AccessKenya IPO/OFS - Last Day

Raging debates on www.stockskenya.com... Unlike prior discussions, there is more of substance being discussed...

I will not discuss the specifics since the fundamentals are based on POTENTIAL not the assets or current financial state of the firm.

(My) Bottomline:

• Not cheap on a NAV or PE basis.
• Growth will continue for next 3 years.
  
• Cash out by Somens not a good indicator (OFS of 35mn shares).
• Growth will be at lower net margins.
• Expansion is a strong possibility into the region by acquisitions
• Corporate market prefers RELIABILITY over (cheapest) price. As long as Access Kenya delivers RELIABILITY there is great potential among the MNCs & SMEs.
• Cheaper bandwidth (TEAMS, Eassy) will boost usage.
• Increased use by government organisations will boost usage & sales.
• No debt plus IPO cash (KShs 426mn)to be used to boost service, sales & customer service.
• Somens want to increase the "value" of their shares so expect their dedication coz I think there will be a merger &/or sale of the AK (as we know it) to someone else!
  

BUY... for the short-term!

Updates on the Service Industry...

The "medical spa" industry in Kenya can get a huge boost by marketing Kenya as a "haven"... We can & need to move up the food chain from primarily "wildlife" tourism to more...

Why doesn't Kenya Airways (or some other airline) target Japan as a source for high-spending tourists! In spite of recent weaknesses in Japan's economy, the Japanese remain avid high-spending travelers! If this route is considered "unprofitable" the Kenya government should try to provide "benefits" for this sector. I do not support subsidies but surely how about a discount on landing fees, fuel tax breaks & offering Japanese language courses in Kenyan universities?

Back to reality... All we have on our front pages is violence at the Coastal areas... violence in the Mt. Elgon area! Tourists from some countries e.g. Japan tend to prefer "safe" locations. Though these clashes do not affect most touristy areas, the "exposure" can be scary!

If we do not clamp down hard on insecurity & land rights... we can't project an image of safety for tourism. Violence can happen anywhere, anytime e.g. the Virginia Tech shooting but violence should not be a constant as seems the case in Kenya!

There have been killings & arson aplenty in the Banana Hill area...

While all this is going on, the Kenya Police spend valuable resources questioning The Standard about some story on the artur brothers while Kenyans are murdered in cold blood...

Sigh...

On a lighter note... I am surprised that Kenya doesn't have a condom factory... esp with Kenyans professing to be (very) sexually active... or that's what one would think listening to the guys at any drinking joint in Kenya... I wonder what flavours... My favourite is Passion... yes, pun intended...

Kenya 2030 - Service Economy Superstar?

Kenya has the potential (yes, that word again...) to become the African Superstar of the service industry.

After reading Kenyan Entrepreneur's blog entry on "niches" & "creativity" I think Kenya needs to find a niche... that niche is providing services to primarily Africa(ns) and beyond.

University Education & Research

• We don't need to send KShs "Billions" to Australia, USA, Malaysia or the UK for tertiary education when we can/should set up WORLD-CLASS universities in collaboration with top-notch universities, departments or research centers around the world. Singapore & Dubai have done it. So can we.
• The cost of living in Nairobi is much lower than S.Africa, Dubai or the UK. In addition, it is cheaper for African students to fly to/fro from Nairobi than many of the other cities.
  
• We can attract students from Africa while providing Kenyans with jobs (lecturers, clerks, janitors, etc). These students become ambassadors for Kenyan universities. This has bee proven time & again by American universities' African alumni.
  
• We can attract African talent to these universities & think tanks to provide African solutions to Africa's problems. They understand Kenya's problems as we understand theirs. This allows for collaboration of peers.
  
• Networking opportunities arise from the interaction of African professionals that allow the expansion of inter-African commerce. It is a fact that "connections" spurs investments. The connotation is not about "corruption" but "connections" between classmates.
  

Medical Tourism

• Kenyans spend KShs "Billions" on treatments abroad. Our so-called "leaders" lead the way to more waste of funds... kibz went to UK, dan moi recently went to Germany. All the "heart" operations that are done abroad since we lack the facilities. The less well-heeled go to S.Africa & India.
• Medical facilities will encourage research that can boost Kenya's stature beyond the HIV & Malaria programs.
  
• Kenya has 2 medical schools & can expand its facilities to ensure we produce more doctors. We can then keep them in Kenya instead of "exporting" them to UK, USA or Australia!
  
• Kenya "exports" nurses to UK. We can keep them in Kenya by offering them better opportunities within Kenya!
  
