Blog Archive

Wednesday, December 12, 2012

Unga AGM FY 2011-12

Location: KICC Amphitheatre
Date: 5 Dec 2012
Time: 10.30 am
My opinions in italics 

The matatu strike had delayed a lot of folks but the check-in handled by CRS was relatively slow. It took almost 30 mins to check in but it was organized since the security was good. There was a lunch voucher given at registration - more on this later.

It seemed the majority of the initial questions were not related to the Financial Statements or Annual Report. There was a sense of frustration among the directors since the questions were about SWAG (aka freebies like T-Shirts, flour, etc).

The relevant questions came at towards the end of the Q&A on the Financial Statements.
Q: What property is Unga planning to sell?
A: 4 acres on Ngong Rd but it is earmarked for "Recreational Use" only thus the sale is probably limited to Sports Clubs or such users. It is unlikely, like in the old days, that a buyer can change the use. The MD even thought that Nairobi needs the green space.

Q: What is the valuation of the properties?
A: Unga revalues the properties every 5 years & the next revaluation is coming up in 2013. The ROA is quite low.

Q: Does Unga use GMO grains/products?
A: No, since the law does not allow GMO but the MD was emphatic that when the next drought hits Kenya, which has been the case every 3-4 years, GMO grains will be imported.

Q: Why not buy local grain?
A: The local grain is very expensive especially maize since NCPB pays KES 3,000 per 90kg bag. This means the farmers expect a higher price. Unga pays sooner than NCPB and will not buy low-quality maize. The biggest competition are regional, not national, millers who don't care about quality.

Q: Why are the related party transactions/purchases with Seaboard Corporation (which owns 35% of Unga Holdings Ltd) amounting to KES 4.16bn (2011: 2.9bn) so high?
A: Seaboard is a large soft commodities trader & provides financing when banks may be more expensive or unwilling to do so. The purchases from Tanzania could drop if there is a ban on exports.

It was mentioned that the next 2-3 years will be tough with high interest rates, volatile exchange rates, high/volatile commodity prices, increasing costs and inflation. Competition has grown substantially from the regional (mid-sized) millers. Are they evading taxes?

The firm (& its subsidiaries) are planning to spend lots of capex to increase/improve capacity. I am not sure how these will be funded with the low ROA.

What was left unsaid but one could 'feel' was the question/risk of the election. Unga's buying centres are in areas (Nakuru, Eldoret) that were severely affected by PEV 2008. Imports have to come by road or rail from Mombasa which were disrupted.

The Board declared a KES 0.75 dividend & this was passed with nary a whisper. It was mentioned that dividends not swag is what shareholders should want.

Alan McKittrick & Andrew Stewart Ndegwa were re-elected as directors. There were 2 vacancies created by the resignation, of the erstwhile Chairman, Richard Kemoli & Jeremiah Kiereini. The new Chairperson is Isabella Ochola-Wilson who handled the meeting well despite the "swag" complaints & questions.

Some shareholders had complaints/questions unrelated to the Financial Statements but were gently chided by the Chairperson for not sticking to matters on the agenda. The matter came to a head when the agenda item regarding 'electronic dissemination' of information & dividends was being discussed. The Company Secretary explained why it was necessary to update the Articles & Memorandum of Association to 'match' the new laws.  of  A major gripe was that he (among other shareholders) did not have e-mail. The counter was that the abridged information would be published in the newspapers but some shareholders claimed they did not buy newspapers. 

A section of shareholders were fed up of the proceedings & visibly agitated at the back & forth about the 'electronic dissemination'. Others started walking out since lunch was 'pending'. I think if they had offered the lunch packs earlier, the hall would have emptied out sooner. An appeal to wait till the AGM was over was ignored. No idea what was in the lunch pack but these must be the largest cost of holding the AGM.

An uneventful AGM with no surprises but the outlook seems bleak over the next 2-3 years unless there is a paradigm shift in the taxation regime, interest rates and business environment.

Thursday, November 22, 2012

Mumias Sugar Company - Rights Issue in 2013?

It seems to me that Mumias will need to raise funds for expansion as the COMESA deadline approaches.

The link above from Business Daily Africa is quite eye-opening. The highlights are mine.

"The latest development in the sugar industry is the talk about an impending acquisition of one of the new sugar factories in the Southern Nyanza region by one of the players in the industry.
Initially, I was inclined to dismiss the talk as having no substance. But I changed my mind after I found out that Office of the Commissioner for Monopolies had actually dispatched its officers in the field to study the implications of the impending acquisition and to investigate whether it was likely to lead to over concentration of economic power in the sugar industry by one player."
  1. "New" sugar factory threw me off but it has been rumored for a long time that Mumias wants to take over the sugarcane fields of the inefficient (or dying) government owned competitors.
  2. The acquisition, even if not approved yet, seems to be gathering steam if the Commish is sending folks out there.
  3. Mumias is the largest sugar firm in Kenya & would only grow larger (volumes) if it acquires a local rival.
I figure that once the approvals are in place, the Rights Issue will be planned but likely to happen AFTER the elections are concluded & a new president is in place.

Thursday, October 18, 2012

Why has South Korea overtaken Kenya? Because its rulers can limit their greed

Original Source:

