Way back in Feb 07 I argued here that Mumias was starting to look attractive based on continued market protection. Today I now know that the market protection is slowly being stripped away and as local sugar prices are at least 50% higher than the cheapest producers in COMESA there is cause for concern. I expect domestic prices to come under pressure as from next year as ever higher sugar imports flood the domestic market. Local producers will be hard pressed to prove their relevance BUT its not the factories I'm referring to, rather it is the sugarcane farmers. If cane cannot be produced at lower prices then there will be difficult times ahead for the sugar belt.
However there may be some good news in store. This past week a Nation article revealed that NEMA had finally approved the proposed $350mn+ sugar plant in the Tana River Delta. According to the article the plant would take 2 year to construct and the related revenues should come through thereafter. This is a particularly important development 'coz the plant could be up and running a full year before quota restrictions on imports of duty free sugar from COMESA states are lifted in Mar 2012. It is time to start reviewing the Mumias stock, I think its future cashflows have just received the lift it requires.
Importantly it is critical to remember this company is a sitting duck for a takeover.
This company has grown its operations consistently over the past ten years or so. The main feature of this growth has been acquisition of petroleum assets that various multinationals deem to be non-core in various countries in Central and Eastern Africa. I must say that the network created thus far is quite vast and impressive. I've never understood what the rationale is in buying what others want to sell. Maybe its my aversion of politically connected companies. I suppose these days you can't claim political influence in this company and thus the probability of a backlash from Kenyan authorities continues to recede. Also as the company continues to grow its regional operations its Kenya concentration will diminish. I suppose if I get my mind round to it I'll eventually get an idea how this company maintains such a strong growth momentum. But the big question for me right now is who (and why) is supplying the market with soo many shares? I suppose we should be rejoicing as the stock has always been soo hard to get any improvement in free float would be a boon.
This market is slowly turning, prices are no longer falling as strongly as they were a couple of weeks ago. The trigger could very well be the full year results that will reveal corporate Kenya is pumping, however the trick will be identifying the companies where the fundamentals are right. In my books these will include, strong consistent management teams, dominant market positions, companies with access to the retail sectors and finally those with a REAL growth strategy. This economy continues to offer adventurous corporates at reasonably acceptable risk levels new revenue streams. I expect the economy to continue to grow strongly thanks in a large part to higher government spending. AND it is not about more money but about greater government efficiency allowing it to expand capital expenditure which was previously never spent. The donors will also come round and become enthusiastic supporters of the budget.
Mumias announced the first half of the year was terrible, thanks to poor rainfall. This highlights the underestimated sensitivity to weather for Mumias. I also noticed that bad debt provisions are well in excess of Sh.150mn pa - this is way to high! All thanks to farmers who do not pay back loans extended for farming inputs. Mumias management should talk to Government to get them to take on this financing risk as its a social activity to maintain welfare. Over the medium term the healing balm will be the TARDA project that should reduce this sensitivity by increasing use of plantation irrigated farming. Just hope they have the Sh.24bn required without raising further equity. The market has however continued to push the price lower a fat window of opportunity is opening up and you should get read to load up.
Following the death of CFC's long serving chairman about a year ago it would seem a re-think by the controlling shareholders was undertaken leading to takeover discussions with Standard Bank of South Africa. The deal as announced will have two components, the first being a takeover of CFC Bank by Standard Bank, and the second will involve of a merger of Stanbic Kenya, Standard Bank's business in Kenya, and CFC Bank. The resulting merger should result in the creation of Kenya's fifth largest bank. In our view we believe a third component is likely, involving the sale of the insurance businesses at a later stage. Our valuation estimate for CFC Bank is Ksh.34.80 and Ksh.38.65. We believe the share was already overvalued before the announcement and the subsequent share price appreciation was unwarranted, importantly so as Standard Bank had provided pricing guidance. We rate the share as a SELL.Download CFC_Bank_07022007.pdf
With the share price tanking as it is one has to wonder at what point should I jump in? Consider this, Mumias must have alot of old plant and equipment resulting in poor cost of goods produced. Since Kidero walked in I'd assume that he has figured out a medium-term plan to progressively improve efficiency and slowly lower cost of production per kilo. If you follow this argument and add the assumption that Kenya's domestic sugar market will continue to be protected and high domestic prices will pertain, then this stock starts to look even more interesting. Have we seen anything similar to this? I think so, EABL is more or less the same story of new management coming in and improving efficiency ratios leading to a consistent appreciation in the share price. Finally, add the fact that the largest shareholder is GoK with 20%! Mumias is a sitting duck for a takeover. Watch this space.
