Barclays Bank of Kenya: Steady As She Goes

First on my itinerary was Barclays Kenya, which is one of the more conservative banks in Kenya. Their loan-to-deposit ratio is 80% and they chose not to compete for deposits in 2012 as they felt deposits had become too expensive. As a result, their deposits market share has contracted slightly.

Looking over a longer period, however, they have grown nicely, doubling their balance sheet to 118 billion Kenyan Shillings (USD 1.39 billion) in 6 years. Their non-performing loans are at 7% and trending down and their loan impairment stands at 1% and is stable. With new (tighter) banking regulations in the works, they are well positioned relative to more aggressive competitors.

Barclays’ greater Africa strategy is also being reconfigured to a more centralized structure as opposed to the current decentralized set-up whereby local countries report separately to London. This might allow Barclays to become a little less conservative and position itself more opportunistically in order to capitalize on the prospects for growth that abound across the continent.

Equity Bank: Competing With the Mattress

Next stop was Equity Bank. This bank is one of the market’s favorites and for good reason: it has a great business model. Whereas other banks compete with each other, Equity Bank believes its largest competitor is the mattress. As stuffing your money under the mattress has a lousy real rate of return and questionable safety of principal, Equity Bank enjoys a lower and more stable cost of funds than other banks that cater to a more affluent clientele.

Additionally, they have one of the lowest cost-income ratios at 49%, as they use agents rather than branches. They now have 50% of the banking customers in Kenya. I asked whether their international expansion is putting pressure on the cost-income ratio and the answer was a firm “no.” In fact, some of their new East African markets have even lower cost structures than Kenya.

Not much to not like here; the trick is to find a good entry point, valuation wise. One should not be too cheap, however, as often the entrenched market leaders in high growth economies will continue to do well as the pie expands.

Photo by DEMOSH

KCB: Appetite for Expansion

The last bank I met with was Kenya Commercial Bank, generally referred to as KCB. Though not as big as Equity Bank, KCB has a robust 14-18% market share in Kenya, depending on what metric you use. With 18% of shares held by the Kenya national social security fund, 51% by local institutional investors, and 7% by domestic retail investors, the bank has a fairly large local ownership constituency. At present, KCB has a significant liquidity ratio of 35.5%, though they are trying to bring that down modestly.

With its eyes on East Africa, the bank is focused on expanding in 5 other countries, including Uganda, Rwanda, Burundi, South Sudan, and Tanzania. In South Sudan their market share is 42%, in Rwanda it is 8% and their minimum target in any country is 5%. Only Tanzania is a bit disappointing at present, with the bank holding only a 4% market share.

Not unlike Equity Bank, KCB also sees its future tied to mobile banking and has been piloting the agency model in Rwanda, where it has 4,100 agents. Though not as efficient as Equity Bank, KCB’s cost-income ratio has been trending positively, declining from 67% to 60% to 57% in recent years, with a target of 50% in the near term.

Back to Basics Banking

What differentiates all these banks from the major banks in the US and Europe is their conservative loan-to-deposit ratios, which on average fall in the 70-85% range vs. 85-120% for their Western counterparts (with the European banks at the riskiest end of that range). Similarly, Kenyan banks enjoy higher net interest margins (10-13% vs. 3-5% in the US) and lower cost-income ratios (not too mention significantly higher growth prospects). Though investors face macro-economic risks in terms of inflation and exchange rates, on a company level the banks look decidedly healthier in Kenya than the too-big-to-fail banks in the developed world. But to the extent that inflation is kept in check and banks don’t have to compete too hard for deposits, the future for Kenyan banks looks very bright indeed.

More on Kenyan Banks

Is KCB Kenya’s Choicest Bank Stock?
Ranking Kenya’s Best Banks
Three Innovative (and Profitable) Kenyan Banks

Kenyan Excitement

Landing in Nairobi one is greeted not by local dances, nor the trumpet of elephants, but an increasingly abundant bird, the Common Yellow Crane. Everywhere you turn they stand towering over construction sites, bringing new commercial buildings and apartments to life.

One cannot ignore the Kenya’s busyness. Everyone seems to be getting on with something: digging away at new roads or buildings, selling goods or heading somewhere with a determined look on their faces. Kenyans seem resolved to create a better future for themselves one brick at a time, or one app at a time, as they code away in the new Nairobi Innovation Centres.

Uhuru Highway is jam-packed with trucks heading from Mombasa, through Nairobi, and deeper into the continent to an eagerly waiting , and growing consumer class.

Photo by Jonathan Kruger

It’s not just the trucks that bring prosperity. The much hailed mobile money service Mpesa sends purchasing power into rural areas via cellphone networks. No longer is Kenya painted by the red of Coca-Cola but the green of Safaricom as cafes and all sorts of small businesses eke out an extra margin by acting as Mpesa agents. Meanwhile, Equity Bank agents sprout from every corner as agency banking takes off, mostly eliminating the need for formal branches or ATMs.

At the time I traveled through Kenya, the national elections were imminent and you couldn’t find a more patriotic people. Kenyans were glued to their seats as they watched or read about the presidential debates between the main contenders, Raila Odinga and Uhuru Kenyatta. Discussing real issues and how they intend to solve them is a far cry from South African politics with its dancing and role-playing. With the wounds of the 2007 election violence still hurting, politicians and voters stated their commitment to peaceful elections.

Rumbling Through Tanzania

The Namanga border into Tanzania is a mess, not in an administrative sense, but rather as construction workers scramble to complete the new buildings. A United Nations sign alerts one to foreign involvement. Boosting inter-regional trade seems to be more than just jaw-wagging by politicians and economists. These developments are set to dramatically shorten border crossing times and reduce the cost of business. Truck drivers told us it previously took six hours to cross the border. Now it takes less than an hour. We got through in 15 minutes.

While Kenya appears to be advancing at a staggering pace, Tanzania appears to be a bit behind the curve. Arusha (gateway to the Serengeti) is a stark reminder of the pressure wide-scale urbanisation is putting on aging infrastructure. Seemingly disorganised markets compete for space with formal businesses (such as Shoprite and Standard Chartered Bank). Driving past the United Nations Criminal Tribunal for Rwanda (ICTR) is a reminder of Africa’s painful past. After 20 years, the work of the court is complete and the institution will close its doors in 2014.

