David Ofungi's blog

Dubai COMESA Summit 2011 - wish to the economic Genie

2011-03-31T22:40:00.006+03:00

4^TH COMESA INVESTMENT FORUM - DUBAI COMESA SUMMIT 2011

Dubai’s opulence is not something that you can prepare for. In recent years especially, I imagine guide books struggled to keep up pace with the multitude of edifices that sprouted at the pace of steroidal bamboo shoots - this time moulded out of concrete, steel, and glass. The examples are too many to list. However, what adds that tasty cherry on top is the very warm hospitality extended by the Emiratis (ahlan wa sahlan - welcome!)that makes it easy to plug in wholesome into their fantasy even if visiting for a few days.

Years ago, the leadership of Dubai, fueled by a huge dose of paranoia in the knowledge that some day the oil revenue would dry up, undertook to reconfigure their economy. Substitute forms of income would be required to guarantee the very survival of the Emirate that is less than the size of lake Albert – a fresh water lake in the Western Rift Valley that has ironically fuelled an equal measure of optimism in Uganda on account of recent oil finds. Dubai’s diversification has resulted in real estate, tourism and financial services as the highest contributors to GDP.

It is therefore fitting that Dubai hosted the 4^th COMESA-Africa summit themed Dubai to Africa: Unlocking the Markets of the Future. An economic insomniac meets the valium-laden giant that is being slowly nudged into unleashing its potential. Africa has plenty of lessons to learn from the successes and mistakes of Dubai.

The theme on partnership was on heavy rotation at the summit – be it infrastructure, tourism, energy or any other sector. Resources need to be primarily geared towards the close to 1 billion African consumers in a win-win structure – this requires investment in value addition as opposed to historical norm of extraction and export of raw materials en mass.

To put things into context, Dubai (no more than 1,600 square miles in total land mass) is set to attract 15 million tourists by 2015 . For comparisons sake, East Africa (701,000 square miles) - home to the Source of the Nile, Masai Mara, Mount Kilimanjaro, the Mountain Gorilla, incredible flora and fauna as well as pristine beaches and coral can just about muster 3 million people as a block. The fundamental problem that needs addressing may not be in the finance itself but in reconfiguring the minds of our leaders – those who have the ability to adjust policy to propel Africa to her rightful place in the stratosphere of economic achievement. From my experience, several entrepreneurs expressed desire to come and deliver on investment, transfer skills and forge equitable partnerships but in the same vein, had qualms about pricing in bureaucracy.

It is my feeling that many of the conference participants came away with a less clouded view of Africa’s position in the global market place and where their efforts should be directed. The market is diverse for which ‘cut and paste special’ is a model more likely to succeed – the special being comprised of skills transfer, value addition and local participation at the very least.

In all, the economic genie in the proverbial lamp of investment will ensure a long-lasting legacy of success not by granting three wishes to whoever holds it but by transferring skills in order for local aspirants to the genie profession to be able to propagate a culture where entrepreneurial ambition is met with the right tools and attitude for success across Africa.

Shukran to Dubai and COMESA!

The East African Petroleum Conference 2011

2011-02-23T12:24:00.004+03:00

The 5^th East African Petroleum Conference and Exhibition ended successfully early in February. Credit must be given to the organisers at the EAC Secretariat and the Petroleum Exploration and Production Department (PEPD) in the Ministry of Energy of Uganda for serving up a spread that met the high expectations of all attendees.

I must say that it is a very different feeling when one moves away from merely reading newspaper headlines about a 2.5 billion barrel oil find to mingling with a thousand people from wide spectrum of professional backgrounds and nationalities. I was privileged to host one of the evening functions where it was evident that the cloud of optimism was hanging quite low with nationalities from as far afield as Venezuela and Kazakhstan clustering beneath it.

For the most part, the Ugandan private sector delegates sought to understand how best to chart an unencumbered path through the maze – a sort of 3D seismic study of the opportunities that lie in store if you like. This uncertainly was somewhat reflected in the lack of local exhibitors at the conference. The recurring question became – where do we go from here?

Immediate opportunities

First of all, like any other sector, oil and gas requires a number of generalist support services. In the immediate term legal, accounting, insurance, banking, telecoms, and other services are required to do what they do for other industrial segments. The unique attributes of oil where government and a handful of developers form the top tier of the sector means that the bench in the waiting room is not that long. Preferential seating is reserved for established firms that will likely be riding on relationships built elsewhere. Still, value propositions come in different shapes - there is strong requirement for local experience on matters legal, financial and the like, cost competitiveness where skills are on par and importantly, the affirmative actions in place to support local enterprises all combine to change the make-up of who is flipping magazines in that waiting room.

The degree of complexity is upped when one looks at support on the logistics side of things. Specialist skill in transportation for example will have to be adopted to meet the uncompromising workflow expectations of running an oil production programme where rigs can cost up to USD 100,000 a day to hire.

Skill and scale: Logistics

Skill aside, a challenge for local (Ugandan) enterprise is scale. Brian Glover, country manager of Tullow mentioned that the anticipated freight volumes when the refinery is being built would grow from 200 tons to 200,000 tons. Now that may trigger a similar surge in the amount of roast chicken that a roadside vendor will sell along the route but a more savoury proposition sits on the plate of the large logistical firms. An extra one thousand trucks means that a ripple effect for financiers, insurance, hotels and restaurants (chicken vendor again) forms.

