Weekly Market Commentary

Volume has fallen substantially over the past two weeks. The week ended 22^nd September 2017 saw only 67,746,900 shares traded as compared to its predecessor’s 136,140,300 (-50%). However, last week volume recovered, edging up to 103,945,000 shares (+53.4%), still 23.6% lower than volume for the week ended 15^th September 2017.

All the main indices took a drubbing. The NSE 20 slid to 3751.46 (-0.34%) which is a trend continuing from the antecedent week 38, where it slid -0.52% to 3764.44. The broad NASI took a steep dive to 162.21 (-2.23%), while the NSE 25 fell sharply to 4272.27 (-1.56%).

Politics

The volatile situation in the country has not been ameliorated by the incumbent President’s acceptance of the court dictated nullification of his re-election. The exhortations for peace continue to reverberate throughout the country.

The intransigent opposition have made a number of irreducible demands to the electoral body:

1. Standardisation of constituency tallying forms
2. Rescinding the ballot paper printing tender awarded
3. Mandatory signing forms by multisectoral election monitors before declaration of results
4. Appointment of new returning officers who are ‘elected’
5. Only verified results to be transmitted
6. Verification at all levels by candidate’s agents, especially in regard to IT intensive processes
7. A secure, transparent and independently verifiable IT function
8. Barring certain officers who allowed ‘illegal forms to pass through the process’

You can find more information on these pedantic stipulations, which are prerequisites to the opposition candidate’s participation in the repeat presidential election here

They are a carapace over free and fair elections and will hopefully be negotiated over to scrap unreasonable demands, while adopting the gems that will help transparency glitter. Unfortunately, demonstrations took place on Tuesday, the 26^th of September, to give weight to these demands.

The incumbent government has fast-tracked legislation in parliament to address purported weaknesses in the electoral process, as elucidated by the Supreme Court judgement. The amendments include:

1. Withdrawal of a presidential candidate in a two-horse race will lead to the remaining candidate being declared president elect, without any elections
2. Punishment of returning officers who fail to sign or try to falsify election declaration forms
3. Only those successful in a presidential election petition to contest in repeat polls
4. Reducing the mandatory qualifications of the Chairman of the electoral body, empowering the vice chairmen and commissioners, thus preventing a crisis in the event the Chairman is unable or refuses to carry out their role
5. Manual transmission of results to carry more weight over electronic but both will be complimentary
6. Making it more difficult to nullify a Presidential election by the Supreme Court, shifting the burden of proof on the petitioner, requiring them to prove that irregularities and illegalities altered the popular vote significantly.

This is an excellent bill that will prevent a constitutional crisis, should the Opposition candidate turn out to be a ‘no-show’; loopholes are duly addressed.

If the bill is passed, all risks relating to the election will be watered down (unless the Court nullifies it). Negative power will now lie in the hands of a recalcitrant Opposition, to cause mayhem and violence by obstreperous mass protests, economic sabotage and other disruptive techniques such as civil disobedience.

Telecommunications Sector

Safaricom Kshs. 24.75 (-3.88%) saw the transmission of 46,520,800 shares. After going ex-dividend on Monday 8^th September 2017, it floored at a day low of Kshs. 24. After that, recovery continued, and the share rallied, exceeding Kshs. 26 multiple times during the ensuing two weeks. However, on Wednesday 26^th September 2017, the Opposition leader alleged that the telecommunications giant was part of the ‘rigging conspiracy against him’. He later threatened economic sabotage. This affected demand significantly.

Banking Sector

KCB Kshs. 41 (-4.65%) saw a total of 4,977,000 shares served. It is still +78% from its 52-week low of Kshs. 23. Co-operative Bank Kshs. 17.05 (+0.29%) traded 2,739,900 shares while Equity Bank Kshs. 38.75 (-1.90%) experienced 2,201,800 shares exchange hands.

Barclays Kshs. 10.10 (-2.88%) traded 739,600 shares, while National Bank Kshs. 9.85 (-3.43%) moved 571,400 shares.

The banking sector is set to be hit with a new International Financial Reporting Standard, IFRS 9, from 1^st January 2018. Its main impairment provisions are as follows:

1. When a financial asset, such as a loan, is acquired through establishment of a contractual obligation, 12-month expected credit losses are recognised in profit or loss and a loss allowance is established in the same accounting period in which the financial asset originates – interest revenue is calculated on the gross carrying amount and not the amortised value
2. If credit risk on the loan increases significantly and is not considered low, full lifetime expected losses are recognised in the financial statements of the period in which management thus changes its view regarding the financial asset – interest revenue is still calculated on the gross carrying amount and not the amortised value
3. If a financial asset becomes credit impaired, full lifetime losses are recognised – interest revenue is now calculated on the amortised value and not the gross carrying amount

The above standards will lead to a spike in impairment provisions in bank’s financial statements and many institutions may report depleted profits or even losses. Moreover, stringent selection of candidates for loans will take place, in order to reduce the need for heavy provisions on non-performing loans, effectively leading to a credit crunch. Weaker banks may need additional capital to stay on the green side of statutory ratios.

Commercial and Services

Longhorn Publishers Kshs. 5.25 (-4.55%) saw investors flip through 180,700 shares. Kenya Airways Kshs. 4.80 (+3.23%) experienced 1,438,900 shares fly through the market.

Uchumi Kshs. 3.15 (-16%) saw the barter of 427,600 shares. Any further pull back below Kshs. 3 could mean a good opportunity for speculators betting on good earnings and a quick supply of the additional capital expected, with an emphasis on the former. The supermarket chain’s loss before tax for the full year ended 30^th June 2016, reduced by 17.6% to Kshs. 2.8 billion from Kshs. 3.4 billion in a similar period. However, KPMG Kenya issued a disclaimer of opinion on the group financial statements due to lack of audit evidence on foreign subsidiaries up to the date of loss of control and a qualified opinion on company financial statements with regard to lack of audit evidence on Property and Equipments opening balances.

