African Markets and Investments

The story of stuff. I draw your attention to the big golden arrow.

Great piece, and food for thought and action…

http://www.storyofstuff.org/movies-all/story-of-stuff/

A superinvestor of graham and doddsville.

Rest in peace.

posted on a mac… iLegend

The below is an excerpt from Warren Buffett’s annual letter to shareholders of Berkshire Hathaway:

“INTRINSIC VALUE
Now let’s focus on a term that I mentioned earlier and that you will encounter in future annual reports.
Intrinsic value is an all-important concept that offers the only logical approach to evaluating the relative attractiveness of investments and businesses. Intrinsic value can be defined simply: It is the discounted value of the cash that can be taken out of a business during its remaining life.

The calculation of intrinsic value, though, is not so simple. As our definition suggests, intrinsic value is an estimate rather than a precise figure, and it is additionally an estimate that must be changed if interest rates move or forecasts of future cash flows are revised. Two people looking at the same set of facts, moreover  and this would apply even to Charlie and me will almost inevitably come up with at least slightly different intrinsic value figures. That is one reason we never give you our estimates of intrinsic value. What our annual reports do supply, though, are the facts that we ourselves use to calculate this value.
Meanwhile, we regularly report our per-share book value, an easily calculable number, though one of limited use. The limitations do not arise from our holdings of marketable securities, which are carried on our books at their current prices. Rather the inadequacies of book value have to do with the companies we control, whose values as stated on our books may be far different from their intrinsic values.
The disparity can go in either direction. For example, in 1964 we could state with certitude that Berkshire’s per-share book value was $19.46. However, that figure considerably overstated the companyís intrinsic value, since all of the company’s resources were tied up in a sub-profitable textile business. Our textile assets had neither going-concern nor liquidation values equal to their carrying values. Today, however, Berkshireís situation is reversed: Now, our book value far understates Berkshire’s intrinsic value, a point true because many of the businesses we control are worth much more than their carrying
value.
Inadequate though they are in telling the story, we give you Berkshire’s book-value figures because they today serve as a rough, albeit significantly understated, tracking measure for Berkshire’s intrinsic value. In other words, the percentage change in book value in any given year is likely to be reasonably close to that year’s change in intrinsic value.

You can gain some insight into the differences between book value and intrinsic value by looking at one form of investment, a college education. Think of the education’s cost as its book value. If this cost is to be accurate, it should include the earnings that were foregone by the student because he chose college rather than a job.
For this exercise, we will ignore the important non-economic benefits of an education and focus strictly on its economic value. First, we must estimate the earnings that the graduate will receive over his lifetime and subtract from that figure an estimate of what he would have earned had he lacked his education. That gives us an excess earnings figure, which must then be discounted, at an appropriate interest rate, back to graduation day. The dollar result equals the intrinsic economic value of the education.
Some graduates will find that the book value of their education exceeds its intrinsic value, which means that whoever paid for the education didn’t get his money’s worth. In other cases, the intrinsic value of an education will far exceed its book value, a result that proves capital was wisely deployed. In all cases, what is clear is that book value is meaningless as an indicator of intrinsic value.”

Absa Capital in talks to list ETF in Kenya

Absa Capital a subsidiary of Barclays is in talks with the CMA and NSE about listing a gold-backed exchange traded fund, aiming to float in 2011.
The NewGold exchange-traded fund (ETF) is listed in South Africa where it is the largest ETF and invests directly in gold, with around 52.5 tonnes of gold bullion in assets. In physical gold.
The value of NewGold has catapulted as gold prices hit record highs.
Absa Capital said talks with the Capital Markets Authority (CMA) and Nairobi Stock Exchange (NSE) were positive, but in their early stages.

This will be a secondary listing of the NewGold ETF on the NSE from the JSE in South Africa.

Some of the advantages of this listing is that you can now invest in physical gold without the headache associated with security and costs of storage.

Further the ETF will be denominated in Kenya Shilling thus giving exposure to another asset class which is favoured globally as a good investment alternative especially in times of a depression.

Similar plans are also being pursued for a listing in Botswana and Nigeria.