Half a generation away

The third level is the highly specialised technical skill that directly feeds into the production process. Petroleum and process engineers, geologists, niche IT services and more will be required to get the infrastructure in place. From a productivity level, this presents the largest opportunity but as paradoxes go, is the most complex to navigate on account of the skill and experience required. The Nigerian experience shows that it took close to a generation for local professionals to gain experience with multinational firms and set up stand-alone competitive enterprises. Indeed, a number of these firms have opened up a presence in Uganda. Joint ventures that emphasize skills transfer will be an important factor in this regard.

Afro-strain of Dutch Disease

We however have the benefit of being able to study the manifestation of the oil industry in other countries in order to avoid the pitfalls (sub-Saharan Africa) and adopt the positives (Trinidad and Tobago). The initiatives shared by the EAC, government of Uganda and the licensees including the establishment of a regional training school for oil and gas professionals, emphasis on local content on tendered projects and revenue management policies are very encouraging.

In all, it has been proven that the much-feared Dutch Disease has an effective antidote. We however have to be cautious about whether the vaccine can handle the especially deadly strain that has struck much of Africa. In today’s globalised and digital age, there is more clarity on issues, more personnel manning the checkpoints.

Somehow, Ugandan entrepreneurism always finds a way - conferences like EAPC ’11 do well to illuminate the maze. I am in no doubt that now, that cloud of optimism has a fair amount of local enterprises standing confident beneath it.

Climate Change and Elections

2010-12-31T09:49:00.003+03:00

Electioneering and common sense seldom share the same platform. Throughout an election period, crowds clad in unfashionable and cheap monochrome t-shirts chant and applaud enthusiastically to the same set of lies that were told at the last election. They then vote, candidate wins and immediately falls victim of the same strain of amnesia.

The irony of each candidate receiving a brand new gas guzzling vehicle and other environmentally averse habits around campaigns (noise, rubbish etc) will be covered on another day. My take however is in the context of climate change and the environment – specifically how debate on the subject is always relegated to the footprint of election manifestos if included at all.

In recent years, the impact of climate change has been clearly documented in parts of Uganda. The distortion of weather patterns, horrific landslides, low agricultural yields and rural conflict are some of the effects chronicled across the country. The wider effects on health, food and energy security also raise serious need for intervention at national level. The landslides of March 2010 Bududa, Eastern Uganda claimed over 300 lives – a number higher than the tragic terrorist attacks later in the year.

The situation is further exacerbated given that almost our entire income as a nation (tourism and agriculture) is totally dependent on our climate – approximately 90 % of our direct and indirect employment relies on both sectors. With the 2^nd highest rate of population growth (3.6%), Uganda’s risk level is high. According to OXFAM, a British charity organisation, a 2-degree rise in temperature will entirely wipe out our coffee crop with disastrous consequences.

It is therefore a sad thing that matters environmental are not mentioned on the campaign trail. As candidates crisscross the country, they encounter communities whose health, food and energy security is much dependant on a mature approach to the challenge of climate change. For the record, climate change and efforts to mitigate it was not mentioned at all in the last national budget.

The moment is opportune for action to be carried out. The recently concluded COP 16 climate change talks includes a "Green Climate" fund, proposed to be worth $100 billion a year by 2020, to assist poorer countries finance emission reductions and adaptation. The shortfall however is that specifics on how the funds will be raised were not set. Also, there were no firm conclusions on how to extend the Kyoto protocol – an accord that requires industrialised countries to cap their greenhouse emissions to below 1990 levels.

We are, as a nation, pleased with the peaceful manner in which the current campaigns are being executed. Our hope remains that as the different candidates, bedecked in their party colours push their individual arguments to the electorate, that a non-partisan embrace of matters ‘green’ be adopted for the good of the next generation of voters.

Sterile Creation

2010-10-10T22:52:00.005+03:00

I learnt of the economic theory ‘creative destruction’ before The Economist relegated my favourite column ‘Face Value’ to the abyss of fallen columns even though a few inches are occasionally dedicated to profiling business personalities - I suspect that this was on account of there being few inspirational leaders at the height of sub-prime and the trail of economic disruption that followed. Face Value was replaced by ‘Schumpeter’ - a column named after the renown economist Alois Joseph Schumpeter who, with reference to Wikipedia;

‘popularized and used the term to describe the process of transformation that accompanies radical innovation.^[2] In Schumpeter's vision of capitalism, innovative entry by entrepreneurs was the force that sustained long-term economic growth, even as it destroyed the value of established companies and laborers that enjoyed some degree of monopoly power derived from previous technological, organizational, regulatory, and economic paradigms.”

In summary, the power of innovation will inevitably torpedo unimaginative incumbents or more cruelly, those incumbents who may recognize the need for renewal but turn up to the beach party wearing a tweed jacket after misreading the invitation.

The Wikipedia entry http://en.wikipedia.org/wiki/Creative_destruction provides examples like Polaroid’s demise as digital photography took hold (Polaroid went bust) and what the Huffington Post is doing to traditional newspapers (many newspapers have gone bust). Even the most creative get screwed as facebook seems to be doing to the erstwhile indomitable Google (did anyone get google wave? – myspace.com deserves no mention). I wonder whether the wiki editors out of humility chose not to cite what in my opinion is the best example of creative destruction in recent times – the demise of the severely traditional crust of reference, the Encyclopedia Britannica (wiki entry here http://en.wikipedia.org/wiki/Encyclopedia_Britannica) thanks to a non-profit foundation that has no elitist Uxbridge editors on their staff – the Wikipedia founder is an American called James Whale.