• India has taken up the concept of "Medical Tourism" with gusto & it is a major growth industry for them. The benefits of Medical Tourism then flow to the rest of the population as the latest technology is used & personnel trained.
  
• Nairobi has become the premier airline hub for the East, Central & West Africa region - multiple carriers e.g. KQ - with the necessary connections to Nairobi. Kenya can effectively compete against S.Africa to become the preferred choice for medical treatment.
• The medical per capita "spend" is much higher than regular tourism! Of course, the patients' guests/visitors might tour other "touristy" locations e.g. Game Parks.
  
• The knock-on benefits for Kenya's construction sector, industrial (e.g. BOC Gases), education sector (nurses, doctors, technicians), agriculture (food, flowers) & tourism (relatives, friends visiting parks) are tremendous.

Business Process Outsourcing

• We can capture some of the growing BPO market from India or complement India.
• There is need for BPO services for many African countries as these countries' economies expand.
  
• The fiber-optic broadband systems (planned) could substantially reduce the cost of telecommunications between African countries.
• Kenya needs to expand language classes in German, Italian & French since these countries may not be effectively served by India.
  

Problems & Challenges for the Service Economy

Insecurity

Kenya needs to work on the high levels of insecurity prevalent today.

• Being "poor" is no excuse for being a thief. And being a violent thief is worse!
• I support brutal suppression of the "violent" elements. Yes, it will not be popular with the "human rights" folks but I would rather a thief is killed than my near & dear hurt. That's my opinion... What about my Rights to enjoy my hard-earned cash & life?
  
• My "little finger" is more important to me than the life of a violent thief! I would rather the police kill the thug/crook/thief before a single hair on my head is harmed.
• We need a 24-hour "economy" especially if we want to serve the BPO market in the USA.
  
• JKIA's utilization can increase substantially if insecurity is not an issue since the travelers may start their journeys much earlier & fly in much later.
• The transport industry - using lorries - can be boosted if these carriers move goods at night without fear. This means that the roads are "clear" for passenger & tourist traffic during the day!
  

Telecommunications

• Despite advances in telecommunications, the cost of phone calls remain much higher than necessary. We need more competitors as well as increased "openness" for them then operate effectively.
• Data costs too much to access. Hopefully, the government will get its act together or allow private firms to lay fiber-optic cables all over the country (without onerous conditions/permits/fees) as well as international connections.
• Progress has been made with EaSSy & TEAMS but the there have been too many delays.

Political Stability - Ethnic Conflicts - Property Rights

• Political & ethnic conflicts (esp violent clashes) e.g. Mt. Elgon clashes in 2007 need to be stopped asap. Even if it requires a military response. Nevertheless, the cause roots need to be examined.
• Property rights should be supreme. Kenya should not succumb to a "tribal" or "nationalistic" tendency that tramples on Human Rights that will dissuade further investments & aggravate poverty e.g. mugabe's antics in Zimbabwe.
  
• Politics seem to be a 24/7 obssession with Kenyans. No wonder we remain poor since "talking politics' takes precedence over "work productivity".
• Kenyans spend less time working, even at their jobs, than discussing politics!

There is hope but we need to find our niche, soon, before someone else steals a march on us! If we do not do it... someone will... S.Africa is looking into becoming a BPO powerhouse as are many N.African countries.

Safaricom to list offshore... What are they thinking?

Disregarding the valuations placed on Safaricom... but let's say 25% is worth KShs 30 Billion...

Please note the proposal is NOT about an IPO but an OFS (Offer For Sale) where the shares sold are already issued thus none of the funds goes/benefits the firm being listed.

Scangroup was primarily an OFS with a small component as an IPO. Eveready was an OFS. Kengen was an OFS as was the second tranche of Mumias.

This is an amount that can & will be easily absorbed by Kenyans. Approx KShs 27 Billion was collected during KenGen's OFS. Most of it was refunded.

Safaricom's profits are primarily from Kenyan subscribers (who have been ripped off for ages!) thus:

• Kenyans should have the first RIGHT to buy shares
• If Kenyans can't buy them then offer to foreigners

The "liquidity" fear is overblown. At most this will distort the market for 45 days but it is easily remedied/mitigated by:

• Multiple receiving banks e.g. all corporate applications handled by Barclays, QII (pensions, etc) handled by KCB and all individual applications handled by Equity
• The receiving bank opens an account with CBK for funds from the applications. These funds are used to lend funds to the "depleted" banks at the 30-day or 90-day T-Bill rate instead of the higher CBR (10%)
• Most banks have excess funds in T-Bills substantially above the required liquidity ratios. The CBK can allow for repos at favourable rates during this period.
  

