City Trust & Business Daily goofs!

Errors Galore... Business Daily at it again! My comments/questions in RED... City Trust banks on I&M regional expansion

Written by James Makau

I&M Bank has assets worth Sh30 billion in Kenya. June 27, 2008: The star that once shone over City Trust Ltd at the Nairobi Stock Exchange (NSE) in 2007 seems to have dimmed, put out by low volumes of tradable shares that have led to stagnation of its share price at the local bourse. Actually... prices on shares with low liquidity tend to be more volatile... if there are trades... At the Alternative Investment Market Segment (AIMS) of the NSE, low liquidity and the lack of shares available for trading is the bane of firms , but this is one plight that City Trust had managed to side- step, making huge gains on its share price last year. Little is still known of the firm which at one point in 2007 had floored the MSCI World Index— a free float-adjusted market cap index used to measure global equity performance— by a massive 157 per cent. The press is allowed at AGMs... Did this reporter make the effort to attend an AGM? 'Little is known'... I think the reporters concentrate of the 'larger' sexier firms e.g. KQ, Equity, etc while ignoring the smaller firms then claim 'little is known'... But in a remarkable about turn , City Trust —a listed investment holdings company—has lived to the AIMS billing; trading a mere six times this year, with the price changing only thrice. The owners of City Trust, which is tucked away in the relatively quiet corners of the stock market, keep an equally low profile. Picture this. The company, with a book valuation of Sh220 million and market value of Sh781 million, has no office or employees. It has an office. Ask the directors. A shareholder asked them at the AGM & he was told where it is though by law all a firm needs is a registered office - which is at Kirungii for City Trust. The business of the day is run by two of the four directors of the company board with the full board overseeing the company operations. The board occasionally meets at the Livingstone Associates offices, Westlands to plan and transact the business of the company. Prime Securities Investment Trust Ltd is listed as the largest shareholder in the firm with a 49.98 per cent stake while local individual shareholders account for 29.48 per cent. Institutional investors control a 17.89 percent stake in the firm. And with a dormant subsidiary —Kenstock Ltd—and modest earnings compared to other firms listed at the bourse, City Trust rising share price is likely to remain a subdued affair, outshone by the likes of titanic debutant at the bourse, Safaricom. Erm, it's the Earnings Per Share rather than the Profit After Tax that is directly related to the share price. But there’s still hope for City Trust, one that of course makes investment sense for its shareholders. Analysts say that should a persistent investor willing to buy bits of City Trust over a long period of time to create a weighty portfolio, the consistent dividend payout from the firm is a worthy attraction. What the heck is a 'weighty portfolio'? The dividend per share of three shillings which is pocketed entirely by the firms shareholders is mainly attributed to City Trust’s stake in a rising star in Kenyan banking. So... if the firm's shareholders don't pocket the "entire" dividend, then pray I ask... who does... Of course, the shareholders get the "entire" dividend (except withholding tax)!!! Investment consultant with over 50 years experience of trading at the NSE Chandulal Shah in a previous interview with the Business Daily expressed the view that City Trust’s shareholding at Investment & Mortgages (I&M) Bank holds a crucial piece to the firm’s portfolio puzzle. With a stake of 11 percent representing 1.1 million ordinary shares in I&M Bank, City Trust is the recipient of a tidy sum in dividends from the bank .“This is an investment company (City Trust) where any dividend derived is paid directly to shareholders.” said Mr Shah. Actually, City Trust owns only 8.93% of I&M Bank represented by 1.94mn shares. This is public information if one reads their Annual Report. City Trust which is expected to release its half year results this month is set to pay out a hefty dividend that will top up the Sh3.10 payout issued to shareholders last year. I thought the 1H 2007-8 ended 31 Jan 2008 thus the 1H 2007-8 results should have been released by 31 May 2008 or they are in breach of some NSE regulation. Income statements for the company at the beginning of the year put the firm’s investments at I&M Bank at Sh171 million. Last year, the firm increased its investment portfolio to Sh185 million. In 2007, I&M Bank reported a pre-tax profit of Sh1.3 billion compared to Sh936 million the previous year. Following the steady growth and strong earnings derived from I&M Bank, the firm invested more funds in the bank, bringing City Trust’s investment to Sh185 million as at January this year. In March this year I&M Bank acquired 50 per cent shares in First City Bank (FCB) of Mauritius at a cost of Sh1.1 billion. The acquisition of FCB represents the bank’s first investment abroad and is viewed as a launching pad for its regional expansion. FCB is one of the 19 commercial banks in Mauritius licensed to do both on-shore and off-shore banking business. I&M Bank has assets worth Sh30 billion in Kenya and has 10 branches in Nairobi, Kisumu and Mombasa. The bank also announced a private offer for Sh600 million subordinated unsecured floating rate notes to shore up its capital base. Low Liquidity Even then, City Trust’s free float and tightly held share structure still have a major bearing on the firm’s trading price. With only 4 million shares listed at the Nairobi Stock Exchange, City Trust Ltd is one of the smallest firms at the bourse. But even with about 3.5 million shares available for trading; only a tiny fraction of these are actually traded. Hmmm... according to the 2006-7 Annual Report, City Trust gave a bonus & this increased the shares to 5.2mn. I got this info from the NSE pricelist... No rocket science here... With only a few thousand shares changing hands on a weekly basis, the low supply of City Trust shares at the bourse has allowed holders of the securities to quote high prices which are occasionally matched at the bourse leading to price distortion. Wait... the same article (this one) claims there were only 6 trades this year... but the above paragraph claims that a few thousand shares trade weekly. Since it is June 2008, I would say we have had over 32 weeks this year... ICDCI was in a similar case a while back before turning round are becoming one of the most profitable investment holdings firm in the country. What has low trading volume & 'steady' price have to do with a firm's profitability? Sameer Africa , Eveready , Unilever Tea trade much more than City Trust but are they as profitable? But one reason that market players believe is a key link behind City Trust’s meteoric rise is the possible share holder value derived from the sterling performance of its portfolio’s gem.