The consumer is dynamic and as such, companies need to accurately prescribe strategies that accommodate change in their clients lest someone else serves up a hard-to-resist buffet. Speaking of which, Warren Buffett concurs in his dry wit manner in saying that it ‘sucks to be a horse when a tractor comes along’ – no amount of neighing will save you from your fate.

Historically speaking, Africa seemed to have decided that Schumpeter was smoking something illegal when he developed his theories. However, globalisation and advances in communication technology are fanning the winds of change. M-Pesa from Kenya for example has radically changed the rules of retail banking with far-reaching consequences across the globe. In mini Silicon Valleys across major cities on the continent, smart developers are creating innovating mobile apps that address local issues.

My mind goes back to Idi Amin (no economist degree mentioned in his wiki entry) who may or may not have used Schumpeter’s writing to bludgeon his enemies to pulp. His attempt at economic balance – the expulsion of enterprising Ugandan Asians certainly had a bludgeoning effect on our GDP. Digging deeper, Amin had an argument on account of historical subordination of native enterprise at the expense of our colonial masters and the imported labour from the Indian sub-continent. Christianity, commerce and colonialism suppressed any free participation in religious practice, trade and governance respectively. King Leopold took it a step further by adding a ‘P’ for pillage to the more conventional CCC model. Idi Amin certainly could have come up with better options – perhaps by invoking that the dominant enterprises at the time list a portion of their shares on a stock market.

The boomerang that Idi Amin tried to get rid of has brought us full circle to a tiered economy – this time fuelled by globalisation which allows for well-oiled foreign enterprise. This time, a different CCCP dominates and there is not much anyone can do about it. The merger of Chinese checkbook diplomacy which insitutes Chinese everything – I repeat, everything and the sterile creation of our weak economies has led to further suppression of the little innovation that we had. We have the polaroid camera when everyone’s gone digital and have no option to pose, smile and ask that the picture be posted before accepting the correction on email as an option.

Now I am also not sure whether Robert Mugabe has Schumpeter’s biography either (Wikipedia again) but I am sure that at some point, he may have interacted some bit with Idi Amin. If the conversation was candid (I know, politicians and candor drive on opposite sides of the highway), surely the repartition process in Zimbabwe would have charted a different course. Again, the boomerang has smashed through their ideological glass house because under sanctions, good old Robert can only head east and that comes with some heavy concessions that on a net basis are likely to depress rather than enhance the notions of empowering the native folk.

Sterile Creation dogs us in more ways than we can list. It is refreshing that a number of African states have recognised that harnessing human capital adds more value than populist drives – no better example than Paul Kagame who may have grown up in a stable but is firmly in the driving seat of Rwanda’s economic tractor - plowing and sowing the seeds of what soon enough will bear the kind of fruit that will undoubtedly leave a savoury taste in Schumpeter’s mouth.

The Joneses and the Einsteins

2010-09-08T08:55:00.002+03:00

As is the case with other aspects of life, peer comparison is a tool in business used to gauge whether the dials on the performance compass need recalibration. Unfortunately, “Relativity Theory” (the Joneses not the Einsteins) seldom chronicles how the posh car in the driveway of the magnificent house on the hill was acquired. Subjectivity is loaded with preconceptions of whoever is tagging on the heels of Mr. and Mrs. Jones.

The analysis cashflows is universally agreed to be the most accurate method of valuing a project, a company or a division within a company. This form of valuation is by no means scientific and often leans towards the abstract that would have old Albert turn in his grave but the guiding premise is simple.

The cost of an asset along with the other elements of business that process raw materials, market and distribute the resulting product(s) needs to be acceptably exceeded by the cash generated from sales. That seems fairly straightforward until one factors in competition, the cyclicality of business, government policy, acts of God or nature, and the fact the the Joneses just might have moved on to a different product by the time your cogs are in motion.

All these parameters are guided by the all-important factor of time that also brings its own dimension because the price of cash one uses to acquire the asset is unlikely to be the same when consumers hopefully begin to buy the product it churns out. If the bank gives you a loan, the interest rate you pay is your cost of debt funding and the required return of investment from shareholders is the cost of equity funding.

In the quasi-science of discounting cashflows, inaccuracies can lead to huge strategic errors that often have serious consequences for the company in question. For example, Microsoft Corporation’s advantage in the computer sector has been eroded because of their inability to properly appraise several opportunities including web browsers, search, social networking and cloud computing.

It is therefore somewhat of a wonder that a more subjective comparison – multiples analysis, is brought in as a check-and-balance mechanism on the plausibility of a forecast. Used carefully however, multiples analysis essentially makes the more accurate method more accurate.

Multiple analysis basically involves comparing a peer group of companies in a particular industry or industry sub-sector for example Information and Communications Technology (ICT) or Internet Service Providers (ISPs) respectively. The argument is that by using a set of specific parameters, the performance of a company can be put in perspective once compared with companies with similar operational structures, products or services and therefore prospects for the future. This way, coca cola’s growth prospects in Southern Sudan need not be compared with those of a construction firm (even the most creative ‘share of throat’ strategists would have difficulty here). Relatively speaking though, coke and construction can be classed as peers should the analysis come from the angled review of international firms with exposure to frontier markets.