Photo by Jonathan Kruger

When entering Dar Es Salaam one is greeted by massive billboards advertising beer, electronics, banking and apartments to name a few. Tanzanians are demanding more than cassava (the local staple food) as they attempt to trade up to their new found tastes. The Common Yellow Crane can be seen towering over some rising skyscrapers. Less visible are the sharks ready to offer unsecured loans at ludicrous interest rates to consumers facing the allure of modern appliances.

Friendly Malawi

Malawians proved to be extremely friendly, always willing to return a wave as they rode past on their bicycles, sometimes with cellphone in hand. Lake Malawi was incredibly beautiful. The poverty was not. Traditional African problems were clearly evident: high HIV infection rate, poor education, lack of water and housing, poor infrastructure and a handout culture. Many spoke of hope in South Africa where relatives have sought refuge.

The New Joburg?

Johannesburg appeared to arrive too soon. We were greeted by familiar sights: shopping malls, modern roads, apartments, luxury hotels, Afrikaans accents and South African shops (Shoprite, Mr Price, Spar, Woolworths, FNB to name a few). I had to pinch myself to realise I was in fact in Lusaka, Zambia. Boom. The population has trebled in the immediate post-independence era. Foreign companies are flocking to the area to reap the “demographic dividend” the city has to offer. Chinese letters adorned buildings, and a sign saying “This road was donated by the Republic of Japan” clearly marked the East’s presence.

Herero Technology

Photo by Jonathan Kruger

Zimbabwe is incredibly beautiful, going nowhere slowly and desperately needs a regime change. Enough said. A final tale comes from an interesting chat I had with a Namibian business women (see picture) from the Herero tribe. She uses her solar charged cellphone (on MTC’s network) to run her craft business in an extremely remote area near Uis. The device is key to ordering materials and finding out when tour buses are arriving.

The African road may be bumpy but pockets of progress are spreading across the continent.

If you’d live to hear more of Jonathan’s insights on investing in Africa, follow him on Twitter @InvestorPumba.

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Why did the news provoke me to bounce around my office like I’d hit a buzzer-beating jump shot?

Because, at this moment, I believe the Global X Nigeria Index ETF (Ticker: NGE) is one of the most accessible, pure, and cost-efficient ways for US retail investors to tap into the Sub-Saharan growth story.

Invest in Nigeria on a Shoestring Budget

With a GDP growth rate well above six percent, a gigantic, young population, and a reforming financial sector, I am very bullish on the Nigerian economy. In fact, I wrote about several mutual funds with exposure to the country just two weeks ago.

Happily, NGE’s arrival on the scene has made that post a moot point.

Here’s why.

First, NGE gives you a pure play on the Nigerian stock market very cheaply. How cheaply? Its expense ratio is a mere 0.68%. Compare this to the other funds with significant Nigerian holdings.

Not Too Much 0f That Oily Feeling

Second, NGE’s portfolio is nicely skewed toward assets that stand to benefit from the growth of Nigeria’s consumer economy.

Less than 25% of the index is invested in oil and gas companies. The remainder is invested largely in banking (45%), consumer goods (25%), and cement (6%).

Here’s a brief introduction to the ETF’s ten largest holdings.

1. Guaranty Trust Bank (GUARANTY:NL) – Weight: 10.0%

Nigeria’s largest bank stock just reported earnings growth of 69% on the back of double-digit loan and deposit growth. Now it has its sights set on East Africa. The CEO this month announced its intention to enter the Kenyan, Tanzanian, and Ugandas markets via the purchase of a profitable small to mid-tier local bank.

2. First Bank of Nigeria (FBNH:NL) — Weight: 9.9%
Who’d have thunk that a Nigerian bank with a nearly 120-year history would be one the Nigerian Stock Exchange’s most dynamic stocks? Shares of FBN, which boasts the country’s largest branch network, have gained 135% in local currency over the past 12 months.

3. Zenith Bank (ZENITHBA:NL) — Weight: 8.1%
Shares of this fast-growing lender have just hit the London Stock Exchange in the form of Global Depository Receipts. In spite of it hitting a four-year price record, Zenith shares still trade for just a little more than seven times earnings.

4. Nigerian Breweries (NB:NL) — Weight: 7.4%
This affiliate of Heineken is Nigeria’s largest beer-maker. Earnings were flat in 2012 due to an expensive expansion strategy.

5. Access Bank Nigeria (ACCESS:NL) — Weight: 4.6%
It may be substantially smaller than GTBank, FBN, and Zenith, but Access is definitely a bank to watch. It more than doubled profits this year and now trades at a P/E ratio of just 5.3 and sports a dividend yield of 8.6%.

6. Nestle Nigeria (NESTLE:NL) — Weight: 4.6%
This consumer goods giant is figuring out the best ways to get its products into the hands of lower-income customers. The upcoming earnings report sounds as though it might disappoint some people, but the stock is up nearly 140% over the past 12 months.

7. United Bank for Africa (UBA:NL) — Weight: 4.5%
Yet another bank. This one has a larger geographic footprint throughout sub-Saharan Africa and has tripled its share price over the past year.

8. TGS-NOPEC (TGS:NO) — Weight: 4.4%
This Norway-listed firm provides geological data to oil and gas exploration companies, some of whom have substantial interest in Nigeria. To be honest, I’m not entirely sure why this company merits such a heavy weight in this portfolio.

9. Subsea 7 (SUBC:NO) — Weight: 4.4%
Another Norwegian company that caters to offshore oil drillers, Subsea 7 specializes in the maintenance and refurbishment of oil rigs. This company’s inclusion in the index also seems odd.

10. Saipem (SPM:IM) — Weight: 4.2%
An Italian oil drilling firm that does a significant amount of work off the Nigerian coast.

Other significant ETF holdings include Guinness Nigeria, Dangote Cement, and Unilever Nigeria.

Is It a Game-Changer?

The Global X Nigeria Index ETF presently trades at a premium of roughly 3% to the value of its underlying portfolio, but in my view this is a small price to pay for taking the hassle out of opening a Nigerian brokerage account.

Sub-Saharan stock markets are hitting the world stage. These are exciting times.

[Disclosure: I have a beneficial interest in shares of Guaranty Trust Bank and Zenith Bank through my work with Africa Capital Group.]

