Friday, July 21, 2006

Scangroup IPO: Are these Rumours True

The on-going Scangroup IPO has been trailed by several rumours which are doing rounds in tao. A few of them below:
  1. That the promoters of this IPO knew that the same would be undersubscribed hence they sought underwriting from the sponsoring investment banks(CFC, Standard and Suntra)....this is the firt IPO in kenya to be underwriten..up to 43%.
  2. That the reason why a clear allotment criteria was not set is that Scangroup favors few large shareholders rather than many small shareholders. As such they 'tricked' the CMA to get away with a vague allotment criteria ie. 55% retail and 45% institutions. This way they can be able to allot as they wish without breaking any rules. Eg. In the event of oversubscription, they could allot pro-rata according to the volume of shares applied for without a minimum or maximum allocation. This would crowd out most of the small investors and favour the big applications. You will recall that Kengen had a minimum allocation of 500 shares then the rest prorata to a ceiling of about 6500 shares.
  3. The Esther Passari's Adopt a light is the suitor targeted for take over by Bahrat Thakrar and duly mentioned in the prospectus. That is why we no longer hear of the Adopt a light IPO. That the cash raised form this IPO will go to Passaris towards this take over. Then she will be offered shares in one of the flagship subsidiaries of Scangroup.
  4. Have you noticed that the brokers are dilly dalying about this IPO. The application forms are not easily forthcoming and very little info is in the public domain as compared to KENGEN. Also, the advertising budget has been kept to a minimum. In the big 4 brokers, forms are only allowed to those applying for 10000+ shares. These manouvres are designed to intentionally crowd out the small investor (read 500, 1000, 2000........9000 shares)

Thursday, July 20, 2006

Equity Bank Listing: the facts

The announcement by Equity Bank that their shares will trade on the NSE beginning 7th August has surprised many, mostly because they have refused to sell new shares to an expecting public. The bank may have been motivated to take this path for several reasons:-
Fear to Dilute the stake of anchor shareholders
The bank's ownership structure now stands as: IFC & AFRICAP 18%, BRITAK 12% OTHERS 75%. If the bank was to float new shares, they would have to reduce the stakes of these three. This must have been a scaring prospect for these shareholders as they would like to maintain the control they now have over the bank
CMA , NSE & brokers' fees
By avoiding to list new shares, the bank have deftly avoided a subtantial chunk of the fees payable to these institutions while at the same getting to trade at the NSE. They have also managed to escpe to pay fees to a myriad of market operatives including brokers, lawyers, agents (read banks). In the Scanad IPO which is much smaller, this is a hefty 70m Kshs. Equity's would have hit nearly 200m in fees alone.

EQuity's Future
The bank appears to be on a positive growth momentum in the short term. In the year ended 2005, they surpursed the phsycological 500m mark in profits. This ensures they join the league of the top 6 big banks by way of profits. They were crowned the third best bank in kenya on the MI finacial sector survey 2006.

Unique Market Niche
The bank has carved out a distinct and unique market for itself in micofinance. No other institution other than the fast expanding Family Finance has been able to duplicate their business model. Most important is thier unconvetional way of assessing risk. Instead of using, the famous land, assets and collateral method, equity simply uses a client's account history or group credit. This has proved to be hugely sucessful. They have also attracted the trust of small depositors in the urban and rural areas thereby bringing in much needed chep deposits for onward lending.

Support from Wordbank
The world bank is the largest shareholder with a stake of 18% throgh their private investment arm, IFC and AFRICAP. This investment appears to have been motivated by the desire to support microfinace in the developing world. In return this has given Equity the legitimacy and 'credit worthiness' to attract attention and investments from other institutions and high net worth individuals.

However, there are many risks which may dampen investors appetite forEquity shares.
Lack of capacity to serve all customers adequatly
Equity has over 500,000 active customers (source, equity annual report 2005). With all these coming in for basic services like deposits and withdrawals every now and then, they risk being unable to service them fast and efficiently. The solution perhaps lies in what Equity CEO, James Mwangi is trying to do; install and IT platform to handle basic services. Already, the bank has invested over Kshs. 600m in an IT system from Infosys of India together with more than 50 ATMs now installed in many towns. However, this appears not to be working as there are still vey long ques at the bank as late as today, many months after the installation of the ATMs. Looking at these ques, one sees many customers lining up to do basic functions including cash deposits and withdrawals, instead of going to the ATMS. Perhaps the bank may consider launching a customer education drive to go hand in hand with their roll out of ATMs. If this is not sorted out, theese customers may run to other upcoming institutions like family finance and Co-op bank.

Provisions for Bad Debts
Many analysts believe that Equity's formula for bad debts provision is inadequate. Loans that would have been classified as 'bad' in other major banks are still 'performing' in equity's book. This raises a dark cloud over the future of the bank. Central bank's initial delay in issuing Equity with a formal banking license till 2004 is seen in this light. Cosidering Kenya's history of bad debts, this is the biggest risk facing investors

Capital growth and dividends
Equity's shares are in huge demand. This is best illustrated by most investors who are visinting brokers and agents now. they have been heard to say that they prefer Equity shares to Scangroup, not knowing that the former is not issuing new shares to the public. With this demand, and the ongoing growth across the board, the shares are likly to continue gaining at the NSE upon lisiting thus creating value to shareholders. In addition, the bank has maintained a generous dividend payout history which they're expected to maintain.

Need for additional capital
The bank has a capital base of Kshs. 1.8bn. Under the CBK Rules, this allows them to take deposits of up to Kshs. 23bn . Their deposits are growing at 30% p.a. If they maintain this kind of growth, then they will have to raise additional capital in 2009 so as to meet the CBK requirements. The deposits with then have hit Kshs. 25bn. This will be an opportunity for investors to participate i a rights issue to raise the funds.

In the foregoing i consider these shares a good buy