Using both methods of valuation allow a company to avoid reactionary strategies. With the right sort of calibration, one can confidently set course to a prosperous future serving a whole new set of Joneses and their aspirational neighbours.

Africa's economic Vuvuzela needs finetuning

2010-07-30T21:21:00.001+03:00

The early conclusion from this year’s world cup is that Pele’s accuracy in front of goal sadly did not rub off onto his crystal ball. His bold prediction that an African team would win the world cup by the end of the 20^thcentury, even with a healthy ten years of added time dims with each passing tournament.

Cameroon’s vuvuzela let out no more than a whimper of submission in their loss to Denmark last week (which made the the first team knocked out of this year’s tournament). The Africans - Olympic gold medalist in 2000 and four-time champions of Africa lost to Denmark who apart from miraculously winning the Euro 1992 tournament, (they only participated because of sanctions imposed on group winner Yugoslavia) cannot say much else as far as footballing prowess is concerned; compared to Cameroon's paper record, that is.

The stats say that Cameroon had more possession in the attacking third 74.5 percent (Denmark 66%), touched the ball 23 times to Denmark’s 5 at 2-1 in the second half, yet they lost the game. My mind inevitably drifted to the concept of value addition in Africa which goes beyond converting goal-mouth chances to goals.

The economics seem to play out on similar turf to Soccer City. With a GDP of USD 311 billion, Denmark's economy is fourteen times the size of Cameroon’s (GDP USD 22 billion). Cameroon’s population of 19m occupies a land mass of 475,000 sq.miles. Denmark with just under 5m people is sits on a mere 43,000 sq.miles.

Cameroon’s agricultural sector contributes 20% of GDP but employs over 70% of the working population. Denmark on the other hand, derives a minuscule 2.5% of its GDP from agriculture, the majority of which has been morphed into value-added agribusiness. Unemployment in Cameroon runs at about 30 percent, compared to 2.7% in Denmark and similarly, the percentage of the population living below the poverty line is 48 percent for the African nation compared to 12.1% in Denmark which nonetheless has a strong social benefit system financed by the state.

Both countries have decent reserves of oil with the African nation producing 81,000 barrels/day compared to Denmark's 287,000. However on the renewable energy front, Denmark is infinitely ranked higher in terms of harnessing wind potential that both countries have offshore. Wind constitutes 19.7% of Denmark’s total energy production and 24.1% of her consumption. Indeed, VESTAS, the largest global manufacturer of wind electricity systems has revenues (2009: EUR 6.6 billion) that are over half of Cameroon’s total GDP.

Though the adoption of mobile telephony and Internet usage has been much heralded as a technological leap of benefit to developing nations, the digital divide remains uncompromisingly large. 750,000 Cameroonians have Internet access compared to 4.6 million Danes, a ratio relative to the total population of 3% and 92% respectively.

The economic superlatives can continue ad infinitum with most resulting in favour of the European nation. Economic value-additionists would argue that it is not the sound of the vuvuzela that counts but rather the harmony that comes from it.

Africa’s solutions on the pitch once attained, will likely have some important lessons for her economies.

An Inconvenient Truth - SAVE MABIRA FOREST

2007-03-27T16:35:00.000+03:00

Dear all,

For those who were in Kitante Primary School, some may remember that the part of the school field where 'Rwenzori Green' used to camp out had what we used to call Mabira forest in the valley below. I am not sure whether it still survives with all that has been going on (Google Earth someone?). However, a big and immensely important task lies with every citizen of the globe as we try to save the bit of its namesake that is being given out to exploiters!

I do this painfully but just for argument's sake, if we gave the sponsors of this madness the benefit of doubt with respect to supposed benefits to the economy, one would wonder why a loss making entity that doesn't add a single cent to the treasury should rob one of our great national treasures. On the proverbial scorecard, the arguments for social-economical benefits do not even feature. Further still, the table below shows that economic pitch if raised, only enhances the 'stink' surrounding this issue.

If we use the lowest possible benchmark for all things environmental, it is a shame that even the much-loathed Bush administration has admitted that climate change is an issue that needs addressing. One cannot help but wonder whether our guys in leadership know that whatever it is they are smoking, chances are that they might just originate from Mabira Forest!

A summary of the income statement is shown below. For those not familiar with reading financial statements, do not be fooled by the 2004 figures. There was a restructuring of secured debt in 2003 which basically makes the company post a superficial or one-off profit. The outstanding loans were bundled with an additional facility from shareholders (read: government) to total 107 billion shillings in 2004 according to the balance sheet. This basically resulted in more debt repayments in 2005 which triggers more losses, probably till perpetuity if you ask me.

