Nairobi Stock Exchange hasn’t been a great performer the past few years. Why should investors be investing in Kenya now?
Nairobi Stock Exchange (NSE) is a buyer’s market which presents foreign investors with massive bargain opportunities. This situation results from various factors that have converged to push stock prices to levels are out of whack with the fundamentals on the ground.
These factors include a weakening currency (which has finally stabilized), escalating fuel prices, a surge in local liquidity prompted by a heavy bank lending to the private sector, and food inflation caused by the region’s persistent drought. Increased political uncertainty because of the MENA crisis and the trials at the Hague of individuals suspected of instigating violence in Kenya following the 2007 election further compounded the situation.
As a result, despite healthy turnover levels, stock prices have suffered over the last six months. Only 13 out of 48 active stocks trade above their year-end levels.
But financial results for the 2010 fiscal year show that listed firms — especially the financial sector companies–enjoyed explosive bottom line growth. This trend continued in the first and second quarter of this year, which shows that economic growth is still on course.
Considering that a majority of stocks trade at P/E ratios below their respective sector P/E ratios, and that 15 of the 29 largest-cap companies offer dividend yields above 3%, there is an obvious mismatch between stock prices and company fundamentals. which often corrects itself going forward.
The NSE is an ideal frontier market. It offers foreign investors exposure to the Kenyan economy, and — because many listed firms have expanded beyond Kenya’s borders — it also serves as an entry point to the regional economy. In the short-term, foreign investors can capitalize by investing in the weak shilling and seek exit points as it strengthens against the US dollar.
Let’s suppose I am a US-based investor and want to buy shares of a Kenyan stock. How would I do so? Can you walk me through the account-opening process?
SG: The investor would need to open an account with a local stockbroker who will open a Central Depository and Settlement Corporation (CDSC) account for them. The CDSC account is where all tradable shares are stored electronically.
Account opening forms are typically available on stockbrokers’ websites. The potential investor would first fill the forms and attach scanned copies of a recent passport-size photo, a certified copy of their driver’s license or passport, and a certified copy of a tax return or utility bill. After the broker receives the documentation, they will activate the investor’s account and they will communicate details to them within one business day. At NIC, we suggest you scan the documents and emailed to us. The originals can follow later.
How would I, as a US-based investor, place a buy or sell order through NIC Securities?
SG: If the investor would like to place buy and sell orders by email, they can complete the email indemnity form and submit a one-off processing fee of KES200 (USD 2.30).
Otherwise, the investor can communicate their order to us and arrangements can be made to accommodate them as long as adequate security measures to facilitate proper identification are in place.
What does it cost when trade Kenyan stocks?
SG: The Capital Markets Authority (CMA) regulated commissions for trades below KES100,000 (USD1,111) is 2.1% and 1.85% for trades above that amount. At NIC, lower commissions are negotiable depending on deal sizes.
Do most Kenyan brokers have minimum amounts required to open a trading account? To place a trade?
SG: At NIC Securities, opening a CDSC account is free. The minimum trade size is 100 shares of any counter. We, however, pride ourselves on having the capacity to handle large trade sizes with low turnaround times.
How are dividends delivered to foreign investors?
SG: they do not deposit Dividends into a trading account. This is a market regulation. However, they pay dividends directly into the client’s bank account and you can plan to reinvest the funds from there.
Must an investor have a Kenyan bank account to collect dividends? Or can I can wire them to a US bank account?
SG: When opening a CDSC account they require the investor to show their divided disposal preference. This could also be to have the money wired to their foreign account. The concern for the investor would be that they would have to pay for the electronic funds transfer. Having a local holding account to allow the dividends to accumulate before wired to the foreign account would be great. Most local banks have dollar accounts and they can also use these to hold the dividends. They do this to take advantage of currency fluctuations.
What sort of account reporting can an investor expect to receive? Do brokers send a monthly statement of my cash and stock holdings?
SG: Brokers provide periodic and ‘on demand’ statements. This shows the securities that an investor holds with that broker at any point in time. They will send total portfolio holdings via email to the investor by the CDSC every six months for dormant accounts. And at the end of any month in which there is any trading activity on the account.
A couple Kenyan stockbrokers failed recently. Are there now safeguards in place to protect investors and prevent similar events from happening again?
SG: Several markets reforms have taken place recently to protect investors’ funds. They have resulted in introducing an automated trading system. More stringent capitalization and disclosure requirements. Also, the adoption of a standard stockbrokerage platform, and the eventual demutualization of the NSE.
The minimum capitalization requirement has resulted in most of the smaller brokerage firms being gained by banks. They have relegated investment banks which have not reached the KES250 Million capital threshold to stock brokerage status. This requires a minimum capitalization of KES50 million.
The government plans to increase the investor compensation fund. Investors also are being educated on how to identify and report fraudulent behavior.
What is your favorite Kenyan stock right now?
SG: I have three favorites.
First is Scan group (SCAN: KN). It is East Africa’s largest advertising holding company with an 80% market share. It faces no local competition, which enhances its ability to attract and keep the region’s best talent. Being a listed company means it can also keep its top employees through stock options. In a human-capital intensive field such as advertising, this is important.
Costs related to its acquisition of Ogilvy East Africa, a former competitor affected the company’s 2010 results. We expect the merger to result in cost advantages going forward. We’re also bullish on the company because competition in East Africa’s banking and telecoms industries is heating. This will ensure higher ad-spends and thus more revenues for Scan group. We expect an annual profit growth north of 20% this year. It sells at a PE of 20, but we consider it undervalued because of growth opportunities.
My second pick is Equity Bank (EQBNK: KN). It is the fastest-growing bank in Kenya. It boasts a market share of deposits that has grown from 1.7% in 2005 to 6.2% in 2009. The deposit growth result from branch expansion — particularly in rural areas—and by mobile phone banking.
Equity Bank caters primarily to the SME and lower income segment with most loans being below KES100,000.
This “banking the unbanked” model has yielded impressive results. The deposit growth of 44% during the first half of this year is an evidence.
Equity has also done an admirable job at containing costs and maintaining the quality of its loan book. Both factors should lead to improved margins.
Finally, for the income investor, I like KenolKobil (KNOC: KN), a downstream oil marketer with a skillful and motivated management team. They focus the company on growing its storage capacity and distributional efficiencies. This is imperative for survival in the Sub-Saharan African fuel-marketing industry. As competition increases and margins decline, the company will take advantage of its scale economies.
I also like the diversity both geographically and in terms of its product range. The company has a heavy presence with over 400 service stations in East and Central Africa and Southern Africa.
The company is selling at a historical P/E of 10 and a half-year dividend yield of 5%. At the current price, the full year dividend yield will be approximately 10%; with profit growth, and a dividend pay-out ratio of 40-45%, the company is a cash cow.