*An ETF -  exchange-traded fund is an investment fund traded on stock exchanges, much like stocks. An ETF holds assets such as stocks, commodities, or bonds and trades at approximately the same price as the net asset value of its underlying assets over the course of the trading day. Some ETFs track an index, such as the S&P 500 or MSCI EAFE. ETFs may be attractive as investments because of their low costs, tax efficiency, and stock-like features.

*Definition courtesy of Wikipedia.

Graham and Dodd

In the past few months I have gone into hibernation(and still am), desperately intoxicating myself with the Graham and Dodd theorems on value investing, trying to capture that which made the oracle of Omaha what he is today, just that he picked up these theories from the teacher himself and went on to offer to work for free at his partnership… read more on that from the snowball

Here am borrowing from two books, intelligent investor and of course security analysis which will guide you on how to choose those securities (guided by analysis of the financial reports as the foundation)

The metamorphosis of the stock market

Recent developments in the Kenyan capital markets are typical of any emerging securities market, analysts are now a currency and are floating around all major brokerages as evidenced by the numerous ‘musical chairs’. Which is driven by more retail investors demanding quality research, this is the third major stage in the metamorphosis of the Kenyan stock market, which has followed closely after the take over of most stockbrokers by banks and subsequent recapitalization, with the initial stage being the death of the family controlled/individual owned, ‘careless about corporate governance and separation of personal from business accounts’ years that were before us.

The next stage will definitely be the demutualization of the stock exchange followed by most likely introduction of the more sexier exotic products e.g. ETF’s (Exchange Traded funds), possibly single stock futures, REIT’s (Real Estate Investment Trusts), CFD’s (Contracts For Difference) etc..

Back to my topic, is value investing a viable option in Kenya? of course, it should be, but the question that will linger is what would be the payback period? proponents of this ideology which I now fully subscribed to, have a holding period of ‘forever’ with the argument being if the stock is good and is appreciating over time, consistently and probably paying a good dividend, then why incur transactional costs associated with offloading and on-loading (of-course different markets charge different fees in Kenya its a fee between 1.8% to 2% of the total value depending on the volumes and value of your transaction, and currently without any capital gains tax, while in other markets the fee is higher and in most cases includes a capital gains tax thus eliminating any benefits that would be accrued by selling when the stock has been fully priced and stocking up when the price drops)

The death of property… soon... (I checked this with Octopus Paul)

Lets look at specific examples, in the recent past, Kenyan real estate/property (land and houses) prices have been rising phenomenally, to an extent where in my un-informed position(because I do not have access to any comparable research on this) believe that we are experiencing a boom and its only a matter of time before prices slow down if not outright crush.

What do we expect when we can now buy land the size of a 30 by 80 in extremely remote areas and justifying to ourselves that there is a by-pass which will be going through there (be it, the fact that the by-pass is a few kilometers away or even non existent) and then when that does not work we claim that land is a scarce and limited resource. As if shares are not scarce??? and we still experience downturns???

Back to Graham and Dodd

- Inherent value

So if I wanted to be exposed to land in Kenya, without the hustle of buying the physical asset, then I would look at listed companies that have substantial ownership of land, and in this category comes the agricultural companies which own substantial tracts of land.

e.g. Limuru Tea owns over 250 ha in Limuru about 678 acres***, Eaagads has over 480 acres of land in Ruiru on the Nairobi-Thika Road, and then I would do a simple calculation, what is the inherent value of this land, and is this reflected in the current share price of the company?

- Margin of Safety

KCB rights issue was priced at Kes 17 and the shares were hovering at around Kes 18 -20, there was no sufficient margin of safety.. period. TPS Serena on the other hand has issued its rights at Kes48 with its share price in the region of Kes 54-57 which gives a slightly larger buffer. Of-course this is just one metric and these are two different companies with very different financials and future outlooks not withstanding the fact that they are in different industries too. But margin of safety is margin of safety and that’s the only way to protect yourself from the downside that is inherent in investing in shares. How about Stanchart rights issued at Kes 165.45 while the share price is at Kes 270, that’s great margin of safety.

* However am using this concept(margin of safety) loosely and more for illustrative purposes since i am technically assuming that the prevailing share price reflects the true value of the company. This is not necessarily so.