UGX MILLIONS	2001	2002	2003	2004	2005
Sales	24,110	29,413	36,062	47,724	50,002
Cost of Sales	(20,590)	(23,868)	(26,151)	(31,274)	(35,930)
Gross Profit	3,520	5,545	9,911	16,450	14,072

Other Inc.	218	575	177	182	1,574
Indirect Costs	(7,069)	(6,872)	(8,011)	(7,729)	(8,412)
Oper. Profit	(3,330)	(752)	2,077	8,903	7,234
Net Fin. Costs	(8,694)	(18,143)	(13,381)	2,370	(15,540)
Profit Bef. Tax	(12,024)	(18,896)	(11,304)	11,273	(8,306)

Source: SCOUL financials

UGX MILLIONS

	2001	2002	2003	2004	2005
Secured Loans	61,108	72,001	101,753	0	0
Shareholders' loans	0	0	0	107,445	119,695

Source: SCOUL financials

Another doomsday scenario: At Sh1.2m per hectare, the proposed giveaway of 7,100 hectares of Mabira Forest land, translates into UGX 8.5 billion. The company is likely to have a one-off superficial income from the sale of timber if the land giveaway succeeds.. The value of this timber could be up to 1 billion $ according to estimates (ecological damage cannot possibly be priced). Now there is unlikely to be any covenants that deter the company from collateralizing the land for further debt to fund the said expansion. Basically, free land could be mortgaged for even more debt finance!

This will really piss you off now...There are two shareholders in SCOUL; the International Investment Corporation (IIC) and the Government of Uganda with a share holding of 76.2% and 23.8% respectively. IIC, which is registered in Bermuda, is the investment arm of the Mehta Group. We all know that a Bermuda-registered company (offshore haven) must be structured in for some tax purpose!

You ready for more bad news? The Company's board of directors consists of six members five of whom are appointed by IIC including the Chairman who has a casting vote. The government only has one board representative, a ministry of finance official who is unlikely to carry anything but a symbolic vote when it comes passing resolutions.

Oh, and just to twist the dagger, the growth in sales is mostly price driven as most who live in Uganda will know, the price of sugar has more than doubled in over the past three years. I have not seen the 2006 financials but with the current energy crisis and increased cost of fuel, change for the better is unlikely.

Did I mention that Kinyara Sugar Works, on two thirds the land (without the giveaway) of about 10,000 Ha has almost 1.5 times production of SCOUL and posts a profit? SCOUL (see table below) covers 15, 000 Ha. Sugar production in SCOUL in 2005 was 44,138 tons compared to 64,000 tons for Kinyara. There is a huge element of operational inefficiency with SCOUL because their cane production of 2500 tons per day is more than Kinyara's which stands at 2000 tons per day. The situation is further exacerbated due to the fact that SCOUL has a bigger advantage due to its close proximity to the market resulting in lower transportation, relocation and other costs, all this when there is a government policy in place to ban non EAC sugar imports!

The table below shows comparative sugar production across the three existing firms.

COMPANY	SCOUL (LUGAZI)	KAKIRA SUGAR	KINYARA SUGAR
Location	Lugazi, Mukono	Kakira, Jinja	Kinyara, Masindi
Ownership	Metha (through offshore company) 76%, GoU 24%	East Africa Holdings Limited (100%)	Rai Consortium (51%) /GoU (49%)
Area	15,000 Ha	22,000 Ha	11,000 Ha
Sugar Cane tonnage	480,000	900,000	500,000
Sugar tonnage	44,000	90,000	64,000

Source: http://www.germanwatch.org/tw/zu-afr06.pdf

If the Mehta's had faith in their abilities to run a sugar factory, surely they would have put in a bid, along with the Madhvani's et al for Kinyara Sugar? Their absence manifests their incompetence and self interest which serves not our nation but a small private company, conveniently registered somewhere at a P.O. Box the West Indies!

The link: http://www.savemabira.petitiontime.com/

St. Valentines Trade!

2007-02-15T08:36:00.000+03:00

Today is the 14^th of February 2007. It is a Wednesday so the markets will be closed. The bustle of Kampala however will today borrow the red theme from our stockbrokers as flowers, bears and for the very indulgent, lingerie and lipstick get traded on St. Valentine’s Day.

That there is hype in Kampala on Valentine’s Day is a severe understatement. Unlike most other common saint’s we made acquaintances with in our formative years, the story of Val remains unclear. St. Francis of Assisi was, how do we put it? Dead broke but at the same time, content with his simple life. St. Nicholas was a generous all round good guy whose gift giving was legendary and as a result, enjoys far more commercial success than all other saints combined. Val? Well Val, in research analyst speak was kind of low on the fundamentals but totally runaway on hype. Think www.anythingdumbideathatcomestomind.com com during the irrational exuberance of the dotcom era.

The market hoped all of a month or so ago that the Stanbic IPO would capture the imagination of the vast majority of Ugandans still sceptical of investing on the bourse. With the media and all the other mini-hype channels, it is clear that Stanbic shares stand no chance against old fashioned rose bouquets and expensive Swiss chocolate. How can one possibly romanticize a share offer of 70 Shillings as a much better proposal than candle lit dinner at the Serena even to the most practical of people out there? Would the ingenious florist risk all for competitive advantage by including a few Uganda Clays shares in their Valentine’s Day hamper? Or even further still, call your broker in the run-up to the 14^th and get a special lovers discount if your purchase is ‘per due’?

Let’s face the facts. Investing can be boring and the typical long-term return just does not cut it with the fast living people that we now are. Kenyan IPO speculators will bear testimony to this. Some stocks rise, some stocks dip severely. Your worth is a simple paper certificate…your fortune for a great part is linked to the competence (in Enron’s case, incompetence) of others. Compromise is rife, your broker sometimes makes a bad call. All too much for us simpletons, no?

Now I muse over what St. Valentine would think…I suspect that for all its risk, need for compromise, unpredictability, ups and downs, he would indulge regardless. Besides, the risk return profile can’t be too different from love and romance can it now?

Happy Valentine’s trading folks!