Why has Asia boomed in recent decades, while Africa has sunk into penury?
The pithiest answer is a joke I first heard in Nigeria. An African and an Asian make friends at Oxford before becoming politicians.
Years later, the African visits the Asian and is impressed by his mansion, with a Mercedes-Benz in the drive.
"How can you afford this?" he asks. The Asian points to a majestic highway outside. "See that road?" he says with a wink. "Ten per cent."
Later the Asian visits the African's home - a palace with a dozen Mercedes-Benzes.
Anticipating the question, the African says: "See that road?" The Asian sees only bush. "100 per cent."
This is closer to the truth than many on Tony Blair's Commission for Africa would care to admit. East Asia has grown richer in spite of corruption because its rulers felt bound to not steal too much.
They may have skimmed off a bit but they did build the road. Africa's rulers did not.
Consider the cases of Kenya and South Korea. In 1960 South Koreans were, on average, poorer than Kenyans. They are now 25 times richer. What can account for this extraordinary divergence?
It is unlikely to be the legacy of colonialism. The British were disrespectful of Kenyan culture and crushed the Mau-Mau uprising with great ferocity. The Japanese were far more brutal, banning Korean culture and enslaving perhaps 100,000 Korean girls to work in military brothels.
Then, after the Second World War, Korea endured a civil war in which a million people died. Kenya had no comparable trauma.
Some of the differences must be linked to education. South Korean children thrash nearly everyone at maths and science. Kenyan kids do not.
That is not because Koreans are more clever. A more plausible reason is that Korean children do lots of homework. In the early 1990s I lodged with a Korean family in Seoul. The two teenage boys studied hard but never hard enough for their mother. And the father told the elder one that he had to study engineering, whether he wanted to or not, because that was the way to a good job.
Contrast that with Kenya's Masai tribe. Rural Masai send their cleverest sons out to herd cattle, a high-status occupation, and their dimmer children to school.
Given the demands of the modern world, you might think this unwise. But in a way it makes sense. In a meritocratic society such as South Korea, education brings rewards. An engineering degree means a good job.
But in Kenya, those with the power to hire tend to employ members of their own tribe, no matter how lazy or incompetent they may be. So the pay-off from diligent study is less certain; the country has legions of jobless graduates. Korea has tribal problems too. Those from the south-western region of Cholla suffered serious discrimination until quite recently. But there was nothing on the scale taken for granted in Kenya.
The country's first president, Jomo Kenyatta, was from the Kikuyu tribe, who remember him as the father of the nation. Others remember him as the man who gave all the plum jobs to Kikuyus.
Under his successor, Daniel arap Moi, the tables were turned. His Kalenjin tribe were first in line to put their fingers in the public till.
The man who ousted Moi in the elections of 2002, Mwai Kibaki, promised to end the corruption culture. At first he delivered, sacking half the judiciary and warning police to stop robbing motorists.
But then Mr Kibaki grew sick and the Kikuyu cabal around him set about looting the country unchecked. The symbolic end to the anti-corruption drive was when the widely respected anti-corruption minister, John Githongo, fled to London in February, fearing for his life.
Even before then, traders in Nairobi's biggest slum market were telling me that the main reason business was bad was that the police kept confiscating their stock and demanding bribes to give it back.
The difference between the two countries is mostly attributable to politics. Kenya's rulers are parasitic. They enter politics to get rich and care little about the little people.
South Korean governments, though far from perfect, have consistently made economic growth their top priority.
If you doubt that politics matters, consider the case of North Korea. Only half a century ago it was culturally identical to the South - and slightly richer.
After two generations of homicidal Marxism, it is probably as poor as Kenya, although no one really knows because publishing honest statistics there can put you in a prison camp.
• Robert Guest works for The Economist. His book, The Shackled Continent: Africa's Past Present and Future, is out in paperback this month.

Friday, October 12, 2012

NIC Rights Issue - 2012 - Shenanigans?

What an interesting but odd (& worrying) tidbit about the NIC Rights Issue that was forwarded to me:
What is or has the CMA done after they were informed?

NSE websiteNewspapers
Total Number of New Shares Accepted Under Entitlement 85,988,640 85,509,866 478,774
Total Value of New Shares Accepted Under Entitled [KShs] 1,805,761,440 1,795,707,186 10,054,254
Take Up Percentage87%87% -  
Number of Untaken (Lapsed) Rights 12,735,751 13,214,525 (478,774)
Total Number of New Shares applied for Under-application for Additional Shares 248,318,371 248,324,971 (6,600)
Total Number of New Shares applied for Under Entitlementand Application for Additional Shares 333,834,837 333,834,837 -  

The table/results published in the Newspapers (Daily Nation of 11th Oct 2012 Pg 22, The Standard of 11th Oct 2012 Pg 13).

So who got the 478,774 shares at the last minute?

Monday, October 08, 2012

Abu Dhabi - Next destination for Kenya Airways?

Interesting tidbit from Reuters.

KQ's 2nd largest shareholder [& technical partner] is Air France-KLM therefore the recent agreement between AF-KLM "Air France-KLM, Etihad, Air Berlin plan partnership" probably means KQ may reduce flights to Dubai in favor of Abu Dhabi to take [code-share] advantage of Etihad's worldwide connections to Australia, China, North America & the Far East.

Etihad flies to Nairobi & a code-share for ET passengers to (Southern, Eastern, Central, Western) Africa may make sense for both parties. I expect Etihad will not give up major destinations like Jo'burg & Lagos but let KQ handle smaller destinations like Entebbe, Kigali, Kinshasa, Luanda, etc

Saturday, October 06, 2012

Kenya MPs National Anthem

From: "Rawser"

Kenyan MPs remix of the national anthem:
Politicians of all persuasions
Strip this our land and nation
Fortunes motivate us and keep us
May we steal with impunity
Dodge taxes in unity
Plenty be sourced within our dockets
Let all politicians arise
With scams both wily and foolproof
Eating be our earnest endeavor
And our cake-stand of Kenya
Heritage of plunder
May we fight forever to perpetuate
Let parties with one accord
In common greed united
Bankrupt our nation together
May the agony of Kenya
The fruit of our behavior
Remain hidden from our 2013 voters

Sunday, September 23, 2012

Lessons from India's (Dabbawallas) lunch deliverymen

Source: An article by Carol Musyoka from Business Daily Africa

Ownership inherently drives behaviour.

As simple as that. Compare this to the performance of firms or individuals who have little interest since they have little or no ownership. More later.

"...the dabbawalas do not consider themselves employees, nor do they consider the Mumbai Tiffin Box Suppliers Association as their employer.
The dabbawalas are shareholders and entrepreneurs, albeit all earning the same amount of money every month within their respective teams."

Wednesday, September 05, 2012

Government Interference - Case #1 - Kenya Airways

"Raila orders KQ to suspend layoffs" reads the headline. And click on the link provided to read more.