Tombleson began by apologizing for being late. It was two days after Kenya’s general election, and Safaricom, which had been contracted by the electoral commission to transmit the ballot results, was trying to put out a fire related to the delayed vote count. He assured us the failure was not Safaricom’s fault and that they were just trying to get ahead of the story, in order to avoid negative publicity.

It was interesting to get an inside look at the nuts and bolts of the democratic process. I was a little surprised he even showed up for the meeting, considering how much was at stake for Safaricom that day.

It Ain’t Easy Being King

Safaricom owns Kenya’s wireless market with a 78% market share and the nation’s largest 3G network. Its closest competitors are Airtel with 12% of the market, YU at 6-9%, and Orange at 1%.

It wasn’t easy for the company to win such a dominant position. Airtel slashed its prices to loss-making levels in a bid to capture a larger share. Safaricom opted not to match its competitor’s unprofitable pricing schemes. This decision resulted in them losing some customers, particularly in the value and mid-tiers of the market, where revenue per user is less than KES500 (roughly $6.00) per month.

But the strategy ultimately paid off. Airtel was forced to raise its rates to a sustainable level, and Safaricom is happy with its new customer mix, which includes a greater proportion of higher-revenue clients.

The brutal price competition also forced Safaricom’s counterparts to burn cash to subsidize their low rates, which prevented them from reinvesting in their transmission networks. This allowed Safaricom to further strengthen its technological advantage.

Jan Schalkwijk, CFA, Portfolio Manager at Africa Capital Group

To the Victor Go the Spoils

Tombleson believes that the price war  is mostly over, and that the market has reached a cyclical bottom with calling rates at four shillings (five US cents) per minute.

The company pays out 85% of its free cash flow as dividends, and the expectation is that dividends will increase meaningfully. They plan to invest KES10 billion ($120 million) to expand their fiber-optic network. A previous foray into fiber resulted in frequent disruptions because the cable wasn’t laid deep enough and people were digging into it.

Not Resting On Its Laurels

M-Pesa, the system that revolutionized mobile payments in Kenya and beyond, is not capital intensive for Safaricom, but the company has to pay 10% of revenues to Vodafone (VOD:US) (its largest shareholder), which runs the system’s technological backbone. Safaricom is planning to take this job on themselves going forward, which should increase profitability, though there would be some operational risk if they can’t deliver the same level of service.

M-Pesa has now spawned M-Shwari, which is the same concept but adds mobile banking services such as the provision of credit. This new service is delivered in partnership with the unlisted Commercial Bank of Africa (CBA).

Photo by Erik (HASH) Hersman

Happily Ever After?

The prospects appear bright for Safaricom. Though their market share can’t grow much per se, the demographics are favorable as a bigger crop of Kenyan teenagers reaches cellphone-using age every year.

One should also keep in mind that the shadow economy is not accounted for in Kenyan employment and GDP statistics, but it’s a strong source of demand for cellphones.

Additionally, through its extensive independent dealer network, Safaricom’s reach is extensive and future growth can be easily scaled. And any worries about Safaricom’s size making it prone to government interference should be tempered by the fact that the company pays 5% of all taxes in Kenya and the government is not likely to kill the goose that lays the golden eggs.

All told, this looks like a company set to dial up profits.

What Do You Think?

How profitable do you think Safaricom will be in future years? Are you a Safaricom customer or M-Pesa user? What do you like best about the company? And the least?

[Disclosure: Neither Jan Schalkwijk nor Africa Capital Group have a beneficial interest in any stock mentioned in this article.]

Related Posts

Ranking Africa’s Best Telecom Stocks
Afrinvestor’s Journal: Witnessing the Kenyan Election
Hitch Your Investments to Africa’s Demographic Freight Train

It was definitely worth the wait.

Among African stock exchange websites, the ZSE has, in my view, moved from worst to first.

Here are a few of my favorite features:

1) It’s got a huge amount of price and trading data.
The new site posts a daily price sheet, which is more than some African websites can claim. But it doesn’t stop there. It also highlights the days biggest gainers and losers, and even shows you which stocks are most popular with foreign investors. Even more impressive are the customizable price charts for each stock.

2) It boasts a huge library of downloadable financial reports for listed companies.
Are you researching a potential investment in Zimbabwe? Make sure to read through its annual report and most recent results first. You can find them all on ZSE’s website by clicking on each company’s document archive.

3) It compiles some helpful ratios and fundamental financial data.
The ZSE now shows P/E ratios, P/B ratios, and financial statement extracts. It looks very much like something you would see on Bloomberg.com or Yahoo! Finance. This will obviously require a lot of maintenance to keep current. Hopefully, ZSE’s management is committed to doing so, as it is a huge service to investors looking to screen the field of potential investments.

4) It clearly outlines the costs involved with trading.
You can find the complete fee schedule here, which breaks down trading costs by line item.

5) There’s a really nice page outlining taxation in Zimbabwe.
Everything most stock investors would want to know about the country’s tax regime is helpfully explained.

6) The site’s fast, got a clean look, and is relatively easy to navigate.
I’m impressed by how quickly the website loads, and the drop-down menus in the navigation bar organize a huge volume of information in an accessible way.

Photo by Ismail Mia

7) It’s in beta so still open for suggestions!
Perhaps the nicest thing about the new website is that the designers acknowledge that it is a work-in-progress. The site clearly notes that it is still in beta, and it includes a form for users to submit suggestions for making it more useful and user-friendly.

In light of the above, here are a few suggestions for making the site even better.

• I would like to see a bit more detail on how to open a brokerage account and begin trading shares. Currently, this information is touched on in the FAQ, but readers are directed to brokers for instructions on how to open an account. It would be helpful if the ZSE walked step-by-step through the process of opening an account (required forms, disclosure of personal information, account minimums, etc), described the process of how a trade is actually executed (placing an order, settlement), and discussed how to collect dividends and (for international investors) how to repatriate funds.
• It would be terrific if the site would keep track of the current dividend yield for each stock. It looks like this is in process, but I’m an impatient sort of guy.
• Finally, the navigation menu is pretty intuitive, but the drop down menus could stand for some consolidation. I know that this is easier said than done, and my own website is no model citizen in this regard, but the “Market Data” menu is a bit overwhelming and drops all the way off the bottom of my laptop’s screen.

Who’s Next?

Those small quibbles aside, kudos to the ZSE and the developers for putting together such a useful site. You’ve really raised the bar.

