The year that was for investors in Kenyan market

Nairobi Securities Exchange (NSE) trading floor (EVERLYNE MUSIKLI)

NAIROBI, KENYA: Nothing could have prepared investors for the roller coaster that has been the year 2017.

In a short 12 months, they have seen the stock market crash for the first time in 10 years, losing them billions of shillings in the process before rallying to recoup some of the losses.

It has been a year punctuated by an economic slump occasioned by a prolonged electioneering period following the disputed August 8 presidential election that was contested in court, resulting in a repeat poll on October 26. 

While many companies had anticipated this turn of events being an election year, Kenya Airways perhaps embodies the frustration and later triumph of investors at the Nairobi Securities Exchange (NSE).

Already reeling from a damaging debt position, the national carrier had its shares suspended from the bourse for two weeks to allow for a share split that would leave its investors with only a quarter of the shares they held.

In the last day of trading before the suspension, the airline traded at Sh5.30 a share.

But in a major turnaround, the counter made a comeback to register the biggest rally in the history of the NSE from Sh2.10 to average at Sh17.5, gaining over Sh64.5 billion in days.

Several investors were watered down in the capital restructuring move that had the net effect of increasing KQ’s total issued shares from 1.49 billion to 5.82 billion by splitting each share four times.

This diluted retail shareholding by 95 per cent. For instance, an investor who originally held 1,000 shares saw a drop by a factor of four to 250 units.

Some of the investors who lost a significant portion of their stock included Mike Maina Kamau, Vijay Kumar Shah, Ismail Gulamali and Galot International Ltd.

They have since recovered part of their money in the recent KQ share rally and will be offered an exclusive rights issue in which they will be invited to shore up their investments for up to Sh1.5 billion.

The NSE itself has been erratic, with the benchmark share index of 20 biggest companies starting the year at 2,789 points before surging to 4,045 points just after the August polls, signaling a massive rally to a 16-month high.

However, after the Supreme Court annulled President Uhuru Kenyatta’s win, the market plummeted, losing over Sh100 billion in days, literally triggering a circuit breaker that saw the market crash.

Regulatory interventions

The NSE 20 share index dipped to 3,500 points during the repeat polls in October but has since been on the mend to stand at 3,750 points.

Among the top investors who have borne the brunt of the bourse’s roller coaster performance include billionaire investors such as Baloobhai Patel, Equity Bank’s Chief Executive James Mwangi, Equity founder Peter Munga, Co-operative Bank Chief Executive Gideon Muriuki, Jimnah Mbaru of Britam, Centum’s Chris Kirubi and the former Central Bank of Kenya Governor Phillip Ndegwa and his family who own a large fraction of NIC Bank.

In the lending circles, Equity Bank, whose shares closed last week’s trading at Sh41 a share, has endured a tough year under the rate capping regime that has forced it away from its retail clients who form its largest customer base.

The lender reported a three per cent drop in net profits to Sh14.6 billion in third quarter as its interest income fell 11 per cent to Sh35.4 billion.

The bank’s Kenyan and other regional subsidiaries have slowed down due to regulatory interventions, political squabbles and subdued commodity prices on the global markets.

Equity Bank has been forced to loan to the Government and abandon the huge customer base that propelled it into tier 1 status due to the perceived risk of the retail borrower.

Mr  Mwangi now says the lender will focus on its Ugandan subsidiary that posted a 37 per cent jump in profit in the nine months to September, contributing Sh700 million to the group’s profit after tax.

It is also targeting a bigger share of the Diaspora remittances, having handled $48 million (Sh4.9 billion) in September alone, up from $12 million (Sh1.2 billion) in July.

“We are looking to handle between $60 and $70 million of the flows coming into the country,” said Mr Mwangi.

Equity Bank’s top shareholders include Mr Mwangi, British American Investment Company Kenya Ltd (Britam)and private Equity firm Arise.

Financial services firm Britam Holdings also lost money in the year, with its net earnings for the half-year period ending June 30 falling 44 per cent on increased claims payments.

The firm, whose top owners include its CEO Mr Benson Wairegi, Equity Bank’s Mr Peter Munga and Mr James Mwangi as well as Jimah Mbaru, saw its net profit drop to Sh995.09 million from Sh1.78 billion a year earlier, reflecting the impact of last year’s switch to a new methodology of accounting for liabilities.

Billionaire Chris Kirubi’s Centum also saw a downturn in fortunes after it recorded a 21 per cent drop in half-year net profit, posting Sh1.6 billion in September this year compared to Sh2.1 billion in the same period last year.

The NSE-listed firm has previously beaten the market with its employees getting Sh6.1 million each in bonuses last year.

There was a claim that the Investment firm’s CEO James Mworia took home a whooping Sh375.6 million in the year ended March, taking his cumulative eight-year pay to nearly Sh1 billion.

The firm, which has made tactical portfolio exits in several firms, including UAP, which they sold to Old Mutual at a lucrative Sh180 per share, realising over Sh5 billion, according to their investment brief for the year ended March 2015.

Complicated matters

Centum also gave up stake in two private equity funds, realising Sh500 million from the exits.

However, its 74 per cent stake acquisition in K-Rep Bank, which was subsequently renamed Sidian Bank, has not paid off after the banking sector was hit by the rate cap law that sets the maximum interest banks can charge on loans at 14 per cent.

Centum blamed this year’s dismal performance on poor returns from its subsidiary - Sidian Bank - which recorded a massive drop of 37 per cent in its interest income.