I am no apologist for KQ's Board of Directors & Management - which in my view decimated KQ's shareholders' value - and my views can be found here (FY 2011-12 results), here (Corporate Governance) & here (Irregular Commission Payments).

So back to our task at hand. Remember the elections are around the corner & the blabbermouths are out in force!

"Prime Minister Raila Odinga has directed Kenya Airways to suspend the planned retrenchment of its employees expected to see between 650 to 1500 employees lose their jobs."

The government owns about 30% of KQ. The other 70% is NOT owned by GoK. Unlike GoK, the other 70% expects KQ to make a profit. A decent profit. If the PM, Raila Odinga, wants KQ to 'suspend' the retrenchment, then by all means provide KQ with one or all of the following to help it recoup its potential losses:

  1. Reduce the tax on fuel used by the planes when they fill up in Kenya.
  2. Reduce the taxes on plane tickets purchased in Kenya.
  3. Reduce the charges levied by 100% GoK owned airports including JKIA.
  4. Reduce the taxes on spare parts & consumables like tyres imported by KQ.
  5. Reduce the bureaucracy that impedes businesses & increases costs.

"It is not clear where the prime minister was drawing his powers, given that the airline said it was implementing a decision reached by its board of directors, in which the government is represented."

These 'roadside declarations' made famous in daniel moi's days should not be gussied up & made to look anything but. They are not what Kenya needs. Kenya needs structures & governance that lasts after a politician is long dead & buried/cremated/interred.

"Naikuni said the exercise started on August 1, 2012 owing to the large increase in headcount in 2011/12, significant annual staff salary increments, and costly decisions driven by the Collective Bargaining Agreements (CBA) negotiations with the staff unions driving labour costs to unsustainable levels."

Many employees, including senior Management, in Kenya do not want a stake in firm. They want a salary. Simple. Yet they want benefits of 'capital' without investing a dime. KQ's staff won good concessions from KQ but failed to see it could kill the airline. And KQ's Management is to blame too. They agreed to those concessions.

Bottomline: There is no free lunch. Someone always has to pay the piper. Politicians need to let businesses do their thing. If there is an illegality, then let the police & courts do their work.

Thursday, August 02, 2012

Mortgages - Are banks at risk?

Original source from Business Daily - Click the link below

A marriage certificate is now a critical document for anyone applying for a mortgage loan thanks to new land laws that require the involvement of spouses in property acquisition.
What happens to spouses (traditional marriages, etc) who do not Marriage Certificates?
And for the prospective home buyers still in the singles’ club, a sworn declaration of their status would be required as new legislation - intended to protect the interests of the borrowers’ spouse, takes effect.
What if the borrower lies to the Bank/Lender that s/he is single?
The demand that the spouse is involved in the acquisition of property financed by a lender, as envisaged in the Lands Act, is aimed at ensuring that the immediate family is aware of any loans sought to either acquire matrimonial property or where the property has been given as security for a loan.
The immediate family - what's the definition? Do they just have to informed or do they have to OK the transaction?
Doesn't this lock out a spouse who is moving out of the matrimonial home due to a divorce, separation or other event?
A much bigger concern for borrowers who had kept their spouses in the dark over such loans, is that the new laws will apply to existing and new mortgages, meaning less obscurity about financial dealings in the family setting.
What happens to an EXISTING loan/mortgage? What if as a strategic move, the spouse of the Borrower objects? Do banks have to write off these loans?
So far, mortgage lenders have said that thousands of home loan borrowers will be required to re-draft their loan agreements to comply with the regulations which make a spouse’s consent critical in accessing credit. “All mortgage charges will be re-drafted to ensure that spouses assent to the borrowing,” said Frank Ireri, the managing director at mortgage lender Housing Finance.
The Loan Agreements may be re-drafted but what if the spouse (or spouses) object? In essence, it means the Lender is out the money.
Mr Ireri explained that the laws were aimed at protecting the borrowers, where lenders have had a free hand in dealing with the mortgaged property with little regard to the interests of the borrowers and the immediate dependents.
This is a huge step forward for consumers.
It is the reality of losses presented by the new regulation that will prompt the lender to draw up new mortgage charges on all home loans...
What happens if the Borrowers refuse to play ball?
Banks are also required to involve tenants and all interested parties, including spouses and guarantors, before disposing of any property to recover outstanding loan amounts where property has been used as security.
Wow! Involving Tenants means the banks will be forced to hold off on the sale for ages! What if a tenant refuses to assent to the sale or a reduction in the rental rate? Can they blackmail the bank?

Friday, July 20, 2012

ARM vs KQ - Performance & CEO's ownership

Pradeep Paunrana, the CEO of Athi River Cement, is a substantial shareholder of ARM.
March 2009 ARM was trading at 60/-. July 2012 the price of the shares 198/-.
Pradeep has raised funds to expand the firm's operations without diluting the shareholders' value.

Titus Naikuni, the CEO of Kenya Airways, has ZERO shares in KQ. His compensation is probably in the region of KES 30-40mn annually [based on the info on the Annual Report under Executive Directors' compensation].
March 2009 KQ was trading at 18/-. July 2012 the price is 14/-.
The under-performing Board raised funds by diluting existing shareholders through a huge (16:5) Rights Issue that required exemptions from the CMA to be considered successful.

Comparing the two on the same graph. ARM in red. KQ in blue.

Thursday, June 14, 2012

KQ Results for FY 2011-12 - Lousy!

KQ's PAT for 2011-12 down 53% vs FY 2010-11

I wonder if the CEO, CFO or Directors will take a similar pay cut?
Yes, when pigs fly during a blue moon seen on a sunny day.

Tuesday, May 29, 2012

Nairobi's Railway Commuter System

It is gratifying to see the commuter railway system being built.

At the moment the only line is the 2.2kms from Syokimau to Embakasi but I hope the process/construction is fast-tracked from CBD (Moi Ave) to JKIA which will cut down on the traffic plying the roads between the CBD & JKIA.

