|
 |
Interview with:
Mr J.P. MUNGE,
Chairman & Mr ATHA NAMUCEO
Nairobi, May 7th 1999
Contact
Head Office:
Postal address: P.O. Box 14686, Nairobi, Kenya.
Visiting address: 14th floor, Nation Centre, Kimathi Street, Nairobi
Tel: + 254 (2) 227300
Fax: + 254 (2) 213024
E-mail: shahmunge@iconnect.co.ke
|
Shah Munge is one of the 5 most important brokerage houses in Kenya. Since when have been established in Kenya?
We started in 1969. I was trading under the name of CL Shah, the oldest Kenyan top broker. It transformed itself in 1990 into Shah Munge & Partners when I joined then, and subsequently it has been expanding not as a partnership anymore but as a limited liability company. From 1992 the company has been rated as number 1 at the stock exchange in terms of turnover. In 1998 the figures we have from the NSE (Nairobi Stock Exchange) place this company as number 1 in terms of equity, turnover and fixed income.
How have you managed to reach that position?
I would say its because Shah Munge Partners was one of the original six top brokers. For a long time we were only six established brokers, so the clientele basis was wider. Now we are 20 stockbrokers and find that the market share of 22% last year is unlikely to be sustainable. As new comers also establish their market needs, and they improve their marketing systems, the clientele base expands. That market share of 22% in absolute terms (having out of 20 players) is very skewed and we expect it to come down. However if that market share came down, we also expect that the volume of business at stock exchange would also increase. At the moment the NSE has got a market cap of $1.8. Billion. With certain measures which are being undertaken particularly the electronic clearing and settlement systems (central depository system), we think the turnover will increase. So if we say our market share went to 15 we would be talking of a larger plan.
What role does Shah Munge play in the NSE?
Firstly we play the role of stockbroker, buying and selling shares. We also work in areas such as corporate finance, providing advisory services to those who want to raise capital, either through private placement or through public offers. We also work with the government on the privatization process. We are involved in the management of the Exchange. Through that we are able to provide ideas on how the Exchange can improve. The Stock Exchange is an investment option, not only in this country but worldwide. There is a very major challenge for both players nationally at the global level. Naturally, there is limitation to what a bank can do. We encourage the expansion of the market through the participation in lectures to explain what it is to invest in the Exchange.
The Stock Exchange is presently flat, mainly due to high interest rates and the huge benefits of Treasury bonds. How do you think the situation can be improved and when do you foresee the full expansion of the NSE?
Probably a good example is a tennis ball: it requires some energy to make it bounce. Once it bounces its very easy to play, but first it needs a bounce. This economy has been going down so significantly that it the situation is not just going to improve in three months. Interest rates have come down and the government has given assurance about macro-economic stability. The right noises are thus being made, but it is going to take time. For instance, you need to generate commercial demand which stimulates companies production, but purchasing power was eroded that Kenyans had stopped saving. Interest rates were so high such that big business had to use their profitability while marginal companies were actually wiped out. So you need time due to the extent to which the economy has gone down.
There are still some industrialists and consumers who still believe that the worst is yet to come. Right now we have a major political constitutional issue regarding the succession of the President which needs to be resolved. Most people will not tell you this, but we have clients who are worried about what will happen after President Moi since we do not have a proper constitution in place. Recently there was an article in the Economist about Kenya. It concluded that if the constitutional process is not put into place and Moi exits at the year 2002, as planned, the center will not hold, and that comes from a very conservative media. At the back of the mind of many investors that is an area of concern. The President has been there for 21 years; he has not really created a system whereby you have an able and clear successor. Obviously that has strengthened the centralization of power around him but at what expense. When you have a centralized rule the institutions become weak and therefore continuity becomes a problem. What is difficult is to try to cope with this political anxiety which affects investments at medium and long term. Not that the country will fall into pieces after he retires, but investors cannot visualize in their minds what the political environment will be after the year 2002.
I believe that is the concern of most people. However we have taken major steps over the last 7 years. We have now a multiparty system and competitive politics, but the opposition is hopelessly fragmented and weak in relation to the establishment. These are concerns that people have. How can they be assured of progress?, by very definite and clear movements towards a change in the constitution. There has been deal cutting between in the opposition and the government so that those who are in the government now would feel comfortable that, in the event of change, they would not be in trouble. That is part of the process of compromise and discussion that is going on with the constitutional review. And Kenyans want to see definite progress along the constitutional review to feel more secure. Few people would tell you this, but that is the way it is.
