DBIB; JUST A THOUGHT Founder Member of the Nairobi Securities Exchange

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1 DYER & BLAIR INVESTMENT BANK DBIB; JUST A THOUGHT Founder Member of the Nairobi Securities Exchange 19 th FEBRUARY 2016 TABLE OF CONTENTS SITTING ON A GOLDMINE; LISTED COMPANIES WITH LARGE TRACKS OF LAND IN THEIR BOOKS Its scarcity and surging value makes land the most sought out investment due to the perception of its low investment risk. But how well do we recognize its value and utilize it for maximum benefit as owners and stakeholders? In most cases, matters of land crop up when companies disclose major assets sale or during mergers and acquisitions transactions. In other instances, the effect of these large land holdings has been seen through land and property revaluation gains made in the income statement that would flip operating losses into net profits. Top of the list of major land owners are agricultural stocks with thousands of hectares in both productive and underutilized use, and in most instances with their value conservatively held in the books. We believe that the value of the land of the companies covered far exceeds the KES 40BN that may be indicated by their acquisition or fair values. The fair value and revaluation models though seeks to, as closely as possible, reflect the market value of assets by revaluing the assets on a regular basis (preferably every 5 years) as required by the International Accounting Standards No. 16 (IAS 16). The analysis will highlight some big land owners with either large hectares of land or parcels of land with a huge value due to their locality to key city centers or infrastructure. Company Estimated (Ha) Historical cost (MN) Revalued (MN) Kakuzi 11, Sasini 2, ,800.0 Kapchorua Williamson Tea 2, Centum 4, ,600.0 Limuru Tea TPS Serena N_A 9,200.0 Car and General N_A 1,900.0 Kenya RE N_A 7,200.0 Uchumi Supermarkets ,800.0 EABL , ,600.0 Eveready Total , ,792.0 N_A: Not Available (Source: Company, DBIB Estimates) 1 Kakuzi Limited Sasini Tea Kapchorua Williamson Tea Centum Investments Limuru Tea TPS Serena Car and General...6 Kenya RE...6 Uchumi Supermarkets....7 EABL....8 Eveready Research Analyst Gerald Muriuki gmuriuki@dyerandblair.com Tel:

2 KAKUZI HECTARES UNDER PRODUC- TION KAKUZI LIMITED Kakuzi, a listed company on both the Nairobi and London Stock Exchanges, is an agricultural producer and manufacturer of tea, avocados, macadamia nuts, orchards, and runs a beef livestock farm and forestry operations. Its pineapples cultivation is a joint venture with Del Monte. The company is majority owned by Camellia Plc., a UK based corporate, with 50.7% shareholding held through two incorporated companies; Bordure Limited (England) and Lintak Investments (Kenya). Its fully owned subsidiaries include Estates Services Limited and EPZ limited, both incorporated in Kenya. Kakuzi operates in two locations in Kenya, the main operation and Head Office based at Makuyu about 65 Km North East of Nairobi and the other operation, mainly tea growing, situated in Nandi Hills about 350 Km North West of Nairobi. Its main operation at Makuyu occupies over 80% of the company s total land holding. Production in Hectares Product Hectares Tea Avocados Macadamia nuts Fresh Pineapple 64.0 Commercial Forestry 1,512.0 Cattle (Bomas) 2,511.0 Cattle (Ranch lands) 5,294.0 Joint Project Pineapple 1,111.0 Kakuzi s annual report for FY14 indicates a net book value on a historical cost basis of KES 432.3MN, being its freehold land together with their respective buildings, improvements, and dams. To put this into perspective, the book value represents an average price per hectare of KES 39,273 of land including buildings. This undervalues the real estate assets of the company given that near the industrial town of Thika, land and property prices have risen in value with the completion of the Nairobi-Thika Highway and other mega real estate projects along the way. Kakuzi indicated its intention to further increase its land holdings by approximately 500 hectares for fresh pineapple under the joint venture with Del Monte and by a farther 1,006 hectares under Macadamia plantations. 2

