Kenya’s KCB Bank Dials Up Growth with Mobile Loans

Over the past decade, Kenya has pioneered the convergence of financial services and mobile telephony. And Nairobi-based KCB is now beginning to reap the benefits.

Photo by Hugh Mitton
Photo by Hugh Mitton

Bid farewell to long lines at the teller window.

Brick and mortar bank branches will soon be going the way of the dinosaur.

That’s the message that KCB CEO Joshua Oigara delivered while presenting the regional bank group’s 2015 earnings results.

Over the past decade, Kenya has pioneered the convergence of financial services and mobile telephony. And Nairobi-based KCB is now beginning to reap the benefits.

A New Lending Platform

Historically, KCB disbursed roughly 200,000 new loans per year. Then along came mobile banking, and loan applications skyrocketed. The bank made nearly 4,000,000 new loans in 2015.

This works out to one new loan every eight seconds.

And the vast majority of these borrowers (94% to be exact) never even walked through a KCB branch door. They simply applied for a loan with a few keystrokes on their mobile phone, instead.

This remarkable growth was made possible by the bank’s heavy investment in technology over the past few years.

In 2012, the bank launched an in-house mobile banking platform (Mobi) and, last year, bolstered it through a partnership with Safaricom Mpesa, Kenya’s overwhelmingly popular mobile payment system.

KCB Mpesa and KCB Mobi combined delivered some $91 million worth of loans last year.

And these were small loans. Very small. Their average size was roughly $25-$30.

How is KCB able to manage to administer such small loans profitably? By pouring reams of Mpesa customer data into a proprietary algorithm capable of processing the risk of each loan applicant in a matter of milliseconds.

A Key Partnership

It’s difficult to overstate the importance of the bank’s Safaricom partnership.

In Kenya, nearly everyone with a mobile phone has an Mpesa account, and thanks to its convenience and security, it’s become fully integrated into its users’ financial lives.

Thus, KCB now has access to the earning profiles and spending habits of millions of potential customers that it otherwise wouldn’t have had access to.

This allows the bank to extend loans to people who previously wouldn’t have had a prayer of getting them.

A fruit seller, for example, who receives Mpesa deposits at the end of each market day can now demonstrate proof of income in a way that would have been impossible before, which boosts her creditworthiness.

The result is a 98.5% repayment rate at interest rates that range between 4% and 6% per month depending on the tenor of the loan. One month loans come with a nominal APR of 101%.

So, such loans are already making a significant contribution to revenue, but, more importantly, they allow the bank to reduce its costs.

Over the past five years KCB has reduced its cost-to-income ratio from 64% to 50%. By slashing the time required to process a loan from three days to just 60 seconds, mobile lending will help to further this trend.

Scratching the Surface

In aggregate, mobile loans currently represent a very small portion of KCB’s total lending book (roughly 1%).

But Oigara believes that the bank has barely scratched the surface of mobile lending’s potential.

Over the next few years, he wants to increase the size of the average KCB Mpesa loan from $25 to $100, and he believes Kenya’s digital loan industry could grow as large as $5 billion over the next few years.

Moreover, the convenience of mobile lending has helped the bank attract hundreds of thousands of new customers. Each of these customers present opportunities to cross-sell other products, ranging from savings vehicles, to insurance, to mortgages.

And Oigara is confident that the mobile lending model can be extended to new markets in the bank’s rapidly expanding geographic footprint. A well-developed mobile banking platform allows KCB to move into big markets like Ethiopia, the DRC, and Mozambique without the need to build and staff new bank branches.

“Welcome to the age of algorithmic banking,” he says.

The Price Looks Right

It’s an attractive investment proposition, and one that’s made all the more compelling by the bank’s depressed share price.

Over the past six years, KCB’s pre-tax profits and net asset value per share have grown at annualized rates of 26.5% and 23.3% respectively. Yet the stock now sports a price-to-earnings ratio of 6.3, a 2.5% dividend yield, and a price-to-book ratio of 1.5. It’s been over five years since the stock has traded at such low multiples.

With a valuation like this, I believe KCB’s fast-growing, increasingly digitized operation is poised to deliver market-beating returns to investors over the next five years.

(Disclosure: Ryan has a beneficial interest in shares of KCB Bank Group through his work for Africa Capital Group.)

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Why It’s a Great Time to Buy Kenyan Stocks

African stocks have fallen off many speculators’ radar screens. But there are bright spots in the gloom that shrouds the continent’s stock markets, and I believe the Nairobi Securities Exchange (NSE) will soon be one of them. Here are a few reasons to be bullish.

Photo by Erik Hersman
Photo by Erik Hersman

African stocks have fallen off many speculators’ radar screens.