The NSE 20 share index closed lower this week as market players continue to avoid pushing prices any further. The unfolding scenario is opening up opportunities in the market, if the market continues to lose ground over the next two weeks we will see share prices enter the BUY territory. I believe the current re-rating we are seeing was triggered by fund manager comments that stocks are over valued. It would seem investors assumed no share is under valued and have run in droves.
There is a lesson in all this, fund managers may be talking the market in the direction they want to see it - it is possible some guys would love to push prices lower to get a chance to load up. This is one of the oldest tricks in the profession. Don't believe all you hear, some shares are not that expensive. Then others are just beyond reason. Some little digging will point anyone to the real gems in this market. Reporting season will start in earnest next week, lets see if anything then will stem this slide.
interestingly the government has decided to go ahead with the listing AND at the same time try to recruit an MD and Finance Director. While I must admit the stock market has never had such an enthusiastic government as this one, on this one I'd urge caution. Plans are not always set in stone if something crops up you adjust your plans and avoid forcing things. In this case, the government discovered some financial mess that seems to involve the immediate past FD and MD. The two end up leaving the company and government still wants to have a share offer in April this year - just over 60 days away. Anyone who knows how long it takes to recruit would tell you you need no less than 6 months to advertise, interview, negotiate and have your new recruit complete a notice period. Then after that the poor MD still needs to figure out what he is dealing with and draw out a plan of action going forward. Maybe on this particular one it would be better to shelve the listing plans for one year. The clouds hanging over the company may just be enough to frustrate a full subscription despite the euphoria in the market at present.
On another note the market continues to cool down as people seem to be waiting for the next move. 2006 annual result reporting season will kick off very soon through to mid March and direction will become clearer as we move through the month. There might be a few bonus share issues or even another stock split. It will be interesting to see if people now accept these really do nothing to the value of their investments or will it trigger another intense round of speculative trading? Time will reveal. Nafikiria watu wanachanuka sasa.
Following the second round of sale of shares in this company, the share price has taken a dip as those who bought at the offer price of Sh.49.50 started selling their shares. With sellers exceeding buyers the price sunk all the way to Sh.41.75 yesterday. It would seem that recent negative sentiments expressed by professional money managers on valuation have also cooled the market somewhat. I'd expect over the next 2 weeks the price will remain under pressure as those looking for a quick profit scamper. Thereafter the share will start to look attractive to investors.
In my view the current selling is opening a window of opportunity, particularly for those with a desire to hold large blocks. With a sugar deficit in the country, coupled with efficiency improvements on the cards for Mumias and low per capita consumption levels this company is still in an attractive position. The share price may now be getting into the zone where the serious buyers should come in.
Various ODM Kenya luminaries have been quoted in the press saying the market activity seen today is drug money being laundered. More recently they say on coming to power after this year's election they will reverse all IPOs (or more specifically government sale of shares) undertaken under the present government. This is a troubling trend and has grave implications for property rights in this country going forward. I hope someone points out the great damage to the economy if these statements are seen through.
I'll speculate how the reversal can be achieved. One way is to buy all the shares back and revert to full government ownership. I'm not sure if this would be the best use of resources given that our hospitals and schools still need plenty more supplies. Another way would be to just nationalize the companies, ignore the current shareholders and just move in. Just have a look at Zimbabwe and see what that idea did to the economy.
I hope these are just statements made in the heat of the moment and nothing more. We are in an election year, politicians will be shooting from the hip and all manner of statements should be expected. My view is carry on with your life, do your thing as reason will prevail as the dust settles after this year's election.