3 SASINI TEA AREA UNDER PRODUCTION SASINI TEA Sasini tea is a diversified agribusiness company with operations in growing and processing of tea and coffee, forestry and dairy farming. Its head office is in Nairobi. Sasini s Subsidiaries Name Stake(%) Kipkebe Limited Keritor Limited Kipkebe Estates Limited (through Kipkebe) (through Kipkebe) Mweiga Estates Limited 85.0 Wahenya Limited 85.0 by Sasini,15.0 by Mweiga Aristocrats Coffee & Tea Exporters Sasini Coffee House 60.0 While Sasini has not provided its total holding of land, its FY14 report provided a glimpse of its land holdings with tea occupying an area of 1,465 hectares, and coffee 912 hectares. The company has maintained a continuous afforestation program in its idle land, while a natural vegetation covers its water catchment areas. According to the notes accompanying the FY14 annual report, Sasini s revalued net book value of its freehold land stood at KES 6.8BN, having recognized revaluation gains of KES 5.7BN. Viewed on the basis of its 228 MN issued shares, the value of this freehold land is approximately KES per share, which exceeds its latest market price per share of about KES In 2014, the company undertook to sell approximately hectares of its leasehold land held through Mweiga Estates (106.7 hectares) and Wahenya Limited (98.8 hectares). This parcel of land had an estimated book value of KES 1.39MN and would be disposed for approximately KES 1.0BN. This transaction alone, being over 700 times the book value of the land reveals the extent of the hidden value of the assets of some of the listed agricultural companies. KAPCHORUA TEA Kapchorua Tea, located in Nandi Hills Rd, Nandi Hills, Kenya is engaged in the cultivation, manufacture and sale of tea. The company s top shareholders include Williamson Tea Kenya Limited with 39.56%, Ngong Tea Holdings Limited London (23.96%) and Shawmut Limited (12.50%). 3 Kapchorua s plantations are categorized into mature tea plantation which is under 621 hectares and immature plantations covering 7 hectares. The company s financial report has not placed a value on the hectares under tea, and neither does it provide the basis for measurement of the company s land holding. We can only presume

4 that its land holdings has been recorded in their books using the historical cost basis. WILLIAMSON TEA WILLIAMSON TEA: AREA UNDER PRO- DUCTION IN HECTARES OVER THE YEARS Williamson Tea is engaged in the cultivation, manufacture and distribution of tea produced from its plantations in the highlands of Kapchorua, Kaimosi, Tinderet and Changoi. The company is majority owned by Ngong Tea Holdings Limited of London (51.46%) and maintains its headquarters on Manor Farm, Wiltshire in the United Kingdom, though it has a local office at Karen office park, Lang ata road. Its brands of tea are processed in its factories and are mainly exported to European countries. Williamson tea has provided limited information on the value of its land holdings in its recent FY15 annual report. The company revalued its PPE by KES 375MN to a consolidated PPE value of KES 2.2BN. However, the company s FY12 provides a more detailed analysis of its land under tea when it revalued the book value of its 2,142 hectares of land and buildings to KES 830MN, on an open market basis. This book value indicates a price per hectare of Williamson Tea land of KES 387,488. Assuming the revaluations are made every 5 years, the next would be carried out in the year Its financial reports still carry the value of its land and buildings at the 2012 net book value, which does not reflect current fair value changes as from the year We can conclude that this rich agricultural land would cost way more than its per hectare book value indicates. CENTUM INVESTMENTS Centum is an investment company listed on the Nairobi and Uganda Securities Exchanges. Its investments are organized into three divisions: Quoted Equity, Private Equity, and Real Estate and Infrastructure, all spread across financial services, power, FMCG, ICT, education, healthcare and real estate sectors. Its notable investments in the recent past include the Two Rivers Shopping Mall, the Coal Power Project in Lamu, and the acquisition of K-rep Bank amongst other investments. The company has been an active player in the Real Estate sector with notable purchases of land and development of real estate. In 2015, Centum acquired 9,646 acres of land located in Kilifi County at the Coast, from REA Trading at a price of KES 180,000 per acre. The corporate affairs director had previously mentioned that a portion of this land could be set aside for real estate and a larger portion thereof to continue under lease to Rea Vipingo Plantations Ltd for their sisal operations. In this deal, Centum would also take Rea Vipingo Plantation s subsidiary, Vipingo Estates which owns approximately 900 acres of land, at a price of approximately KES 340MN. The entire transaction with RVP approximates KES 2.1BN for a total of 10,546 acres, ideal for mixed use industrial, commercial, residential, and recreational purposes. 4

5 Its key real estate project, Two Rivers, is set on 100 acres of prime land 20 minutes from the Central Business District along Limuru Road and is set close to Runda, Gigiri and Muthaiga neighborhoods. Centum acquired this piece in 2010 at an approximate cost of KES 1.6BN, adding to its portfolio of real properties. On its completion, the Two Rivers project will host a shopping complex, hotel, residential apartments, office towers among other social facilities. In its quest to realize this investment, Centum has brought on board other investors like Old Mutual which recently bought a 50% stake in Two Rivers Lifestyle Centre Limited, the holding company of Two Rivers Mall. Another of its subsidiaries in Uganda, Pearl Marina Estates Limited (Uganda) owns 389 acres of prime land located in Garuga Peninsula, between Entebbe International Airport and Kampala with 4km of Lake Frontage. Pearl Marina development will incorporate residential apartments, a retail centre, office space and hotels, and is expected to be up and running by February Transaction/Asset Acreage Acquisition Value Vipingo land 9,646.0 KES1.7BN Vipingo Estates KES340M Two Rivers KES1.6BN Pearl Marina LIMURU TEA Limuru Tea is an outgrower to Unilever Tea Kenya Ltd. (its parent with 52% stake as at 2012). In turn, Unilever acts as the company s managing agent in the growing, manufacturing, sales and marketing of its tea. As at 2015, the Company had 677 hectares of land of mature tea bushes located 4 kilometers to the east of Limuru town, about 30KM from Nairobi. In its FY14 annual report, LTC valued its land and buildings at cost, to the tune of KES 9.9MN (a price per hectare of KES 14,610, with buildings). This is a far undervalued per hectare price of land especially with Limuru s close proximity to Nairobi and does not fully capture the huge value of its 677 hectares of land in its books. 5

