19 Sep 2014. KK @ 9.80 KQ @ 9.50 ... @obiero is a tough chap hanging in there.

The previous playing the market endeavors have focused on a 1 year period which have been more of speculation and less of investment.

In 2010: http://www.wazua.co.ke/f...aspx?g=posts&t=5551

In 2011: http://wazua.co.ke/forum.aspx?g=posts&t=10373

In 2012: http://www.wazua.co.ke/f...spx?g=posts&t=16435

The year 2013 was a good year for many investors. This year, I only traded for 3 quarters (April to Dec 2013) through Coop Bank (Bought at 15 sold at 18s), Equity Bank (Bought at 32.75, sold at 35.75), CFC Stanbic (Bought at 60) and Safaricom (Bought at 7.50 sold at 11).

The capital gains from these shares have delivered satisfactory results well above the 19.2% NSE 20 share Index rise for 2013. By End of year 2013, I had sold the Coop, Equity and Safaricom shares and await my target price of Ksh 100 for CFC Stanbic at which point I will consider whether to continue holding the share or book profits.

The objective of playing the market 2014-2016 is to double capital gains within the three year period. As such, the shares I have chosen over this period of time are those which I consider to offer the greatest chance to achieve this objective based on my projections.

Despite a target of holding for three years, I will be reviewing the performance quarterly just to update on progress.

1. DIAMOND TRUST BANK

Purchase Price: Ksh 192
Currently trading at (Year 2012) EPS of 17.5 and P/E of about 11.
• DTB has by far the best quality of loan book of the listed banks. Its NPL ratio as at Q3 2013 was 1.1%. (Compare with KCB 8.4%, Equity 5.5%, Coop 4.6%, Stanchart 3.0%, Barclays 3.0%, NBK 12%, and HFCK 8.2%). The rising NPL ratio in most of these banks should be a source of concern especially if by Q4 2013 the ratio is not reducing.
• DTB also has the most prudent loan loss provision policy; as at Q3 2013, its NPL Coverage was 96.1%. (Compare with KCB 44.5%, Equity 42.7%, Coop 51.5%, Stanchart 24.2%, Barclays 83.3%, NBK 42.5%, HFCK 14.2%).
• The bank is regionally diversified with almost a quarter of its profits coming from its regional subsidiaries in Tanzania, Uganda and Burundi.
• One of its major shareholders (Habib Bank) has indicated an intention to increase ITS shareholding in the bank from 11% to 26% over a period of 5 years. With another major Pakistani Bank already conducting due diligence on a smaller Kenyan bank for acquisition, it is evident the Pakistanis are getting attracted to the Kenyan Financial Sector. The 15% additional shares will be sourced by Habib Bank from the NSE market ensuring a constant source of demand for the DTB Shares at the NSE.

MY 3 YEAR PROJECTIONS ON DTB:

The growth in EPS for 2013 as compared to 2012 is about 35-37%. I estimate that the bank will maintain a similar growth trajectory. The growth will result from a conservative dividend policy with the retained profits being used to finance growth in loan book, opening of new branches and acquire more shares in its subsidiaries (Uganda – currently at 57% shareholding, Tanzania – currently at 63%, Burundi – currently at 64%).
I assumed a conservative 25% year on year growth in EPS plus assumed a P/E of 10 to arrive at my projections.

Projected EPS for Financial Year Ending Dec 2013: Ksh 24; Target Price by April 2014; Ksh 240
Projected EPS for Financial Year Ending Dec 2014: Ksh 30; Target Price by April 2015; Ksh 300
Projected EPS for Financial Year Ending Dec 2015: Ksh 37.50; Target Price by April 2016; Ksh 375
Projected EPS for Financial Year Ending Dec 2016: Ksh 46.9; Target Price by April 2017; Ksh 469

(Purchase Price – Ksh 192, Target Price after doubling of capital gains Ksh 384 hence target may be achieved by July 2016).

2. TPS SERENA (E.A)

Purchase Price: Ksh 46
Currently trading at (Year 2012) EPS of Ksh 3.60 ; P/E of about 12.8 and at Book Value.

• The share is greatly influenced by travel advisories and negative publicity events such as happened this year with the JKIA Fire and the Westgate Terrorism Attack. The security uncertainties occasioned by the Kenyan elections having been held this year further compounded the negative fortunes for this share for 2013 as tourist numbers were depressed.
• The Jubilee government seems committed towards improving the tourist numbers with a target of 3M tourists by 2015.Further, the single tourist visa for Kenya, Uganda and Rwanda in addition to a joint marketing strategy by the 3 countries (eg a single tourism expo stand at tourism trade fairs to market East Africa as one rather than individual countries) should generate good synergy. This will be very beneficial for Kenya especially in targeting tourists from countries where their governments have issued travel advisories against Kenya in particular but not the other East African Countries.
• TPS Serena E.A has a good regional diversification that mitigates against country specific risks. It is present in Kenya, Tanzania, Uganda and Zanzibar. It is also managing hotels in Rwanda, Mozambique and soon Burundi.
• In Jan 2013, it acquired a 79.2% stake in TPS Uganda ensuring that Uganda will contribute almost a quarter of its profits going forward, with Kenya contributing less than half and the other countries contributing the remaining quarter of profits hence further mitigating risks.
• The Kampala Serena sits on 17 acres and TPS Serena is exploring the possibility of further diversification into Real Estate through Office Space and Shopping Mall development within the expansive land.
• Historically, TPS Serena E.A has issued bonus shares on a three year cycle as follows:
2007 – 1:5 Bonus Issue ; 2010 – 1:6 Bonus Issue
I forsee a mixed rights and bonus issue to accompany end of year 2013 results. The management had indicated that in 2013, it would evaluate the need for refurbishment of Nairobi Serena Hotel (Estimated to cost Ksh 3B to refurbish rooms and expand the hotel). A 50:50 Equity: Debt financing of the refurbishment is likely with a Ksh 1.5B Corporate bond and a 1.5B rights issue mixed with a bonus issue. The increasing number of newer international hotels coming up will require an urgent refurbishment of Nairobi Serena in order for it to retain its competitiveness and hence the likelihood of the rights/corporate bond issue in 2014.
The increasing number of international chain hotels setting camp in Kenya highlights the positive outlook for this sector.

