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Wednesday, July 12, 2006

ScanGroup IPO - July 2006

ScanGroup has posted the prospectus online on July 12 which is 5 days ahead of schedule.

Salient Points - My observations (read at your own risk & do your own research!) in Blue:
  • KShs 10.45 per share. Priced to sell i.e. the price will attract many investors like the "cheap" shares solely on account of price & not fundamentals!
  • 9 Million "new" shares will be sold to raise KShs 74 Million for ScanGroup. These funds will go to reduce debt, increase working capital & for acquisitions.
  • 60 Million shares will be sold by the "Vendor" (Bharat Thakrar - CEO & founder) for KShs 584 Million. He is cashing out a good chunk of his shares. Plus he will still own an additional 45 Million shares after the IPO thus effectively he is a Billionaire! Our first (public) media BILLIONAIRE! Not a bad deal... This listing will open the eyes & doors for other private businesses to go public as a way to cash out.
  • NAV of KShs 1.58 (Price = 6.61 x NAV) High ratio for listed Kenyan firms & there will be little left for ordinary shareholders if ScanGroup goes under! Nevertheless, in this business it is the earnings/creative talent that counts. How do you value creativity & ideas?
  • EPS 2005 = 0.96 thus P/E of 10.88 Not cheap but in line with many other listed firms on the NSE. Was it "boosted" for the IPO?
  • EPS 2006 (estimate) = 1.05 thus P/E of 9.95 Not cheap but in line with many other listed firms on the NSE. An estimate is just that... an estimate!
  • AJL White (Creative Director) is not selling his shares but has "contributed" 3 Million to Bora Services (an ESOP-like structure). The shares will vest after 5 years for the benefit of Key Management. Hopefully, this will keep the Key management on board for at least 5 years. Thakrar contributed 12 Million shares towards Bora. Venkataraman contributed 3 Million shares to Bora - though he is sole beneficiary in 5 years.
  • High dividend payout since this is not a capital intensive business. A bad year can mean reduced dividends thus the shares could be volatile.
  • Management team is relatively young. Bodes well or new ideas but ScanGroup will experience poaching by other firms (thus the Bora incentive!)
  • Most MDs & GMs of the subsidiaries are not Kenyan e.g. A.J.L White, S. Ambegaonkar, S. Venkataraman, M. Shah, S. Sundaram, P. Sham, etc. Why aren't there more Kenyans? Anyway, the incentive to stay on in Kenya is not as strong for expats as for Kenyan managers thus reduces the expats' loyalty to ScanGroup.
  • Executive compensation (2005: KShs 25 Million) will increase substantially as the management feels they were underpaid as "owners". How much more? This also disincentivises management since lower profits does not necessarily reduce their income.
  • Shares in the IPO: 5% reserved for employees, 45% reserved for corporate buyers & 50% for individual investors. I would have preferred all investors (corporate & individual) be treated as equals thus "spreading" the wealth. To reduce costs for ScanGroup & BT the minimum application should have been for a minimum of 1,000 shares.
  • Promoters (Thakrar & White) will not be able to sell (except with "permission" from the Company (ScanGroup) any shares for 3 years. Even then only 25% of their shares. They can dispose of all their shares after 5 years. Note that BT+AJLW control ScanGroup so it might be "easy" to get permission from themselves!
  • Key Management has incentive for prices to rise in the long-term since the value is locked in the shares' value in 5 years. Basically the higher the price in 5 years the more the Management makes! This is a HUGE incentive for the longer-term. But we do not have access to the documents thus they may be clauses that allow opt-outs.
  • The economy is geared for growth for the next 2 years leading up to the elections. Whereas there are always chances of pre-election violence, I don't think Kenya will see it on a large-scale. Spending on ads will increase as we see American-style electioneering e.g. DSTV carried Raila's ads. The savviest firms will be used by all politicians to make themselves look good. The ads will cut across all mediums!
  • Increased viewership on TV means slicker ads thus increased profits. The big guns can afford the fancy equipment for these ads. BTW, the smaller shops will become very competitive with falling technology prices & greater computing power. This is a very real threat to the "Production" department of ScanGroup.
  • Regional expansion esp by multi-nationals who prefers one firm doing all the PR & marketing instead of finding new partners in each market/country. Potential is huge for ScanGroup as incomes rise in the greater E.African region e.g. Uganda, Rwanda, Congo, etc.
  • The salaries are going to be pretty high (i.e. direct costs will increase regardless of profitability). The promoters have taken a pay rise but the new salaries are not revealed in the prospectus.
  • Section 6.4 (ii) seems to ALLOW for INDSIDER TRADING! I would appreciate someone reading the section & providing their interpretation!

