Graham and Dodd
In the past few months I have gone into hibernation(and still am), desperately intoxicating myself with the Graham and Dodd theorems on value investing, trying to capture that which made the oracle of Omaha what he is today, just that he picked up these theories from the teacher himself and went on to offer to work for free at his partnership… read more on that from the snowball
Here am borrowing from two books, intelligent investor and of course security analysis which will guide you on how to choose those securities (guided by analysis of the financial reports as the foundation)
The metamorphosis of the stock market
Recent developments in the Kenyan capital markets are typical of any emerging securities market, analysts are now a currency and are floating around all major brokerages as evidenced by the numerous ‘musical chairs’. Which is driven by more retail investors demanding quality research, this is the third major stage in the metamorphosis of the Kenyan stock market, which has followed closely after the take over of most stockbrokers by banks and subsequent recapitalization, with the initial stage being the death of the family controlled/individual owned, ‘careless about corporate governance and separation of personal from business accounts’ years that were before us.
The next stage will definitely be the demutualization of the stock exchange followed by most likely introduction of the more sexier exotic products e.g. ETF’s (Exchange Traded funds), possibly single stock futures, REIT’s (Real Estate Investment Trusts), CFD’s (Contracts For Difference) etc..
Back to my topic, is value investing a viable option in Kenya? of course, it should be, but the question that will linger is what would be the payback period? proponents of this ideology which I now fully subscribed to, have a holding period of ‘forever’ with the argument being if the stock is good and is appreciating over time, consistently and probably paying a good dividend, then why incur transactional costs associated with offloading and on-loading (of-course different markets charge different fees in Kenya its a fee between 1.8% to 2% of the total value depending on the volumes and value of your transaction, and currently without any capital gains tax, while in other markets the fee is higher and in most cases includes a capital gains tax thus eliminating any benefits that would be accrued by selling when the stock has been fully priced and stocking up when the price drops)
The death of property… soon... (I checked this with Octopus Paul)
Lets look at specific examples, in the recent past, Kenyan real estate/property (land and houses) prices have been rising phenomenally, to an extent where in my un-informed position(because I do not have access to any comparable research on this) believe that we are experiencing a boom and its only a matter of time before prices slow down if not outright crush.
What do we expect when we can now buy land the size of a 30 by 80 in extremely remote areas and justifying to ourselves that there is a by-pass which will be going through there (be it, the fact that the by-pass is a few kilometers away or even non existent) and then when that does not work we claim that land is a scarce and limited resource. As if shares are not scarce??? and we still experience downturns???
Back to Graham and Dodd
- Inherent value
So if I wanted to be exposed to land in Kenya, without the hustle of buying the physical asset, then I would look at listed companies that have substantial ownership of land, and in this category comes the agricultural companies which own substantial tracts of land.
e.g. Limuru Tea owns over 250 acres in Limuru, Eaagads has over 480 acres of land in Ruiru on the Nairobi-Thika Road, and then I would do a simple calculation, what is the inherent value of this land, and is this reflected in the current share price of the company?
- Margin of Safety
KCB rights issue was priced at Kes 17 and the shares were hovering at around Kes 18 -20, there was no sufficient margin of safety.. period. TPS Serena on the other hand has issued its rights at Kes48 with its share price in the region of Kes 54-57 which gives a slightly larger buffer. Of-course this is just one metric and these are two different companies with very different financials and future outlooks not withstanding the fact that they are in different industries too. But margin of safety is margin of safety and that’s the only way to protect yourself from the downside that is inherent in investing in shares. How about Stanchart rights issued at Kes 168 while the share price is at Kes 270, that’s great margin of safety.
* However am using this concept(margin of safety) loosely and more for illustrative purposes since i am technically assuming that the prevailing share price reflects the true value of the company. This is not necessarily so.
The birth of corporate raiders in Kenya
We are a conservative people by definition and definitely by action, but recent developments has seen a lot of private equity shops both local and foreign set up shop in Kenya, we only have so many SME’s and emerging companies in Kenya and the wider East Africa region that can;
1). absorb the large briefcases of dollars being shipped in and 2). that are willing to relinquish control as the nature of PE firms is to take equity positions in their target companies, so what will happen after these low hanging fruit is fully taken up. These firms will of course descend on the stock market and acquire companies that have a mismatch between the market capitalization and net asset value.. e.g. say, the agricultural companies which they can acquire put a hold to their agricultural pursuits and use the land for estate development or even sub-divide the huge farms and sell the land in pieces of course this should (not necessarily will) generate shareholder value.
Or acquire firms and force them into major cost cutting measures by taking over the board and realizing the benefits of leaner and probably more efficient companies…
Is this the next cycle that the private equity shops in Nairobi will take.. probably..
*Sometimes as I write a post it takes a life of its own and denies me the initial intention which leads me to change the title in most cases than not, for instance this was to read ‘Is value investing viable in Kenya?’
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