Now, which exchange will rise to this new precedent? Namibia? Ghana? It’s your move.

Related Posts

Grading African Stock Exchange Websites
The Nigerian Stock Exchange Website Ups Its Game

As the plane began its descent into Nairobi the evening of March 5th, I struck up a conversation with the KLM flight attendant. I always enjoy the opportunity to speak a little Dutch, which is not a daily occurrence for me these days.

As part of the usual small talk, I asked her where in Nairobi the flight crew was staying. She replied that KLM security had advised them to stay at the airport this time in light of security concerns surrounding the elections that had been held the day prior.

It was then that I mentally connected the news articles I had been reading about the Kenyan elections with the reality of being there, at ground zero of what could either be a repeat of the 2007 election violence or something more hopeful: a watershed moment for Kenya — a peaceful transition of power.

Was I foolish or naive to be here at this moment? Perhaps. Yet, I felt a strong desire to be in Kenya now, not later, to get an on-the-ground sense of the forces of change, the reactionary headwinds, the energy of the economy, and the level of optimism of the Kenyan people.

Yes, I was glad to be in Kenya.

An Uncharacteristically Quiet Nairobi

Once I had identified my driver, we were off to Nairobi. In a city usually consumed by grueling traffic jams into the late hours of the night, I was struck by how quiet it was. In fact, I was wishing it was a little busier, so my driver would have to slow down a bit and tone down the joyride experience.

He was equally surprised, and said he had never seen it this quiet. Because of the elections people had left town in great numbers, to vote in the towns and villages from where they had migrated, or just to be in the safe confines of their communities of origin. Of those who remained in Nairobi, many had taken time off from work to see what the next few days would hold.

Jan Schalkwijk, Portfolio Manager at Africa Capital Group

We arrived in New Muthaiga, a wooded, residential neighborhood west of town, sprinkled with embassies, and the home base for UN personnel, with their SUVs and red license plates. I had booked a stay in a private residence I had found through AirBnB.com, which I use frequently when abroad. Besides the obvious benefit of saving 75% off the price of a nice hotel room, I like to travel in this manner, as it affords me the opportunity to share meals with my hosts and to see the region from the local perspective.

Open for Business

Once day broke I was eager to tackle the assignment at hand: to visit a number of publicly traded Kenyan companies and to get a sense of the economy and the way forward post-election.

The broker that was taking me around to meet with the various companies was Kestrel Capital. Though most brokers can deliver a meeting or two, the quality and number of meetings they were able to arrange and their hospitality made a very good impression.

Furthermore, traffic was still light and continued to be so for the remainder of the week, making the otherwise taxing effort of shuttling between meetings a breeze. The only hassle was the increased security, which I was told has been in place ever since the Kenyan army entered Somalia.

Despite the stepped up security presence, it didn’t feel tense, and the security guards were generally friendly and not too worried to see me show up at their gates. So once I was re-adjusted to the sight of AK-47s – ubiquitous throughout much of Africa – and proficient with the procedure of taking out my laptop and recording the serial number on the sign-in sheet, it was business as usual.

Investors Welcome

Over the course of the next seven days, I met with a number of companies in industries ranging from telecom, banking, and infrastructure, to private equity and media. The meetings were always with senior management and always lasted until I started feeling guilty that 60 to 90 minutes had passed and no one had given any indication that the meeting needed to be wrapped up.

As I sat down with the CFO of Safaricom (SAFCOM:KN) for an hour plus, I realized how hard it would be to pull something similar off in New York with the CFO of Verizon (VZ:US).  Any perceived informational disadvantage in the analysis of companies traded in Africa versus those in a mature and data rich markets like the US is mitigated by the access one gets to senior management, their willingness to talk to you, and generally the less complicated nature of their businesses.

Election graffiti in Nairobi

An Anxious Wait for an Election Outcome

As the days passed, people were getting more anxious about the pending election results. Why was it taking so long? Why did the electronic vote counting break down? Television screens in office buildings, shops, and restaurants were all tuned to continuous election coverage.

As I left for Burundi to visit my sister the Friday after Monday’s elections, the results still had not been declared. Watching the TV screens at the airport, it appeared that Uhuru Kenyatta, the son of Jomo Kenyatta, Kenya’s first elected president, seemed to have a slight margin over 50%, the share needed to avoid a run-off.

As the district results came in, it was hard to avoid noticing that in each district one candidate generally had 90-99% of the vote. That would suggest that Kenyans are still very much divided along ethnic lines and not voting based on issues. Hopefully the new constitution and the increased direct participation, will gradually lead politicians to substitute the politics of ideas and results for the politics of ethnicity.

Grounds for Optimism in Burundi

Whereas Kenya was humming with economic activity and building upward and outward, Burundi is more reminiscent of the Africa that is familiar from the Western media: poor, agrarian, and little infrastructure. One has to be careful for mosquitoes and food-borne illnesses, and running water and electricity are both a luxury and unreliable. But even here, one would be hard pressed to not see the optimism, the desire to create a better life.

The growing capital city, Bujumbura, boasts breathtaking views of Lake Tanganyika with the mountains of DR Congo as a backdrop, and lush hillsides and tea plantations just outside of the city. The economy feels like an NGO driven one, with every place we visited teeming with expats.

But at the same time, billboards with cellphone advertisements, banks, and restaurants are sprouting up left and right. The future holds great promise. It was during a car ride back from the cool mountain tops to the capital that I learned on Radio France Internationale that Kenyatta had been declared the winner in the Kenya elections.

Burundi

Post-Election Kenya Gets Back to Work

Once back in Kenya, Nairobi seemed to be at peace with the election results and eager to move on. The people I spoke to, granted they were likely Kenyatta supporters, felt that the Supreme Court challenge by his main rival Raila Odinga would run its course but was doomed to fail and that Kenya was ready to move on.

Whether the post-election era of Kenya is the dawn of a new era or a consolidation of power, time will tell. I could, however, empathize with the desire to move on and to not dwell on 2007 and the ghosts from years past.

I was also fortunate to get a chance to visit East Nairobi, which is usually not where the brokers will take you. I felt like I had been miniaturized and dropped off near a giant anthill. The scene was utterly chaotic, full of energy, and everyone was laboring at something. Welding pipes together, making a bed frame, selling building blocks, transporting car parts in a wheelbarrow, an endless road, with endless activity.