BAT Uganda factory closure

2005-12-16T11:59:00.000+03:00

Press release came out today that BAT (Uganda) is to shut down their Jinja factory (the same one they closed temporarily following the increase in excise duty last July). Costs of decommissioning not immediately apparent but it is expected that there would be a compensation package for staff among other outlays.

There was talk of the company rerouting all operations to Nairobi but political implications of such a move would be quite heavy. The Jinja factory closure follows decision last year to scrap leaf plant that was to be built in Namamve near Kampala.

BATU made a UGX 4.9b loss in 2005 following a UGX 3b profit in 2003. Loss attributed to rejection of leaf consignment worth USD 10m due to impurities in product and increased smuggling.

Market summary. Week ending 04 Oct 2005

2005-11-04T18:17:00.000+03:00

Trading this week was restricted to the DFCU counter where a total turnover of UGX 2.5m was recorded on the back of 5833 shares traded at UGX 425 per share. The all share index however rose 0.7% to close at 713.8 points due to upside movement of the cross listed stocks on the Nairobi and Dar es Salam bourses. The USE was closed on Thursday due to a public holiday.

Uganda's IMF relief status changed

2005-11-04T18:15:00.000+03:00

In a major fiscal development for the country, a recent review led to the conclusion that the Uganda no longer qualifies for aid from the International Monetary Fund (IMF). This was the result of an early October visit by an IMF team for the sixth and final review of its current three-year, USD 20m programme under the IMF's Poverty Reduction and Growth Facility (PRGF), which ends in December.

IMF elevates Uganda to Policy Support Instrument (PSI) statusUganda’s foreign currency reserves currently stand at USD 1.3 billion from virtually zero when the IMF first came in two decades ago. The country has now agreed with the team that with the end of PRGF, it was ready to move up to a new support facility, the Policy Support Instrument (PSI). This framework is designed for low income countries that may not need or want IMF financial assistance, but still seek advice, monitoring, and endorsement of policies. Under the new instrument, the IMF will evaluate economic performance twice a year and publish assessments.
Donors, creditors and markets look to the IMF for clear signals if a country is following sound economic policies and deserves their support. Nigeria's recent PSI deal opened the door to debt relief USD 18 billion from the Paris Club of creditors announced late last month.

We expect that focus from donors and potential investors will now turn to the presidential and parliamentary elections of March next year which will serve as a major test of the country's political maturity following the switch to the multi-party political system after the July referendum. Another challenge that is yet to be overcome is the battle against corruption after a series of high profile scandals including the alleged misappropriation of Global Fund for AIDS, Tuberculosis and Malaria, have been internationally scrutinised.

USE Quarterly review out

2005-10-30T18:10:00.000+03:00

USE Q305 quarterly bulletin releasedThe Uganda Securities Exchange (USE) this week released their Q305 quarterly bulletin which showed a 76.7% fall in turnover to UGX 627.2m from UGX 2.7b the previous quarter. Volumes traded were also significantly down to 1.6m from 5.8m. DFCU continued lead trade activity with 88.9% of the total turnover and 97.8% of volume for the quarter, followed by UCL with 10.5% of the total turnover and 26bp of volume trade.
On the fixed income side, no corporate bond trades were recorded; a 3 year government bond was issued in September bringing the total number of government bonds on the USE to 11 and the total issued amount todate to UGX 610 billion.

Market summary. Week ending 28 Oct 2005

2005-10-29T17:02:00.000+03:00

The USE All Share Index ended the week down 2.9% to close at 708.9 points, the lowest since mid-September. In line with Q305 data released by the USE this week, DFCU continued to be the most heavily traded stock in both of the week's sessions with 78% of total turnover. DFCU was up UGX 5 to close at UGX 425 on Thursday. The remaining trades stemmed from the New Vision Limited (NVL) and Uganda Clays Limited (UCL) counters. Turnover for the week was lowest for the month of October at UGX 15.2m.

Market summary. Week ending 21 Oct 2005

2005-10-21T16:54:00.000+03:00

On the Uganda Securities Exchange (USE) this week, trading was brisk in Tuesday’s session with a recorded turnover of UGX 84.2m on the back of 137009 shares traded on the DFCU (UGX 54.1m), UCL (UGX 29.9m) and NVL (UGX 100,000) counters; all stocks closed at their all-time highs of UGX 420, 16,500 and 250 respectively. Thursday's trading was pale in comparison after a single trade worth UGX 924,000 was recorded at the DFCU counter; 189,800 shares of the same stock were on offer in 1 lot with no takers. The UGX all-share index closed up 2.18% at 729.88 from last week's 714.28.

Market summary. Week ending 14 Oct 2005

2005-10-18T17:40:00.000+03:00

There was a 3.81% drop in the all share index this week with activity in both sessions exclusive to the DFCU and NVL counters. In Tuesday’s trade, DFCU was up UGX 5 to close at UGX 420; an all-time high which was maintained on Thursday. NVL closed unchanged at UGX 250 after 1,100 shares worth UGX 275,000 were traded.

Market summary. Week ending 7 Oct 2005

2005-10-07T15:56:00.000+03:00

The Bank of Baroda (BOBU) counter experienced activity albeit a single trade when 200 shares exchanged hands to turnover UGX 166,000 in Thursday's session. Their share price remained unchanged at UGX 830. Interest in DFCU and Uganda Clays Limited (UCL) continues with both stocks dominating volumes this week. Overall turnover dropped 66.1% to UGX 15.1m on the previous week's total of UGX 44.5 m. The USE All Share Index dropped 1.6% as the crosslistings Kenya Airways (KA) and EABL fell slightly on the Nairobi bourse.

