Amana Capital October Newsletter.

Published on 2021 | 10 | 13

Infrastructure Bond (IFB1/2021/21) Oversubscribed

As we had anticipated, the Infrastructure Bond (IFB1/2021/21) auctioned by the Central Bank of Kenya in September received high demand from investors. 

The Central Bank received bids worth KES 151.3 billion against KES 75 billion which was on offer. They accepted KES 106.7 billion from the amount bidded at a weighted average interest rate of 12.737%. 

Infrastructure bonds are attractive because they are exempt from withholding tax and hence generate a lot from investors across the board. 

However, concerns continue to persist as heavy borrowing by the Government from the domestic market continues to have a negative effect on lending by banks to the private sector. Banks hold the largest proportion of the Government domestic debt, that is, 51% of KES 3.7 trillion. Money that would have been lent out to the private sector is being invested in government securities offered by the Central Bank and hence starves the economy of the required funding to drive growth and hence stalling the recovery of the economy.

Not A Rosy Month for Investors in Shares

September was a month to remind investors that markets do not move upwards indefinitely. Global markets were roiled by concerns of systemic risk from China’s Evergrande crisis and power crunch and concerns of a US government shutdown. 

The US main share indices: the S&P 500, Nasdaq Composite and Dow Jones Industrial were down 4.7%, 5.3% and 4.2% respectively in September. The Stoxx Europe 600 Index was down by 3.41%.

Locally, the trend was the same as a result of profit taking especially on banks and Safaricom. The NASI and NSE 25 declined by 2.2% and 2.6% respectively, however, the NSE 20 was up marginally by 0.5% in September. Foreign investors bucked the trend for the last two months and became net sellers, net foreign flows stood at USD –8.52 million in September compared to USD 15.66 million and USD 1.43 million in July and August respectively. 

As highlighted earlier China’s Evergrande crisis contributed to the volatility witnessed across global markets. Evergrande Group is currently the world’s most indebted real estate developer to the tune of USD 300 billion. The Chinese real estate developer sent markets on a whirlwind when information came out that it may not be able to make interest payments on some of its liabilities and it could miss a principal payment on one of its loans. What is causing anxiety amongst investors in and out of China is whether the Chinese government will step in and help, however, the government has been quiet. The possibility of Evergrande’s crisis morphing into a full-blown crisis as the one witnessed in 2008 remains low. Remember the Ever-Given cargo ship that got stuck in the Suez Canal, my superstitious friends would say that anything that starts with ‘Ever’ is cursed; Evergrande, Ever Given and locally Eveready

Inflationary pressures 

Headline inflation for the month of September increased to 6.91% from 6.57% in August. Food and energy prices have been the main drivers of inflation in 2021. Food inflation was up 10.63% year-on-year while transport costs were up 9.21% year-on-year as a result of high petroleum prices. 

The pain of high petroleum prices being felt by Kenyans are not expected to abate anytime soon. Crude oil prices as measured by WTI Crude and Brent Crude were up by 8.41% and 8.27% in September. 

Globally inflation is on overdrive following policies by major Central Banks to deal with the slump caused by the pandemic. More inflationary pressures are now being triggered by energy concerns across different sides of the globe. Europe is battling increasing natural gas prices which are up 440% year-on-year. Natural gas is mainly used for production of electricity in Europe and with winter on its way, heating of homes is expected to be an expensive affair. Soaring coal prices across Asia is leading to power outages and factories are being forced to stop production for hours, the impact of this is that global supply chains are expected to be affected leading to higher prices of goods. Tighten your belts, soaring prices globally will be felt back here at home.

Nation Media Group Complete its Share Buy Back

One of the main objectives of public listed companies is maximizing shareholder value. 

If a company is generating more cash than it needs to fund its own operations and investments, it might choose to return that excess cash to its shareholders. 

A company may achieve this either through issuing dividends or by buying back its own shares in the open market which is commonly known as a share buyback.

Locally, Nation Media Group is the first listed company to execute a share buyback. They planned to buy back 10% of its issued and paid-up share capital which was equivalent to 20,739,652 shares at a price of KES 25.00.

The board of directors of a company may prefer share buy backs as the best way of returning the excess cash to the shareholders for the following reasons:

  • The board might feel that the company’s stock is undervalued and reducing the shares in circulation will make the remaining shares more worthy, however, this is not always the case.
  • The company’s large shareholders may not want the extra tax burden of an increased dividend. In Kenya, dividends accrue a 5% withholding tax for local investors and 15% for foreign investors.

Nation Media Group share buyback was opened on 28th June 2021 and closed on 24th September 2021. It achieved a success rate of 82.5%, translating to 17,101,352 shares being bought back.

The share buyback left the number of ordinary shares available for trading at the NSE at 190,295,163.

The successful execution of the first buyback by Nation Media Group is expected to spur more companies who are cash rich, but the market has undervalued its shares to use it as an avenue to unlock shareholder value.

However, share buy backs are neither good nor bad. If a company has cash to spare and its shares are arguably undervalued, a buyback can be a good way to generate benefits for shareholders. But if its shares are expensive, it’s worth asking why the company isn’t choosing to pay a special dividend to its shareholders instead or hanging on to the cash for a rainy day.