Does Britam Kenya Still Have Room to Run?

British American Investments Company – Kenya (BRITAM) has made investors very happy of late. The stock is among the Nairobi Securities Exchange’s best performers this year, posting a dazzling 94.7% return.

Now the shares trade a shade below 2.5x their book value. Is that too rich a price? Or is there upside left here?

Let’s take a look at earnings (and Kenya’s long-term bond rate) to give us a clearer picture.

Britam Kenya: Room to Run?

British American Investments Company – Kenya (BRITAM) has made investors very happy this year. The stock is among the Nairobi Securities Exchange’s best performers, posting a dazzling 94.7% return.

Now the shares trade a shade below 2.5x their book value. Is that too rich a price? Or is there some upside left?

In order to answer that question let’s begin by taking a closer look at the business and how it makes money.

Insuring East Africa

While it does operate a small asset management business, Britam Kenya is, first and foremost, an insurance company. It sells everything from life insurance to fire, marine, and medical policies. Kenya is its primary market, but it also operates in Uganda, South Sudan, Rwanda, and Malawi. Over the past five years, the company has grown its net premium revenue at a 22.7% clip.

Like all insurance companies, it invests the cash that it receives from customers until it needs to pay it out in the form of claims or other expenses. This investment capital is known as float, and it’s where the real magic happens.

Britam invests its float in a combination of real estate, government securities, and stocks. It also owns a 21% stake in Housing Finance Company of Kenya (HFCK).

When these investments perform well, Britam becomes the virtual equivalent of a cash machine. Such has been the case over the past 12 months. After accounting for the change in fair value of all the company’s property and equity investments, the company generated comprehensive income of Ksh3.48 per share. That’s a 30.1% increase over the prior 12-month period.

Value Check on Britam Kenya

One way that I quickly assess the value of a stock is to imagine that the underlying company suddenly stops growing. Forever.

Britam Kenya: Room to Run?
Photo by Wayan Vota

What’s the most that I would be willing to pay for a stock if it continued to generate the same level of earnings per share in perpetuity?

In such a case, the stock’s earnings can be viewed very much like the interest payment on a long-term bond.

The stock’s earnings should “yield” as much as a long-term bond would. Otherwise, there’d be no point for me to buy the stock. Thus, the prevailing long-term bond rate is my required rate of return.

To illustrate, let’s assume that Britam’s growth stagnates. Year after year for the foreseeable future, it averages comprehensive income of Ksh3.48 per share.

To find out how much such performance would be worth, we can simply divide the annual earnings (Ksh3.48 per share) by Kenya’s 10-year bond rate, which currently hovers around 12%.

If we do so, we arrive at a value of Ksh29.00 per share.

Kshs3.48 / 0.12 = Ksh29.00

So, in the event that Britam’s earnings froze at current levels, investors who buy at a price of Ksh29.00 per share would realize a 12% annual return.

Priced for Stagnation

How does this calculated value compare to the current price of the shares on the Nairobi Securities Exchange?

Well, as of this writing, you can buy Britam for Ksh29.50 per stub. Interesting, huh? So, essentially, Britam is priced for zero earnings growth in perpetuity.

I’ll gladly take that bet.

Even if the company’s earnings were exceptionally high over the past 12 months, I’m guessing Britam, with its steadily rising premium income and a large investment portfolio (which it could simply invest at a 12% rate of return if it chose to), will find ways to grow earnings over the long-term.

Thus, for patient investors, the shares appear to offer value — even after nearly doubling in price over the past ten months.

What Do You Think?

I’d love to hear your thoughts on Britam Kenya. Am I too enthusiastic about its prospects? Or do you agree that it looks like a bargain? Share your take in the comments!

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13 thoughts on “Does Britam Kenya Still Have Room to Run?”

  1. I’m surprised that you based your conclusion on just one years’ eps. Arent we, as value investors, supposed to look further into the past to determine the business’ true earning power?

  2. Ok, i like your simple analysis but then when I checked their financial statements, I found that their returns especially on equity and assets, especially for a company that invests in real estate and had huge assets, is pretty low. In comparison to centum whose assets are almost twice less has a better return than that of Britam. May be you could give me a better understanding as regards to that issue.

  3. I like your analysis. It put everything on the table. It helps a lot of people make realistic investment judgement on Britam. Can you look at Kenol Kobil also.

  4. The portfolio at stake that cyton has grabbed cant be simply wished away (40b)
    Further the ability of BRITAM to manage BAAM is now critical from the exist of their key persons, not forgetting that this deals were sourced by the very same persons who now run cyton …this puts BRITAM at a very risky position on its future growth…

      1. this is true by the way it has not been booked. further lets be objective, this country Kenya is not short of talent. They can very well hire new guys who can analyse the property market, which is not rocket science by any standards, raise the funds internationally and hit the ground running.The only disadvantage they could have is that they are going to be held for sometime realigning things but once they get that right we will continue moving. Besides the acting CEO Jude Anyiko is a sharp brain as a matter of fact he was in charge of private equity at BAAM so it is not all lost. My loud thoughts!!!

  5. Ryan, I totally agree with you. Without adding much to that and am thinking your analyses is very ‘Prudent’ and does not consider some projects that are in the pipeline case in point the acquisition of Real Insurance and all the projects that Real had and that will generate income in the next one year or so. Ryan I agree with you totally but time will tell. All that I believe is that the value is immense.

  6. I bought a huge chunk of the Britam shares when I thought they were on an uphill climb… but the way things have been going for the past two weeks, I guess I made the purchases when the shares had hit their resistance point.

    It is however consoling to find this optimistic article. I will keep holding the shares.

  7. I wish I got into this stock when it was 10 bob. I jumped in late, when it was 29bob, it went to 37/- and didn’t sell, I was waiting for it to hit 45/- then sell, only for it to start dropping. Well, let it drop, i will buy more… Regards, Peter Oluoch,

  8. After reading about Brittam on the newspaper and the loss of 2.8 b i think this
    might end up like NYS problems and schemes going around…. where will the poor kenyans
    end to after working hard for their retirement… yet big grabbers are on the look???
    Is this not true that some are now opening a new branch?

    1. Hi Grace,

      Much of Britam’s recent earnings drop resulted from a drop in the performance of the NSE as a whole. I am, however, less excited about this company than I was when the article was first written because of revelations that its parent company, the Mauritius-based BAI, had essentially been running a Ponzi-scheme. There’s been no indication to date that anything untoward has been happening at Britam Kenya, but I am taking a cautious stance for the time-being.

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