Its half year results for the period ended 31^st December 2017 revealed a loss before tax of Kshs. 547m, down from a loss before tax of Kshs. 1.02b in the previous period. Despite the decreasing losses, revenue has fallen from Kshs. 14.46b through the full year ended 30^th June 2014, to Kshs. 6.43b through the full year ended 30^th June 2016 (-55.5%).

The revival of Nakumatt through a merger with Tusky’s will see Uchumi’s competitors continue being fierce rivals to its business, perhaps even strengthened. However, branch closures and problems with supply have been the main sculptors that chiselled away at the naked revenue and not belligerent competition.

Construction and Allied

Bamburi Cement Kshs. 180 (-2.70%) experienced the distribution of 133,700 shares while ARM Kshs. 14 (+14.75%) saw heavy volume action of 13,030,000 shares. After touching a new 52-week low of Kshs. 11 in the beginning of the week, it began its upward climb as supply evaporated. The fragrance of another strategic investor is emphatically present in the market. While obliquely mentioned, explicit details of the impending dilution will help capitalists make better decisions. For now, the market is hoping that the new capital will not alter its book value of Kshs. 27 and an aura above, by more than a few dozen percent in the unwanted direction from the stated net asset value.

Energy and Petroleum

Kengen Kshs. 8.70 (-2.79%) saw the teleportation of 1,445,700 shares while KPLC Kshs. 9.95 (-2.93%) experienced low voltage on the back of 1,286,400 shares surpassing the resistance of sellers to hold the security.

KenolKobil Kshs. 16 (-3.32%) moved 2,180,800 shares. Most of the oil marketer’s sales, “like 75%”, in the CEO David Ohana’s words are on cash basis. He wants to deleverage the business completely, as it is “quite expensive to borrow money in Africa”. His strategy for taking the company ahead has been and will focus on the following:

1. Reducing expenses, especially finance costs
2. Not employing more people than the company needs (I’m sure he pushes his staff hard as he has some army experience!)
3. Focus on high margin, cash intensive products, but also entering into low margin business after establishing a good presence in the aforementioned

Volume has grown from about 45 million liters in 2013 to 120 million liters today! Kenya contributes 70% to the company’s bottom line despite its presence in five countries. However, it exited Tanzania operations as it was a huge contributor to the balance sheet – “We were losing money there!”

Umeme Kshs. 14 (+0.36%) traded only 300 shares. The Ugandan electricity distribution company reported a half year loss after tax of Kshs. 2.38 billion from a profit after tax of Kshs. 1.69 billion based on an exchange rate of Kshs. 0.029 for a Ugandan shilling. In its interim statement, THE MONOPOLY explained the shocking loss as follows: “Following the issuance of Modification Number 5 to Umeme’s Supply License number 48 on 12th May 2017, the Company has elected to record impairment provisions for the accrued growth revenues and tax receivables in accordance with International Accounting Standard 39 – Financial instruments, recognition and measurements. The Board and Management have carefully considered the form of the mentioned Amendment 5 and noted that the modification to the Company’s Supply License no.48, as published, did not expressly provide a mechanism for the recovery of the associated revenues due to Umeme Limited.  The Company however believes it is entitled to these revenues and is pursuing recovery of the accrued amounts from the Government of Uganda, in line with the principles of the Consent Judgement reached with the Electricity Regulatory Authority (ERA) on 17th May 2016.”

Insurance

Britam Kshs. 15 (+0.33%) saw new buyers lay claim over 14,634,700 shares while CIC Kshs. 5.35 (-4.46%) experienced motion of 1,015,300 shares.

Kenya Re Kshs. 20 (-6.98%) took a plunge on heavy volume. Its PE ratio of 4.26 and dividend yield of 4.00% makes it the cheapest insurance stock in the country. Strong share. Its 52-week high is Kshs. 24.50, representing a 22.5% upside. However, its net asset value is Kshs. 37.

Investment and Investment Services

Centum Kshs. 41 (-0.61%) took a small dip as it went ex-dividend on Thursday 28^th September 2017. Investors holding the cheap share on the record date will walk away with a Kshs. 1.20 dividend per share, with guaranteed capital appreciation for those that are patient enough to hold it without itching.

NSE Kshs. 18.80 (+7.43%) saw 253,600 shares move meaningfully through the board.

Manufacturing and Allied

Unga Group Kshs. 29.25 (-4.10%) beheld investors sift through 41,700 shares. It reported a loss for the year ended 30^th June 2017 of Kshs. -32.29m, down from a profit of Kshs 508.82 (-106.3%). Due to the following reasons:

1. Loss from discontinued operations
2. Maize supply challenges in Kenya
3. Challenging business environment in Uganda – a loss reported there for third consecutive year
4. Bad debt provisions and depreciating local currency
5. Credit challenges facing the retail sector, necessitating an exit from Nakumatt where it had counters and implants

However, EPS stood at Kshs. 0.28, still in the green, albeit down -93.5% from the previous reporting period. This was propped up from a negative yield due to profit from continuing operations and profit attributable to owners of the parent. Dividend is steady at Kshs. 1 per share. The share price actually posted gains, on Friday 30^th September 2017, average inching up to Kshs. 29.25 from the previous day’s Kshs. 29, kissing day highs of Kshs. 30. Average 3-month volume is only 2,792 shares and thus this share would be suitable for small-scale retail investors. The 52-week low is Kshs. 27, while the 52-week high is Kshs. 36.50.

Sources: NASA coalition website, The Standard, Daily Nation, The Star, Financial Times, NSE, IFRS, Rich Management

@MihrThakar