6 TPS SERENA TPS East Africa owns and manages hotels and lodges across Eastern Africa. The hotel chain s largest shareholder is the Aga Khan Fund for Economic Development (45%) with its top ten shareholders being corporates holding about 80% of shares outstanding as at end of year Its key properties among others include Nairobi Serena Hotel, Serena Beach Resort and Spa (Mombasa), and the Amboseli Serena Safari Lodge. The company s flagship hotel, the Nairobi Serena Hotel sits at a prime location overlooking the Central Park, a close proximity to the Central Business District. Another of its prime property in Kenya, located along the coastal beach of Mombasa, is the Serena Beach Resort and Spa, which is in close proximity to Bamburi Beach. The books of the company as at 2014 indicate the company s land and buildings having a revalued net book value KES 9.2BN. The latest revaluation of its land and buildings was 31 December 2010 by independent valuers, C.P. Robertson-Dunn in Kenya and H & R Consultancy Limited in Tanzania, using the earnings for existing use method as the basis for valuation and not the asset fair value gain method. TPSEAL has a policy of revaluing its land and buildings every five years with the next revaluation set to appear in the financial report of year At its current share price, Serena is trading below its book value at about 0.9x, and represents an undervalued asset. CAR AND GENERAL Car & General is a supplier of motorized equipment such as generators, motorbikes, lawn mowers and other power equipment within East Africa. The company s latest revaluation was carried out on September 2013 by R.R. Oswald & Co on an open market basis, revaluing its land and buildings to KES 508.8MN. Its leasehold investment property as of this date were a major part of the company s assets, with a book value of approximately KES 1.9BN. We believe the assets of the company would now be worth more than they did as at last revaluation, and represents a discount based on its recent price to book value of approximately 0.6x. KENYA RE Kenya RE provides reinsurance services to insurance companies mostly in East Africa. It s major shareholder is the Government of Kenya with 60% stake. 6 For the year ended 2014, the company's investment portfolio consisted of

7 KES 7.2BN in investment properties, which accounted for 28% of the entire company s asset base. This portfolio of investment property include land and buildings held to earn rentals and for capital appreciation. The company measures its investment properties initially at cost and subsequently revalues them every year. With the company s key properties which include Kenya Re Towers (Upperhill Nairobi); Anniversary Towers (Nairobi); Reinsurance Plaza (Nairobi) and Plaza (Kisumu), all located in strategic locations, Kenya Re s investment properties provide a solid asset base that will strengthen the company s financial and operational stability going forward. With its share trading below its book value at approximately 0.7x, we believe Kenya RE to be an undervalued stock. UCHUMI SUPERMARKETS Uchumi is a retail supermarkets business distributing food consumables, appliances among others through its network of 15 branches in Kenya. It s subsidiaries are Uchumi holdings and Kasarani Mall Limited. The Company is majority owned by Jamii Bora Bank (15.8%) and the National Treasury (14.6%). Uchumi Land Ownership Registered Owner Location Acreage Tenure Uchumi Supermarkets Langata Hyper 3.7 Acres 98 years (from1995) Uchumi Supermarkets Ngong Hyper 2.5 Acres Freehold Kasarani Mall Limited Nairobi, Kasarani 20.0 Acres 99 years (from 1999) Kasarani Mall Limited Nairobi, Kasarani 52 years (from 1965) (Source; Company) Uchumi s property of freehold land and buildings was last revalued in June 2013 to KES 1.5BN, by Kiragu & Mwangi Limited, on the basis of open market value. The company s 20-acre leasehold land at Kasarani was revalued to KES 2.3BN as at 30 June 2015, and is categorized as investment property by the company. Uchumi has had land disputes relating to caveats placed on its properties at Kasarani by among others, the Government of Kenya and self help organizations. 7

