Category Archives: Rift Valley Railways

First Class: Kenya Railways vs SGR

This is the first class cabin of the lunatic express, the 120-year-old Kenya Railways line (operated by Rift Valley Railways – RVR), that the Standard Gauge Railway (SGR) is meant to improve on. The cabins are about 40 years old; they are mostly used by tourists or adventurous travelers and families taking scenic journeys to and from the Coast or Rift Valley.
It was disappointing to see pictures from Kenya Railways of what #SGR “first class” will be – it looks like a third class with swivels seats – this after a $3.2 billion mega-project?. Yes, the trains will move faster, but apparently, they won’t go too fast because this is Kenya where they may encounter people or wildlife on the tracks. 

By looking at this chart of train cabin seats in China, KR is a correct, but the first class of China and the new SGR is not the same as the first class on the old (RVR)/Kenya Railways. China has first, second, and business class (which has lie flat seats) like an aircraft – but no economy class.

What we know as the first class of the old Kenya railways, qualifies as a luxurious “sleeper coach” in China which offers privacy and comfort. SGR Journeys will be faster, perhaps 5 hours from Nairobi to Mombasa compared to the current train service by RVR which takes 15-20 hours. The  train is also used by hundreds of residents who live in small towns along the railway and who will appreciate the improved new cabins.

But will Kenya Railways offer some new sleeper cabins to improve on the old railway service? The Kenya Economic Survey 2016 shows there has been a continuous decline in rail passenger indicators of journey, passenger-km and revenue. The major reason is prioritizing on the freight, which is more profitable than passengers’ services hence the available locomotives are prioritized to freight.

Passenger Train to Mombasa in 2015

What if the salesperson, at a company you want to buy from, tells you not to buy their  products and you still go ahead to, because of nostalgia and history?

Train front

The legendary iron snake

What if, despite being routinely behind schedule, the staff go out of their way to ensure that you’re comfortable? What if despite being inconvenienced by half a day, you still consider it worthwhile? And after all this, and understanding all the circumstances they are in, would you still recommend the service to your friends?
That’s the situation with the passenger train between Nairobi and Mombasa. Many people used to take the Kenya Railways train to Mombasa and for school trips elsewhere. But not many do these days, and many more are not aware that the passenger train still runs to and from Mombasa.

It’s been eight years since this last review and there are some major differences

  • There used to be two trains per days, now there is one train, that makes numerous stops
  • The train runs to Mombasa three times a week (M, W, F), and the same to Nairobi on alternate days (T, R, S)
  • The meals are done by Pride Inn hotel group
  • The train is usually late
Train late lunch

Late lunch at Kenya Railways

The train was meant to leave at 7 p.m., and get to Mombasa at 10 a.m. the following day. But we got called at 10 a.m. the day of the trip to be told that the night train was late, and to come in at 10 p.m.

This we did, and there was still no train at the station, just the night managers who said this does happen a lot. There were other passengers waiting, and it was clear that they would take the train no matter what time it came, as it was their only transport from Nairobi to whatever town they were heading on the route. The station master said that when the train came, it would take more than an hour to clean and ‘fill the water’ before the return journey.

We left a phone number with the station master and went back home and kept calling every half hour back to check if the train had come. It did come in at about 3 a.m. and we went back to the station. At about 4 a.m. the train pulled up from the yards, and after showing our receipts, we were issued with boarding cards for the first class cabins. A first-class ticketis   Kshs 4,505 ($45) for adults and 2,795 ($28)  for children for full board travel which is dinner, breakfast,  and beddings in the cabin for each person.

Train cabin beds

1st class cabin with upper and lower beds made

Dinner was served at 5 a.m., and shortly afterward, the train departed Nairobi for what turned out to be an interesting and very long day trip. When we got back to the rooms, the beds had been made up by the train staff and we went to sleep for a few hours, till the bell rang again to announce breakfast was served. This was at about 10 a.m. and it was back to the dining car that seats about 40, in tables of 4.

The train made many stops in places such as Konza, Sultan Hamud, Makindu, and Ulu, and it got to Mtito Andei which is the mid-point of the journey at about 2 P.M. At these small -town stations, passengers in the third class cabins would get on or off the train with their luggage.

That should have been it for meals, but at about 5 p.m. the crew again to summoned first class passengers for an unexpected late lunch meal. After that, it was back to either watching the afternoon views or taking another sleep break in the cabins

The delayed train afforded some unusual daytime views not seen on past trips. Two particular new sights were views of the SGR, the new China-built standard gauge railway which for many kilometers, runs parallel to the old railway. Also after Mtito Andei, and once the train was passing the Tsavo Park, there were also sightings of wildlife including several giraffes and elephant herds in the evening.

Train speed

Speeding through Tsavo

The train is able to attain a decent speed of almost 60 kilometers per hour when the railway is straight and there are no slopes to navigate or stops to make.

But cargo is clearly the priority for the Rift Valley Railways consortium who run the railway (it is said that 99% of their revenue is from cargo, with just 1% from the passenger trains) – and on at least three occasions, our passenger train had to stop for 10-30 minutes at a station, to wait for a heavy cargo train to pass on the way to Nairobi. The trains had wagons go goods or fuel for Uganda, or wagons for the Magadi soda ash factory.