A conceptual sketch of the Commuter Railway System

Kenya Airways Rights Issue Results Announcement Delayed

The date of the announcement of the of the results of KQ's 2012 Rights Issue has been pushed from 30th May 2012 to 6th June 2012.

I wonder why...

Sunday, May 27, 2012

Kenya will remain King of the East African jungle

I came across this little tidbit in The East African... Museveni backs First Lady for the presidency

This is not unique to Uganda.
  • USA - Bill Clinton who backed his wife, Hillary Clinton, for the top job in 2008 though this was 8 years AFTER he retired as the president.
  • Argentina - Cristina Elisabet Fern├índez de Kirchner succeeded her husband as the president in 2007
  • India - Rajiv Gandhi succeeded his mother, Indira Gandhi, as PM after she was assassinated in 1984
Unfortunately for Uganda, the tension & potential instability over the Yoweri Museveni succession will allow Kenya to steal a march over Uganda in the following areas:
  • Infrastructure - Railway, Roads & Air. It's simple. Kenya plans to build a railway from Mombasa/Lamu to South Sudan. The earlier plan was to extend the Mombasa-Nairobi-Kampala line to Hoima-Juba but now it  is likely Kenya might just go Lamu-Juba (with a spur to Ethiopia). The loss to Uganda will be substantial. Add roads by-passing Uganda heading to South Sudan. As for Air Travel, Kenya is far ahead already & a new/expanded airport will only help extend the lead.
  • Oil Refinery - Uganda is slightly ahead on this matter since it found viable oil finds 3 years prior to Kenya (2012). The good news for Kenya is that South Sudan (as well as potential oil finds in Kenya) makes for a better case for a new refinery planned for Lamu.
Kenya's only competitor for good governance (not that the bar is high) is Rwanda which plans to build a new airport in Kigali to compete as an East African hub. Rwanda has been in the forefront of integration & plans to sue other EAC countries to reduce non-tariff barriers.

It is unfortunate that Kenya will benefit at the expense of the regional neighbours but this is not Kenya's doing. Ideally, there should be a concerted effort to increase regional trade by reducing barriers but investing in unstable situations is pricier & not every investor is comfortable.

Kenya screwed up in 2007-8. It is easy to blame the politicians but they did not go out with machetes to hack their neighbours but idiots/sadists among us did. Kenya is an African country & I (sadly) expect at a few election related deaths. Not unique to Kenya or Africa. This happens regularly in Pakistan, Middle East (Bahrain, Iraq, etc), India, etc.
*Yes, I am being (slightly) pessimistic but very few regime changes or elections in Africa over the past 10 years have been violence free. Perhaps these were not at the scale of the Kenyan debacle but somewhat violent*

Tanzania (generally peaceful political transitions) with it's misguided "We are Southern Africans" has held it back from usurping Kenya's clout. I expect the economy of Northern Tanzania to remain reliant on Kenya - a net consumer of fruits, vegetables & grains. If Kenya expands the Port of Mombasa before the Tanzanians smell the roses, then the supply of many goods into Tanzania will be dominated by supply chains via Kenya.

*** As an aside, thumbs up  to Kiran Jain (born in Kibos, Kisumu & whose parents still live here) who heads Dehli Airport's "airline marketing & route development". Hopefully, she returns to Kenya at some point & revamps JKIA!!!

Thursday, May 24, 2012

Corporate Governance & Independent Directors

Warren Buffet in his Letter to Shareholders in the 2006 Berkshire Annual Report

In selecting a new director, we were guided by our long-standing criteria, which are that board 
members be owner-oriented, business-savvy, interested and truly independent.  I say “truly” because many directors who are now deemed independent by various authorities and observers are far from that, relying heavily as they do on directors’ fees to maintain their standard of living.  These payments, which come in many forms, often range between $150,000 and $250,000 annually, compensation that may approach or even exceed all other income of the “independent” director.  And – surprise, surprise – director compensation has soared in recent years, pushed  up by recommendations from corporate America’s favorite consultant, Ratchet, Ratchet and Bingo.  (The name may be phony, but the action it conveys is not.) Charlie and I believe our four criteria are essential if directors are to do their job – which, by law, is to faithfully represent  owners.  Yet these criteria are usually ignored.  Instead, consultants and CEOs seeking board candidates will often say, “We’re looking for a woman,” or “a Hispanic,” or “someone from abroad,” or what have you.  It sometimes sounds as if the mission is to stock Noah’s ark.  Over the years I’ve been queried many times about potential directors and have yet to hear anyone ask, “Does he think like an intelligent owner?”  

 The questions I instead get would sound ridiculous to someone seeking candidates for, say, a 
football team, or an arbitration panel or a military command.  In those cases, the selectors would look for 
people who had the specific talents and attitudes that were required for a specialized job.  At Berkshire, we are in the specialized activity of running a business well, and therefore we seek business judgment. 

When I criticized the Board of Kenya Airways for not looking out for Shareholder Interests, I had in mind what Warren Buffett has said over the years.

1) Directors should have a significant stake in the business. The best Non-Executive directors, who watch over the CEO & Senior Management have have to have skin in the game, hence open to losses/downside, not pandering to the CEO or Senior Management to receive hefty perks, with all upside & no downside.

KQ's Board [excludes the corporate directors representing KLM & GoK] have less than 25,000 shares worth less than 400,000/- whereas the perks/compensation (as reported) were about KES 6mn. I doubt we even know the full value of the free non-work related flights they (& their families) received thanks to KQ.

2) Directors have to have business judgement not political appointees or because they are 'nice' people.

So many examples of directors who should not be on many boards. Look at the appointees/nominees on GoK controlled (or influenced) firms like Kenya Airways, EA Portland Cement, National Bank of Kenya, etc. Compare the performance of these firms vs their peers or even the NSE in general.

  • KQ has destroyed shareholder value. The recent Rights Offer (16:5) was at 67% discount to NAV.
  • EAPCC vs Bamburi vs Athi River Mining. ARM (the CEO has a significant stake) has created significant shareholder wealth.
  • NBK vs Equity vs NIC vs Diamond vs I&M Bank. NBK has stagnated (I remain an admirer of the CEO) while the others grew tremendously. Equity and I&M Bank's CEOs have significant stakes in the bank. The directors of Diamond Trust & NIC represent the majority/key shareholders.

