NSE 20 Share Index

From July 01 2008
The new companies forming the 20 Share Index are; Rea Vipingo, Sasini Tea and Coffee Kenya Airways, Nation Media Group, CMC, Safaricom, Barclays Bank, Standard Chartered Bank Limited, KCB Bank, Equity Bank, Centum Investments and Bamburi Cement.

Others are; East African Breweries, BAT Kenya, Kenya Power & Lighting Company, E A Cables Limited, Athi River Mining, KenGen, Mumias Sugar Company and Express Limited.

Traits That Make You Filthy

Saving money isn't all about whether or not you know how to score screaming bargains.

It has more to do with your attitude toward money.

Just think of those who don't fit the filthy-rich stereotype. People like Warren Buffett.

As explained in the book The Millionaire Next Door by Thomas J. Stanley and William D. Danko, personal finance has as much to do with people's traits as it does with money. Many millionaires, in fact, have frugal ways.

Understanding how personal traits can influence your finances is an essential ingredient for building wealth.

Here are 10 key traits:

1. Patience

Patience is one of the most important traits when it comes to saving money.

This means waiting until the first wave of product hype has passed, keeping a car for an extra few years before getting another one and waiting until something you want fits into your budget instead of putting it on credit.

Patience is often the difference between creating savings and being in debt. Having the patience to wait until you find a good deal is a cornerstone of good finances.

2. Satisfaction

When you're satisfied, there is no reason to spend money on nonessentials. The sole purpose of commercials is to make you believe that buying a product or service will make you happier, wealthier, better looking or improve whatever isn't bringing you satisfaction.

People spend because they want to capture the excitement shown in advertisements. When you are satisfied with what you have and your life (not trying to live like those on TV), your finances will be in a lot better shape.

3. Organization

Being organized can make you more productive and ensure that all the many issues pertaining to personal finances are addressed.

It means not paying late fees, not buying two of everything, knowing deadlines that can affect your finances and getting more done in less time. All these can greatly benefit your finances.

4. Discipline

You need the discipline to continue to save money for specific, long-term goals every month.

Personal finance isn't a way to get rich quick, but is a disciplined execution of your lifetime plans.

5. Reflectiveness

It's important to be able to look at your financial decisions and reflect on their results.

You're going to make financial mistakes. Everyone does.

The key is to learn from those mistakes so you don't make them again, or recognize if you keep repeating them.

6. Creativity

The economy and our earnings don't always match our expectations.

Unexpected developments wreak havoc to elaborate financial plans. When this happens, changes are needed to deal with the new circumstances. Creativity is essential to accomplish this.

Creativity allows you to make something last longer rather than purchasing it when you don't have the money. It means juggling money to stay out of debt rather than simply paying with a credit card. It means finding a cheaper alternative when money is tight.

In these ways, creativity plays a large role in keeping finances in order.

7. Curiosity

Having curiosity helps you learn, study and improve yourself.

The curiosity of wanting to know more, to take the time to study and then take what is learned and put into practice is an important process that is driven by curiosity.

8. Risk-Taking

To build wealth, one needs to be willing to take risks. This doesn't mean uncalculated risks. It means weighing all the options and taking calculated risks when appropriate.

The stock market has risks involved, but over the long term, history shows that it provides good returns on money that is invested wisely. Those who fear risk altogether end up saving money in accounts that likely lose money to inflation in the long run.

9. Goal-Oriented

The importance of setting and working toward goals is obvious. If you don't know where you are going, it's difficult to get there. It helps your personal finances immensely if you have money goals and are motivated to reach the goals that you have set for yourself.

Those who lack goals don't have a road map to take them to the financial destination they want.

10. Hard- and Smart-Working:

Creating wealth and staying out of debt rarely comes about without a lot of hard work.

Many people might hope that the lottery will solve all their financial problems. The true path to financial freedom, however, is to work hard to earn money while educating yourself to continue to have more value and increase your salary.

You may not possess all of the above traits. But knowing them can help you make changes so that you nourish the ones that you have and obtain the ones you're missing.

Ultimately they will help you with your personal finances and create a plan to accumulate the wealth you desire.

11. Decision making: Let say you want to buy a car. How do you decide which type tp buy. Example: An average American drives 12K miles per yr. On average you drive about 50-100 miles on snow, thought the winter months are 5. Because most times it snows, most people skip all those unnecessary trips you drive or else you postpone them. So, should you buy a 4x4 because of snow, when you only apply 4x4 for 50miles, but you gas it for the rest 11, 050 miles?

