Suffesa Monthly Review by Suffesa Strath

“Together we Achieve”

Suffesa Monthly Review. “Together we achieve”

“Together we Achieve”

Contents:  Editor’s Note.

 A Glance at the Past.

 Financial Economist?

 Suffesa Stock Index – (SSI).

 Index performance.

 Stock Pick of the Month.

“Together we Achieve”

Editor’s Note: The First Edition is here with us finally after a lot of consulting and opinions from different independent professionals. We introduced our own Index which we hope will enable us to form our own views about the financial market as well as challenge what has been there before. We are pleased to have reached this far and we hope that you’ll enjoy this piece as we build on more content going forward. Enjoy!

“Together we Achieve”

A Glance at the Past… With a growing middle class, improved infrastructural development and the most advanced financial services sector in the region, the Kenyan Economy made significant strides in 2012 after a grim economic situation in 2011. In mid-2011, the economy was exposed to unparalleled instability occasioned by import inflation and a volatile currency kicked off by high international food and fuel prices. The Central Bank of Kenya through its Monetary Policy Committee (MPC) had taken a wait and see approach towards the foreign exchange market earlier in the year, and claimed that the market would correct itself. When the shilling slipped past the 100 mark against the dollar and economic agents started complaining over the increased cost of living and doing business, the MPC undertook a drastic tightening of the monetary policy in Q3 2011, increasing the Central Bank Rate by 150 basis points to an all-time high of 18% in December 2011. From economics 101, high interest rates tend to curtail the level of growth in an economy since the cost of money becomes higher. As a result, the economy posted a growth of 3.4 % in the first quarter of 2012, compared to a growth of 4.3% during the same period in 2011. Nonetheless, going forward into 2012, the macroeconomic situation in Kenya embarked on an improvement curve. The MPC maintained the CBR at 18% from December 2011 to June 2012 and curbed inflation over the year, which was trimmed down to 3.2% by December 2012. Most sectors in the economy recorded a slowdown in growth in 2012; given the balancing act policies that the CBK undertook, to try and maintain internal stability and cushion the economy from external factors that were at play in the global economy, which included the Euro zone and the decline in manufacturing statistics amid high unemployment rates in the Far East, Latin America and Northern America. These areas’ respective foreign governments were undertaking expansionary monetary policies to grow their economies through quantitative easing, which led to increased foreign investor activity within the Kenyan economy. This led to foreign reserves in Kenya declining to an eight-month low in February this year. As a result, the import cover declined to 3.75% months as at the end of February falling short of the mandatory four month import cover. This has reduced the CBK’s power to intervene in the

“Together we Achieve” forex market which might be alarming especially if the shilling is subjected to speculative attacks. However the decline in foreign reserves was offset by the disbursement of a Kes.8.5Bn foreign exchange support loan by the IMF seeking to further boost the shilling which has been strengthening since the conclusion of the elections. The multilateral body granted the loan upon approval of the monetary stance taken up by the CBK to ensure currency stability in an environment with high political risk. This is in addition to the previous funds borrowed from the international institution by the country in April 2012 whereby Kenya took up a Kes.9Bn loan to boost its foreign reserves. The government faced budgetary pressure due to a large budget deficit caused by an enlarged federal government, under the new constitution. Moreover, the Kenya Revenue Authority failed to meet its target for the year for revenue collection due stagnated tax revenue. Going into 2013, these challenges are still looming and the government has gone into a high leveraged position borrowing heavily from the domestic and foreign market, to not only foot government expenditure but also to boost foreign reserves and the import cover. On the stock market front, the NSE 20 Index hit an all time high of above 5000 points on 11th April 2013 following investors’ high confidence coupled with their bullish activity after the peaceful swearing in of a new Kenyan president. However, the index soon declined from this threshold as market activity went back to normal and stocks returned to their fair valuations. Generally Kenya’s economic performance though slow has been stable throughout the previous year and the first quarter of 2013 despite the uncertainty associated with an election year. Kenya is expected to grow at 5.80% this year and 6.20% in 2014. The strong rally of the NSE and structural reforms being set into place give confidence that Kenya may achieve the forecast growth rate for 2013. By – Allan Mutuma

“Together we Achieve”

