IPO Train: full on board

It’s now the fourth official day of the Safaricom IPO, with some banks and brokers working over 7 days processing applications. And, over the weekend, many of the negatives of the IPO turned into positives;

Politics align: The IPO was launched last Friday by President Mwai Kibaki, who placed a personal application for 1 million shares, worth 5 million shillings ((0.01% of the shares on offer) . Since then the ODM side have also changed tune of the IPO matter, as they realized that as leaders they have to guide their people – and one of the ways to do so is to enlighten them on opportunities of wealth building and methods of advancement beyond agricultural and real estate productivity. Why tell people not to buy shares, when other communities buy the shares? What do you want your people to do? In any case the public holds minority stakes in most NSE companies with over half the shareholding hidden behind other companies whose shareholders are not well known.

Competitive sisters: Kengen was a watershed IPO but that was 2 years ago. The last massive regional IPO was Stanbic Uganda – how do they compare?

Company; Stanbic : Safaricom
Target; (Ushs 70 billion) USS$ 38 million: (Kshs. 50 billion) US$ 770 million
Beneficiaries; Standard Bank (SA) & Government of Uganda ; Government of Kenya only
Shares on offer; 1 billion shares : 10 billion shares
Share price; (Kshs. 3) $0.04 : (Kshs. 5) $0.08
Oversubscription 3 X : (2X is a conservative estimate)
Applications: 37,000 ; (1 million expected)

Animal Metaphors: We now have CNBC Africa which has been live for about a month and it’s a great channel to watch especially late at night, when they are covering Asia or American markets. Last week, they were discussing the US banking crisis and one analyst used the Sherlock Holmes tale of the dog that did not bark in the night to reflect on the silence of Japanese banks that were heavy investors in US mortgage securities but have not declared any losses.

The animal metaphor with Safaricom – is the elephant in the room which everyone is ignoring and that is Vodafone (UK): Did they want the IPO? I doubt it – they are not making money from the IPO, and will go from having a cozy boardroom, to having a million shareholders (estimate) demanding phones and umbrella’s at AGM’s.

– They are reluctant partners in this who for the last three years (and long before Mobitelea became a Matatu name) they had tried to buy 9% or 11% of Safaricom from the Government of Kenya, for a figure far less than the Government will raise from the public. Vodafone will remain the largest shareholder with 40% (or 35%) to GoK’s 35% , and retain veto power over business plans, budget, and CEO & FC appointments. But most companies listed on the NSE have parent companies who find it prudent to retain at least 50% of the company’s ownership to control the strategic and management direction of a company – and could they be buying any floating shares out there after listing? They can own up to 60% of Safaricom.
– It has exposed the embarrassing practices that gave rise to Mobitelea

Will stockbrokers’ change?: The only smudge so far has been the past performance of stockbrokers. It is sad that the lines outside Nation Center (of Nyaga Stockbroker clients) is as long as that any broker/banker I have seen this week. Stockbrokers have put out their best clothes, advertised and got new staff to woo investors for the 1 billion plus shillings ($15 million) commissions from the IPO – but what happens after? Will they revert to their dark old ways of insider trading, and secret share dealing? An ominous story from the Nation goes that one of the most interesting but unconfirmed anecdotes at the bourse is that Nyaga Securities managing director Patrick Gakiavi actually attended (as a director) the NSE meeting that decided to pump Kshs. 100 million into his operation. – and that joins the NSE urban legend archive like the one of the CEO who was able to cash out his significant stake on the last day of Uchumi share trading

Modernization to eliminate rogue brokers: The central deposit settlement corporation (CDSC) is seeking an SMS solution (mobile phone messaging) to alert investors on their account share trades (theirs/by rogue brokers) and also respond to client requests. (Deadline is April 9) The laws have already been amended to allow them to collect 30 shillings from each Safaricom applicant for postage and this will probably continue for any statements thereafter – as investors will be eased into the cheaper option of SMS (maybe at 5 or 10 shillings per message)

Beyond Safaricom: Hisanet Africa recommend that investors look at some other shares of interest amidst the IPO: these include NIC Bank, Kengen, Barclays (who are now expanding into Rwanda), Access Kenya, and East African Cables.

Safaricom IPO starts

The launch ceremony was held on Friday morning, and this came after several lively debates on TV news shows last night on the issue of if the IPO should go on

A bit of politics: ODM and civil society were a bit late to the party (they have known for two weeks that this was coming), with final complaints about Mobiltelea. And ODM MP’s (Anyang Nyongo and Omingo Magara) went ahead to put a caveat notice in the newspaper today warning investors that the Safaricom privatization is being done outside of existing privatization law, the privatization commission supposed to oversee the process has been sidelined and that there are conflicts of interest among transaction advisers.

That out of the way, it is clear that Minister Amos Kimunya and the rest of Government doesn’t want to hear about Mobitelea or have anything derail the IPO which will net about 50 billion shillings ($770 million) to the Government for rebuilding.