An economic slowdown in China, a sharp drop in commodity prices, unorthodox economic policies in Nigeria, and questionable political leadership in South Africa, have scared off all but the most patient investors.

But there are bright spots in the gloom that shrouds the continent’s stock markets, and I believe the Nairobi Securities Exchange (NSE) will soon be one of them.

Here are a few reasons to be bullish.

  • Kenya’s electricity output is at an all-time high, which makes it easier for businesses to operate and expand.
  • Oil prices are at multi-year lows, which makes it cheaper to transport people and goods.
  • Strong tea sales and a recovering tourism industry have taken downward pressure off the shilling, which helps to contain the cost of imported materials and products.
  • Interest rates are high but appear relatively stable.

The factors above are why the IMF predicts Kenya’s GDP will expand by 6.0% this year – making it one of the fastest-growing economies in Africa.

But, for me, the most compelling reason to invest on the NSE now comes down to value.

Quite simply, Kenyan stocks are cheaper today than they have been in years.

Let’s take a look at the recent returns of Kenya’s ten largest stocks.

Company 1-Year Return*
1. Safaricom 10.5%
2. East African Breweries -16.7%
3. Equity Bank -26.2%
4. KCB Bank -35.0%
5. Co-operative Bank -14.7%
6. BAT Kenya -11.1%
7. Barclays Bank Kenya -24.2%
8. Bamburi Cement 14.6%
9. Standard Chartered Kenya -43.1%
10. Diamond Trust Bank -22.6%
* 52-week return as of 1 February 2016

It’s a pretty dismal looking set of returns, isn’t it? Safaricom and Bamburi were the only shares to increase in value, and most of the others dropped by more than 20%.

But in spite of the market’s pessimism, these companies continued to go about their business unfazed, quietly reaping profits and creating value for their shareholders.

As a result, investors now have the opportunity to pick up a shilling’s worth of earnings at price tags not seen in several years.

The table below displays the current price-to-earnings (P/E) ratio for each of the NSE’s ten largest companies. It also shows how long it has been since each stock has traded at a similar valuation.

Company  P/E Ratio (ttm) Years since similar Valuation*
1. Safaricom 17.5 3 years
2. East African Breweries 21.5 4 years
3. Equity Bank 8.0 4 years
4. KCB Bank 6.4 more than 5 years
5. Co-operative Bank 7.8 2 years
6. BAT Kenya 18.0 2 years
7. Barclays Bank Kenya 7.7 more than 5 years
8. Bamburi Cement 12.9 4 years
9. Standard Chartered Kenya 7.3 more than 5 years
10. Diamond Trust Bank 8.4 3 years
* calculated as of 1 Feb for each year

As you can see, the market is pricing Kenya’s blue chip firms at a significant discount to their historic averages. In some cases, it’s been more than five years since their P/E ratios were this low.

With valuations this low and the economic forecast this bright, Kenya investors should be very pleased with their returns five years from now.

[Disclosure: At date of post, I (Ryan) held a beneficial interest in shares of KCB Bank.]

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Kenya’s 10 Best Stocks of the Past 10 Years

The Nairobi Securities Exchange had a tough go of it in 2015, but investors have reaped exceptional rewards from long-term investments in stocks ranging from banking to agriculture. Here’s a countdown of the top Kenyan stocks over the past 10 years.

Let’s not sugarcoat it.Nairobi, the capital city of Kenya

The Nairobi Securities Exchange (NSE) had a dismal year in 2015, dropping 10.6% (21.5% in US dollar terms), and market watchers remain decidedly unenthusiastic about the prospects for Kenyan stocks in the year ahead.

When bearish sentiment prevails, it’s often difficult to see just how profitable a long-term investment in stocks can be.

So let’s turn back the clock ten whole years, to the early days of 2006.

Kenyan voters had just rejected a proposed new constitution, a disastrous drought was creating misery in the north, and the Anglo Leasing scandal had just broke. The intervening years have brought devastating election violence, a global financial crisis, and horrific terrorist attacks.

In hindsight, it seems like an absolutely dreadful decade to have been invested in Kenyan stocks.

Yet throughout that time period individual companies have posted some sensational performances. A dozen stocks more than tripled in value during that time period, creating a healthy nest egg for their long-term shareholders.

Here’s a countdown of the NSE’s five best performers over the past ten years.

5. Kakuzi
(10yr Rtn: +560.4%)

Ten years ago, this diversified agricultural producer was saddled with heavy debt and reported an earnings loss due to drought and low tea prices. But over the past decade, the tea price has nearly doubled and the company invested heavily in lucrative new crops like avocado and macadamia nuts.