The train eventually got to Mombasa at  1 a.m., having left Nairobi at 5 a.m. the day before. Mombasa station seems to have lost or leased some space in its front yard to a private developer and there’s now a lorry sales lot where cars used to park.

Some other advice;

  • Carry extra snack foods, and soft or hard drinks of choice.
  • Carry wipes, toilet paper, bug spray.
  • Have reading material and fully charged devices

M&A Moment: BritAm, Centum, other East Africa deals

Britam and Centum have had a busy few weeks.
 
BritAmEA (i) Had an oversubscribed bond at the NSE that saw them raise Kshs 6 billion (ii) Completed the acquisition of 99% Real Insurance – giving them access to Mozambique, Malawi and Tanzania (the Competition Authority approved this deal with a caveat that they retain at least 85 of the 105 employees of Real) (iii) Established an office in Rwanda (IV) Britam will also pay about Kshs 2 billion for Equity’s 25% in Housing Finance.
 
Centum (i) Are proposing to acquire an additional 66% shares in K-Rep Bank (ii) Are seeking shareholder approval to create a Mauritius company, set up Kings Beverage, Bakki, Shefa subsidiaries, and also ratify the acquisition of 73% of Genesis & 30% of Broll (real estate) (iii) Ceded 42% of Two Rivers venture to investors at Kshs 6 billion, (iv) Are still in the running for Rea Vipingo offering Kshs 75 per share, over the Rea bid of Kshs 70 per share to other shareholders (v) Key Centum shareholder, Chris Kirubi said he wants to be a dollar billionaire. 
 
Other recent deals include
 
Airlines
  • Kenya Airways to give Tanzania’s Precision Air a $10 million bailout. 
  • Waiting to see who will officially be FastJet’s partner will be for their renewed push to enter the Kenyan aviation market.
  • Hong Kong-listed Frontier Services Group completed the acquisition of 49% of Phoenix Aviation for $14 million (Kshs.1.2 billion).
Autos
  • Al Futtaim Auto to compulsorily acquire the remaining 8.4% of CMC shares from minority shareholders
Banking & Finance
  • Actis to acquire Compuscan, the largest independent credit bureau in Africa & run it as Credit Service Holdings with Michael Jordaan as chair.
  • Diamond Trust has an ongoing rights issue to raise Kshs 3.2B ($42 million) from shareholders at Kshs 165 per share.
  • Ecobank got investment bank approval in Kenya following their buyout of Iroko buyout and will target oil & gas, infrastructure & commodity deals. 
  • KCB is now a holding company, and is said to be interested in buying an insurance entity.
  • (edit) Kenyan Women Holdings will sell 25% of the shareholding of Kenya Women’s Finance Trust to their 600,000 members between September and October 2014. 
  • NIC Bank to have a corporate bond and rights issue during 2014
  • Atlas Mara to buy 77% of Development Bank of Rwanda 
  • National Bank shareholders to vote on if money from their upcoming rights issue can go to pay off preference shareholders
  • Western Kenya politicians have supported the creation of a new Mulembe Investment MFI bank, that will be part-funded by counties to serve 5 million people. 
Building & Cement
  • Holcim is set to acquire effective control of Kenya’s Bamburi Cement as part of the planned merger between Holcim and Lafarge. “The parties do not wish to see any change to the status of Bamburi as one of Kenya’s leading industrial companies listed on the NSE.”
Food & Beverage 
  • Danone bought 40%of Kenya’s dairy processing company Brookside which had revenue of Kshs15.4 billion (€130 million) in 2013. It was previously 90% owned by the Kenyatta family with Abraaj owning 10%. Brookside collects milk from 140,000 farmers and has 3,000 employees.
  • Distell of Stellenbosch South Africa got privatization approval from the Kenya government to acquire of 26% of KWA Holdings E.A. that was previously owned by ICDC  for Kshs 860 million (about $10 million)
  • Kenya Wines will also their Kshs126 millionUchumi Supermarket stake.
  • See Centum (above)
  • South African food company, Tiger Brands has dropped plans to acquire Kenya firms Rafiki Millers for $25m.
Health & Beauty
  • Procter & Gamble merged India, the Middle East and Africa into one IMEA region to improve execution.
Hotels & Tourism
  • The Kenya Competition Authority approved the acquisition of 100% of Fairview Hotel by City Lodge Hotels.
  • Kempinski Hotels, Europe’s oldest luxury hotel group has officially taken over Hôtel Des Milles Collines in Rwanda.
Insurance 