Why start early?: That out of the way, day one is rather quiet, with not too many queues outside some stockbroker offices. But there’s almost a month to go, and Kenyans are not very time conscious initially. This will change next week, as investors will have been bombarded with questions of the process, are looking for cash or are wading though loan sharek offers from various banks and SACCO’s before placing their orders. I hope ether won’t be calls to extend the process for late-comers late in April!

Official sites: Safaricom also launched a revamped website to coincide with the IPO. There are also two official sites, for online applications and information – but the prospectus is yet to be put up on either.

Shooting blanks: All week long the Business Daily has been promising a feature edition that would help investors identify the good from the bad brokers. But when your own CEO is a director of a stockbrokerage, that’s about as serious as a member of Karen club complaining about the green on the 18th hole at Muthaiga club course. The 20 page issue issue aimed at sophisticated investors does not name names or go beyond tips and guidance on ethical stockbrokers, how to select a broker, qualities to look for in a broker (office premises, reporting frequency, staff qualifications, ownership – How??) for 20 pages full of advertisements by the same brokers. So you’ll have to be satisfied blogs, forums or other online channels to find out the good and the bad of brokers.

East African investors: CFC announced this week that they have they have crossed the 100,000 CDS (online investors) account mark. But a Uganda stockbroker does not get expect to get more than 2,000 applications owing o the passport requirements
– Meanwhile you can design a logo for EASEA – the East African Stock Exchanges Association.

Other opportunities from the papers

Jobs
– Barclays: relationship manager – SME banking, local business development manager, local business advisor. human.resources@barclays.com
– Deloitte: (2) business Analysts’ corporate financial services: hr@deloitte.co.ke by 5/5
– Insurance regulator authority; manager technical, finance manager, company secretary (legal manager), commins@skyweb.co.ke by 15/4

Safaricom IPO: Prospectus Peek

Thanks, M

At the end of it all, there are people who will buy the company regardless of what is in the prospectus or will not buy. So does it matter?

IPO pool

Domestic pool

  • 6.5 billion Shares total (runs from 26 March to 23 April)
  • Individuals (retail) 3.38 billion shares (just 52%) minimum lot is 2,000 shares.
  • Qualified institutional investors (insurers, pensions and other entities recognized by the RBA) 2.73 billion shares (42%). Minimum lot is 100,000 then 10,000 after.
  • Authorized dealers 130 million shares ( 2%) – minimum 2,000
  • Employees 260 m shares (4%) minimum is 2,000

International pool

  • 3.5 billion Shares set aside and targeted at long-term investors. (runs from 9th April to 23rd April).
  • 30 million shillings ($461,000) per order minimum and the price will be set by book building

Inside Safaricom

Balance sheet:

  • Assets of 68 billion ($1 billion) in September 2007, but with negative net assets (9b current assets, 22b current liabilities). In March 2007, it was much better (CA 10b, CL 13b)
  • The company owns no land or buildings.

P&L:

  • 9-month profit before tax of 16 billion, up from 12b a year ago – and the company is on track for 21 billion pre-tax profit in 2008.
  • Revenue has been increasing at about 30% a year: operating expenses take up 40% of revenue; while SGA take another 10% (average annual increases have been 100% for marketing, 40% admin and 30% for staff each year)

Competition & subscribers:

  • As at December ’07 the company had 9.2m subscribers, up from 5m a year before. Safaricom claims an 80% market share to Celtel’s 18% (2.1m subs).
  • But Celtel hurts: Average revenue per user (ARPU) at Dec 07 of 650 shillings (583 pre-paid, 3,968 post-paid), down from 816 shillings (705, 5,708) a year ago. This is due to adding new subscribers, with lower spending capacity in rural areas and reduction of all rates following the competition. They lost fewer customers (churn) ever since they allowed free replacement of lost SIM cards.
  • Also voice minutes (9 months): Dec 07 352 million, Dec 06 203 million
  • Operating margin Sept 07 31%, Sep 06 36%: this has dropped as a result of chasing new customers with reduced tariffs and increased marketing expenses

Staff:

  • Key managers take home about 200 million shillings a year, while all employees take home 2 billion in compensation.
  • Like at Kenya Airways, foreign partner (Vodafone) will continue to appoint CEO and Financial controller (Michael Joseph’s contract runs through mid-2009).
  • Has 1,145 employees ( ½ in customer care) in 2007, up from 535 in 2003

Odd points:

  • IPO budget includes just 5 million for PR and 2 million for advertising, but it sells itself.
  • The prospectus lists a shareholder PST who will appoint directors – cut & paste job?
  • Lead transaction advisor (Jimnah Mbaru & Co) bid just 0.05 cents for the job.
  • The dreaded word Mobitelea appears 4 times and the mysterious company owns 5% of Safaricom through (12.5% of Vodafone (K) limited’s 40%. It is mentioned in the context of a public accounts committees report (risk factor). But Standard Chartered’s 1% owner has not bothered anyone for years, so is it an issue really?

