NBK 1H 2007 Results

So what does all this mean?
Is NBK out of the woods?

The net interest income has significantly dropped in 2H 2007. As Marambii opined earlier during the AGM that the GOK was being charged interest at 15% which was a great rate by all means! But will now receive a lower rate. This will be a drag on earnings.

The largest gain is from the reduction of Loan Loss Provisions... Hmmm... what it means is that NBK with the "assent" of the CBK did not fully provide for these dud loans!

NBK claims it has enough securities to cover the "open" bad loans i.e. loans not provided for thus they do not see that as a problem. Of course, in Kenya, it means a lengthy court process to get much out of defaulters.

Nevertheless, NBK can start growing by pursuing new lending. The challenge will be how to deploy the Billions that the GOK will repay NBK. Who to lend to? At what rate? At what risk level?

The GOK & NSSF hold preference shares & I expect they will demand Preferred dividend payments if NBK pays Ordinary dividends.

The options to mitigate this are:

• Negotiate a conversion from Preferred Shares to Ordinary Shares which would dilute the current shareholders' stake.
  
• Pay off the GOK by exchanging the T-Bonds for the Preference shares but this will result in reduced income.

Well, it has been a long, hard road for NBK. I think the shares are over-valued but there is potential for strong profit growth with the reduction in Loan Loss Provisions. If the Balance Sheet is restructured there is a possibility of a takeover.

Stanbic remains a suitor but 2 years down the line since CFC-Stanbic caters to the middle market but does not give Stanbic the heft it wants across all sectors of the economy. NBK's reach among the masses is probably #3 behind Equity & KCB.

There is a distinct possibility of a Nigerian bank taking a stake in NBK as they expand across Africa.

Kudos to National Bank of Kenya

I am impressed with the listed "smaller" banks outside of BBK SCBK & KCB who provide much more information to their shareholders on a timely basis!!!

NBK & Equity have well designed websites that provide up-to-date information for investors. That is a contrast to Barclays & StanChart.

Anyway to NBK's release of their 1H 2007 results... which were released on 19 July 2007... this is amazing... when most other banks will release their results after at least 30 days. If not for the statutory requirement for them to release results in 60 days, they would do so even later!


Equity & NBK have been pushing technology & this appeals to the masses since it lowers the costs of transactions.

Keep it up!

What is the relationship between Nakumatt & Tuskys?

I read that Nakumatt & Tuskys (formerly Tusker Mattresses) are sister companies.

Does anyone have an idea of their exact relationship?

Who are the directors of Tuskys?

Does that make Nakumatt the undisputed leader in Kenya's retail scene?

Pity the honest Kenyan businessman....

Sigh... I feel for the honest Kenyan businessperson... Here is an example of how they get screwed on a regular basis!

Shouldn't there be a legal "Supreme Body" that can sort out such administrative matters? Why should the poor taxpayer get caught up with the antics of such idiots?

I have written before on how the Government of Kenya (GOK) screws (I want to use another 5-letter word but I want to kee the blog G-rated) the Kenyan consumer. Unfortunately, the (dumb) consumer blames the wrong party coz the GOK puts a populist spin to it...

GOK direct taxes constitute almost 35% of the cost of petrol at the pump. After adding other local & national taxes (payroll, land rates, unrecoverable VAT, etc) the amount is closer to 50%...

So when you curse the Oil Companies for charging 80/- per litre for petrol, the GOK (& local municipalities) have their 40/- hidden right in there. Using the 40/-, the Oil Marketers have to import the Oil/Oil products, transport it to the stations, pay its staff, pay interest before making any profit.


Did you know that Petrol Stations in Kenya are NOT allowed to breakdown their charges to you i.e. they can't show what part of that 80/- is paid as direct taxes even though this is an easy feat/calculation using today's technology.

Why you ask?

Because the GOK wants to HIDE their thievery! They expect citizens to resist/protest these taxes IF the citizens knew about them. Instead they let the Oil Marketers be the "bad" guys while some idiot called the Energy Minister lambasts Oil marketers for rising fuel prices while the GOK doesn't even refund (or pay interest on) VAT & Duties to the Oil Marketers...!

And most of us (the almost dumb) citizens can't see beyond our noses...
(Erm, except me & some others)

So I want to bring this to your attention... please, please, please provide me with additional hard data that I can post here. Few of the Oil Marketers are willing to go on record about this issue since they fear a backlash.