3) Directors should be compensated by having 'locked-in' shares or options not just cash compensation.

KenolKobil's CEO has options (amounting to at least 4% of the outstanding shares) which has translated into superb growth in earnings as well as an on-going Takeover Bid. Kestrel Capital expects a (at least) 20/- buyout offer which is 60% above the last traded price & significantly higher than the NAV/share. Compare to what the Board of Directors of KQ did to its existing shareholders.

Wednesday, May 23, 2012

Investment Bankers - Untrustworthy. Ask Warren Buffett

Warren Buffett: “Don’t ask the barber whether you need a haircut.”

Warren Buffett does not trust Investment Bankers. I am not surprised. One of the world's savviest investor has a low opinion of Investment Bankers. So should we.
We have see what they did to investors, shareholders & the public during the housing crisis among other debacles.

The article (courtesy The Guardian) has this to say:

Goldman Sachs decided to sell nearly half its holding, while Manhattan hedge fund Tiger Global increased its sell-off from 3m to 23m shares. Those most likely to have seen the analysts' forecasts may have decided that the shares were unlikely to enjoy the customary day-one surge, seen when Google and the professional networking site LinkedIn went public. Basically, for those in the know, at $38 a share Facebook was a "sell".

As you can see GS decided to sell out while probably encouraging their clients to buy!

Of course, investor who bought at $38 or higher are to blame as well. The ratios were outrageously high.

In Kenya, we have the case of SIB benefitting from a less than savoury deal on the Kenya Airways Rights Issue. Here is some interesting reading!

The Flying Rip-off

Kenya Airways - Commissions Payment Scam

The late to the party Parliament to probe KQ Rights Issue

As outlined in this article, the perverse incentives for SIB to make sure the Rights Issue went through even if the deal hurt existing shareholders. The Board of Directors failed in it's duty to protect existing shareholders.

If I had to replace the entire Board of Directors of KQ with Warren Buffett, I would do it in a fraction of a heartbeat.

Sunday, May 20, 2012

CEOs buying Shares in their firms

Well, hats off to Martin Oduor-Otieno who now has shares in KCB.
Adan Mohamed also bought some shares in BBK.

It is not clear if these shares have been purchased directly or via an ESOP.

Mr Mohammed bought 296, 000 currently worth Sh4 million while Mr Oduor-Otieno acquired 509,180 shares now valued at Sh12 million —making them top shareholders among the lenders’ directors and executives and an entry on the investor registry.

Readers may recall my disgust at the actions of the Board of Directors of Kenya Airways who shamelessly approved a Rights Issue at KES 14 when the NAV of each KQ share was 50/- (per the latest audited Financial Statements).

I compared the performance of firms like Equity Bank, Athi River Mining, ScanGroup and KenolKobil whose CEOs have a significant interest/shareholding in the firms they run versus Kenya Airways in which the CEO has ZERO shares!

Pradeep Paunrana of Athi River Mining announced the issuance of a Convertible Debt instrument that would help ARM grow WITHOUT destroying value for existing shareholders. That's the type of CEO a firm needs. One who cares about shareholders, not just his salary, bonuses, perks & benefits but feels no pain when shareholder lose.

I would encourage that MOO prudently buys more shares in KCB throughout the year which will give other shareholders faith that they sink or swim together. I would like to point out that Sunil Narshi Shah (a former, now retired, director) owned 5% of KCB at one point. He would keep an eye on the happenings in KCB since his 'wealth' was directly affected by the going on at the top.

Friday, May 18, 2012

Parliament to probe KQ Rights Issue

Via Daily Nation Page 6 of 18th May 2012 (I do not have a link)

A parliamentary investigation has been ordered into the justconcluded Kenya Airways rights issue after questions were raised on the process.
Deputy Speaker Farah Maalim referred the matter to the parliamentary Finance committee yesterday after a member questioned how a stockbroker was picked and paid Sh100 million.
KQ plans to raise Sh2.7 billion for expansion and acquisition of additional aircraft in the rights issue which was launched by President Kibaki in March.
The government holds 23 per cent of KQ’s total issued capital.
Yesterday, Igembe North MP Ntoitha M’Mithiaru questioned the procedure of selecting stockbrokers for the submission of the provisional allotment letter and whether the service attracted a commission.
He also questioned whether the submission of the provisional allotment letter was a separate service from the advisory services provided by transaction adviser.
The transaction adviser in the rights issue was CFC Stanbic Bank Limited with CFC Stanbic Financial Services Limited as the lead transaction stockbroker. Standard Investment Bank Ltd was the lead sponsoring stockbroker.
Finance assistant minister Dr Oburu Odinga said the mandate for submission of the provisional allotment letter was with the lead sponsoring brokers who were competitively appointed by KQ.
Mr Maalim directed the Finance committee to report back to the House in a week’s time.
Sh100m Millions of shillings stockbroker was paid by Kenya Airways.

Below is the blogpost I had posted earlier in April 2012.

KQ Rights Issue Commission Scam

Tuesday, May 15, 2012

KenolKobil Takeover - Could Puma list on the NSE

This is an interesting article from the FT published in Sep 2011.

The trader on Thursday said it has sold a 20 per cent stake in Puma Energy, its petroleum terminals and storage business, to Sonangol Holdings, a subsidiary of Angola’s state-owned oil company. The parties did not disclose financial details.
“The sale is a step to prepare the company for a listing in the future,” Pierre Eladari, Puma Energy’s chief executive, told the Financial Times in an interview.

It seems that Puma may have an incentive to do the following:

  • Puma makes an Offer to swap KK shares for Puma shares in the future.
  • Keep the listing 'live' [even if suspended] in Kenya until the Puma IPO is complete.
  • The KK shares are then 'converted' to Puma shares and trade on the NSE [as well as being fungible & traded on other exchanges e.g. Angola [when it finally goes live], in Asia [HK or Singapore] or London.
Puma Energy has not completed a Takeover/Buyout of Minority S/holders of (former) BP Zambia for almost 2 years. Is the final endgame a cross-listing of Puma shares in multiple countries?