Short-term outlook:

  • Dividend in 2007 was 4 billion shillings out of 17 billion profit, 3b the year before. But that is yet to be paid out – Telkom are owed 2.4 billion but that will be used to offset some of their debts to Safaricom.
  • First AGM likely in September.
  • Weak shilling: and/or high-interest rates are bad for the company in the short term

Long-term:

  • Revenue of $677m in the last 9 months compared to $194m Celtel for 2007 – and an EBITDA of 44% to Celtel‘s 16% hmmm – whose managing Celtel? Will they dispute any of these numbers?
  • Country risk: Derives all its revenue from Kenya, so if you don’t believe in Kenya, this is not for you.
  • Competition (5 mobile companies) but competition will hurt/affect all companies.
  • Threat to banks?: M-pesa (virtual money accounts & transfer service) has been registering about 6,000 applicants per day and has 700,000 users. But Vodafone owns the M-pesa solution and Safcom pays them.

Mostly Safaricom: 2 days to IPO

Prospectus is out

but before that
– The Kenya Capital Investment Group has a nice post to guide Diaspora investors considering the Nairobi Stock Exchange (NSE) for the first time
– Which broker to use for Safaricom? Check out the Business daily on Friday March 28 for a guide to stockbrokers – the good, the bad, and the rogue. Afrika investment bank is the newest (previously was Ashbhu Securities) I-bank now.
– beyond Safaricom I Co-op bank announces plans to list, which is a great overdue addition to the NSE
– beyond Safaricom II and if the Finance Minister is by chance short in his bid to raise money from the privatization process, I’ve always maintained that he should go after another prime company; Kenya Pipeline – with pre-tax profits of Kshs. 4 billion (and EPS of 163), ripe for a split and a listing
– loans for shares: Joining equity bank in offering 100% financing is family bank, oriental and national bank so far. I may change my stance on loans for shares if I see a bank with a clear policy of loan prepayment, in case say 80% of the cash is not utilized – so an investor is not left with a loan to squander, instead of shares to sell
– Investors will be able to use pesa point ATM’s to pay for IPO shares
– Housing finance signing with Safaricom’s M-Pesa for money transfer last week shows how traditional companies like Western Union have been overtaken by changes in the banking industry.
– Writing in the Financial Standard (Tuesday) Jonathan Somen, CEO of Access Kenya (the last ICT company to be listed) calls Safaricom a good short term buy as they have performed prior to the arrival of France’s Orange (formerly Telkom Kenya) and India’s Essar (through Econet)
– Africa Alliance has opened an IPO center in Nairobi – open from 7am to 7 pm
– DYK: You have to apply to use the Kenya flag on any product? Safaricom have received permission to use it on scratch cards, the Tea Board of Kenya to display it on tea packets, and Nike International (through their lawyers) to sell it on hooded jackets!
– Pay for mail; CDS will for the first time require IPO applicants to pay Kshs. 30 for mailing each confirmed allocation.

NSSF: Apples & Oranges

Kenya’s National Social Security Fund finally released their year-end results in the newspapers today after many years of pressure from governance experts and regulators. The scheme hopes to convert into a pension fund and states that it plans to hold an AGM soon

While the statements show improved performance over the last four years (NSSF-K was abused in the 1990’s and forced into bad property investments and lost billions in collapsed banks), how does it compare with NSSF Uganda who released their results last week?

an approximate conversion to US$

Buildings/property/land
NSSFK $434 million (35%)
NSSFU $76 million (13%)

Government Securities
NSSFK $115 million (9%)
NSSFU $289 million (51%)

Equities
NSSF Uganda lists their holdings – as Uganda Clays, Baroda, Nsimbe, DFCU, Stanbic, Serena, HFCU, Victoria properties. The Kenyan one does not list but the portfolio would include Unilever Tea, Nation media group, HFCK (11%) KCB (8%) British American Tobacco (20%) East African Breweries (8%), EAP cement (27%), and National Bank (48%)
NSSFK $618 million
NSSFU $54 million

Current assets
NSSFK $50 million
NSSFU $350 million

Current Liabilities
NSSFK $20 million
NSSFU $11 million

Members Funds
NSSFK $1,240 million
NSSFU $548 million

Totals assets
NSSFK $1,240 million
NSSFU $564 million

Income:
NSSFK $61 million
NSSFU $38 million
However, the Kenyan one include changes in the market value of shares in last year, adding another $80m to bring total income to $141m

Costs
NSSFK $41 million
NSSFU $7 million

Net Gain/Profit
NSSFK $147 million
NSSFU $31 million

Earlier:

  • Under its current format, the ultimate payout will be low from NSSF(K) and the benefits at retirement will not be enough to sustain a majority of retirees.
  • Comparison between Stanbic Kenya and Stanbic Uganda.