Financial Economist?!... It’s 5am. 5.10am to be exact. Spent the last 10 minutes or so in a stare down with my alarm clock, a lovers tiff of some sort except none of us spoke, we just stared, in negotiations. I promised to love her, if only for just 5 more minutes of sleep. She told to keep my love; she had been in this business too long to fall for those kinds of ‘sweet-nothings.’ Sigh. I thought. (But out loud, she would never forgive me.) So I get up, up in such a huff it takes me a bit of time to settle. I don’t want to get up, but I have to. I need to. See these days, it stopped being about what I want. When you have cats beckoning and exams in merely a few days it stops being about you. You’re not allowed to be selfish. Off to the shower. I am not your typical Financial Economics student. I don’t get excellent grades, consistently answer questions in class or burn the midnight oil teaching myself calculus. I’d like to be, but I’m not. I can’t be. We are all wired differently you see. I have friends of mine, good friends who are great at being students. I on the other hand, well... Right from the time I walked into my first classroom, with my neat front-to-back cornrows, the slightly oversized bag, the well-polished shoes and the eyes, those beaming eyes not so deeply set on a small, round shiny face. I would have been the poster child for petroleum jelly those days. But I digress. From that very first day I knew I was going to be different. Fast forward to about 18 years later, two weeks to exams and I know I am not ready. Hell, even if they were the following day, I still wouldn’t be ready. I am a procrastinator. No. I am THE procrastinator. You could even call me lazy. (Or just call me maybe? No? Never mind.) Where was I? Yes. I’m lazy. It got to a point in ‘Uni’ where I just get by; I survive. Don’t give me that look, that condescending look. I like what I do, Financial Markets excite me. The way the economy works is exhilarating. I like my life. In fact, I love my life. I enjoy it. World War III with the alarm clock aside, I do like to get up in the morning. If only just to sample what the day has to offer. It’s not a purpose-driven life, but it’s something. I haven’t quite found my niche yet. Haven’t quite struck a balance with school and all. But it’ll happen (or not). For now, I’ll stick to my last minute routines and hope lady luck doesn’t give up on me just yet. I work with what I have and within the scope of what I have understood as my own reality of things. As for beckoning cats and exams, there’s Blankets over the weekend. The spirit is willing, but the flesh is weak…  By - Valentine Njoroge.

“Together we Achieve”

Suffesa Stock Index - SSI Suffesa Stock Index Previous

Indicator Stock index Performance % Market Capitalization ( Kes . Bn ) P/E Ratio

Current 3,668.78 96.97 9.02

3,480.66 92.82 8.68

% change -5.13% -4.28% -3.75%

SSI – This is an index comprising of 10 stocks that are trading below their fair values and are deemed to be either grossly undervalued or have high earning potential. The Index comprises of 10 stocks from the Nairobi Securities Exchange (NSE) with a blend of large, mid and small-cap stocks. Based on the valuation multiples, the stocks chosen to constitute the index have high earning potential and the approach towards choosing the index is mainly a value – weighted approach. The decision to have 10 companies in the SSI was to mimic the NSE FTSE 10 index. Below is a table showing the composition of the Suffesa Stock Index: Index Allocation

Weights

Price Change

Centum Investment Co Ltd Ord 0.50

0.07%

-2.93%

CFC Stanbic of Kenya Holdings Ltd ord.5.00

25.13%

-7.09%

1.43%

2.75%

E.A.Portland Cement Co. Ltd Ord 5.00

5.53%

0.00%

Eaagads Ltd Ord 1.25 AIMS

0.54%

0.00%

Housing Finance Co.Kenya Ltd Ord 5.00

6.35%

0.00%

Kenya Power & Lighting Co Ltd Ord 2.50

38.47%

-5.18%

Liberty Kenya Holdings Ltd Ord.1.00

6.41%

2.67%

TPS Eastern Africa Ltd Ord 1.00

10.21%

-2.80%

Uchumi Supermarket Ltd Ord 5.00

5.86%

-5.75%

100%

-1.83%

Crown Paints Kenya Ltd Ord 5.00

*Stocks used to form the index are represented in the Index allocation

Index Allocation Centum Investment Co Ltd Ord 0.50 CFC Stanbic of Kenya Ho ldings Ltd ord.5.00

0% 10%

Crown Paints Kenya Ltd Ord 5.00

* Securities represented in the index can change from period to period depending on fair value of the stock.