I met a local businessman there who runs a factory that makes personal care products such as disinfectants, creams, hand sanitizers, etc. It was nothing like I had in mind. In a vacant lot next to the building, a pig was sorting through heaps of garbage. As we descended into the basement where the factory was, a small team of workers was mixing, bottling, and labeling some sanitary product for shipment. In spite of the gritty surroundings, the bottles looked immaculate and my host was enthusiastically showing me around and sharing his vision for growth.

The East Nairobi that I saw is the economy that hardly shows up in the official GDP tallies, that is not accounted for in the 40% unemployment number, but that definitely generates income, buys cellphones, real estate, food products, etc. One would be mistaken to assume the official economy is the sum total of Kenya’s economic activity. In fact, the East side feels rather powerful in that regard.

A Farewell Safari

With some time to spare on my last day, I paid a visit to the National Park. I imagine decades ago the city and the park were some distance from each other, but today, the city reaches to its gates. It makes for the interesting experience of seeing wildlife against the backdrop of a city skyline. No need to sign up for a safari; just ask your driver to take you there and drive into the park and if you have a hard time finding the animals, just follow the Jeeps from Kenya Wildlife Services (KWS).

The wildlife is best spotted at dawn and dusk. I was there in the middle of the day, yet was fortunate to spot plenty of giraffe, buffalo, gazelle, and even a hippo that surged out of a swampy body of water, just as I was contemplating getting out of the car (I subsequently changed my mind). My driver – I would guess in his mid-fifties – had never been inside the park, which struck me as odd and was the topic of some friendly laughter and joking around, during our drive.

As I thought more about it later, I realized that on a trip to Long Island years ago, I was stunned to learn during a business lunch that half my table had not been to New York City in over a year and some had never visited the Empire State building. Perhaps we are not that different after all.

[Jan Schalkwijk is a Portfolio Manager at Africa Capital Group.]

Thanks to a raft of reforms and a growing realization of the investment opportunities in Africa’s most populous nation, the MSCI Nigeria Index is up 78.6% over the past 12 months.

And this bull run looks like it may have some real legs. The market remains well below its five-year high. The five largest companies on the exchange have an average P/E ratio of 15.4 in spite of them averaging earnings growth of 40.6%. And 23 foreign portfolio managers are poised to dive into the market.

I’m guessing some of you would like to do the same. Unfortunately, the market isn’t as easily accessible as its larger counterpart in Johannesburg. So how exactly can a non-resident invest in Nigerian stocks?

Investing in Nigeria via ETFs and Mutual Funds

The simplest entry point for most US-based investors is through an ETF. This is as easy as buying any other stock listed on the NYSE or NASDAQ. The downside is that your exposure to the Nigerian market will be limited the weight given to it by the ETF’s portfolio manager. The majority of these funds’ holdings are not Nigerian, so you’ll want to take a close look to see if the portfolio as a whole fits with your investment strategy.

Here are some ETFs and mutual funds with significant Nigerian exposure along with their major Nigerian holdings.

Nile Pan Africa Fund (NAFAX)
Nigerian Weight: 38.07%
Key Nigerian Holdings: Nigeria Treasury Bond, Guaranty Trust Bank, Zenith Bank, UAC of Nigeria, FBN Holdings

Market Vectors Africa Index ETF (AFK)
Nigerian Weight: 24.61%
Key Nigerian Holdings: Guaranty Trust Bank, FBN Holdings, Zenith Bank, Nigerian Breweries, United Bank for Africa

Wasatch Frontier Emerging Small Countries Fund (WAFMX)
Nigerian Weight: 18.90%
Key Nigerian Holdings: Nestle Nigeria, Nigerian Breweries, Unilever Nigeria, Cadbury Nigeria

Photo by World Bank

HSBC Frontier Markets Fund (HSFAX)
Nigerian Weight: 12.90%
Key Nigerian Holdings: FBN Holdings, Guaranty Trust Bank, Zenith Bank, Nigerian Breweries, Nestle Nigeria

iShares MSCI Frontier 100 Index (FM)
Nigerian Weight: 12.58%
Key Nigerian Holdings: Nigerian Breweries, Guaranty Trust Bank, Zenith Bank, FBN Holdings, Guinness Nigeria

Harding Loevner Frontier Emerging Markets Portfolio (HLMOX)
Nigerian Weight: 12.00%
Key Nigerian Holdings: FBN Holdings, Access Bank, UAC of Nigeria, Diamond Bank, Dangote Cement

T. Rowe Price Africa and Middle East Fund (TRAMX)
Nigerian Weight: 11.67%
Key Nigerian Holdings: Zenith Bank, Guaranty Trust Bank, Nestle Nigeria, Nigerian Breweries, FBN Holdings

Templeton Frontier Markets Fund (TFMAX)
Nigerian Weight: 9.66%
Key Nigerian Holdings: FBN Holdings, Zenith Bank, Guinness Nigeria, United Bank for Africa, UAC of Nigeria

Investing in Nigeria via US-listed Stocks

ETFs and mutual funds aren’t your style, you say? Well, if you’d like a bit more control in exactly what sorts of Nigerian assets you invest in, but don’t want to hassle with opening a new brokerage account, consider the following three options. All can be purchased via a US discount broker.

Coca-Cola Hellenic Bottling Company (CCH:US)
One of the world’s largest Coca Cola bottlers, CCH owns the Nigerian Bottling Company, Nigeria’s only authorized Coca-Cola distributor. Nigeria accounts for 8.7% of the group’s total sales volume. Its Coke sales increased 13% during the fourth quarter of 2012.

MTN Group (MTNOY:US)
Africa’s leading wireless telecommunications company derived 28.6% of its 2011 revenue from Nigeria. And look for this share to increase. The firm operates in more than 20 countries, but it will invest $1.5 billion in Nigeria on new cellular towers in 2013, a sum that represents almost half of its total capital expenditure for the year.

Aviat Networks (AVNW:US)
Aviat makes the equipment that’s required by wireless companies wishing to upgrade their 2G and 3G networks to 4G. Given that Africa’s wireless data usage is forecast to expand 790% by 2017 and that Aviat is a preferred provider to MTN, we should see Nigeria’s 21.3% share of the company’s revenue expand significantly.

[Note that there are also lots of US oil companies that do significant amounts of business in Nigeria, but I've excluded them because extractive industries are not the focus of this blog.]

