngest in 1977. At senior management, the managing director is the oldest employee at 54, while the head of finance is the youngest at 31.

NSE Nairobi Investor Briefs

new corporate activities at the Nairobi Stock Exchange include

British American Investments – a.k.a. British American a 46 year old company in the country now planning an IPO at the NSE. They are also embarking on regional diversification as a group, which is best known for its British American insurance (Britak) – but has since added British American asset managers (formed in 2005) and Britam insurance in Uganda.

In 2010 they had gross revenue Kshs. 4.5 billion ($56 million) (up from 3.9 B in 09) largely due to Investment & other income of Kshs 5.1 billion (09 was only 400k) and their profit before tax was Kshs 2.8 billion, compared to a loss of Kshs. 334 million the year before. This also included underwriting income in Kenya of Kshs 152 million (up from 80M year before)

They are aiming for the IPO in 2011 to finance their diversification into micro-insurance and bancassurance as well expansion to Tanzania, Rwanda and south Sudan. They are yet to obtain shareholder and capital markets authority approval. Group Managing Director Benson Wairegi said they have alerted the CMA, but are yet to submit documents until their shareholders approve the process

Kenya’s capital markets rules require 3 to 5 years profitability before a company can list, though @coldtusker disagrees with that saying smart investors should be allowed to decide a company’s prospects regardless of their recent profitability.

Other: – Their balance sheet grew to Kshs 25.2 billion ($315 million) up from 16.3B. Assets under management by British American asset management (BAAM) grew from Kshs 8 to 17 billion
– Expenses were up 8% compared to 16% for revenue
– Paid a dividend of 200M (Kshs 6.67 per share) up from 120M last year (Kshs 4 per share)
– Bank portfolio: they own 11% of Equity bank and 15.9% of Housing finance

TransCentury: Also up for possible listing is TransCentury which was founded by a Group of prominent Kenyan investors who expand into the limelight when they acquired East African cables in 2004. Since then they have taken stakes in Development Bank of Kenya, Kenya Power & Lighting company as well as Rift Valley Railways

Their 2010 highlights and 2009 detailed accounts show;
– High finance costs eating into profits and need to pay down debt
– Strong shillings bad for there profit 170m impact,
– Kshs 1 billion invested in 2009, down to 50 million in 09

Portfolio – Seem to manage regional diversification better than Olympia did and which Centum is now trying to do
– Quoted shares in Metal Fabricators (Zambia) 20%
– Unquoted in Rift Valley railways (34%) and Development Bank of Kenya

– In 2010, added Cableries du Congo (Congo Cables)
– Chai Bora Blended Tea (Tanzania) [Revenue of Kshs 714M, pre tax loss of 29M]
– Kewberg Cables & Braids [Revenue of Kshs 781m, pre tax profit of 44M]
– Tanelec (Tanzania) [Revenue of Kshs 772M, pre tax profit of 133M]
– Avery East Africa (Kenya scale) [Revenue of Kshs 226M, pre tax profit of 21M ]
– Participation in investment in funds include Kshs 200 million in Aureos (East Africa, South Asia, china), Helios (Kshs 350m) and Business Partners International (Kshs 43 million)

In anticipation of a NSE listing, they made moves such as:
– 10:1 share split in October 2008. Now has 263 million ordinary shares up from 20 million after bonus, split, and new issues
– Paid a dividend of Kshs 13 million in 2009 (DPS of Kshs 0.05). For 2008, it was 29 million, which was part paid in ’09
– According to the East African in Feb ’11, Transcentury shares were trade at an OTC market run by Dyer & Blair at Kshs 35 per share compared to Kshs 48 in 2010.
– Seem to manage regional diversification better than Olympia did and which Centum is now trying to do

Kenya Airways: Is likely to seek to raise capital from its shareholders this year on advice from their directors and CFC Stanbic who are their financial advisors.

Regional: In Tanzania, Kenya Airways is ceding a steak in Precision Air, which is seeking to raise almost $30 million, in an IPO, but indications are clear that Kenyans will be locked out as will other non-Tanzanians.

From Rwanda, we have the prospect of more share listings from two companies – Bank of Kigali and MTN Rwanda, and following in the footsteps of Bralirwa who’s IPO was open to all East Africans.

Analyzing Kenya Pipeline

Pre-IPO Peek at KPC

Kenya Pipeline Company (KPC) is expected to be the next big privatization project to help plug the current Government of Kenya budget deficit. The IPO transaction adviser selection process is already underway for KPC and other state corporations

How much can one glean from audited accounts of the giant company? I got hold of a 2007 annual reports of the company – a rare big glossy booklet that mentions every project e.g. SAP, ISO, fibre optics, refurbishments in Western Kenya, Mombasa, Athi River, with lots of graphs.