New Vision FY05 results released

2005-10-04T18:45:00.001+03:00

The latest company to list on the Uganda Securities Exchange (USE), New Vision Limited (NVL) this week released their FY05 results. There was an 8 percent increase in turnover from UGX 23.7 billion in FY04 to UGX 25.6 billion on the back of higher sales volumes and price adjustments on some of their products. The company however experienced a 12 and 7 percent drop in operating profit and net income respectively attributed to increased production costs arising from increased fuel prices, higher costs of imported materials, charges and staff costs. Net income for FY05 Was UGX 1.3 billion compared to UGX 1.4 billion the previous year.

Despite a drop in earnings, the board approved a dividend increase to UGX 6.9 per share, up 41% from last year's UGX 4.9 per share. NVL shares current share price of UGX 200 is UGX 45 below their IPO price of December 2004 when the Ugandan government divested 20 percent of their shareholding in the company.

Intiation of coverage report on NVL from African Alliance due late October 2005.

www.newvision.co.ug

USE trade activity 29 September 2005

2005-09-29T20:59:00.000+03:00

Volumes down from Tuesday’s session with the UCL and DFCU counters again dominating market activity. There were six deals equally split between DFCU and UCL during which 3,666 shares were traded; 2930 in the former and 736 in the latter. The DFCU share price temporarily dipped to UGX 400 mid-session but recovered to again close at their all-time high of UGX 415 with total value of UGX. 1.2 million. Total trade today value totalled UGX 13. 3 million.

As has been the trend post interim results (H105), today’s session had plenty of unfulfilled offers; 22423 shares in DFCU remained un-traded in addition to the New Vision counter where 10,000 shares were offered UGX 20 higher at UGX 230 with no takers at all. Baroda and KA had outstanding offers with no activity. EABL and BATU were flat on the day.

The USL all-share index closed 3.18% higher at 754.29 points.

USE trade activity 27 September 2005

2005-09-27T21:45:00.000+03:00

I suppose it would not be too loose a description to use the word brisk to sum up today’s market activity on our exchange given the goings-on over the past few months.

5 deals, UGX 31.1 million turnover from 30,450 shares traded. While DFCU again dominated the flurry of activity; 3 deals of 400, 14940 and 13960 effectively making up 96% of volumes traded, today’s trade highlight was the fact that UCL at UGX 16,500 recorded the highest turnover on the bourse amounting to UGX 18.9 million on the back of 1,150 shares traded. Both counters continue to trade at their all time highs with DFCU closing at UGX 415 and UCL at UGX 16,500.

Liquidity is still an issue, the desired scenario in terms of capital market development is to see a greater degree of shares on offer being absorbed, at least for those stocks that have bullish prospects that are backed by professional valuation reports. There were just over 52,000 shares of DFCU on offer of which 29,000 were sapped up; absorption rate of 56% which admittedly is much improved from last week.

Your comments welcome on this forum or email of phone me at time convenient to you.

Happy investing!

ANALYSIS: UCL H105 results

2005-09-24T04:05:00.000+03:00

Unaudited UCL H105 results releasedUganda Clays released their interim results this week which showed net income up 77% y-o-y. Turnover grew a modest 6% on H104 as the company sought to implement efficiency improvements on the newly installed UGX 3 billion kiln.

The growth in earnings is primarily attributed to a 66% drop in income tax payment from UGX 533, 742, 000 in H104 to UGX 181,928,000 for the first half of 2005. The significant fall was due to deferred tax payment incurred during the investment phase that was completed last year.

During the period under scrutiny, the outlay on capital expenditure went towards the purchase of five kiln burners in May at a cost of UGX 307 million to ensure modern firing equipment on both Hoffman kilns. UGX 90 million was spent on a new cutting table.

As a result of the installation of new kiln burners, production was slowed down with further setbacks coming from the last phase of transition from the old to new kiln. Another contributing factor that hampered production was a breakdown in the tile press which caused disruption in supply of clay tiles, their core product which contributes 55% of total revenue.

In the late part of H105 and early H205, a scarcity of coffee husks undermined the company’s ability to meet demand with some customers having to wait up to a fortnight for product. However, Pressure on kiln fuel has been alleviated with the signing of a contract between UCL and Bugisu Cooperative Union in Eastern Uganda. Storage units have been constructed at the main factory and Mbale, Uganda’s main coffee district.

The Marketing and Sales reach will next week be extended with the opening of a new outlet in Mbale, Eastern Uganda to serve the growing market there as well as some demand in western Kenya.

With the ironing out of production bottlenecks, steady kiln fuel supply, and an order book that includes three main construction projects in H205 we remain optimistic about the company’s ability to meet our revenue and earnings growth target of 23.4% and 76% respectively y-o-y. We maintain out OVERWEIGHT recommendation and price target of UGX 23,443.