25% E.A.Portland C ement Co. Ltd Ord 5.00

6% 1%

Eaagads Ltd Ord 1.25 AIMS

6% Housing Finance Co.Kenya Ltd Ord 5.00

6% 39%

Kenya Power & Lighting Co Ltd Ord 2.50 Liberty Kenya Holdings Ltd Ord.1.00 TPS Eastern Africa Ltd Ord 1.00 Uchumi Supermarket Ltd Ord 5.00

Chart showing the respective weights allocated to each stock.

“Together we Achieve”

Index performance: Index SSI NSE - 20 share Index

Week 1

Week 2 Week 3 Week 4 Gain / Loss Points change 3,668.78 3,660.99 3,550.01 3,480.66 -5.13% (188.12) 4,985.68 5,020.50 4,868.29 4,785.38 -4.02% (200.30)

Over the month of April, the Suffesa Stock Index lost 188.12 points to close at 3,480.66 losing 5.13% while the NSE 20 lost 200.3 points to close at 4785.38 losing 4.02%. The recent dip in the market has been attributed to investors profit taking from the stock price appreciations witnessed before and after the elections. Although there is a generally positive outlook on the economy in the coming months, we expect market correction to take place as some counters are overvalued following a bullish run into the end of the year on the back of positive investor sentiments and confidence in the market.

Chart showing SSI vs. NSE 20 performance;

SSI vs NSE 20 Performance 1.0200 1.0100 1.0000 0.9900 0.9800 0.9700

Suffesa Stock Index - (SSI)

0.9600

NSE 20 share Index

0.9500

0.9400 0.9300 0.9200 0.9100 Week 1

Week 2

Week 3

Week 4

 Data has been scaled down to allow for volatility.  Downward trend witnessed in both indexes in the past month. *The SSI has been ranked against the NSE 20 share index and not the FTSE 10 because of the popularity of the NSE 20 and publishing frequency of the NSE 20 share index.

“Together we Achieve”

Stock Pick of the Month:

This month, the top stock was Safaricom limited rising by 13.6%. With a market cap of 282Bn, the stock provides ample liquidity for investors to take up positions in the stock. The stock has witnessed a good month in April with the pending full year results announcement in May and the CCK report which showed that it gained market share from its competitors, Orange, amid increased data usage amongst Kenyans. In addition to this, the report also indicated that there was an increase in data usage for Safaricom particularly and that the telecom industry had grown. With the recent announcement of M-PESA’s success of having the most deposits, (226bn) even outdoing the banks, the stock is currently trading at a current P/E multiple of 17.16, at a share price of Kes. 7.05. With an EPS of 0.41 for the year 2012 and the upcoming announcement of the full year results in the month of May, investors have been upbeat about the stock pushing the price above levels last seen during the IPO. The share price levels will allow investors who bought into the stock during its IPO to exit at a gain, as the rest, highly likely foreign investors, continue to hold on to it.'

Safaricom Share price – April.

Source: www.bloomberg.com

“Together we Achieve”

Note: Any suggestions towards improvement of the Suffesa Monthly review are welcome. We look forward to your views and comments on our Facebook page and contacts alike. If you wish to become part of the inaugural editorial team at Suffesa Monthly Review, don’t hesitate to contact the person below: Lilian - +254 719 339 906.

Report by: Strathmore University Finance and Financial Economics Student’s Assosciation – (SUFFESA) Email – e.sufesa@gmail.com Disclaimer: The content provided on this document is provided as general information and does not constitute advice or recommendation by SUFFESA and should not be relied upon for investment decisions or any other matter and that this document does not constitute a distribution recommending the purchase or sale of any security or portfolio. Please note that past performance is no indication of future results. The ideas expressed in the document are solely the opinions of the authors at the time of publication and are subject to change without notice. Although the author has made every effort to provide accurate information at the date of publication all information available in this report is provided without any express or implied warranty of any kind as to its correctness. You should consult your own independent financial adviser to obtain professional advice before exercising any decisions based on the information present in this document. Any action that you take as a result of this information, analysis, or advertisement is ultimately your responsibility.

Strathmore University, Student Centre, Clubs office, Madaraka, Nairobi. Tel: +254 725 471 260 (Club Official)