How to make millions from stock market

On March 28, 2008, Samson Obura queued for hours at a securities agent’s office in Nairobi .

He was among the 800,000 investors seeking to get a share of Safaricom in the biggest Initial Public Offer (IPO) in sub-Saharan Africa.

“There was no doubt Safaricom would surpass Kenya Electricity Generating Company (KenGen) once it started trading at the Nairobi Securities Exchange (NSE). Safaricom was raking in huge profits and I believed that buying the share at Sh5 was a real bargain,” says Mr Obura.

KenGen’s share had began trading at Sh11.90 two years earlier, and having missed on its IPO, Mr Obura says Safaricom was his moment of redemption.

He invested Sh90,000. The IPO was oversubscribed by 363 per cent with bids worth Sh231 billion and a 669.7 per cent subscription in the local retail pool.

The number of new investors nearly doubled to 1.5 million with more than 700,000 new CDS accounts opened.

While the over-subscription was indicative of a more mature local market, it was bad news for retail investors as each one was allocated 21 per cent of the shares they applied for.

“I received 3,780 of the 18,000 shares I’d applied for. I was refunded Sh71,100,” he says.

But the shocker would come on June 9, 2008. “The share didn’t shoot up, as I had expected. Instead, it stagnated around the Sh5 before heading south.” By September 2008, the share price hit Sh2.50. “The dividend I received was a mere Sh200, whose cheque I couldn’t even cash. It was disappointing.”

HEAVY LOSSES

According to the Capital Markets Authority (CMA), many investors incurred huge losses after securing easy loans from commercial banks to invest in the IPO. Ms Isabella Chebet was one such investor.

“I’d read and heard that IPOs were profitable and though I had never invested in stocks before, I took a Sh200,000 loan to buy the shares.” While her bank took the refund as part of her loan repayment, Ms Chebet, 33, was left with shares she could not sell until her loan was settled. “It was a bitter pill. I don’t think the stock exchange is for people like me and I’ll never invest in shares again.”

Safaricom’s financial results that year did not make things any better. Its profit margin contracted, thanks to price wars from competitors Airtel and yuMobile. In the three years leading to the 2012-2013 financial year, the firm lost a total of Sh2.52 billion.

“The profit dropped to Sh12.63 billion from Sh15.5 billion. However, the company identified data and financial services as its new income streams. This is what has led to its profitability in the half-year results for this year and the strengthening of its share,” says Investax Capital Securities boss Ndindi Nyoro.

Safaricom announced a 45 per cent jump in profit, which saw its share rally to an all-time high of Sh10.20.

Although many retail investors in Safaricom like Mr Obura sold their stake at a loss, others took advantage of the fall in price to buy more.

Josphat Musau, an IT consultant. He invested Sh10,000 at first: “I continued buying even when the price was at Sh2.50. I knew that someday the share would be profitable.” After buying shares worth Sh1.4 million in the past five-and-a-half years, Mr Musau is today smiling all the way to the bank after offloading the shares at more than double his buying price.

He is not alone. Mid this year, the CMA said local large-scale individual investors were taking up the Safaricom share at a higher rate, with millionaires Chris Kirubi, Baloobbhai Patel, and John Kimani leading the pack with between five and 8.6 million shares bought among them.

According to analysts at StratLink Africa, Safaricom revenues and dividends will grow by double digits this fiscal year. This is good news for the shareholders. The share is currently trading at about Sh9.85 while KenGen is at Sh16.05.

Which begs the question: What does it take to succeed at the stock market?

REAPING BIG

According to Mr Nyoro, while the NSE is the best place to invest now, the trend calls for discipline. “Those who acted greedy when many were fearful of the Safaricom share are now walking with fat wallets.”

The entry of Safaricom into the banking sector via M-Shwari, he says, points to higher profitability, more dividend payouts in the short and medium term, and stability in the long run.

In the past year, the NSE has gone up by over 30 per cent, surpassing real estate and fixed deposit ventures.

It is not only from Safaricom’s shares that investors have been reaping big. Centum Investments has gained over 100 per cent in the past year. “If an investor put Sh1 million in Centum last year, by last month, their investment was worth over Sh2.32 million,” says Mr Nyoro.

Coincidentally, Chris Kirubi is seeking to increase his shareholding in the company to 29.9 per cent from 24.999 per cent. On Friday, Centum Investment closed trading at Sh31.25.

According to Mr Nyoro, Mumias Sugar is also trading at a bargain.

“Mumias closed at Sh3.50 on Friday last week. Sh3 is rock-bottom for the miller and given that the government cannot allow it to collapse, investors can be sure that the firm will be on its way up,” he notes, adding that investors can learn from Safaricom’s share woes.

Apparently, when a share nosedives, investors may be tempted to pick it up in the hope that it may be under-valued.

The head of risk and compliance at Dyer and Blair Investment Bank, Mr Daniel Waweru, says Kenya Airways is about to get to a buyable level.

“The KQ share is still in an over-bought position and is facing a high-price resistance after hitting a high of Sh14.70. Once the share hits the lows of about Sh10.50, it will be a recommendable price to buy,” he says. Kenya Airways closed trading at Sh13.05 on Friday, a 2.61 per cent drop from the previous week.

Mr Nyoro concurs, saying that at Sh10, KQ would be a good buy. The Airline’s chief executive, Titus Naikuni, forecast a positive outlook with the acquisition of new aircraft.

“The expected delivery of the 787 Dreamliners starting March 2014 to replace the fuel-inefficient 767 fleet is projected to be a key driver in the company’s recovery and performance,” said Mr Naikuni while releasing the company’s half-year results.

Evidently, though, many buyers have been cautious about the Kenya Airways share, given that the carrier has run into headwinds.

In the 2012-2013 financial year, KQ suffered a Sh7.9 billion after-tax loss compared to Sh1.7 billion profit recorded in the 2011-2012 financial year. However, the firm seemed to pick ground with the recently released Sh578 million half-year profits.

This helped push the share to Sh14.10. The share was trading at Sh13.05 on Friday, a decline of 7.4 per cent. A decrease or increase of a shilling at the bourse is enough for an investor to rake in a huge profit or suffer loss, based on the volume of shares one holds.

Mr Nyoro further says the NSE has been attracting large number of foreign investors, many of them eyeing Britam, Kenya Commercial Bank, Nation Media Group, Cooperative Bank, Athi River Mining, Centum, and Crown Paints.

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Transacting at the NSE

For one to begin buying and selling shares at the Nairobi Securities Exchange you need to:

• Open a CDSC account with a stock broker or an investment bank. The account is free.
• Deposit the amount of money you intend to use to purchase shares in your stock broker’s account, which is then credited to your CDSC account.
• Research on the best buys in the market. This could include firms with high profit margins, impressive market share, high dividend payout, high earnings per share, innovative, stable and well managed, and future growth prospects. Also have an exit strategy.
• Place a purchase order when you identify a target share. When selling, you place a sell order.
• Once you buy shares, you can only sell them after three days since the local bourse operates on the T+3 system.
• The amount you can start trading with can be relative and will depend on the kind of shares you buy or want to buy.
• Note that the minimum number of shares you can buy is 100.