Buy - at least for the short-term since there is a dearth of IPOs. Expect lots of speculation but support from the underwriters.


pesa tu said...

I will go for it as long as there is momentum for higher prices on the mkt.
Since LONG TERM creative business is very volatile

bankelele said...

I'm going, maybe for 2,000 shares.

Bharat Thakrar is smart and, as you say, will encourage others to do the same. I know many business people who have built up 40 year companies, want to retire & - but have no heirs. So they sell their companies and move to Europe or Canada. This gives them another option of cashing in their chips and still retaining some ties to their pride & joy.

gathinga said...

good buy i think....but not for the long term. i will buy but sell immediately thereafter. i hope they treat us like kengen

Ig-know-rant said...

Coldtuster: Thanks for the soft copy of the prospectus. I'm buying too, and a good chunk.

Btw, how come Tanzanians are still hesitant to allow foreigners participate in their IPOs?? The on-going proposed offer of Twiga Cwmwnt is a good example

coldtusker said...

While we are concentrating on ScanGroup we should give a few thoughts to other firms!

Kenya Airways
KQ remains one of my favourites coz of the MANAGEMENT. They have done a great job in expanding KQ's reach to West Africa.

KQ is training Air Botswana in e-ticketing & hopefully enter into a codeshare with them.

I expect further expansion to Asian destinations including China, India, Korea & Japan... tourism + business!

I do not buy into the "cheap" share theory coz that is a domain for speculators... I am a Warren Buffett fan!

coldtusker said...

@pesa tu & Gathinga - Agreed but I see heavy speculation esp among retail investors. There might be short-term gains. Riskier than KenGen.

@banks - ScanGroup IPO opens the eyes of others wanting to cash in by listing. The Big Daddy would be Chandaria Industries. Also helps in succession planning when the 2nd or 3rd generation doesn't want to be in the business.

@ig - Politics coz they fear domination by Kenyana. By opening to EA investors, they can raise more cash & develop faster!

kitutu said...

Scangroup IPO, interesting. The breakdown of expenses showing that both Company and vendor(owner) will pay is interesting. This IPO sets the way forward for many familiy owned business to list and share their ownership. I think many private companies will follow this route.

Anonymous said...

do you think , we may be getting to a point soon where listing a company is political insurance! since the publci is getting more investment savy and the common man is isbeginning to invest, i think this may be a form of political insurance - uchumi comes to mind

coldtusker said...

@anon - Media firms don't need political insurance coz the "brains" can leave anytime e.g. say Bharat Thakrar & AJL White were forced to "sell" ScanGroup to a politically connected group, he could quit & ScanGroup would diesoon thereafter.

I see firms like Nakumatt going public for protection against political busybodies.

A group that would benefit would be farms/plantations. If James Finlay was "public" then the shareholders would support the use of tea-picking machines esp by showing the benefits. The ownership has to be widespread for the benefits to accrue to the firm.

Whatever COTU + the idiot atwoli says, Kenya competes with Sri Lanka, India & China in the world tea market. Tea is being substituted by sodas, water & juices by consumers. Therefore the tea producers are fighting for a smaller market. Only the efficient & niche players will survive!

Ken said...

Im in on this for speculation only.
@Ig-know-rant - You need to undestand where Tanzanians are coming from. We are 'socio-capitalists' they are full blooded socialists. They detest foreigners (especially Africans) and it will take time before they fully realise the benefits of globalisation and foreign direct investment.

Anonymous said...

i think this is a great buy for now and future, i think that ncihe in the market has barely been scartched in africa. and given they seem to have an african focus. im bullish on africa hence on scangroup i see medium term volatility butf you consider they dont carry too much dead weight like factories that have to run they can always retrench and realign. also they can become a gloabal acquistion target

Jojo said...

Hallo guys, thanks for the good posts. I want to go for some like Gathinga, but ...what do you guys bet for the short term price?

coldtusker said...

@anon - I kinda agree!

AJL White did not sell his shares (& is locked in for 3 yeasr) so I expect he wants the best price in 3 years!

There are huge markets out there. Congo, Zambia, etc that need a firm like ScanGroup. Even the Kenya market is growing.

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