The Nairobi Securities exchange has issued an IPO seeking to raise funds for expansion and also to reduce its debt. 34% ownership has been offered to the public in the much awaited IPO. The stock offering has a book value of Ksh. 4.00.

What is interesting about the counter is that investors will not trade it based only on its performance as a company but also on the country’s economic outlook: like trading stock index futures. We should thus keep that in mind. On the same note, we should also remember that even when there is a sell off the company still makes money based on the transaction levies. However, positive news is obviously better as income sources are diversified due to new listings and introduction of new instruments etc.



a)      Kenya is the region’s largest economy. It will thus attract majority of investment in the region.

b)      Demutualization will improve the image of the exchange

c)       Foreign market pegged indices

d)      Low correlation with developed markets thus may be used as a hedge and diversification


a)      Heavy dependence on foreign investors

b)      Low liquidity and depth thus discourage frequent trading e.g. intraday trading

c)       Limited number of tradable instruments. Currently only shares and bonds.

d)      Delays in implementation of changes and improvements

e)      Only buy side transaction (cannot short sell)


a)      Including derivatives into the markets e.g. REITS, Options, Futures etc.

b)      Large potential customer base in local retail customers

c)       Further automation and better technology

d)      Number of companies with ability to list thus potential income

e)      Growth in revenue streams e.g. data vending


a)      Political risks

b)      Macro-economic exposure e.g. inflation, currency risk etc

c)       Competition from other exchanges

d)      Foreign capital outflow

e)      Capital gains tax

Financial Results

The prospectus has results from 2009. In 2013 there is an entry that is one off and may not be recurring which is the recovery of debts that amounted to kshs. 115,574,000.

PAT = 184,636,900

The NSE is the second demutualized exchange in the continent so comparable data was somewhat limited for the time being. I however used the exchanges of various emerging markets namely: Johannesburg Stock exchange, Mexican exchange, and Malaysia exchange.

PE Ratio 10.05 15.36 25.65 22.69
Price/Book 2.375 3.86 5.56 3.16
Price/NAV 1.36
Dividend Yield 3.53 3.85 3.9
Profit Margin 29.29% 27% 40.56% 36.6%
Earnings Yield 9.95% 6.51% 3.90% 4.41%

Source: Prospectus, Bloomberg.com

The company’s retention ratio was at 81% for 2013. This is calculated based on the given in the statement.

Assuming a current growth rate of 10% in Profit after tax and constant retention ratio then this is a possible projection.

YEAR 2013 2014 2015 2016 2017 2018 2019
PAT 183636900 202000590 222200649 244420714 268862785 295749063 325323970
DIV 34891011 38380112 42218123 46439935 51083929 56192322 61811554
Retained prof 148745889 163620477 179982525 197980778 217778856 239556742 263512416
EPS 0.944 1.038 1.142 1.256 1.381 1.520 1.672


The prospects of the exchange are bright if the opportunities aforementioned are seized and developments made. The PE ratio and the Price/NAV show that the counter is cheap relative to other counters in the NSE. There is good room for growth and this will be heavily bolstered by an improving economy and fate of blue chip companies listed. It is evident that the company is on its exponential phase. Indeed CAGR on profits is 300% since 2009. This is may not be sustainable over the long term as earnings growth stabilizes. None the less, this is a very good stock to hold over the long term.


Alphonce M. Iregi


Should decline in market volatility be a concern?

Decline in volatility has been a subject of debate by economist and traders for the past few weeks. I will try to add on what The Economist had published recently.

Volatility simply defined represents uncertainty about the value of an asset’s cash flows. When volatility falls, theoretically, the risk premium required to hold the asset also falls, driving price-earnings ratios for stocks up and bond yields down.

But, why the decline in volatility? Highly probable that it is the certainty in monetary policies from central banks plus the forward guidance that is to blame.  This has directly caused the decline in volatility of bond yields which influences the major source of uncertainty and volatility in stocks. Fluctuations and speculation on CB interest rates has been one of the main source of volatility. This decline in volatility has started affecting some banks with a number of major banks laying off staff in trading departments.

Question is, is volatility really good in the market?

The answer is that it depends(Like any other economist, I wouldn’t give a yes or no answer). If the lower volatility in the market is as a result of structural change in the economy and the stability of inflation as well then chances are that there’s nothing to worry about. It could simply be taken as an appropriate repricing of risk by the market.

It should be worrying however if it is as a result of a specific stance of monetary policy as is likely the current market situation.  Easier monetary policies drive asset prices up which in turn generates spending through wealth effect. It stimulates investing by lowering the rate for new investment project and shifts spending from future into present. If, in the process, it causes volatility to fall and asset prices to rise to artificial levels, presuming that it is driven by demand and supply forces, when the need for such stimulative policy ends, assets will reprice, and this will facilitate the tightening of monetary policy which is currently what the fed is trying to do.
There has been skepticism in the market that  because volatility is the natural order of things then artificially suppressing it through monetary policy is an equivalent to price fixing(Subject of headline concern), and more practically, will likely end in tears when the system’s natural instability returns. Its debatable but I think to some extent we can assign the blame on the 2008 crisis to the prior periods of low and stable inflation, and limited quarter-to-quarter volatility(Also known as the great moderation). The financial systems almost always respond to volatility. When volatility declines the natural tendency is to use more leverage and to concentrate risk.

Swiss Central Bank’s Jordan recently expressed concern over the decline in volatility in the Nikkei Business Daily saying “Central banks must be vigilant against recent global declines in long-term interest rates. Prolonged low yields could sow the seeds of a future bubble”

This is already visible in the market. WSJ noted..

A rebound in house prices and near-record-low interest rates are prompting homeowners to borrow against their properties, marking the return of a practice that was all the rage before the financial crisis….

…. Some lenders are even reviving old loan products that haven’t been seen in years in an attempt to gain market share.


…. Some lenders are even bringing back “piggyback” loans, which serve as a second mortgage and cover part or all of the traditional 20% down payment when purchasing a house. Piggybacks nearly vanished during the mortgage crisis.




On the upside, banks are not yet really worried with Nomura saying, I quote

“Our macro and central bank forecasts do not project that a downturn/recession is around the corner or that global liquidity is about to be significantly reduced (although the ECB stance is more of an unknown factor). Meanwhile, our broad assessment on leverage does not point to broad-based excesses at this juncture.

Our conclusions are:
1) tactically, volatility levels in FX may have become over-extended to the downside; and
2) strategically, a material regime shift in volatility may not be just around the corner, especially not if the ECB injects further liquidity in H2 2014.”


At the moment, we may be stuck with low volatility and with relative uneasiness.  Changes in volatility might come from, turn in the downturn/recession cycle, removal of global liquidity,  build-up of financial leverage or an unexpected macro or geopolitical shock but in the mean time we will be nervously waiting for the day it suddenly changes, probably violently. My advice would be, be careful not to get caught up pants down, cautiously manage risk because it might turn out to be insidious.