Should you buy a truck to pull your boat while you only sail 3-4 times per year?

Do you have a rationale for the stocks you hold?

June 6, 2008: I went out for dinner last week with a friend of mine from Kenya. We talked about a lot of issues and naturally, the investments topic came about. She is an active participant on the stock exchange together with her husband.

From what she told me, I have to say, I admired how they manage their investments. Every week, they sit down and analyse each of the stocks in their portfolio and each of them has to have a reason to be in the portfolio.

Each of them has to have a reason to exist. How many of us do that? How many of us sit down and think about whether the reasons why we are holding on to a share are still valid?

Peter Lynch once said that if you own shares in a company, you ought to be able to explain why, in simple language so that a fifth grader can understand, and quickly enough so that the fifth grader will not get bored.

You need to think about your reasons for being invested in a stock continuously. When the results of the company you are holding are released, have a detailed look at the financials and find out if things are going like you expected them to. If they are not, find out why.

If something has completely changed, it might be best to sell and move onto a new share, even if you are going to lose money. It has been said that there’s no shame in losing money on a stock. Everybody does it.

What is shameful is to hold on to a stock, or, worse, to buy more of it, when the fundamentals are deteriorating. Sometimes you will be right and sometimes you will be wrong.

Sometimes, it has nothing to do with the company itself. It might have something to do with the general economy. Different shares react differently to different economic scenarios.

Perhaps in your model you had forecast that the interest rates would go down but they are still rising, perhaps you had seen inflation reducing but instead it is moving up or perhaps the rise in the oil prices caught you completely by surprise. Whatever the reasons are, the new information that has come in should be incorporated into your portfolio.

It does not make sense to hold shares in an industry that is facing serious problems.

Even if the company is good, its future growth will be challenged and eventually the company will have to bow out.

Textile industries in most parts of Africa are going down and the future growth is hampered. In my trip this week, I found a company in Nigeria – Afprint which is listed on the Nigerian Stock Exchange and has found an innovative way to survive.

Its past revenue streams depended on textiles but as the road became tough, it switched to agriculture and is now returning some profits to its shareholders.There are three primary reasons why you should sell a share.

First, you should sell if the reasons for holding the share are no longer valid, secondly, you find a better investment with better returns and finally you should sell if the share price moves and the share you are holding becomes overvalued. by Eleanor Kigen

Safaricom post IPO-

Egypt Mobile last year made a net profit of Sh20 billion on revenues of Sh76 billion and is today valued at Sh213 billion on the Cairo Stock Exchange.

Sudatel made a net profit of Sh14.2 billion on revenues of Sh40 billion and has a market value of Sh96 billion, which is almost double Safaricom's despite being 35 per cent smaller in size (revenue wise).

Looking deeper, investors are currently valuing the revenues of mobile phone companies at a multiple of 3.1 in the sector. On sales to value basis, investors are buying Safaricom at a fair value of Sh3.22, compared to the market rate of 3.1.

On valuation metric that is bound to cause a lot of excitement-but its effectiveness, other than that of illustration is equivalent to a crude weapon-is price-to-earnings multiple.

On this measure, frontier market investors are picking Safaricom for a song. Going by the earnings released last week, Safaricom will start trading at a trailing multiple of 3.6, which is way below the sector average of 15.09.

Safaricom CEO Michael Joseph

If we were to make a bold assumption with the expectation that smart investors will spot this gap and that Safaricom's management keeps the till cranking at the current pace or more, if the company valuation was to converge at the current sector average, the share price could hit Sh21. On a sales to revenue measure, the price would be in Sh15 range.

One thing that an investor is bound to ask is that beside currency outlook (which is currently outperforming), why should they pay more for Safaricom which will have a market cap of Sh200 billion, when Egypt Mobile which is slightly bigger than the Kenyan operator would valued at Sh213 billion?

It seems like only some little arbitrage opportunities exist here.

For an investor looking inside, when Safaricom's ability to make money is compared to its peer group of blue chip Kenyan companies, investors seem to be buying the mobile carrier on the cheap. The trailing p/e ratios of these firms are in the range of 17 to 42, compared to 3.6 for Safaricom.

Again, it is difficult to explain why investors are willing to pay a p/e multiple of 41 for Equity Bank, 19.67 for Barclays Bank and 17 for Standard Chartered compared to 3.6 for Safaricom, yet its potential for faster profit growth is bigger.