Management also sold off one of its tea plantations and retired the company’s interest-bearing debt. The combined impact of all these factors has been consistent profitability.

Undervalued land assets along the Thika Road added to the surging share price’s momentum.

And so did activist investor, John Kimani. Kimani, who was born and raised on Kakuzi farm, has been steadily buying shares of the relatively illiquid stock in an effort to represent the rights and interests of the company’s workers and neighbors. His stake in the company has risen from virtually nil ten years ago to a whopping 25% of outstanding shares today.

4. Diamond Trust Bank
(10yr Rtn: +663.9%)

While its larger peers, Equity Bank and KCB, may get most of the headlines, Diamond Trust is arguably Kenya’s best-managed bank. The past ten years saw it embark on an ambitious expansion drive that increased its branch network from just five in 2005 to well over 100 today and extended its reach beyond its Kenyan home base to Burundi, Tanzania, and Uganda.

So, far it looks like the moves are paying off. Customer deposits have increased in excess of 20% in each of the past five years, while non-performing loans have been held to less than 2% of total lending.

The share price has benefited from steady purchases from Pakistan’s Habib Bank. In 2013, Habib announced its intention to increase its stake in DTB from 11% to 26% through purchases on the open market by the end of 2018.

3. Centum
(10yr Rtn: +676.3%)

The comparisons to Berkshire Hathaway are perhaps a bit premature, but if this investment holding company continues to grow at the rate it has over the past ten years, it won’t be long before Chairman Chris Kirubi and CEO James Mworia become Kenya’s answer to Warren Buffett and Charlie Munger.

Starting from small holdings in listed companies, Centum now boasts controlling stakes in firms active in consumer goods, manufacturing, banking, and real estate. Look for it to take on an even more instrumental role in the Kenyan economy over the next ten years through big investments in energy, healthcare, and education.

2. Jubilee Holdings
(10yr Rtn: +743.6%)

Kenya’s largest insurance company has given its shareholders plenty to celebrate over the past ten years. In that time period, the company’s grown its net insurance premium revenue by an astounding 660%.

Savvy investments in Diamond Trust Bank, real estate, undersea fiber-optic cables, and energy projects have augmented the insurance income and positioned it to benefit directly from some of the most promising sectors in the region.

The company now sells its policies throughout East Africa, is on the verge of launch in the DRC, Madagascar, and Ethiopia, and is eyeing expansion opportunities in West Africa, too.

1. Limuru Tea
(10yr Rtn: +1158.0%)

A true home run stock. Lucky shareholders of this 677 acre tea plantation just northwest of Nairobi saw the value of their shares rise more than eleven-fold this past decade.

Rising tea prices certainly didn’t hurt the company’s valuation, but the real impetus behind the stock’s rise is real estate. Limuru’s rolling hills are also highly coveted by property developers. With its pleasant climate and convenient location just 40 kilometers from the capital’s central business district, the plantation is ideally situated for high-end property developments. But if you’d like to own a piece of the company, you’d best be patient. Unilever Tea Kenya owns 52% of shares and the remainder rarely trades even after a 2:1 share split in June this year.

Who were the other top performers on the NSE? The chart below shows the top ten Kenyan shares since December 31, 2005.

10 Best Kenyan Stocks of the Past Decade

Company Return (12.2005 – 12.2015)*
1. Limuru Tea 1158.0%
2. Jubilee Holdings 743.6%
3. Centum Investment 676.3%
4. Diamond Trust Bank 663.9%
5. Kakuzi 560.4%
6. ARM Cement 425.6%
7. Crown Paints 381.5%
8. Equity Bank 314.5%
9. KCB Bank 301.1%
10. BAT Kenya 284.8%
* excludes dividends  

[Disclosure: At date of post, I (Ryan) held a beneficial interest in shares of KCB Bank and Centum Investment Holdings.]

Is KenolKobil Stock a Buy?

This is a guest contribution from Simon Maina.

Petrol station
Photo by Sherwood

KenolKobil is a leading oil distributor and marketer of petroleum and other associated products (e.g. petrol stations) in East Africa. Of late, it has also extended its footprint into Southern Africa with Zambia being its most recent investment.

I find shares of the company particularly attractive because it:

  1. stands to benefit directly from the region’s economic growth,
  2. has a strong brand,
  3. and, under the current managing director, has cut down risk-exposures that previously bedeviled it.

This third point, I believe, will be the key catalyst behind improved performance over the short to medium term.

What’s Driving KenolKobil’s Turnaround?

