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.
SWOT ANALYSIS
Strengths
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
Weakness
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)
Opportunities
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
Threats
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.
| NSE | JSE | BURSA MALYSIA | BOLSAA MEXICO | |
| 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
alphoncemwangi@gmail.com