Opening/listing Safaricom on a foreign market will attract more foreign investors but the additional forex which hurts the exporters. There will be an influx from the diaspora among other investors & the forex should be snapped up the CBK to maintain an orderly market.

Mutual Funds, Unit Trusts & Pensions can & will support the broader market as they snap up "cheap" shares that retail investors sell to buy Safaricom!

Foreign investors should buy Safaricom on the secondary market... that means Kenyans can make more money!

At the end of the day, market forces will prevail... so let them be!

What happened to Telkom's CDMA push?

Telkom has not placed a single ad for CDMA phones or service in the Nation for over one week! Nor has a Telkom dealer advertised... Are they in the market for wireless phone sales?

Safaricom is promoting its Saasa tariff while Celtel is selling its Jishinde postpaid plan with 16/- per minute all day!

All Telkom did over Easter was advertise VOIP calls at 15/-, which are more expensive than the Calling Booths/Cybercafes) but no CDMA service...!
Does Tlkom understand that increased sales of CDMA lines will lead to an increase in international VOIP calls?

Telkom's website is pathetic... slow & poorly designed!

- Is Telkom still rolling out the CDMA wireless service?
- What do the handsets (Mobile + Desktop) cost?
- Can I use a CDMA handset (mobile) to connect to the internet?

The list of dealers on their website has left out all areas except Nairobi. Even the Mombasa dealers are not shown! Their website is a cheap advertising outlet but... they do not use it!

Furthermore, they are making a mistake by selling the lines at 1,000/-... they need a fire sale at 99/- since that will boost the uptake of the service... or sell the line for 1,000/- INCLUSIVE of 1,000/- worth of pre-paid credit!

Unlike Safaricom & Celtel, Telkom requires a "service application form" which adds to the process of acquiring a line!

I am not sure what the handsets cost but unlike Safaricom's offers of "cheap" sets (2,500/-), the Telkom sets 9,000/- & higher! If someone has better information, please post it!

Finally, coverage - still expanding but... not even close to Celtel's (let alone Safaricom's) coverage!

Is there a problem with Telkom's CDMA push?

Where to for Kenyan businesses? Rumination #2 - Telecommunications

Kenya just can't get a Second National Operator (Telecoms), to compete against the perennial laggard, Telkom Kenya...

First, the good news - Telkom has definitely taken a turn for the better under Kirui with better service & increased use of CDMA technologies. The recent loan of KShs 5.8 Billion (secured by an ownership interest in Safaricom) will be used to downsize the staff by 60% thus allowing Telkom a lifeline as it cuts costs.

What does surprise me is the lack of advertising by Telkom & its resellers for the CDMA service. Looking through the Sunday Nation (7 April 2007), I did not come across a single ad for the CDMA service while there were ads pushing GSM phones!

What is the story behind Telkom's absence?

The bad news:

- CCK & GoK is being sued by Econet after the license was withdrawn following the internal wrangles that bedeviled the Econet Consortium. Apparently, the Kenyan "partner" could/did not keep their part of the bargain! This includes coming up with the minimum required 30% contribution.

- After the failed take-off of Econet's network, there was a 2nd round of bidding which brought in a high bid of $170 Million from the VTEL consortium but this failed as the local partner was a no-good (Kirinyaga Construction) politically connected crook!

There were rumblings about dropping the 30% local shareholding requirement thus giving VTEL 100% ownership. A pity that VTEL did not do the necessary due diligence on Kirinyaga

So the CCK approached the second highest bidder, Reliance Group & Triton, to step up their bid from $111 Million to $170 Million. The Reliance Consotium balked unless the GOK agreed to certain concessions & condtions were made.

It was naive of CCK & GoK to expect Reliance to pay $60 Million more without additional benefits! Reliance Telecom is a smart & aggressive player in the Indian market & part of a much larger conglomerate. They are not idiots, their bid of $111 million was discounted to include costs of implementing a new network.

The GoK had cold feet about the "higher" bid after including the concessions. So Reliance also bailed.

By rejecting V-Tel's offer & then Reliance's, the GoK & CCk need to rebid... What does that mean?

Cons

• Costs of re-bidding
• Delays coz of re-bidding
• Lack of serious applicats since this is bid#3. Fatigue from bidders!
  