Puma/KK does business in the following countries with Stock Exchanges:
  • Kenya (KK's Primary Listing)
  • Tanzania
  • Uganda
  • Rwanda
  • Zambia (Puma Energy Zambia's Primary Listing)
  • Botswana
If Puma Energy offers KK's shareholders the option of swapping into Puma's shares, it might soothe a few nerves since not all minority shareholders (or so it seems) want out of KK. Some shareholders are very protective of & loyal to KK as well.

Friday, May 11, 2012

KenolKobil (Takeover) - Update

The shares of KK have been indefinitely suspended from trading by the CMA starting 8th May 2012, following the Cautionary Statement released on 7th May 2012.

See Link to Prior Blogpost - with link to Cautionary Statement

It is not clear if the CMA issued the suspension notice based on KK's request or acted unilaterally. There has been a lot of debate of the appropriateness or justification of the suspension since some shareholders cannot exit their positions. This reminds me of the (failed) BOC takeover bid of Carbacid when the shares  of both firms were suspended from trading for 4 years from 2005 to 4th Nov 2009.

The management of KK feels that the Takeover (at least the sale of shares in KK to Puma Energy) will be completed in 2012 which would leave the Minority Shareholders in the cold.

The CMA has to protect the Minority Shareholders by ensuring they are given the right to offer their shares to Puma at a similar price (or value) to Puma as the Key Shareholders. There will be the question about KK remaining a Listed Firm but based on what Puma's actions in Zambia, it seems unlikely if Puma can get 80% of the shares offered to them.

In Zambia, Puma purchased BP's shares in BP Zambia (renamed Puma Zambia) then ran into some headwind. I am not sure of the full details but it seems Puma will make a Takeover offer for the remainder it does not own. Due to lack of Listings in Zambia, the LuSE & SEC seemed reluctant to let Puma Zambia de-list. Furthermore, the price on LuSE has tripled since the sale by BP to Puma so Puma may not have an incentive to pay the market price.

*The LuSE & SEC have also blocked Airtel from delisting Celtel Zambia (in which it bought a majority stake from Celtel International) by buying out Minority Shareholders then de-listing. The shares have been suspended from trading indefinitely as well!

In essence, will Puma pay for 25% (Minority Shareholders) today for what it paid for the 75% (BP's shares) 3 years ago? I don't have all the details but this should be interesting & will it apply to the Kenyan situation?

A high enough price offered by Puma would convince most Minority Shareholders to sell their shares. The ranges vary but Kestrel Capital (a far better outfit than the Not-The-Standard Investicon Skank) who are also acting as advisers to the Key Shareholders did indicate a value of KES 17.25 in their last research report.

My valuation is higher:

  • The lawsuit vs KPC. I did not understand why the judges thought the award was too high in view of the 'economy' when the various scams KPC has indulged in are of similar, if not higher, amounts! I will reserve my judgement on their judgement. At a gross value of KES 6bn that is 4/- PBT (2.75 PAT) added to NAV. Of course, it is speculative but KK, is not giving up & seems to have a good chance it will prevail.
  • The Annual Report (Chairman's Statement & Comprehensive Income Statement) indicated a large potential loss in 1H 2012 due to Forward Forex Hedges. The net effect may be an EPS of 'zero' for 1H 2012 thus no net effect on valuation going forward.
  • Huge real estate exposure in Kenya (especially in Nairobi & Central Province - whatever that is called nowadays) which has been Kenya's most productive areas. *There is even a place named after Kenol - Kenol Township (which I passed through) - near/towards Kangema!* KK has prime real estate for developmental purposes in Addis Ababa (Ethiopia) as well as Rwanda. It is very hard to estimate the gains in RE values but this could easily add KES 3-5 to the NAV as reported.
  • The 2011 EPS was 2.21 (diluted). There will always be challenges for KK with the volatile KES, interest rates & oil prices but if that is a normalized EPS [a further discount required for ESOP, Management & CEO options] then using a PER of 10 [based on KK's consistent growth & current depressed market prices] this would be: 2.10 x 10 = 21/-
So if we add the 'business value' of 21/- (should be discounted by cheap/free rents on properties owned or long-term leased by KK) + (potential) award vs KPC + Development Real Estate (includes maximize use of current locations by adding stores, buildings, offices without closing the petrol stations) = 25/- less transaction expenses = 24/- net!


Monday, May 07, 2012

KenolKobil vs Kenya Airways - Management Ownership

KenolKobil issued a "Cautionary Statement" -

As I have said before, there is a world of difference between firms like KK & KQ.

KK - The CEO among senior managers have shares & options in KK that take the share price & firms' performance into account.

KQ - The CEO has ZERO shares/options & the entire Board of Directors [excluding KLM & GoK as corporate directors] have less than 25,000 shares.

Now to excerpts from KK's announcement:

"the key shareholders of the Company signed an Exclusive Agreement with Puma Energy for the sale of their majority shareholdings in KenolKobil...  and contemplates making a Take-Over offer to acquire all the shares in the Company..."

"The KenolKobil Board of Directors believes that this transaction... would be a very positive development for the KenolKobil Group... The contemplated transaction is in line with the already expressed wish of Management to drive the Group to new highs and the next level of business development..."

KK's shares traded at 12.55 - 12.70 on 7th May 2012. I expect the price to rise considerably as the key shareholders, BoD & Management [who care about all the Shareholders] have probably negotiated a price or deal that prices the shares at a price HIGHER than market price and closer, if not higher, than the Net Asset Value per Share.

Let's compare this to the BoD & Management of KQ who sold the Rights Issues shares at 14/- when the NAV was 50/- (2010-11 audited accounts). Of course, unlike the BoD/Management of KK, the folks at KQ are in it for the perks, free flights & huge allowances.