The last time there was a significant decline in oil prices (in 2012), KenolKobil and other distributors posted significant losses. International crude oil prices declined sharply from around $127 to lows of around $77 per barrel. The Energy Regulatory Commission reduced fuel prices, which left distributors holding huge amounts of high-cost inventory.

Meanwhile, the shilling dropped sharply and interest rates nearly doubled. Thus, the company, which had borrowed to fund its oil purchases, was forced to sell fuel and other products at a loss in order to fund working capital. Falling demand compounded the problem as its corporate customers were forced to scale back due to high borrowing costs.

Oil prices have experienced an even greater decline in recent months than what was experienced in 2012. Will today’s low oil prices cause a similar decline in KenolKobil’s earnings?

I believe that’s highly unlikely even with a weakening shilling.

In fact, my view is that the decline in oil prices will have a positive impact on the company. Why?

  • The lower amounts required to purchase similar volumes of oil mean a reduction in debt required to finance purchases. This cuts down financing costs and help increase the level of equity in the company.
  • According to the company, they have no material commodity risk at the moment.
  • The drop in the oil price this time, unlike during 2012, is happening in a favorable economic environment. Interest rates are stable, the exchange rate decline against the dollar is fairly gradual and marginal, and the economy is sound.
  • East African governments’ infrastructure spending is likely to boost real household and business income. This is likely to reflect on demand. Lower oil prices also mean higher disposable income, and although the rise in oil consumption might lag a bit (as people drop their expectations of a reversal in oil prices), we could start seeing the effects after a few months.
  • Vehicle imports have increased, partly as a result of a rise in middle class population. This means higher demand for oil, which has been rising at an average pace of around 6% per year.
  • Given KenolKobil’s recent trend in earnings and debt reduction, the company is likely to be offered lower borrowing rates in future, which will increase both equity and earnings.

New Strategy Firing On All Cylinders

The company has been cutting down on loss making operations since 2012’s huge losses. Management now concentrates expansion in countries where returns on investment are disproportionately high and where the regulatory environment is favorable.

As a result of changes made, the company recorded an increase in gross profit by 18% and an increase in profit after tax of 95%. Financing costs declined by 22% and there was significant reduction in dollar denominated debt.

At today’s price of 8.85, the company has a PE of 11.95 and price to book ratio of 1.8.

An Attractive Target

Since Puma Energy’s failed acquisition attempt in 2012, KenolKobil has been the subject of a number of takeover rumors, with the most recent one suggesting interest from a Bahrain-based oil company.

The company’s distribution network and brand name makes it an especially good target for oil companies looking to make an entry into local markets. However the company had specified that it would only be interested in an acquisition that would support its strategic plans. Their preferred suitor would be able to offer, at a minimum, operational leverage such as competitive product pricing in international markets and access to shipping and storage facilities.

The Bottom Line

My view is that KenolKobil is poised for good growth as East Africa’s economy grows. It presents a good buying opportunity into the Ksh7.00 – 8.00 levels for investors with a long-term view.

I will be monitoring how the company copes with rising competition from new and existing distributors and risks associated with expansion in other markets, although, at the moment, the bulk of its revenues comes from Kenya.

I welcome your thoughts for or against my investment thesis in the comment section below.

Simon Maina is the founder of moneyacademy.co.ke and is an investment analyst with Kenya-based, Gravitas Capital. Follow him on Twitter: @moneyacademyKE.

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Should Kenya’s Nation Media Group Be in Your Portfolio?

Nation Media Group's Citizen Newspaper
Photo by Jeff Knezovich

Nairobi-based Nation Media Group (NMG) is where much of East Africa gets its news.

Its stable of newspapers includes Kenya’s Daily Nation, Uganda’s Daily Monitor, and Tanzania’s The Citizen. The company also owns a growing collection of television, radio, and online assets, including one of my personal faves – Business Daily Africa.

So, is it a worthy investment?

Let’s take a look at how the business performed in 2014 to help us decide.

Here are a few things that jumped out at me as I glanced at the most recent financial statement.

Sales are Treading Water

NMG’s total sales dropped 0.2% in 2014. Why? East Africans, just like people everywhere else in the world, are buying fewer and fewer newspapers and opting for online news, instead.

The problem is that online advertising revenue remains far below the amount needed to pay the salaries of NMG’s news teams and support staff. The group’s newspaper division, which accounts for roughly 85% of group revenue, saw sales drop 5% in 2014. If this trend continues, the scope of its publications will need to be scaled back or else their quality will begin to suffer.

Management’s Trying to Live Within Its Means

CEO Linus Gitahi and his team have done an admirable job of keeping costs in check. They’ve invested in modern, more efficient printing presses and streamlined their distribution systems.