MY 3 YEAR PROJECTIONS ON TPS SERENA E.A:
The challenging business environment for tourism in 2013 will most probably result in flat 2013 financial results as compared to 2012. However, it is important to note that the TPS Serena E.A is currently trading at Book Value (P/BV of 1). My projections are based on a recovery of tourism in 2014 up to 2016, a P/E of 15, and at least a P/BV of 1.2. (Sector Average P/E is 21 hence my estimate is very conservative)
Projected EPS for Financial Year Ending Dec 2013: Ksh 3.60 (2012 – Ksh 3.60); Target Price by April 2014; Ksh 54 (If a 1:5 Bonus Issue then Target Price of Ksh 65)
Projected EPS for Financial Year Ending Dec 2014: Ksh 5; Target Price by April 2015; Ksh 75
Projected EPS for Financial Year Ending Dec 2015: Ksh 6; Target Price by April 2016; Ksh 90
Projected EPS for Financial Year Ending Dec 2016: Ksh 7.20; Target Price by April 2017; Ksh 108
(Purchase Price – Ksh 46, Target Price after doubling of capital gains Ksh 92 hence target may be achieved by July 2016).

3. HOUSING FINANCE COMPANY OF KENYA (HFCK)

Purchase Price: Ksh 31.25
Currently trading at (Year 2012) EPS of Ksh 3.22 and P/E of about 9.7 and at P/BV of 1.3

• The Key risk for HFCK is the changes in the law regarding loan recovery which may explain the NPL ratio of 8.2%. The company also seems to be under provisioning with an NPL Coverage of 14.2%. However, its rapid growth and a conservative P/BV ratio makes HFCK a good buy going forward.
• Its strategy to partner with land owners in developing property will greatly diversify its sources of revenue, provide synergy to its mortgage business and impact positively on its profitability.
• The 20B Bond should inject significant capital into the business.
• It is poised to be a major player in the D-REITs market.
• HFCK remains a potential Equity Bank acquisition target especially if it continues posting such a strong growth trajectory compared to Equity bank (Q3 2013M – Equity Bank year on year earning was up only 7.3% vs HFCK 58.7%). The Equity bank growth seems to have hit a plateau necessitating some degree of business reengineering to satisfy its shareholders who are used to stratospheric returns. An acquisition of HFCK would be a logical strategy as it would provide a nice addition to Equity Banks bottom line, reduce the operating costs of HFCK through merging of departments with Equity’s and considerably boost the operating capital and liquidity of HFCK especially now as it embarks on the capital intensive property development business. (Similar to KCB absorbing S&L in 2009).Equity owns 24.9% of HFCK.

MY 3 YEAR PROJECTIONS ON HFCK:

My projections are based on a P/E of 9, and a 25% growth in earnings. (Sector Average P/E is about 10 hence a Conservative P/E of 9 adopted)

Projected EPS for Financial Year Ending Dec 2013: Ksh 4.24 (2012 – Ksh 3.22); Target Price by April 2014; Ksh 38.15
Projected EPS for Financial Year Ending Dec 2014: Ksh 5.30; Target Price by April 2015; Ksh 47.75
Projected EPS for Financial Year Ending Dec 2015: Ksh 6.625; Target Price by April 2016; Ksh 59.50
Projected EPS for Financial Year Ending Dec 2016: Ksh 8.28; Target Price by April 2017; Ksh 74.50

(Purchase Price – Ksh 31.25, Target Price after doubling of capital gains Ksh 62.50 hence target may be achieved by July 2016).

4. UPCOMING RIGHTS ISSUES 2014

Several companies eg KenGen, Uchumi will be conducting rights issues presenting a good opportunity to purchase a stake in them. The pricing will however be key in making investment decisions in the forthcoming rights and hence will be updating once the rights details are released.

I will also be scouting for more companies to bring the total no. of companies to about 5-6.

SUMMARY OF FUNDS ALLOTMENT:

DTBK – 30% OF FUND
TPS SERENA E.A – 20% OF FUND
HFCK – 10% OF FUND
CASH – 40% OF FUND (To be invested in 2-3 more companies as opportunities arise through rights or market bear conditions).

Happy Hunting.

(Twitter: stocksmaster@stocksmaster79)