One reason why investors are willing to pay higher multiples for blue chip stocks in Safaricom's peer group is based on the fact that firms like Barclays, Bamburi, EABL and StanChart are rock solid firms that have delivered good profit growth and a big dividend pay out over nearly a decade now.

Safaricom on the other hand started paying out hefty dividends of Sh4 billion, which is 29 per cent pay out the previous year. But even with free cashflows of Sh10 billion annually, this is a business that can be cash hungry and very price sensitive. Investors are likely to punish Safaricom for this risk.

Then, even with a good dividend payout, the number of people sharing at the pot-840,000 of them is quite a multitude, which leaves everyone with a small chunk. This means that for retail investors, it will take a long time for Safaricom to make huge profits that will yield a big payout. This share is for big investors.

The only saving grace is capital appreciation, which some analysts doubt.

In an interview, Mwangi Kimani, an independent financial analyst in Nairobi said that he did not see why the price per share was as high as Sh5 as he sees little prospects for organic growth. He is convinced that the Kenyan cell phone services market is almost saturated while the entry by competitors like Econet Wireless and Telkom would continue to push margins down on mobile calls. As it is now, there is a raging price war between Celtel Kenya and Safaricom.

Buying a rival in a neighbouring country such as MTN Tanzania could improve Safaricom's future fortunes, but the anchor shareholder, Vodafone would not be interested in geographical expansion in markets it already has a presence. Mr Kimani recommended a price of Sh2.50 per share for the Safaricom IPO.

"Well 30 cents per Sh5 investment is a return of six per cent on capital. That seems a bit low for a country with a projected inflation rate of at least 16 per cent over the next few years," said Mr Kimani.

He added that even diversification to data services may provide only a little headroom. "Data services, unlike mobile telephony, are not governed by high capital entry licenses, so smaller players like Access Kenya can easily provide M-pesa like services in conjunction with banks, using [other] highly efficient technologies (Wimax etc.)"

Although he is generally positive about the future growth prospects of the company, Humphrey Gathungu, a manager at Stanbic Investment Management Services, said that he did not expect the dividend payment for the Safaricom shareholders to go beyond 40 per cent in the next one to three financial years but this could go up to 60-70 per cent in the next four to five years.

The reason the company has to retain so much in earnings has all to do with need to expand especially in view of the fact that there will be fierce competition in the industry. This factor alone could keep the price of the share subdued for several years

A factor that has always suspected in the stock market but never proved and could influence prices after trading begins is speculative attacks from well-financed institutions or individuals. Such attacks could have the share make wild swings as has occasionally been seen on some counters.

Mr Gathungu pointed out that though there are cases such as Telkom Egypt and Telkom South Africa where the price was at about 1.7 and 2.21 times the book value respectively, there were also a number of other cases in which the price of a firm far exceeded the book value per share of the firm noting for example that Orascom of Egypt, a telecommunications firm, was at 7.5 times the book value taking into account its 2006 earnings. He also pointed out that Stanbic Uganda had seen its price to book value rise by even ten times.

Another success story with regard to price-to-book value is MTN of South Africa, which has been known to trade at over six times the book value.

Safaricom post IPO

Can be summarized in one word. Buy. Nothing else will do given I have a 3 yr strategy on the stock.

In the short-term, the counter's price will be pushed downwards and pulled upwards by broadly similar factors.

Loans: With something like 30% of the Ksh191bn having been financed by loans, guys will be wanting to offload ASAP so they can minimise interest charge. Some will also hold out for gains so that they can break-even against the loan, its interest and associated charges.


Subscription: Because of the oversubscription, I'd say retail investors will get hammered and will be lucky to get over 23%. Of the remaining 70% from above, I'd say 20% will sell because these are miserable number of shares to get. The rest will jump in for more.


Refunds: I expect this to be a protracted process not unlike KenGen. The application volumes and the fact that the brokers don't learn, means guys can expect refunds to still be coming in a yr's time. Thus this may mean they sell to get some cash so they can cope with inflation.

Results: Although the 2007/8 results were slightly below expectations by around a Ksh1bn at PBT level, this was still a good performance that will ensure guys will jump into the stock that on a P/E basis of 14, is undervalued by NSE standards.


My strategy is driven by one simple thing, despite the fact that Safaricom is a 15-20% per yr growth company, it'll do an AccessKenya i.e. whatever happens in the short-term (next 3 months), it will be at around Ksh15 in a yr's time. Any price below Ksh7.50 will see me jumping in. Beyond this price, it'll just depend on how my growth stocks are doing.