This allowed the company to widen its operating margin to 28.9% from 26.8% a year earlier and to add another year of positive cash flow – a streak that extends beyond 2004, the earliest date for which I have record.

Unfortunately, the costs of writing down an obsolete printing press and other equipment meant that the company reported a 2.2% drop in earnings for the year.

The Balance Sheet Looks Pretty

Nation Media Group newspaper
Photo by Erik Hersman

NMG is unencumbered by debt and sits on a healthy pile of cash.

It also sports a current ratio of 2.4, which gives it some breathing room as management assesses how best to get growth back on track.

Is Nation Media Group a Bargain?

When trying to determine the potential return of an investment, I first construct a plausibly pessimistic scenario for how the company and stock might perform over the next five years.

Our plausibly pessimistic scenario rests on assumptions about three company characteristics:

  • book value growth,
  • book value multiple, and
  • dividends.

Let’s look at each in turn.

1. A Plausibly Pessimistic Growth Estimate

Some investors use earnings as their gauge of a share’s value. Unfortunately, earnings can be a pretty flaky metric. Abnormal events can lead to big spikes or drops in profitability, and the company can massage the numbers to make performance appear better than it actually is.

That’s why I prefer book value. It’s simply a company’s assets minus its liabilities. The better a company performs, the larger it gets, and, unlike earnings, it tends to grow at a relatively stable rate. It’s easy to calculate and is a bit more difficult to manipulate by unscrupulous managers.

Over the past five years, NMG has grown its book value at a rate of 13.4% per year. That’s not bad. But can we count on it to maintain this pace over the next five years?

Nation Media Group in Uganda
Photo by Garrett Ziegler

I don’t think so, and here’s why.

Over the past two years, the company’s sales are treading water, and unfortunately, there’s not a life preserver in sight.

It once appeared that NMG’s broadcast division would be the company’s growth engine, and Television Kenya did post a big increase in operating profit over the past 12 months. But this is coming off of a very low base. In 2013, television and radio contributed less than 6% of the company’s operating profit.

Moreover, with the increasing accessibility of broadband data connections, East Africans’ entertainment options span far beyond the media conglomerate’s lineup of news, talk shows, and soaps. If they’re anything like me, many will soon forgo television altogether in favor of podcasts and binge-watching shows on Netflix and Amazon Prime.

Further lessening the likelihood of a 13% growth rate is management’s decision last year to boost its dividend payout to roughly 75% of earnings. This leaves less cash available to grow the business.

So, I think a more realistic growth rate over the next five years is 9.6% — which is how quickly it’s grown since 2012. If it achieves this, the company’s book value will increase from Kshs46 per share today to Kshs73 per share in 2020.

Kshs46 x 1.096 ^ 5 = Kshs73

2. A Plausibly Pessimistic Book Multiple

NMG’s share price has dropped precipitously over the past six month, but it still trades at Ksh246 per share, a 5.3 price/book ratio. This means the market believes that the company is actually worth more than five times its stated net assets, which suggests at least one of three things:

  1. The company will grow very quickly.
  2. The company owns a very large hidden asset.
  3. The market is irrationally optimistic.

The pessimist in me believes point 3 is the most likely explanation.

So, let’s assume that over the next five years the market begins to see things in a more gloomy light. What kind of price multiple will it award to the shares?

To get an idea, we can look at NMG’s price chart over the past five years.

Nation Media Group Price ChartWhen we do so and compare it to book value per share over the same time frame, we find that the stock traded at a price/book multiple of 3.1 about three years ago.

Could the same thing happen again? You betcha.

Apply this multiple to our anticipated 2020 book value and we arrive at an estimated 2020 share price of Ksh226.00.

Kshs73 x 3.1 = KSh226.00

3. A Plausibly Pessimistic Dividend

The last step of our valuation process is to estimate NMG’s dividend payments over the next five years.

In each of the past two years, the company paid a dividend of Kshs10 per share. Given the company’s stagnant sales growth, the pessimist in me says that we shouldn’t count on much more than Ksh10 per share over the next five years.

So, we’ll multiply Kshs10 by five (for each of the next five years) and add it to our pessimistic 2020 share price.

KSh226 + Ksh50 = Ksh276

A Plausibly Pessimistic Return

Finally, let’s calculate our estimated rate of total return if this all comes to pass.

(Ksh276 / Ksh246) ^ (1/5) -1 = 2.3%

Does a 2.3% annualized return make for a good investment? Not for this plausible pessimist. I’m pretty sure we can find better places to put our money to work.

It’s Your Turn.

Do these assumptions seem reasonable? Which would you change? Let’s hear your thoughts in the comments!

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