“Sidian is a third tier bank. It is mostly engaged in micro-lending. The credit pricing as a result of the rate cap law has hit the bank hard, but we are in a process of restructuring its balance sheet to bring operating costs down in order to revise the trend,” said Mr Mworia recently.

He said Centum had planned to exit from some of its investments just after the August 8 General Election, but the political situation that befell the country following the opposition’s successful petition on the presidential vote, leading to a repeat poll complicated matters.

It had also shied away from buying a 5.53 per cent stake in fashion retailer Deacons whose fortunes have also dwindled in what has been a tough year for the retail market.

The Ndegwa Family majority-owned NIC Bank also saw net profit slide by 1.3 per cent to Sh3.32 billion in the first nine months of the year due to a slump in interest income.

Only two tier one lenders - Stanbic Bank and Kenya Commercial Bank (KCB) - registered profits.

Stanbic CFC saw its profit rise 19.71 per cent to Sh3.23 billion while KCB’s was up 5.03 per cent to Sh15.1 billion.

Equity Bank (2.9 per cent), Standard Chartered (39 per cent), Barclays (12 per cent), Co-operative Bank (9.5 per cent) and Diamond Trust Bank (3.6 per cent) all reported net profit declines in their nine-month earnings.

The biggest capitalised company at the Nairobi bourse - Safaricom - has for its part had to overcome several obstacles but has somehow managed to skirt around them, with its share price hitting a record high of Sh28 at some point.

This was the best performance by the telco since its listing, pushing its valuation to a record Sh1.12 trillion.

In the first quarter of the year, Safaricom operated under the cloud of a dominance report whose recommendations included the splitting of the firm to guard against the possibility of abusing its dominance. It, however, survived the onslaught.

This was followed by anxiety over the tenure of its Chief Executive Bob Collymore, which was subsequently extended by the board. Mr Collymore, however, had to take what the firm said was an indefinite sick leave in October.

Nationwide boycott

Safaricom’s ownership also caused concerns, especially when British firm Vodafone decided to sell its 35 per cent stake in the telco to its South African subsidiary Vodacom in exchange for 233.5 million new shares in the Johannesburg-based firm.

Safaricom controls a large chunk of the country’s economy, including the mobile money transfer market through M-Pesa, which literally oils daily business transactions in the country.

In this deal, however, the Government lost in capital gains that were scrapped two years ago after an outcry in the stocks market. The UK Government, on the other hand, raked in Sh13 billion in capital gains tax.

Safaricom also faced political pressure, having backed the electronic transmission of elections data.

The Opposition National Super Alliance (NASA) accused some of the telco’s employees of directly interfering with data transmission, prompting the Director of Public Prosecutions Keriako Tobiko to call for investigations.

Subsequently, the opposition called for nationwide boycott of the telco’s products, which saw the company shares dip by Sh20 billion in the first week of the boycott.

Despite these problems, Safaricom reported a 9.5 per cent rise in net profit to Sh26.2 billion in the first half of the year ended September 2017, continuing its profitability streak that has seen it remain East Africa’s most profitable company for the longest time.

The telco defied a difficult economic environment due to the cloud of uncertainty that came with the prolonged electioneering period to grow its revenue by 12 per cent to Sh109.7 billion.

It diversified its offering by breaking into the e-commerce sub-sector through its new platform, Masoko.

“The telecom operator has launched its e-commerce platform Masoko as it seeks to grow its presence in the retail sector. The Masoko platform will give the company a new revenue base as it builds on its data and mobile money services to venture into new business,” said Sterling Capital in a recent note to investors.

The company, however, faces strong competition from the likes of Kilimall, OLX and Jumia. 

Safaricom still has an upper hand in the data and money transfer space even with the entry of Pesa-Link, Equitel, and Mastercard and the strong presence of Zuku fibre, Jamii Telecom (JTL) and Liquid Telecom in the data space.

JTL has rocked the lucrative mobile data market with affordable Faiba 3G that was launched last week.

Safaricom, which has managed to ward off the competition, has said it is now seeking investment opportunities to expand outside Kenya.

Elsewhere, 2017 will go down as a good year for importers of maize, sugar and milk powder after the Government gave them duty-free windows.

Some of the beneficiaries include UK firm Holbud, associated with business tycoon Naushad Merali, which was allowed to import maize worth Sh7.3 billion before the duty-free window ended in July.

Kenya Cooperative Creameries (KCC) and Brookside benefitted from duty waiver on milk imports while sugar importers were allowed to bring in 150,000 tonnes of sugar.

On the losing end was struggling retail chain Nakumatt that saw its debt burden rise to an estimated Sh40 billion as it was also forced into mass branch closures in prime locations.

The troubled retailer’s local and foreign rivals are helping themselves to its former branches as landlords force the supermarket chain to vacate premises for late on non-payment of rent.

Naivas Supermarket has taken up the Bamburi branch after the High Court declined to allow the struggling retailer to appoint a receiver manager.

Tuskys has, on the other hand, taken up Nakumatt’s former branches in Kisii town and  Kisumu towns where the retailer was kicked out.

French retailer Carrefour, run by franchise holder Majid Al Futtaim Holding recently replaced Nakumatt at the Thika Road Mall (TRM) and is poised to take up space at the Junction Mall which was also vacated by Nakumatt.

Game, a South African subsidiary of America’s Walmart, whose entry into the Kenyan market Nakumatt had challenged, is also keen on filling the vacuum left by Nakumatt and recently opened its second store at the Karen Waterfront.