Shell(K) experienced this when they played hardball in 2006... they paid for it when the issue of BP's takeover came into play in 2007. Shell had to sell some stations to NOCK (a GOK entity) at a discount for standing up to the GOK's excesses.

KPC & KPRL's poor management has led to substantial loss of business for Kenyan Oil Marketers who export to other African markets. What a pity... since Kenyan jobs are at stake...

Can you smell a rat? (Kenya Re OFS)

It is a foregone conclusion (unless something drastic happens) that the KenRe OFS (not IPO folks... even if the Business Daily calls it that but Business Journalism in Kenya is a whole new animal...) will be successful...

Nevertheless, the deception by the GOK is not a good sign of things to come... The GOK knew that Mumias 1H 2006-7 was relatively poor but they hid that crucial information until AFTER the OFS was over. The share price plunged to around 25/- in the aftermath.

So there is a forensic report that is being "hidden" from the public... WHY?

Kimunya claims that a copy was given to the Transaction Advisers but we are buying the shares. Shouldn't we know about the shenanigans?

From the Business Daily 19 July 2007: Mr Kimunya, however, maintained that the report had been given to all transaction advisors who had used its insights to structure the deal. “I am assured that necessary accounting provisions and adjustments have been made in the Reporting Accountants’ Report,” said the minister.

Why haven't the criminal suits against the crooks (ex-CEO & CFO) been fast-tracked since this is important to the confidence in the firm?

My advice is to wait till the last moment before purchasing shares in the OFS.

• In case a major earthquake hits Nairobi where most of Kenya Re's assets are located i.e. buildings.
• In case some other lawsuit/evidence surfaces regarding corruption at Kenya Re.
• Try and gauge the level of interest thus applying for enough shares without locking up too much monies in the OFS since I expect a heavy refund.
  

KenRe - No prospectus, online????

I already have a bad feeling about this OFS... the financial scandals involving the ex-CEO & CFO. Then the lawsuit at the last minute...

I still think it will be over-subscribed... massively over-subscribed coz of the price & very few shares on offer... but that is not what I am talking about...

It is an "Offer For Sale" not an "Initial Public Offering"...

Where is the (online) Prospectus? It should have been uploaded & available at 12.01am on 18 July 2007.

How to fix our economy... from my readers

Yes, I am (almost) back to regular blogging... and I am already encouraged by the responses/comments!

Credit for this post/ideas/comments goes to various readers & other bloggers:


Immediate Needs - which I reluctantly called "Short-term Fixes"

• Rebuild Nbi-Msa Highway. It has been "almost competed" for almost 2 years! I fear the road will disintegrate after the major ("long") rains in 2008-9. Furthermore, we need 4 lanes not 2!
• Create alternate routes around Nairobi/CBD to ease pressure off Uhuru Highway. Ultimately, what we need are Over-passes & By-passes through, over & outside the CBD.
• We need a heavy presence of armed & undercover policemen in all major CBDs to encourage a 24-hour economy. Since CBDs are the "engines" thus let's start from there. We need to work in at least 2 shifts that run from 5am-9pm. This will encourage better utilisation of resources & infrastructure.
• Use the death penalty, liberally. Many will disagree but robberies with violence should be dealt with severely. There is some "good" by eliminating pathological violent criminals from our society. Furthermore, there is an element of "deterrence".

Long-term Needs - But these need to be implemented soon

• An expanded railway which includes new or ugraded tracks & additional destinations. I hope RVR is up to the task. So far their performance does not show much improvement but they inherited an almost "dead" firm. A huge plus is that the GOK actually received payments/concession fees from what was previously a sinkhole! Nevertheless, there seems to be some progress. It will take them 2 years to blossom into what was expected of them.
• Move manufacturing from Nairobi further out towards Machakos & Ruiru/Thika. This needs the building of highways & rail lines that allow for easier movement of goods from these areas to & from Nairobi. Nairobi is too congested to remain an efficient manufacturing center. It is better suited as a distribution center.
• Encourage industrial production in other towns closer to agricultural areas e.g. Eldoret, Kisumu, etc. This will ease the pressure on Nairobi/Central while opening newer markets while spreading the "wealth" to other regions.
• Security needs to be beefed up & local registered merchant organisations should be supported in providing security. This creates safe zones for shoppers & businesses. Ultimately, these can be expanded to all parts of the country. Robberies with violence should be dealt with severely. The death penalty should be used liberally.
• Nairobi can become the Financial Capital of East & Central Africa. Dubai has Mid-east covered while Joburg has southern Africa covered. The gap in the middle clearly "belongs" to Kenya. Rwanda is poised to fill this role if we dither.