  • See Britam above
  • CIC had dropped plans for a rights issue in favour of a corporate bond
  • Liberty Kenya proposed to pay a Kshs 1/= scrip dividend, but shareholders can opt for cash.  
  • UAP had an oversubscribed bond that raised Kshs 3.1 billion against a target of 2B. 
  • Africa Report magazine listed insurance companies as the top performers at the NSE in 2014 (see table).
Legal
  • Kenyan firms Hamilton Harrison & Matthews (HHM) and Oraro & Company have announced they are to merge pending regulatory approvals.
Media & Communications
#RIPCareyEaton
  • The $35 billion Publicis-Omnicom merger fell apart. The deal to combine the world’s largest advertising company was foiled by myriad difficulties, including who would run the new firm. The collapse of the deal is a win for WPP CEO Martin Sorrell, who campaigned aggressively against the merger of two of his biggest rivals.
  • A few months after his big deal with One Africa Media consolidating operations in Kenya, Uganda and South Africa, co-founder, Carey Eaton, was killed in Nairobi. See some tributes to Carey Eaton. The Economist also ranked the largest internet companies in Africa and One Africa Media topped this at $80 million, followed by Mobile Planet ($15 million) and Kopo Kopo ($10 million) 
  • passed away – some tributes 
  • Scangroup agreed to acquire a majority stake in a pan-African firm – the Experiential Marketing Group (EXP) 
  • The  Safaricom and Airtel buy out of (and split of) Yu appears to have stalled. 
Oil & Mining
  • In the last year, Tullow Oil and Base Resources have paid the Kenya government $22 million and $16 million respectively. 
  • Tullow received a  judgment in its favour over capital gains tax payments that Tullow had made onHeritage’s behalf to the Uganda Revenue Authority. In August 2013, Tullow received $345.8 million from Heritage in satisfaction of this High Court judgment.
  • Swala Oil & Gas completed their Tanzania IPO which was oversubscribed and will now proceed to list on the Dar es Salaam Stock Exchange (“DSE”). The placement of 13.3 million shares with 1,869 new and existing shareholders also allowed Swala to keep excess funds from Dar IPO.
Transportation & Utilities
  • Transcentury sold their 34% in Rift Valley Railways to Citadel Capital for $43.7M recovering their cash, but below fair value..they cited the delayed turnaround of the railway consortium as a reason for the sale.
  • Actis confirmed the sale of its stake in Umeme for $85.5 million to 20 institutional investors including Investec and Uganda’s NSSF
  • Kone Kenya acquired the business of Marryat & Scott, an elevator installation company.
Other Peoples Money
  • The Australian Navy seized heroin worth $296 million from a wooden boat off  the Kenyan coast.
  • The Karen Blixen house was put up for sale for $9.5 million 
  • Kenya’s NSSF had $600 million (Kshs 51 billion) in quoted securities as at June 2013 topped by Bamburi EABL and KCB.
  • The Competition Authority fined Tusker Mattresses (Tuskys) and Ukwala supermarkets Kshs 5.3 million while allowing them to continue pursuing a supermarket consolidation deal.

Turning Round the Lunatic Express

A few weeks ago, Rift Valley Railways (RVR) and Citadel Capital had a small media briefing to highlight the state of their investment in a consortium to run the Kenya Uganda-Railway. It was meant to signal an escalation in the marketing the achievements of the consortium but it also highlighted the state of the railway that they invested in about three years ago.

The railways which moved 4.2 million tons in the early 1970s’ when it last got a public investment but had been in steady decline since with increased competition from roads and pipelines. It was then passed on by the Governments of Kenya and Uganda through a concession to new owners who, as it became apparent later, were without money or management expertise – and were down to one working train, and about to pull the plug on the venture.

The new investors, led by Citadel and Transcentury, fundraised through debt and equity and set about rebuilding hundreds of kilometres of rail tracks that were dangerous if trains moved at their regular speeds, refurbishing locomotives and wagons, automating line movements, creating storage facilities, and putting staff succession plans in place. This year they launched a graduate trainee program that will have a class of 20 this year who were selected from 3,400 applicants and will soon install a train simulator for training.

Passenger services are 4% of Revenue

Their concession called for an investment of $40 million in 5 years but it’s taken a budget of $300 million to get where they are today, including $11 million worth of levies paid to the governments every year. They hired a management team from Brazil who engineered similar turnarounds, and there has been some progress in going from 22 days to move cargo from Mombasa to Kampala, to a current average of 8 days. The best performance is 4 days, and their internal goal is to make that period the average by 2015. They are back to moving 1.5 million tons a year, meeting a consortium target with s plan to get to 4.5 million tons by 2016.

But even as they are breaking even, the governments’ of Kenya and Uganda are restless. In recent weeks, the Deputy President complained about the creaking 90-year-old relic known as the Lunatic Express that was built by the British Colonial government, while the Transport Cabinet Secretary believes that with 20 million tons passing through the Mombasa Port, there’s need for five other railways.

There are designs to have a Chinese-built wide-gauge railway from Mombasa to Uganda (to be financed with a 1.5% tax on all imported goods) and another 1,500-kilometre track from a planned new Lamu port all the way to South Sudan.

Even with clients like Total, Hass, Maersk, Coca Cola, Shell, the World Food Program Bamburi, Athi River, and EA Portland cement companies, RVR still have a way to go with proving to other corporates that they are a viable reliable option to the hundreds of trucks that make that daily journey from to and from the Mombasa Port.

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.