USE trade activity 22 September 2005

2005-09-22T22:14:00.001+03:00

Finally some movement on the UCL counter with the share price up 37.5% from UGX 12,000 to close at UGX 16,500! In line with price movement on the exchange for most counters bar the cross-listed EABL and KA, the appreciation was in reaction to UCL’s half year results which showed net income up 77% on H104. While overall growth in revenues was at a disappointing 6% on the back of production problems and scarcity of coffee husks used to fuel the kiln, the disproportionate growth in net income was due to a 66% drop in income tax payment from UGX 533, 742, 000 in H104 to UGX 181,928 for the first half of 2005. This was attributed to deferred tax payment last year following completion of investment in the new kiln. UCL will not pay an interim dividend this year as retained cash is going towards paying bank loan to Standard Chartered. More info available from African Alliance Research full initiation of coverage report.

Raising the Roof – UGANDA CLAYS LTD (UCL). We initiate coverage on UCL with an OVERWEIGHT recommendation and value it at UGX 23,433 per share. (David OFUNGI, 26 August 2005) Contact +256 71638644.

DFCU bank (DFCU) held steady at UGX 415 per share for the third session in a row since their interim figures were made public. Again, the counter was the centre of trade activity with a turnover of UGX 6,769,480 on the MIMS board from volume of 16312 shares traded.

New Vision Limited (NVL) closed at UGX 200 after 5,000 shares changed hands. Trading at 18% below their IPO price of UGX 245, the NVL stock has the unique record of being the only Uganda domiciled stock that is trading below IPO price a year after it was floated. Of recent, the NVL management has been more actively reporting favorable company news with the hope of propping up their share price.

12,200 Bank of Baroda (BOBU) shares were offered with no takers; likewise the cross-listed Kenya Airways (KA) had some shares on offer at UGX 1855 with no interest expressed.

USE trade activity 20 September 2005

2005-09-20T14:45:00.000+03:00

Trading on the USE closed this morning with only the DFCU counter active albeit with lower volumes than I had anticipated. Profit takers heavily outnumbered the buyers with 189,633 shares on offer of which only 20,514 changed hands. DFCU turnover was UGX 8,513,310 with shareprice holding steady at UGX 415. There were approximately 9.2 shares on offer for ever share bought, the bulk of whom will have been retail investors looking to primarily liquidate their bonus shares.

The other counters had no activity and with all shares prices remaining unchanged, any change in the index from last weeks close of 717.52 will be brought about by the cross listed stocks; EABL and KA.

Role of research in the development of Uganda's Capital Markets

2005-09-16T08:57:00.000+03:00

‘All business proceeds on beliefs, or judgment of probabilities and not certainties’ goes a quote from the renowned 19th century Harvard University President, Charles Eloit.

That single quotation summarises the purpose, content and ideal level of interpretation that analyst research should foster in the minds of the recipients of the information provided.
When I, as an analyst at African Alliance Uganda Research & Securities released a note on Uganda Clays Limited a fortnight ago, some circles incorrectly inferred our upside on the stocks valuation as a certainty in the same realm as ‘death’ and ‘taxes,’ to cite another famous American.

Research in capital markets serves the simple purpose of providing coherent information to the market. The market in this case is the individual or private investor that has an interest in the companies whose shares can be bought and sold on the Uganda Securities Exchange (USE). Research in general terms goes beyond listed companies to cover government, municipal and company bonds, sectors, economies and any other information put forward for the market to digest. An analyst is then described as someone who uses professional expertise to assess the internal and external environment of an industry and/or company stock, bond and so on, in order to provide valuation estimates that the market can choose to agree or disagree with as they see fit.

The research process is time consuming, follows a logical sequence and should ideally be all-encompassing with respect to that information that will impact the performance of the company or industry on which the report is based. While the UCL reporat will have incorporated some information and data easily obtainable from public reports, a great part is informed by putting the right questions to management based on among other things, financial data and it’s analysis.

In the more developed markets across Europe, the US, South Africa or even closer to home in Nairobi, each listed company will have several analysts covering it. As a result, there will be several reports on a company, for example, East Africa Breweries Limited (EABL) emerging from various research departments and more often than not, these will have conflicting analyses and recommendations for the market to absorb.

An analyst report is a valuation of what the stock should be trading at on account of an assessment of the fundamentals that should affect the company’s performance. Complex valuation models help one derive a specific value; which in my opinion for UCL’s case was UGX 23,443 per share. Some of my colleagues may choose to disagree with the valuation but that can only make for a healthy debate and the odd headlock here and there.

Ultimately, the investment rewards are there to be gained on the exchange on a level beyond most if not all traditional investment instruments available to most Ugandans. A company like Uganda Clays which was floated on the exchange at UGX 4,000 in January 2000 is now trading at UGX 12,000 per share. An appreciation of 200 percent in five years with more earnings potential coming in the form of dividend payments!

While we stick by our valuation as one constructed out of a meticulous and professional endeavor that meets world-class standards, we disclaim the content as opinion rather than fact with the advice that each recommendation must be weighted solely as ONE factor of an investment or other decisions made by or on behalf of the person who accesses our information. At the end of the day, as one of my colleagues always says, ultimately, the best person to make an investment decision on your behalf is you.

The growth of out capital markets and the resulting positive effects can only be achieved if the public is availed information on the benefits that can be reaped from investing on the stock exchange. The companies are after all, classed as being ‘public-listed’. Anaylsts are but a link in a large chain of contributors that includes policy makers, regulators, business journalists and company management whose joint effort will help make a successful and well entrenched capital markets system, a belief I have that will increase the probability of our economy developing at a much quicker pace.

Happy investing!