By Peter Kiragu

FAULU Kenya financial results last week reflected a huge increase in operating expenses, a pointer to what microfinance institutions will have to incur in their quest to transform into deposit taking entities.

The 17-year-old microfi-nance institution (MFI) earn-ings results represented a 40 per cent growth in pretax profits from Sh74 million to Sh103 million. But the figures showed a drastic shoot in the administration and operating expenses that grew by 62 per cent to Sh352 million from Sh217 million, a figure that almost corresponded with the net interest income which stood at Sh354 million, show-ing the company is spending as much as it is making.

This is further indicated by the fact that the company would not be paying any divi-dend to its shareholders even though in March it paid out Sh100 million to its Sh500 million bond investors.

According to the managing director, Lydia Koros, there is however no reason for alarm as the money is being ploughed back to grow the business.

“We are not worried, we have been forced to spend a lot of mon-ey in preparation to transform in into a deposit taking MFI in readiness to be regulated un-der the newly enacted Micro Finance Act,” said Koros in response to a question why the company’s expenses have risen so massively. The Mi-cro Finance Act was passed

in 2006 to regulate the provi-sion of microfinance in Kenya. Kenya’s micro finance sector has been operating under a very ambiguous environment.

While on the other hand there was no particular frame-work of operation, the sector was also forced to contend with a hostile environment to-wards its clientele. The Act has thus been welcomed by industry players who expect it to culmi-nate into a more coordinated industry soon.

The Act is however not operational yet and is wait-ing prudential guidelines by the Central Bank of Kenya which will be laid out sooner

than later, according to sector players. “We anticipate that in 2008, we are likely to apply for a license to be regulated under the Act. Efforts are there-fore been made to comply with the existing provisions of the Act in readiness for licensing,” reads Faulu’s 2007 annual report. The report adds the institu-tion has hired a consultant to assist in the transformation process.

In preparation for the trans-formation, the MFI is now undertaking a major rebrand-ing exercise that involves a change in the company’s cor-porate image, processes and the product offering.

By tiMOtHY MuNuKu

MorTgAgE company Hous-ing Finance has been given the go-ahead by Capital Markets Authority to seek additional capital through a rights issue.

The rights issue will see the company issue 115,000,000 new ordinary shares as rights to existing shareholders.

The approval gives impetus to the mortgage financier to strengthen its capital base in order to bolster its lending capacity. Speaking on the approval by the regulator, Housing Finance’s MD Frank Ireri expressed optimism that the issue would be successful.

“our five-year strategic plan has the requisite planks to transform Housing Finance into Kenya’s premier enabler for the property industry of-fering turnkey solutions on all types of property funding and development across the value chain,” he said.

The company’s board ap-pointed investment boutique First Africa Capital as the lead transaction advisor. CFC Stockbrokers and Standard Investment Bank were named the joint lead stockbrokers, while Hous-ing Finance will be the receiving bank. KPMg is the reporting account-

ing firm while Hamilton Harris & Mathews are the legal advisors.

Comprite Kenya Lim-ited will manage the share reg-ister.

Consequently, the transac-tion advisors have sent a no-tice to the NSE which sets the record date for the issue as May 12.

The record date is prima-rily the closure of its share register in order to allow tabulation of its share-holding and alloca-tion of rights as at the aforementioned date accord-ing to the proposed criterion in its information memorandum.

Can YOU outsmart the expert?

12 Nairobi Star H Monday, 5 May 2008

Up to date, accuratebusiness information

NEWS YoU CaN USE, EVErY DaY.

Where will the price of Safaricom settle? I use the word ‘settle’ carefully because the price volatility is always highest on the first day of trading of an IPO the world over.

So I am not going to even try to predict the high and low on the first day. I will point out that I do not expect to see the elevated levels that we saw with Kengen, when on the first day it traded at plus 400 per cent, for example.

Moreover, a lot of People I meet say “well it’s got to go to Sh20”. This is Safaricom after all. Another fellow said “Look at Breweries that’s trading at 172.00. We are selling these shares way too cheap.” I am afraid, this is very fuzzy thinking.

In many ways, the share price of itself is an optical illusion. As a number, it is utterly meaningless. It means nothing without knowing the second part of the equation, that being the number of shares being issued.

In the case of Safaricom, the Government is selling a 25 per cent stake which translates into 10 billion shares. We now know that 100 per cent of the shares equals 40 billion shares.

40b shares x 5 Sh200 billion. [Foreign Investors are paying more so total net proceeds will be higher than 200b].

Note: Well the Government could have sold one share for Sh200 billion or 100 shares for Sh2 billion or even Sh400

billion shares for 50 cents. The outcome would have been the same each time.

The value of the company stays the same, it’s Sh200 billions each time. The Government chose Sh5 because it creates a sense of affordability.

Now we know what the valuation of the company is and we need to investigate the earnings.

Lets assume Safaricom makes Sh21 billion for the full year [This is an assumption because they have yet to report full year earnings to March 2008]. Divide 200b/21b to get 9.52.

That’s called the Pe ratio. This is the key to understanding valuations and you can apply it to any business.

If you are expecting serious earnings acceleration, then you pay a higher price for those earnings and vice versa.

emerging markets Mobile telephony is trading at an average Pe of 17.00.

I will give a free copy of my book ‘Anyone can be rich’ and a months subscription to my site www.rich.co.ke to the first reader to compute the fair value of Safaricom given the data, I have placed in this article. Answers to info@rich.co.ke.

Part 2 will discuss the price further.

Aly-Khan Satchu www.rich.co.ke is the author of Anyone Can Be Rich, available in local bookshops

faUlU’S big NEW bUDgEt oN CUStomErS By LOLa OKuLO

NATIoNAL carrier Kenya Airways has denied that the airline is under scrutiny over its safety measures as implied by a media report.

Chief executive officer Titus Naikuni said yesterday that the article was in bad taste as most of the claims made in the report were not factual. He said the airline would consult its legal advisers over the matter which may create panic among its customers.

According to the newspaper report, it was alleged that International Air Transport Association officials were in Nairobi over the weekend to discuss KQ’s safety record af-ter the airport reportedly had 135 incidents between January and March this year.

Naikuni said: “We want to clarify that Kenya Airways of-ficials did not meet with IATA officials on Saturday over our safety record, as it is alleged in the paper nor have we received any summons from IATA over the matter.”

IATA’s regional manager for East Africa Hassim Pondor refuted the media reports that officials met after last week’s KQ plane mishap in Kisumu to discuss IoSA (Iata opera-tional Safety Audit) standard safety regulations, in relation to the airline.

Pondor said KQ had been audited to full conformity with IoSA standards.However, a press statement by the airline acknowledged that indeed the airline had been involved in 135 incidents but said that out of the 135 incidents, only three were classified as danger-ous according to the airline’s own internal risk assessment.

Kenya Airways denies report

Housing Finance rights issue approved

graNtED: ireri.

Photo/charles kiMani

alY KHaN’SStar Portfolio

Star biZ

at wHat Price wiLL tHe SaFaricOM SHare SettLe?

oPtimiStiC: Faulu Kenya’s managing director, Lydia Koros.