Your company has been actively involved in the privatization process. Can you tell us about it?
We have been practically involved in every government divestiture. Except a couple of them, we have been handling most of the ones which have come over the NSE.
We were the leading stockbrokers for Kenya Airways. It is Kenya largest floatation bringing a net inflow of US$ 14 million. We are very proud of it. The I.F.C. and the WB gave us an award for the way it was done considering its transparency, management and reach. Transparency on how we appointed the advisors. In terms of management how it was structured. In fact it was an example of how to transform an inefficient government corporation, to market it and even to sell it, not only to domestic investors but also to international ones. We had to bring it to international standards in the shortest time possible. In terms of reach we had to find a way to strike a balance between domestic investors, who are unsophisticated, and international fund managers, and we got it. That is why the WB actually gave us this award, because they recognized that it was really advanced example of transparent divestiture. But the stock has not done well.
Why is the Stock not doing well?
As we said earlier, the market is depressed and there are negative sentiments. If you look at the macroeconomic issue the Treasury is making all the right noises: they say the want to control government expenditure, inflation, and both external and domestic debt. That, in a young, fragile democracy like ours has to go in tandem with political assurance. Look at interest rates, for instance. If they drop, people will wait a few months to see if they hold. If they do and they seem to be disciplined, there is no skepticism. You also have to look at other signs, for instance, social unrest does not exist.
Regarding the stocks of Kenya Airways I think that its low performance has to do mostly with sentiments. Investors are holding back, first of all because the economy has been performing so badly over several years. People do not have purchasing power and although now things are picking up, there is also the question of holding back and saying "are we really out of the woods, are we really on the front side?". International media such as the magazine you represent are helping to reassure people that things are changing. They have to be convinced that the government is committed to its macro economic policy, and that its statements and pronouncement are consistent.
Secondly on the government has got to address the issue of security and social order, to have it controlled in order to reassure both, domestic and international investors. In fact if you compare this country with Uganda, Zambia or Tanzania we have a very good case. If all things are applied correctly the future is very bright. Kenya is the place where people should be looking at 5 years down the line.
It would take so little to make things better if we had a consensus on the fact that we are on the right track, if the government were to address all these issues that we have mentioned, and if there were no political concerns. | How are you planning on being involved in the new wave of privatizations, especially the remaining companies, which are quite large?
We have the experience, the market size, a domestic and international clientele base. Without being modest, we would be the natural choice. The privatization bureau (ESTU) wants to build capacity among the 20 stocks brokers, so it cannot be using only one at the same time.
As you said, the companies left for privatization are the high profile ones: Kenya Telkom, Kenya Railways, the Ports Authority, etc, which, by our standards are huge institutions. Stockbrokers so far have come in when the companies have been bargained and are ready to be sold to the public. Behind the scenes there is a lot of work been done it terms of restructure, which at the moment is being done by merchant banks.
We say that the stockbrokers have corporate finance expertise. We are capable and we desire to be involved also at the primary stages, not just at the secondary ones. Brokerage firms will transform themselves into corporate finance houses, i.e. they will not only come in at the last stage of divestiture, they are going to play a role in the restructuring process. Kenya Airways was a wonderful case whereby we invited KLM. They were for about one year in Kenya Airways systems doing sales, etc. When it was sold to the public it already was a very tightly cohesive international standard type of Airline. Armtrack, for instance, is looking at Kenya Railways, although it is not official yet, and the Koreans want to help with our ports, etc. It is at this stage that merchant bankers and stock brokers can play a role to help reforms. That is the way we would want to operate.
We also get inquiries from our international contacts on what the privatizing plan is. Other companies who are interested in investing come to us and we help them by providing information.
What kind of international connections do you have?
There are very few firm managers specializing in emerging markets. There is a joke going around that says that whenever you enter into an emerging market you will never emerge. But in fact those who go into emerging markets can actually make a killing, as happened in Russia (1992-96), when they made 200% in dollar terms. Sub-Saharan Africa has been insulated from the boundaries of wild fluctuations either upwards downwards. When that happened in Eastern block countries, and more recently in Asia or Latin America, our markets were completely unaffected. Hence, portfolio managers who appreciate that are now saying that Sub-Saharan Africa offers a natural edge to portfolio and bank managers. In Sub-Saharan Africa we are more vulnerable to domestic politics, although this is unlikely to happen to Kenya.
