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