Investing in Nigeria via the London Stock Exchange

If you have access to the London Stock Exchange, perhaps via an ETrade or Interactive Brokers account, you have a few more targeted options open to you.

PZ Cussons (PZC:LN)
PZ Cussons makes all sorts of consumer goods; soaps, detergents, pharmaceuticals, even refrigerators and air conditioners. The company has a long history in Nigeria, where it collects roughly 33% of its total revenue. It recently wound up construction on a new palm oil refinery in the country, a nice step toward vertical integration which should begin paying dividends immediately.

Guaranty Trust Bank (GRTB:LI)
Here we have a pure play. Nigeria’s largest bank in terms of market capitalization trades as a Global Depositary Receipt (GDR) on the London Stock Exchange. It’s big but growing fast. Merrill Lynch analysts expect revenues to increase 17% this year and 21% in 2014.

Diamond Bank (DBPA:LI)
This up and coming Nigerian bank has made a name for itself by focusing on small and medium-sized enterprises and an active retail banking segment. Unfortunately, the Sahel is more liquid than its GDR. Worth keeping an eye on, but if you’re dead set on buying the stock, you’ll likely need to open a local brokerage account.

Zenith Bank (ZENB:LI)
The newest Nigerian GDR, Zenith Bank boasts the second-largest market share of the banking sector. It’s growing extremely rapidly. Earnings are up approximately 50% through the first nine months of the 2012 fiscal year, yet the GDR trades at eight times trailing earnings and yields 4.5%.

Investing in Nigeria via the Nigerian Stock Exchange

Finally, if you’re an expert level Africa investor and/or ready for a little adventure, you can invest directly on the Nigerian Stock Exchange via a local brokerage account. I won’t walk through the steps of opening a Nigerian trading account in this article, but you can find them here.

It’s Your Turn

Do you know of other ways to invest in the rapid growth of Nigeria’s consumer economy? Let us know in the comments!

[Disclosure: I have a beneficial interest in Guaranty Trust Bank and Zenith Bank through my work with Africa Capital Group.]

They generate income for shareholders. They typically boast sharp management teams. And, historically, their shares have outperformed their non-dividend-paying counterparts.

The Nairobi Securities Exchange is chock full of dividend stocks. Almost all companies listed on the market presently pay a dividend.

But not all dividend stocks are created equal. Some don’t yield much in relation to their price. Others pay out so much of their earnings that it hampers their future growth. And some disappoint shareholders with frequent dividend cuts.

So, which Kenyan stocks offer the most substantial, reliable, and growing income stream?

Let’s take a closer look.

1. High Yield

We’re going to start by looking at dividend yields. This is simply the most recent 12 months worth of dividends divided by its share price.

Dividend Yield = Dividend per share over preceding 12 months ÷ Current share price

So, a dividend yield is a bit like the yield of a bond, but unlike bond payments, dividends can (and should) grow as years go by.

Here are some of the highest-yielding Kenyan stocks:

Stock	Ticker Symbol	Dividend Yield
Mumias Sugar	MSUG:KN	10.42%
East African Cables	EACL:KN	7.67%
B.O.C. Kenya	BOCK:KN	6.80%
Sasini	STCL:KN	6.05%
Barclays Bank of Kenya	BCBL:KN	5.81%
British American Tobacco - Kenya	BATK:KN	5.70%
Pan Africa Insurance Holdings	PAIL:KN	5.56%
REA Vipingo Plantations	RVPL:KN	5.18%
Sameer Africa	SAME:KN	5.10%
Unga Group	UNGL:KN	5.03%
Carbacid Kenya	CBIL:KN	5.00%
KCB Bank Group	KNCB:KN	4.81%
Bamburi Cement	BMBC:KN	4.59%
Kakuzi	KKZI:KN	4.41%
KenGen	KEGC:KN	4.33%
Equity Bank	EQBNK:KN	4.00%

2. Payout Ratio

A great yield is nice but if a company can’t afford to continue paying it when times get tough the value of the stock is less than it might seem at first glance.

The payout ratio is one way to measure the security of a dividend. It shows us what percentage of earnings a company pays to shareholders in the form of dividends and how much it keeps for a rainy day or to re-invest back into the business.

To calculate it, we simply divide dividends per share by earnings per share.

Payout Ratio = Dividends per share ÷ Earnings per share

The lower the ratio, the more likely it will be for the company to continue paying the dividend at the same level or higher. A high payout ratio, on the other hand, may indicate a dividend in danger of being cut.

The chart below shows the current payout ratios for Kenya’s highest-yielding stocks.

Stock	Ticker Symbol	Payout Ratio
Kakuzi	KKZI:KN	13.3%
REA Vipingo Plantations	RVPL:KN	17.4%
Mumias Sugar	MSUG:KN	37.9%
Equity Bank	EQBNK:KN	38.3%
Unga Group	UNGL:KN	38.3%
Pan Africa Insurance Holdings	PAIL:KN	43.3%
KCB Bank Group	KNCB:KN	46.2%
KenGen	KEGC:KN	46.9%
Carbacid Kenya	CBIL:KN	52.4%
East African Cables	EACL:KN	57.5%
Barclays Bank of Kenya	BCBL:KN	62.1%
Sameer Africa	SAME:KN	63.4%
Bamburi Cement	BMBC:KN	86.3%
B.O.C. Kenya	BOCK:KN	88.2%
Sasini	STCL:KN	91.5%
British American Tobacco - Kenya	BATK:KN	98.5%

When I screen stocks, I typically consider a payout ratio above 60% to be a warning sign of a stagnating dividend, or potentially one in danger of being reduced. There are six stocks in the above chart with payout ratios in that territory. Let’s remove them from our list and move on to the next item on our Dividend King checklist.

Photo by Travis S.

3. Dividend Cuts

While the payout ratio is a fairly good indicator of a possible dividend cut, it tends to overlook companies whose policies dictate that dividends be maintained at a fixed percentage of earnings.

This is why I also like to see whether a company consistently pays a dividend and whether it has cut its dividend at any point during the most recent five years.

The chart below shows exactly this.

Many income investors can’t abide dividend cuts, and for the purpose of this article, neither can I. Any company that has cut its dividend over the past five years (or hasn’t paid one each year) isn’t fit to be a dividend king.