I had highlighted KenolKobil's Chairman & CEO (Jacob Segman) as someone with a vested interest in the firm he runs. This is unlike the Chairman, BoD & CEO of KQ who has ZERO shares thus had nothing to lose when the shares were sold in the Rights Issue at a 72% discount to NAV/Share.

Whereas it is not known what price the 'key shareholders' have agreed to sell their stake in KK at but it will most likely be at a significant premium to the price as of 7 May 2012.

And on a personal note, I am sure Not-The-Standard Investicon Skank is not advising KK...

*** Did you know Steve Jobs had a $1 salary from Apple? He was paid in Options.

Monday, April 30, 2012

Kenya Airways - Commissions Payment Scam

Why is the Government of Kenya going through a Standard Investment Bank to exercise its Rights?

Stockbrokers have protested over the award of a Sh70 million deal to buy Kenya Airways (KQ) rights shares on behalf of the Treasury to a single investment bank, arguing that the contract should have been tendered through competitive bidding.

KQ will pay KES 70mn to SIB. GoK owns 23% of KQ. In essence, the cost to GoK is 23% of KES 70mn = KES 16,100,000 for SIB to stamp a piece of paper? Of course, as a Director on the Board, GoK should NOT have used any stockbroker.

It seems nothing has changed in the 'new' Kenya.

*** I wonder what the status is of the application by KLM & IFC. If its KQ's staff that worked on these deals (as indicated by the executives at KQ) then something is stinky fishy if these applications gone through stockbrokers.

Thursday, April 26, 2012

Kenya Airways - The Flying Rip-Off

The information is from the Rights Issue Information Memorandum of 2012 & the published Annual Reports. I am not sure of all subsequent events. Please let me know of any errors.
My opinions are Italicized.


titus naikuni, the CEO, has ZERO shares in KQ. Sufuri, Nada, Zilch. Hakuna!
alex mbugua, the CFO, has 6,054 shares in KQ worth KES 84,750 (at 14/- each)
The 2 Executive Directors compensation for 2010-11 was KES 66,000,000/-
The Net Asset Value per Share = KES 50
Rights Issue Price = 14/-
Rights Offer Entitlement: 16:5 (That's 3.2 'new' shares to be paid for for each 1 held)

So whereas titus and alex are paid KES 5.5 MILLION per month by KQ between them they have shares worth 85,000/-.
That's a decimal point of a decimal point. The salaries are not affected by how much Shareholder Value they destroy.

KQ's Net Asset Value as of 31st March 2011 (Last Audited Accounts) was KES 23,090,000,000 which divided by 461,615,484 shares = KES 50/- (NAV/Share)

The Board of Directors (excluding 'corporate directors' viz Treasury/Govt of Kenya & KLM) have less than 25,000 shares. The largest chunk is 10,090 held by the chairman.

The BoD got benefits & fees of KES 12 Million in 2010-11 (12 months)

So the BoD which owns a piddling (less than) 25,000 shares worth (at 14/-) max market value value of 350,000/- ... decided to sell Rights at 14/- at a ratio of 16:5 (3.2:1).

Therefore a shareholder who is UNABLE to exercise the Rights will be diluted to 24% of the original value.

Current 461,615,484 shares = NAV of KES 23,090,000,000/-
New Shares 1,477,169,549 = Net Proceeds 20,109,959,011/-

So are the existing shareholder getting a stick up their, erm, evacuation orifice? YES
Does the BoD care? NO

BTW, the directors AND their families enjoy (almost) free flights wherever KQ flies. Not economy but First Class and Business Class. So more destinations that KQ flies to means more free or discounted flights in Biz Class or First Class.

Compare the Directors, including the CEO, to other CEOS like:

Pradeep Paunrana of Athi River Mining (30%+ shareholding)
Bharat Thakrar of ScanGroup (20% shareholding)
James Mwangi of Equity Bank (5% shareholding)
Jacob Segman of KenolKobil (Options for 5%+ shareholding)

The share prices for the firms in which the CEOs have a stake have done much better than KQ. Each of them trades at more than the Net Asset Value per Share especially Equity Bank & ScanGroup. They have done deal to expand their firms' footprint without destroying the underlying Shareholder Value.

Now the CEO of KQ has ... ZERO shares = 0% shareholding.
Annual compensation unknown but at least KES 33,000,000/- (KES 66,000,000/- between him & the FD)
KQ NAV/Share = 50/-
Current market price = 14.95
Rights (New Shares) sold at 14/-

Instead of sweating the current assets, KQ's BoD & Management are raising more Capital by selling shares in KQ to many including 'non-shareholders' at a HUGE discount. So IFC, Citibank, etc will buy shares at 14/- whose NAV/Share is much higher.

Want a kick in the pants?

KQ's BoD in its 'wisdom' decided to make the New Shares rank pari passu for dividends for the completed Financial Year ending 31st March 2012. So any dividend declared for FY 2011-12 will be shared with NEW SHARES even though the 14/- from the New Shares did not contribute a single penny to profits for FY 2011-12. So whereas existing shareholders 'money' worked for the entire FY 2011-12, yet the New Shares whose cash starts 'working' in June 2012, will get 76% of the dividend payout for FY 2011-12.

Just a reminder, while KQ's BoD gets all those perks, sitting fees, free flights & cash compensation, they own less than 25,000 shares in KQ. So they don't really care about kicking KQ's minority shareholders in the pants. They will probably demand an increase in perks & sitting fees.

Would the 4 'owner-CEOs' do the same? I doubt!

To add insult to injury...

The Lead Transaction Brokers (Standard Investment Bank) are going to 'process' [which means stamping a form] on behalf of the Govt of Kenya and 'earn' KES 70,000,000 or more!