None of the above will be easy but it needs to be done by the Private Sector who need to be given the freedom to do so. The government should play a supporting role but not act as a roadblock to these initiatives. Therein lies the rub!

Most of our current politicians are NOT up to the task! We need new leadership that is driven by economic interests not by dithering crooks & fools.

Sometimes...well, more often than sometimes... I think we should outsource our government to Singapore!!!

Hang 'em I say...

If Kenya were to adopt China's tough anti-corruption measures... 99% of the civil service would be, erm, hung...
At least we produce our own sisal... so finding enough rope would not be a problem! Plus it would boost a local industry & is (relatively) environmentally friendly... Of course, the ropes are reusable!

LOL... I can dream...

OK, the Chinese are playing politics but I like the Japanese honour system of commiting hara-kiri... Pity, Kenyan politicians don't do that!

Kenya's Exporters Hurting - What to do?

The Kenya Shilling has appreciated considerably against the US$ (among other currencies). I shall focus on the US$:KShs since this is the functional currency for most exporters. The US$ has depreciated against other major currencies as well.

Furthermore, we need to "expand" what we consider our universe of exporters to include non-traditional exporters. We all know that Tea, Flowers & Coffee are exported. There are other sources including Labour i.e. Kenyan diaspora.

KQ is a net exporter - 90% of KQ's earnings are generated in forex. Visit any travel agent in Kenya & they will quote most KQ flights (except intra-Kenya flights) in US$... $299+tax, $499+tax... etc!

Kenol & Total (listed firms) are exporters - They have, well used to have, a significant business in re-exporting goods (petroleum products) to other countries e.g. Uganda & Rwanda. The strong KShs has hurt them but as I will show there are worse problems for them caused not by the strong KShs but incompetent & often corrupt bureaucrats.

Tourism - A well known source of forex. Booming but I think they can increase prices easily without hurting their business. This is the time for Kenya to shift towards more profitable tourism by lowering the number of tourists by skewing towards higher-priced tourism. The strong KShs just helps this cause.

Subsidies for Exporters?

No... No... No...

Exporters should not be subsidised like India plans to do... This would increase the avenues for corruption. The Goldenberg scandal started off as an "Export Compensation Scheme". This should be warning enough.

Government programs that involve forms, rules, regulations, procedured & "people" are bound to fail. Corruption is a hydra-like monster... It seeks out new ways to "eat".

Solutions?

The BEST "intervention" is to improve conditions for Kenyan export-oriented industries by improving/aiding their LONG-TERM competitiveness. Then let market forces prevail.

I believe the "secret" is in significantly improving the infrastructure while letting the best survive.

Roads

India has embarked on building their "Golden Quadrilateral" that connects major cities in all four corners of India. This will allow for faster movement of people & goods. Part of the impetus is to encourage exports to compete with China, which has created an impressive network of roads in the past decade, to facilitate exports.

Whereas the Yuan is artificially "fixed" to the US$, this will hurt them immensely in the future, China has built superb infrastructure & created an environment that helps their industries export goods all over world using special highways that lead to their ports.

This enabling environment works far better than any "devaluation" or "currency pegging" China performs.

Examples relevant to Kenya

Better (larger, fewer potholes & safer) roads from Naivasha to Nairobi's JKIA will decrease transport costs for Horticultural products thus increase profits despite a strong KShs. Lower transport cost will make Kenyan goods more competitive.

Better roads to & from the airports & ports will encourage tourism as well as movement of goods & people.

Folks dread going to & from the airport. CBD to JKIA should take 30 mins takes 90 mins! The roads leading from Mariakani & Miritini (industrial areas) to Mombasa Port are horrible!

Airports

KQ has been asking for a larger (Nairobi) airport for over 4 years. They could have consolidated their hold on the African market during this time frame creating a tough market for other to enter into. The delay in upgrading JKIA has cost them market share esp to N.American market. Now competition & barriers to entry abound from Ethiopian, Virgin & BA.

KQ needs a 2nd runway so an accident does not "close" the airport! For some inane reason the KAA is not building a 2nd runway! Currently domestic & international flights use the same runway! Nairobi is KQ's hub & closure of JKIA for even a few hours is very expensive.

KQ is a major mode for transporting perishable exports. Better roads & services to JKIA will lower costs for KQ who can pass on savings to exporters.

I say privatise the airports. BAA runs the UK airports. Why do we have a government agency running the airport? Leave immigration & customs in government hands if it is a matter of "national security" but the airport's functions need to be in private hands.