4. Dividend Growth Rate

Ideally, companies will increase the size of their dividend in line with earnings growth as years go by. This can make such stocks a fantastic source of income. Suppose you bought KES10,000 worth of a stock that traded at a dividend yield of 4.00%. And suppose that stock increased its annual dividend at a rate of 15% per year for five years. At the end of those five years, the yield on your original KES10,000 investment will be equivalent to 800 shillings per year or 8.00% annually. And the value of your shares will have likely doubled, too!

The formula for calculating a dividend’s five-year growth rate is a little complicated, but I’ll write it here for you number crunchers.

Growth Rate = (Most Recent Dividend ÷ Dividend Five Years Ago)^(0.2) – 1

Or you can also use this handy online calculator.

So, which Kenyan stocks pay a high, safe, and growing dividend yield? Check out this chart.

I generally like my investments to grow at a rate of at least 15% per year. An investment with this rate of return will double in value every five years. If we use this as our hurdle rate, only two stocks make the cut – Equity Bank and KCB Bank Group. In my view, they are Kenya’s Dividend Kings.

What Do You Think?

How important are dividends to you? What criteria do you use when deciding whether to add a dividend stock to your portfolio? Let us know in the comments!

The MSCI Ghana Index has soared of late. It’s now 37% higher than it was at the beginning of the year. Think about that. That’s 37% in just over two months!

Making the surge all the more impressive is the fact that the Ghana Cedi depreciated against the US Dollar by over six basis points during the same time period.

To figure out what’s behind Ghana’s bull run, I enlisted the help of my friend, Harrison Tettey-Fio.

Harrison Tettey-Fio

Harrison Tettey-Fio, Snr. Securities Officer, Standard Chartered Bank – Ghana

I attribute the market’s performance to two factors.

First would be the listed companies’ stellar operating performance during 2012. Of the 16 companies that have reported 2012 results so far, only one has recorded a loss. This has generated a lot of interest; especially in banking stocks, which drive much of the trade volume on the GSE.

The second factor is the implementation of pension reforms which have resulted in more pension fund assets being allocated to Ghanaian equities.

Combine these two factors with the limited float available on the market, and you have a recipe for strong performance.

Let’s dig a little deeper to see which stocks have done the most to drive the market higher. The following is a countdown of the top seven performing Ghanaian stocks and their US Dollar-adjusted gains.

7. CAL Bank (CAL:GN) +41.2% (P/E Ratio: 3.9, DivYield: 4.9%)

Shares of this mid-tier bank exploded to a four-year high after it announced 2012 earnings that far surpassed local analysts’ expectations. Net income more than tripled on the back of a 106% increase in net interest income.

A dramatically larger lending book propelled the earnings growth. This bears watching because loans to customers now outstrip customer deposits, which means that interest margins will likely be under pressure going forward. Having so much of its asset base tied up in loans also raises concerns about the bank’s liquidity. Bulls will note, however, that the non-performing loan ratio has dropped to an impressive 5%.

6. Ghana Oil Company (GOIL:GN) +42.6% (P/E Ratio: 18.7, DivYield: 1.5%)

It’s not an oil driller, but this operator of Ghana’s second largest network of fueling stations sure did hit a gusher in 2012. The company recorded earnings growth of 32% thanks to a 30% sales increase.

GOIL’s newly appointed CEO has led a renewed push into the ship and aviation fueling markets in addition to carrying out a well-received re-branding exercise.

5. SG-SSB (SG-SSB:GN) +44.9% (P/E Ratio: 15.2, DivYield: 5.6%)

A subsidiary of France’s Societe Generale, this bank also crushed its previous year’s results. Earnings soared 34% on a 50% increase in lending and a 37% larger deposit base. Tech upgrades and cost efficiencies resulting from a new centralized office should keep profitability strong in the years ahead.

4. FAN Milk (FML:GN) +46.4% (P/E Ratio: 22.5, DivYield: 3.8%)

One of my personal favorites, this ice cream purveyor delighted shareholders with an earnings gain of nearly 44% for 2012.

I mean, really, what’s not to like about a company that employs at risk youth on bicycles to sell frozen treats to a population with rising income in a place as hot and humid as Accra? Oh, did I mention that the company has zero long-term debt and churns out wads of cash?

More, please.

3. Ghana Commercial Bank (GCB:GN) +46.7% (P/E Ratio: 9.2, DivYield: 2.3%)

Ghana’s most ubiquitous bank celebrates its 60th anniversary this year and has fittingly posted blowout stock price gains to mark the occasion.

Thanks to a recent development that freed up a huge chunk of the bank’s assets that had been previously been tied up in an ill-fated loan to the Tema Oil Refinery, GCB is back in the lending business. Over the most recently reported 12 months, it nearly doubled its loan book.

Much of the new lending has been directed to the retail sector, specifically government workers who comprised the bulk of GCB’s customer base and were recently awarded a 20% pay increase.

2. Ecobank Transnational (ETI:GN) +49.1% (P/E Ratio: 5.3, DivYield: 4.3%)

Photo by Adam Cohn

Shareholders of ETI, Africa’s largest bank in terms of geographic footprint, cheered its 48% profit boost through the first nine months of 2012. But that might be only the start of the fun.

CEO Thierry Tanoh recently announced that he expects customer deposits to grow 20% in 2013 as the bank rolls out its operations throughout the Sub-Sahara. He also forecast annual revenue gains of 15% between now and 2015. That’s not bad for a company that trades at a paltry 5.3x trailing earnings.

Looking for exposure to ETI but don’t have a Ghanaian brokerage account? Consider the South Africa-based NedBank Group (NDBKY:US), which holds the rights to a 20% stake in the company.

1. Benso Oil Palm Plantation (BOPP:GN) +78.9% (P/E Ratio: 6.6, DivYield: 2.7%)

I remember being at a complete loss as to what an “oil palm” was when I first came across this company. Palm oil, it turns out, is an edible oil and an increasingly popular substitute for trans-fats. It also serves as a decent biodiesel.

BOPP shares soared when its parent company, Wilmar International, announced that it would soon open West Africa’s second-largest palm oil refinery in Ghana. The development should widen BOPP’s profit margins.

In spite of its nearly 80% price gain, the stock still trades at less than seven times trailing earnings.

Are You a Ghana Bull?