From Business Daily Africa of 25th April 2012

Stockbrokers have protested over the award of a Sh70 million deal to buy Kenya Airways (KQ) rights shares on behalf of the Treasury to a single investment bank, arguing that the contract should have been tendered through competitive bidding.
The Kenya Association of Stockbrokers and Investment Banks (Kasib) has written to the investment secretary Esther Koimett, complaining that the picking of an intermediary to buy the national carrier’s rights on behalf of the Treasury was shrouded in secrecy.
The Treasury owns 23 per cent of KQ shares, and the uptake of its full rights is expected to cost Sh70 million in brokerage commissions.
“We are unaware of any competitive tender process undertaken to procure the services of the submission of the provisional allotment letter (PAL) for the Kenya Airways rights issue on behalf government in accordance with the Public Procurement Act,” said the Kasib letter, which did not, however, name the implied investment bank.
“In the absence of an open tender, the provisional allotment letter should be divided and allocated equally to all the licensed stockbrokers that have been appointed by the issuers,” added the letter.
The BoD added even more salt to the wound by paying CASH to the 'vendors' & plan to pay the Stockbrokers in cash instead of Shares. After all if the stockbrokers are so confident then why not accept shares? Of course, the stockbrokers take the lead from KQ's CEO who has ZERO shares!

KQ's alex praised KQ's Finance Team (including Jane Kioi) for 'closing' the deal with IFC. So will a stockbroker submit IFC's application when it is KQ's 'team' [paid by KQ] who brought IFC to the table?

IFC is getting an awesome deal by buying into KQ at a huge discount at the expense of existing shareholders. Click on the link below for more information.

World Bank’s IFC to own 7.4pc stake in Kenya Airways after offer

Will KLM's [who is a corporate director] application be handled like GoK's application i.e. commission paid to a broker who 'stamps' the PAL form?
Financing of 'New Shares'

Many Kenyan banks will offer 50% Loan To Value (LTV) for shares. This means if one deposits shares worth KES 1,000,000/- the maximum loan given against that will be 500,000/-.

Therefore a Current Shareholder deposits 100,000 KQ Shares worth (at market price of 14/-) with XYZ bank will get KES 1,400,000/- to apply for KES 1,400,000 worth of KQ New Shares.

Current Shares Held = 100,000
Value of Current Shares = 1,400,000/-
Rights Alloted = 320,000
Rights Price = 14/- each which means one needs 4,480,000/- to exercise them
Loan from Bank = 1,400,000/- (based on 50% LTV)
Maximum Rights exercised = 100,000
"Lost" Rights = 220,000

Therefore, the existing shareholder LOSES the net Shareholder Value (50/- per Share) after the Rights Issue is over since the Untaken Rights will be alloted to others.

Is the existing (Pre-Rights) Shareholder who cannot exercise his/her full Rights Entitlement getting screwed over? YES and what a screwing...

Via Daily Nation - Click on the Link Low demand for KQ rights issue by retail investors

Who are retail investors? The 70,000+ shareholders (with less than 5,000 shares) who will be screwed over.

The expansion is a good idea but look how the following firms (as shown above) have raised funds WITHOUT diluting existing shareholders.

Equity Bank sold shares (25% of the Issued Shares) at a price that was MARKET PRICE to Helios. James Mwangi is a smart chap. He did not dilute his existing shareholders. Of course, JM at the time owned a huge chunk (10%) of Equity. Furthermore, other Board Members like Mary Wamae, Peter Munga, etc also owned considerable (20%+) shares in Equity Bank. They were conscientious about PROTECTING existing shareholders.

Compare to KQ's BoD which has less than 25,000 shares in KQ.

Athi River Mining recently bought a factory in Rwanda & want to increase the capacity by 500% as well as make additional improvements. ARM is in the process of increasing its production in Kenya as well as a huge NEW factory in Tanzania. Pradeep Paunrana & family have a large stake in ARM. He has grown ARM using a smart combination of debt & equity. The 'shares' he has sold in ARM to other strategic investors has been through Convertible Debt. The latest $50mn Convertible Debt has an exercise price HIGHER than the current market price & much higher Price to NAV.

Compare to KQ. The 'new shares' are being sold at a HUGE discount to NAV. The existing shareholders will be diluted if they can't take up the Rights. Unlike Pradeep, KQ's CEO has ZERO shares.

ScanGroup has grown by leaps & bounds since its listing on the NSE under Bharat Thakrar (currently 20% owner) the smart & consummate dealmaker. Some MPs even criticized ScanGroup for having a low NAV/Share upon listing. Whereas ScanGroup shares have grown multiple-fold in price, KQ has DESTROYED Shareholder Value. Bharat cut a deal with WPP to buy shares in ScanGroup for cash at a huge PREMIUM to NAV. He did not sell minority or himself shareholders out.

Compare to KQ.

Question to potential 'new' shareholders. If KQ's Board of Directors can do this to existing shareholders today, how sure can you be the same will not be done to you in 3 years?

Comments? Questions? Please let me know...

Govt of Kenya to pay commission for KQ Rights Offer

So Government of Kenya plans to buy Shares in Kenya Airways through the Rights Issue.
GoK is a 23% shareholder in KQ & has a board seat (according to the Information Memorandum)

This begs the question... Why would GoK use Standard Investment Bank to apply for the Rights (for which KQ has to pay 1.5% approx KES 70mn) when it is allowed to directly submit its application to KQ?

Click the link above for the Business Daily Africa story.

Stockbrokers have protested over the award of a Sh70 million deal to buy Kenya Airways (KQ) rights shares on behalf of the Treasury to a single investment bank, arguing that the contract should have been tendered through competitive bidding.

The Kenya Association of Stockbrokers and Investment Banks (Kasib) has written to the investment secretary Esther Koimett, complaining that the picking of an intermediary to buy the national carrier’s rights on behalf of the Treasury was shrouded in secrecy.
The Treasury owns 23 per cent of KQ shares, and the uptake of its full rights is expected to cost Sh70 million in brokerage commissions.

The KES 70mn saved could have been used to buy equipment, hire new staff as well as put a down-payment for an Embraer.

Furthermore, what about KLM's shares? [Also on the Board] = KES 75mn in commissions
What about IFC's shares? [The deal was negotiated by KQ's senior management] KES 30mn in commissions

KQ's shareholders should be outraged! Adding salt to the wound when the Rights Shares are being sold to IFC among other non-Shareholders at a 72% discount to NAV/Share (KES 50 per the last audited results)