Typically the people who have contacts with are Templeton, Genesis or Clement Martins which are dedicated to merging markets. Others such Meryll Lynch, have emerging markets divisions. Banks like Standard Bank of London or Standic of South Africa also have interests, in Sub-Saharan Africa. The majority of them deal with our office.
Our market last year was driven 30% by foreign institutional investors so it is not a segment of the market you can ignore. In 1994 the Nairobi Stock Exchange was the best performing emerging market in dollar terms (84%). All this to say that there are opportunities in this market. These bank managers take a medium to long term view. They buy into companies because they see them cheap and they know that they will going to be around for a long time. They do not bother about fluctuations due to domestic politics.
Kenya is known to be an agricultural country, and we have wonderful companies in this field, but in 20-30 years this country is going to industrialize and starting to manufacture micro-chips. But for now buying into agricultural companies such as Sasini or Broke Bond you are buying into the future. Tourism is another sector worth investing in. Foreign investors take a slightly more strategic investment horizon.
How do you see the development of Shah Munge and of the NSE in the next few years?
We see the company doing well despite the poor performance of the economy. Of course if the economy does better the NSE will boom and so will we. We want to develop expertise in corporate finance, whereby we would provide advise on take-overs and mergers, etc. In fact that is a natural option to our stockbroking business. That is where we see ourselves going. We are also looking into the regional markets in order open an office in Dar-es- Salaam and in Uganda.
We also want to do more research. International investors ask for more and more research. Domestic investors do not ask for it. If we talk about a company such as Kenya Breweries, for instance, they probably know more about it than yourself. But when we are talking about a prospect investor let's say in London, he does not know anything about our local companies, so research is very important for them. However it is also expensive, so you need to get the right people.
Regarding the Stock Exchange itself, growth is going to come from a number of areas. The first one is from the privatization of some large companies. We believe it will build capacity for US$ 1.8 million, and that will put the NSE in the map. The second area of growth for the Stock Exchange will come from the private sector, which, with the exceptions of South Africa, Morocco and Egypt, is the most developed Sub-Saharan Africa. Take for instance the network we have in light manufacturing or service industries: 40 insurance companies, 50 banks including 20 multinational ones, food processing, etc.
The third area of growth will come from technology and information. The central depository system, which is an electronic clearing system, will hopefully become fully operational at the end of this year. Today buying shares is still a very tedious process. You have to sign a transfer form, the seller signs a transfer form, he physically takes it to the registrar who manually checks that the signature is the same. So by the time the buyer gets the certificate he is tired. On top of it, if you buy a share today, you cannot sell it until you have a certificate, and it takes 4-8 weeks to get it. With the electronic system we think the turnover is going to be increased. Last year the turnover was only 2½ . That means that of the market capitalization of the exchange only 4% changed hands. If you increase that turnover that is where the stockbrokers are going to make money.
The fourth item is the Region, united by technology. Kenya is a US$ 10 billion economy, Tanzania is about US$ 5.5 and Uganda is about US$ 5. And now we have the spirit of the East African Community. However this is a very sensitive political issue. If there were no barriers to capital flow, you will find that Nairobi would be the natural hub for capital markets, but nobody wants to say it loud because Ugandans would be upset. Being the East African Community at such a delicate stage we do not want to shout about it, because we do not want to offend anybody.
What would be your message to prospect international investors?
There is value in this country ad in sub-Saharan Africa. Here are the main reasons:
We are insulated from fluctuation and risks associated with emerging markets.
There is value. If we look at the price/earning multiples, you see that in UK you typically have multiples of 30. Here we have Barclays Bank trading in multiples of 60, and there is no difference between Barclays Bank Kenya and Barclays P.L.C. (London); their profile and management is the same. There are truly under valued assets in sub-Saharan Africa.
Finally something that is often omitted or forgotten by many analysts is that governments cannot get worse. The world is moving into a more democratic and consultative way of governing, away from centralist governments to more open systems. So it can only get better. The political and social framework can always get better.
These factors really make the Kenya the perfect recipient for investment. Now, if you want to invest for six month then perhaps it's not the place, but if you want medium-long term investment, this is the place to come. |
|
© World INvestment NEws, 1999.
This is the electronic edition of the special country report on Kenya published in Forbes Global Magazine.
November 29th 1999 Issue.
Developed by AgenciaE.Tv |
|
| | | | |
| |
|