So, the Ghana bourse has had quite the run-up, but, as we’ve seen many of them still trade at attractive valuations. Do you invest in Ghana? If so, let us know what you think the remainder of the year holds in store in the comments!

[Disclosure: I own shares of FAN Milk, Ghana Oil Company, and Ghana Commercial Bank.]

Related Articles

How to Invest on the Ghana Stock Exchange

Ranking Ghana’s Best Banks

Investing In Ghana’s Booming Banks

It’s easy to understand why.

Violence following the 2007 poll left hundreds dead, thousands homeless, and temporarily derailed the region’s economic development.

The presidential contest pits the Jubilee Coalition’s Uhuru Kenyatta, the son of Kenya’s first president, who faces war crimes charges at the International Criminal Court (ICC), versus CORD’s Raila Odinga, the nation’s current prime minister who has been accused of corruption relating to a state-owned molasses plant.

Polls indicate the race is neck and neck and could be pushed to a second round of voting if neither candidate receives a majority of the vote the first time round.

Photo by Kevin Walsh

The World Bank estimates that Kenya’s economic growth will reach 5.0% this year if the elections come off peacefully. But if post-election tumult erupts once more, that rate is forecast to brake to 3.0%.

Given the stakes for the Kenyan people, I approached a number of market watchers with boots on the ground and asked them what they expected to transpire. Do they expect the poll to be peaceful and did they care to speculate on the outcome?

Here’s their take:

Samuel Gichohi

Samuel K. Gichohi, Business Development Manager, NIC Securities

I do expect a free and fair poll on Tuesday! The Kenyan population seems to have realized that the fight is between the candidates and this has been the dominant agenda in voter education. Voting patterns are now shifting towards issues. Hate speech has been non-existent this time round, and this will help to ease tensions. Most leaders now know that the ICC is watching us very closely this time round.

Moreover, the  necessary institutions have been put in place and the electoral commission is not in dispute as was the case in 2007.  We also have a new voter register which will weed out ghost voters and rigging claims while the reformed judiciary has created a credible avenue for recourse.

One important factor of note is that investors have continued to drive a bullish market up to one week before the election which is an indication of confidence since the market is a thermometer of investor sentiment.

Alistair Gould

Alistair Gould, Head of Trading, Old Mutual Securities

I’m very optimistic about the upcoming election. Kenya has grown considerably from our last election, and I believe that all concerned persons, whether politicians or voters, have learnt from the 2008 experience.

Kenya is poised for great growth at the moment. And while the election race is tight and too close to call at the moment, we are at a very defining time in our history, and I believe the greater good will prevail. As a democracy, the strides we have taken over the past five years have brought us a long way forward, and I believe that we shall see a free and fair election this time round. Security around the country has, naturally, been heightened, and we are not likely to see any substantial violence.

Kimathi Ikiao

Kimathi Ikiao, Senior Investment Analyst, Industrial and Commercial Development Corporation

I am very optimistic that the upcoming election will be fair and peaceful. Immense resources have gone into educating the public on the electoral process, and the need for accepting the outcome of the election results. As such, the country is far from being as polarized as it was at the last election when the cracks were evident not only in the streets but in virtual (online) communities as well.

I happen not to have been in the country during the last election but closely monitored the proceedings online. This time around, the online community forums show an increased sense of maturity and tolerance of opposing view points which is a real reflection of the general public’s approach to the elections.

Mika Davis Mtonga

Mika Davis Mtonga, Founder, Contrarian Investing Kenya

The voting process should be peaceful, but overall it depends on how contestants handle the outcome of the elections. I think that’s the biggest unknown.

The outcome will depend on the voter turnout in each of the contestants strongholds and how they perform in swing regions. Overall, I expect a run off or an upset from Jubilee.

Francis Mwangi, CFA

Francis Mwangi, CFA, Head of Research, Standard Investment Bank

I believe the electoral body has taken adequate measures (ie. investor education and the streamlining of the results submission process) to ensure fairness prevails.

On peacefulness of the process, this time around there are numerous campaigns by churches, government, media, churches and NGOs. Though the anxiety is mounting, now that we are only have six days to go, it feels different as in 2007 there was more tension than anxiety.

While I sound optimistic, the key negative that comes to mind is the lack of compliance to set rules by the electoral commission. During the party nomination process (primaries), the rules were clear that anyone who did not secure nominations on the original party ticket would not be allowed to move to other parties. The electoral body failed to enforce this, raising questions on their independence.

Daniel Chege Ndung’u

Daniel Chege Ndung’u, Portfolio Manager, Cannon Asset Managers

I am optimistic that the upcoming election will be fair and peaceful for four reasons.

1) Kenya now has a very elaborate and well structured new constitution which seeks to strengthen key institutions.

2) The government has undertaken many reforms which provide a platform for a fair and peaceful election. The police, election commission, and judicial institutions have been reformed in line with the new constitution.

3) Kenyan politics seem to have matured somewhat as demonstrated by the two presidential debates where issues were discussed.

4) The Kenyan people have learnt that violence and destroying each other does not help them as witnessed in after the 2007/08 election.

I would not want to speculate on the election’s outcome, but it seems that the Jubilee Coalition is gaining ground each day and is likely to come out tops. However, if there is a runoff, CORD will be at an advantage.

Johnson Nderi

Johnson Nderi, Head of Research, Suntra Investment Bank

We believe the elections will be free and fair because, even though there are strong undertones of tribalism, the competing coalitions are actually relatively heterogeneous. Civil society has also played a big role in ensuring things go smoothly.

Moses Waireri

Moses (Waireri) Njuguna, Senior Research Analyst, Genghis Capital

I’m very optimistic that these elections will be peaceful. The reason for this is we have a stronger and more powerful judiciary that has undergone restructuring and vetting. The Chief Justice actually sent representatives to Uganda so that they could learn how to hasten any election petition case – Uganda completes such a case in a time frame of about two weeks. Furthermore, the memories of 2007/8 post election violence is vivid in the minds of Kenyans who do not want to see a repeat of the same.

The risk is the unrest exhibited during the primaries especially in Nyanza providence, which could be a precursor of violence in that area. There are rumors that certain groups are arming themselves either with guns or machetes so any small spark could cause something way worse than 2008. But I believe with the 90,000+ police force who either have or will be dispatched will be able to quell any uprising.

What Do You Think?

What are your expectations for Kenya’s 2013 general election? Let us know in the comments!

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