• Telkom's resurgence reduces the incentive for a SNO
• Telkom's imminent privatisation means potential SNO bidders would rather bid for Telkom
  
• Safaricom & Celtel's price war has reduced the attractiveness of the SNO licenses
• Econet won the court battle over the "withdrawn" license and can now roll out their network
  

Pros

• Finally get it right!
• Newer technologies to be introduced
• Fibre-optic cable to Kenya as part of the deal

Bottomline

• GoK has left money on the table by not accepting VTEL's offer or Reliance's counter-offer. It is unlikely that the next round will raise bids of $170 Million.
• Kenyans are paying higher phone/communication rates coz of inane decisions made by political mandarins/idiots who do not understand free markets & competition!
• Reliance has the capability of building & running a quality communications system, including a fibre-optic undersea cable, that could bolster Kenya's growth as a preferred BPO destination.

Solutions

• Bid out the SNO to anyone who wants it, whether it is a consortium or not, local participation or not!
• Shelve the SNO but offer "broader" licenses, cheap or free, to existing operators including Access Kenya, Celtel, Safaricom, Flashcom or Popote.
• Force Telkom to share its publicly funded network with others for a modest fee.

These will increase competition & lower costs for users thus allowing for an increased level of growth necessary for Kenya to move forward!

Where to for Kenyan businesses? Rumination #1 - Refunds

I have a high regard for Entrepreneurs (and many businesses), esp those in Kenya, who face numerous challenges to bring some semblance of commerce to a generally unappreciative populace & government ("elected" by the same populace).

I am going to tackle some of the issues faced by them over a series of blog entries...

REFUNDS - of taxes, duties, etc...

Refunds to the Horticulture Industry

Refund:

1.	to give back or restore (esp. money); repay.

2.	to make repayment to; reimburse.

I have written on the delayed refunds to Oil Marketers which costs them 100s of Millions annually, only part of which are passed onto consumers, while the government mandarins/idiots berate them for not reducing prices while sitting on Oil Marketers money!

Now I come across what is an even more RIDICULOUS situation!

The GoK (Govt of Kenya) has apparently "raised" the refund kitty from $8,571 to $14.3 Million in 2007. Imagine a refund kitty of $8,571 for an industry that has arrears amounting to $43 Million! So a mere 33% will be refunded! $8,571 does not even buy a USED car!

Which idiot (who was probably paid more than $9,000) made the decision to allocate ONLY $8,571 for refunds in the first place? These exporters have to borrow at 12%+ rates from the banks to finance their operations while waiting for their refunds!

An average borrowing cost of 15% means Horticulture exporters subsidised the GoK in the amount of $6.5 Million/year!

Why is the VAT collected not refunded asap (meaning within 30 days at most)?
What are the idiots waiting for? Do they want these firms to collapse?

Even the idiots we call MPs (well, most anyway, there are some good ones e.g. Wangari Mathaai) more in annual travel reimbursements than $9,000!

Add some insult to the wound, the "increase" in VAT refunds does not take into account the constant accumulation of refunds due as horticulture exports increase. So apart from leaving a huge portion "unpaid" there is the question of new VAT submissions.

Quote from bdafrica: "Agriculture Minister Kipruto Kirwa says the move is part of the government efforts to streamline the fresh produce sector, which is currently subjected to more than 35 taxes that industry players want harmonized or scrapped altogether."

Well, duh! This is a sector that has suffered from a strong KShs for over 1 year & needs help. I want to make it clear that I whereas I do not support currency support or other non-market measures (with some exceptions), I think it is only fair that we make business EASIER for these exporters!

Challenges include:

• New stringent EU food/horticultural import regulations e.g. origin rules produce
  
• Competition from North & West Africa
• Lack of sufficient, reasonably priced belly space for exports to Europe/America
• Strong Kenya Shilling vs hard currencies esp US$ thus reduced competitiveness
  

Even the government realises that the inordinate delay in VAT refunds has led to cashflow constraints as well as hampering operations thus REDUCING levels of employment!

A sector that:

• earns gross receipts of $637 Million (14% of Kenya's forex receipts)
• is a large contributor to GDP (est at 25% including local sales)
  
• is #3 earner of forex (behind Tourism & Tea)
• employs upto 3 Million Kenyans within the entire process
  

but is treated so shabbily is a shame! Kenyan politicians should be helping exporters/farmers by streamlining the processes not building roadblocks! No wonder some firms are relocating to Ethiopia.

The slow refunds will starve these businesses of profits (& cash flow) needed to expand & compete with other producers in other countries.

Why are we killing one of our Golden Egg Laying Geese?