The birth of corporate raiders in Kenya

We are a conservative people by definition and definitely by action, but recent developments has seen a lot of private equity shops both local and foreign set up shop in Kenya, we only have so many SME’s and emerging companies in Kenya and the wider East Africa region that can;

1). absorb the large briefcases of dollars being shipped in and 2). that are willing to relinquish control as the nature of PE firms is to take equity positions in their target companies, so what will happen after these low hanging fruit is fully taken up. These firms will of course descend on the stock market and acquire companies that have a mismatch between the market capitalization and net asset value.. e.g. say, the agricultural companies which they can acquire put a hold to their agricultural pursuits and use the land for estate development or even sub-divide the huge farms and sell the land in pieces of course this should (not necessarily will) generate shareholder value.

Or acquire firms and  force them into major cost cutting measures by taking over the board and realizing the benefits of leaner and probably more efficient companies…

Is this the next cycle that the private equity shops in Nairobi will take.. probably..

*Sometimes as I write a post it takes a life of its own and denies me the initial intention which leads me to change the title in most cases than not, for instance this was to read ‘Is value investing  viable in Kenya?’

***updated 30th Oct 2010

Ghana:
Of-course the Ghana story is well documented and commented upon, with commercial oil production scheduled for the end of this year and plenty of foreign firms and investors flocking Ghana.
The Ghanaian Cedi changes at a rate of 1 Ghana Cedi = 0.70 USD, after dropping four zeros in the past few years.
The country is hailed as a model democracy in Africa, a position Kenya once pretended to hold until, we fought and killed each other…

Well, hopefully oil dollars won’t throw Ghana into this trap. And should they continue on the growth trajectory they are positioning themselves for, then am very bullish on the Ghanaian stocks especially their banks and oil companies.

Uganda:
This is another oil story with a twist, the country still has rebels engaged in guerrilla warfare. That worries me somewhat, that even if there will possibly be an oil windfall, this could send the country into more chaos.

But should Museveni hold it steady and steer the country out of this path( a big ‘if’), then this forms a good country to also consider. And Uganda is currently implementing a central depository system and most of the shares are being immobilized, this has been one of the things that has slowed me down when investing in Uganda as I have to sign sale orders, follow up to receive share certificates and lodge them when selling.. terrible admin which was Kenya a few years back. After the share immobilization in Kenya, traded volumes increased and market liquidity improved, this is an effect am hoping will be replicated in Uganda in the next few weeks.

I am positioning myself here for the local companies, not the cross-listed Kenyan companies. For those I don’t need to take a currency risk since I can still be exposed to them with the shilling.

These are two countries I will keep a close eye on in the coming months, with a view to accumulate.

Housing Finance: Merger arbitrage opportunity?…. or not.

If Equity Bank is serious on buying Housing Finance then accumulating the stock presents a potential windfall in the near term should Equity Bank go out on a fully fledged hostile bid. Where they will have to bid at a premium to the  prevailing price so that they can buy out as many small holders as possible and using the accumulated position to bid for all of the companies outstanding shares. Should this scenario materialize then current  holders of course stand to gain.

Agricultural Stocks: Is it time to sell.. as in lock in the profits already booked?

I have been pro the tea stocks especially since Sept 2009, when I looked at them keenly.  Possibly there is still some juice to be extracted from these shares and if you are not in, then choose very carefully before going in as a lot of the positive outlook is already priced in in these counters. However the weaker shilling to the dollar and high tea price continue to be great drivers, as well as the increased output/production in terms of tea tonnage…

KPLC: A great stock but with dilution concerns similar to the current fears on National Bank. But I think once the dilution conversion of the govt. held preference shares into common stock has been facilitated and priced to the stock, which I strongly feel most people are ignoring at the prevailing price(Around Kshs:180), I will continue circling this stock, waiting for the right time to close in and accumulate. There are a few things I think they are doing right, and on top of this list is the ultimate impact of the prepaid meters which they have been pushing through with a vengeance(watch impact of a bird in hand that earns interest before service provision..). Further, this is one utility company we will not be getting enough of their services any time soon. A few other positive notes include the fact that their costs have come down since we have sufficient water levels in the dams which keeps the diesel powered generators away and the shillings firmly in Mr Njoroge’s control.