Electricity

Apparently Kenya has among the highest rates in Africa. Whereas Kenya does not have sufficient sources of "cheap" power, there are resources e.g. geothermal sources that can be exploited further. Olkaria can potentially supply 50% of Kenya's current needs.

A major reason for the obscene rates/costs is the corruption that has plagued various projects e.g. Turkwell Gorge. We need public review of these projects & a watchdog that is not beholden to politicians.

Further reductions in cost can be gained by improving the delivery/transmission. The transmission is plagued by crooks stealing wires, cables, transformers & oil. Kenya needs to introduce severe penalties & enforcement. The Chinese take drastic measures. I say so should we. Shoot on sight!

Lower electricity costs will help exporters become more competitive across the board despite a stronger KShs.

Taxes
Lower taxes, fees & licensing costs will flow to the bottomline of these exporters despite a strong KShs. Lower taxes & bureaucracy encourages more export-led growth. Sure it will increase forex flows but from sustainable growth.

Pay refunds in a timely manner. These are refunds! The government screws exporters by keeping this money interest-free! What a travesty! The idiots aka MPs & ministers draw interest-free loans while sucking it out of firms that are trying to create jobs!

Kenya re-exports oil products e.g. petrol, lubricants, etc but both Kenol & Total have indicated that they have substantially reduced their export business in 2006-7. The strong KShs hurts their profits but the interest cost hurt even worse! So it was not the strong KShs but the delay in refunds that led to reduced exports which in turn led to loss of Kenyan jobs!

Local Consumption (or lack of...)
We need to have a sustained campaign to encourage the consumption of local products that are exported. This includes coffee, tea, flowers & tourism. Why do we drink sodas instead of tea? Creating local demand brings stability to some sectors.

It pains me to see butter from New Zealand & Ireland while we have KCC. KCC is forced to find export markets! Increased consumption of local production reduces the need to export "at all costs".

International Barriers & Tariffs
Kenya needs to stand up to the EU, Japan & USA (esp the EU) in matter of fair trade. Fight the "subsidies" that EU provides its farmers. This will allow Kenyan exporters get a better price for their produce. Better price realisation will decrease/mitigate the pain from a stronger KShs. These EU subsidies lower the "cost" of their products that are exported to Kenya! Our farmers lose benefits from economies of scale since they can't compete against EU subsidies.

Imports of Industrial Goods
This is the time for GOK to encourage local construction firms & industrialists to import "Capital Goods". Kenya should not be encouraging imports of consumables like butter, biscuits & sugar!

We need heavy machinery to build new roads & we need to build local capacity by providing incentives e.g. lower import duties/taxes on such machinery. Kenya does not manufacture heavy goods/machinery but needs these to boost its infrastructure. This will benefit us by reducing the quantity of forex in Kenya while allowing us to jump-start economic growth.

Tea, Coffee & Horticulture
There is excess tea in the world marketplace. Let's reduce new tea plantings for now. Instead we need to focus on higher quality & "origin" branding. Since the tea industry was privatised there has been considerable progress. I watch with disdain & horror as the idiots called MPs want to put KTDA back into government hands... Sigh...

Coffee can be far more profitable if Kenya cuts a deal like Ethiopia did with Starbucks. In fact we can produce more coffee & achieve higher realisations! So a strong KShs notwithstanding, we make more money in US$, Euros & KShs!

The Horticulture Industry needs reforms. We need to target the higher end of the market by value addition. Let's produce less but get the same or increased income.

The environmental impact is huge esp in the riparian areas of L. Naivasha & L. Nakuru. We might be getting negative returns from our horticulture ventures after factoring in environmental degradation.

Conclusion/Summary
A strong currency is not necessarily a bad thing. I have not addressed other issues like GOK borrowing, massive corruption, etc. There are many other ways to strengthen the economy whose benefits will flow to all Kenyans.

We need to improve Kenyan institutions & think long-term NOT fix a short-term problem by sacrificing long-term growth.

Under a strong KShs, jobs will be lost in some industries/sectors but substantial gains will be made if we start an infrastructure construction-led boom. The lowered costs of economic activities will rein in inflation & reduce the hurt felt by a stronger KShs.

Kenya Re IPO announcement

So.. finally...

The KenRe IPO (really an OFS coz the govt is selling its shares & no funds raised will go to benefit KenRe) will be off & running on July 18...

GOK will sell 40% of KenRe (240mn shares at 9.50) with a minimum application for 2,000 shares.

More details to follow!