8 Caveator Property Complaint Government of Kenya Kasarani, Nairobi Title Validity Commissioner of Domestic Taxes Ngong Hyper Stamp duty Roysa Community Self Help Group Kasarani, Nairobi Trespass Roysambu Shell Youth Self Help Group Kasarani, Nairobi Acquisition (Source; Company) As per the company s FY2015 report, Uchumi s pieces of land in Lang ata and Ngong had secured some borrowings from the Kenya Commercial Bank and the Industrial and Commercial Development Corporation. Creditor Charge Collateral KCB Loan(KES589MN) Ngong Hyper land ICDC Loan(KES800MN) Lang ata Hyper land With the properties' location in close proximity to Nairobi, we believe they hold a value that in future will be unlocked as major assets of the company, if and when all the charges and caveats are fully settled. EAST ARICAN BREWERIES LIMITED (EABL) East African Breweries is a holding company with subsidiaries in the manufacturing of branded alcohol beverages like beer and spirits. Its major shareholder is Diageo PLC of UK, with 50.02%. Its subsidiaries include Kenya Breweries Limited, Serengeti Breweries and Uganda Breweries Limited. As per the company s FY15 financial report, the company had freehold property valued at cost, amounting to KES 3.3BN. During release of the results, EABL revealed it only required half of the 60 acres of land it had at its Ruaraka headquarters. Over this period, the company disposed 15 acres recognizing a realized gain of KES 1.8BN on this sale, and was seeking to dispose another 10 acres in concurrent financial period. Subsequently, EABL announced in its HY16 financial results investors briefing that it had further disposed approximately 6 acres close to its Ruaraka headquarters for KES 707MN. This sale ultimately values its remaining 39 acres of land at approximately KES 4.6BN, a figure that is far above the current book value of its freehold property, highlighting the extent of value lying outside the company s books. 8

9 EVEREADY EAST AFRICA Eveready is a supplier of portable power products across East Africa through its network of associates and distributors. Its main brands include EVEREADY, Energizer, Schick, Turbo and Lighting Collection. The extent of Eveready s hidden assets were revealed when it shut down its battery factory located along Nakuru/Kisumu Road in Nakuru County. During its 2014 announcement, the company indicated it was seeking partnerships to venture into real estate, though the it had yet to determine whether to build a hotel, shopping complex or a housing project on the 18.5 acre piece of land where the plant sits. The CEO at the time placed the price of the Nakuru location to be approximately KES 370MN. He further mentioned of another two acres of prime land in Milimani (also in Nakuru) that could be priced even higher than the Nakuru land. To gain more perspective on these assets, we can compare the assets value to the company s market capitalization of approximately KES 567MN, and we can conclude that Eveready is trading at below its book value of just the two pieces of land. This is another company worth a look by value investors based on land value. 9

10 IN CONCLUSION Being a real tangible asset, scarce and in high demand, land provides a solid asset base for future growth as its value tends to appreciate over the long term as demand for infrastructure development, agriculture and settlement increases. For companies seeking expansion, land ownership can provide a softer avenue to raise capital in unfavourable capital markets and high interest rate environment. The big question has been, why would some of these companies especially agricultural, divest from some of the land they currently hold especially idle and less productive pieces. Such companies may seek exit routes through long term leasing arrangements to others, outright sale of idle non core land, and putting up real estate properties. This will aid the companies to boost their operating results, enhance their financial stability and provide a more diversified source of income especially for the agricultural stocks. For investors of some of the companies, the key is recognizing the operation strategy of the company and any hint of realization of value from either sale or diversification from these pieces of property. 10

11 APPENDIX COMPANY INVESTMENT RATINGS Buy: Share price may generate more than 15.0% upside over the next 12 months Overweight: Share price may generate between 10.0% and 15.0% upside over the next 12 months Hold: Share price may fall within the range of +/- 10% over the next 12 months Take Profit: Target price has been attained. Look to accumulate at lower levels. Company fundamentals however remain strong Underweight: Share price may generate between 10.0% and 15.0% downside over the next 12 months Sell: Share price may generate more than 15.0% downside over the next 12 months, significant business and/or financial risks present, industry concerns Not Rated: Counter is not within regular research coverage SECTOR INVESTMENT RATINGS Overweight:Industry performance better than that of the whole market Equal weight: Industry performance about the same as that of the whole market Underweight:Industry performance worse than that of the whole market DISCLAIMER While every care has been taken in preparing this report and it has been prepared from sources believed to be reliable, no representation, warranty, or undertaking (express or implied) is given and no responsibility is accepted by Dyer and Blair Investment Bank Limited, its related companies, subsidiaries, affiliates, its employees and agents, as to the accuracy and completeness of the information contained herein or in respect of any reliance on or use thereof. This report is solely intended for distribution to clients of Dyer and Blair Investment Bank Limited. Any information may be changed after distribution at any time without any notice. 11