KPC still mostly compares itself to other state corporations in terms of goals such as to raise capacity from 440,000 to 880,000 lire per hour by August 2008 – a massive project that later turned controversial and may have cost the last MD (Okungu) his job in January 2009.

Financials
– 2007 revenue of 8.8 billion shillings (~$117 million) (2007 was 8.45 billion and 2003 was 6.5 billion). 2007 Revenue comes from export services (4.3b), local services (3.7b), and 748 million from Kipevu storage fees
– Pre-tax profit of Kshs. 4.3 billion in 2007 (~$53 million)
– Earnings per share was 163 shillings [153 in 2006, 2003 was 29 shillings) – company’s shareholding is made up of 18 million ordinary shares of 20/= par each.
– Dividend paid out of 8.25 per share each year 2007 and 2006
– Cash of 4.5 billion (1.1 billion in 2003) of which 2.5 billion is in Treasury securities (which they only started investing in from 2005)
– Paid 2.2 billion in direct and indirect taxes and was recognized by the Kenya Revenue Authority as a distinguished taxpayer
– Total assets of 20.2 billion shillings (18.7 billion in 2006) – however fuel stocks of 13 billion shillings (384,509 cubic metres) that is owned by marketers is not included in their accounts. [2006 was 36 billion comprising 856,958 cubic metres]
2008 decline: summarized KPC financial accounts show revenue declined by 7% to Kshs. 8.2 billion and pre-tax profit 54% down to Kshs. 2.6 billion in 2008

Auditors: Accounts audited by controller and auditor general, who hired Deloitte & Touche; who said the accounts were ok except to note that 1.2 billion receivables (current assets) include 348 million owed from an unnamed oil company that is the subject for a court case and for which no provisions have been made

Scandals: has been a cash cow for politicians for years with a high turnover of managing directors, manager and directors. Different parts of the report mention Kshs. 967 million pending in lawsuits, 404 million leasehold land unable to develop since it is gazetted forest land, 347 million from Oil Company, 314 million of obsolete spares, and Kshs. 221 million for a finance deal with Triple A that cost the previous MD (Ochuodho) his job. The company also provided Kshs. 382 million of services to National Oil Corp of Kenya (related company as they are both owned by the Government– do they pay all oil marketing fees?

Banking
Bank with NBK, CBA, Stanchart, Co-op. In 2007, they paid off all bank loans (EIB, Stanchart, and CBA) amounting to Kshs. 500 million in 2007, but are still stuck with the 221 million Triple A loan.
– KPC recently signed a syndicated loan of Kshs 8.2 billion with CFC-Stanbic, Barclays, CBA, Citibank, and KCB.

Exports:
– Exports 58% to Uganda, 155 Rwanda, DRC 14% Tanzania 6% Sudan 4% Burundi 3%
– strong shillings bad for export sales
-pricing structure – more expensive at Eldoret and Kisumu means that the company loses revenue if other countries e.g. Rwanda, Uganda remove their oil at Nakuru or Nairobi depots
– 50% of their revenue comes from fuel exports, and With oil being found in Uganda, Sudan, and possibly Congo, is the pipeline capable and adequate to transfer oil from central Africa to the coast at Mombasa?

Others & Non-core activities
– Will Construct an LPG plant with private sector investors (including Kenya pipeline refineries limited, and now-collapsed Triton) in Mombasa at a cost $50 million and one in Athi River at a cost of $13.5 million by Bharat of India
– Other income includes Kshs. 8 million in helicopter income, and also disposed of 120 million worth of helicopters in the year 2007
– 50 million donated to the Ministry of Youth Affairs
– 6 acres worth of land worth 30 million in Nairobi was donated for a street children rehabilitation center
– Spent 114 million in advertising (by a monopoly) and 35 million shillings in legal expenses
– Has shares in the Petroleum Institute of East Africa and Consolidated Bank
– Successfully changed their pension from a defined benefit to a defined contribution scheme

Outlook:
– Slight financial dip in 2008 will probably be attributed to the post-election disruptions
– Capital spending could be significant as they are extending the pipeline to Uganda (Eldoret to Kampala). Also, the company already spends quite a bit in pipeline rehabilitation costs, but won’t a completely new pipeline (though more expensive) be a better solution?
– Needs a stronger management team led by a strong MD – like Kengen’s Eddy Njoroge (someone with a legacy to protect who will shun the wheeler dealers) and a stronger board (not just the Energy ministers’ cronies)
– Could be a good IPO buy i.e. a cash cow pre-tax profit margins of almost 50%

Other Opportunities
– Bank of Africa: branch managers, assistant branch managers, operations assistants’ recruitment@boakenya.com by 5/2
– Consolidated bank credit manager, administration manager, apply to the Head of HR 51133-00200 by 31/1
– Housing Finance senior relationship manager (mortgage finance), portfolio manager, legal officer, human.recources@housing.co.ke
Dyer & Blair sales agents, and for several hundred other weekly jobs visit Kenyan jobs blog.