Why you should be investing at Uganda Securities Exchange (USE) now

The Uganda Securities Exchange (USE) is currently a quite enviable ‘buyers’ market. A snapshot of the market reveals a free fall on the major stock counters. Precisely, 5 out of the 7 local listings have been trading south over this last quarter of the year. This situation is a result of various factors that have converged to push stock prices to levels that are out of whack with the fundamentals on the ground. These factors include a stringent economic environment that has been perpetuated by a weakening shilling (which has finally begun to stabilize), escalating food and fuel prices and a regional political uncertainty due to the fourth coming general elections in Kenya. The situation has been further aggravated by the fact that almost 50% of investors at USE are Kenyans. The big question to the average Ugandan investor is, ‘Could the time be right to go shopping for shares?’

Warren Buffet once said
,‘Whether we’re talking about socks or stocks, I like buying quality merchandise when it is marked down’ Warren meant that in buying a stock, it’s quite important to determine the stock’s intrinsic value and compare to its market price. The concept is therefore to buy an undervalued stock which will appreciate in value overtime, one commonly renowned as ‘value investing’. Most of these companies at USE, especially those in the banking sector, reported above average half year 2011 financial results. Well, not to forget, the Bank of Uganda (BOU) legislation early in the year which required all banks to increase their reserves by a massive 400%. We could therefore argue that listed banks at USE are more valuable than before. Below are recommended ‘buy’ counters basing on several cues.

Bank of Baroda (BOBU)
Top on the list is Bank of Baroda Uganda (BOBU) which reported an impressive 48% in net profit growth during the half year results. Despite such an admirable performance, the company’s share price which stood at Shs. 700 after a 1.5:1 bonus issue early during the year has steadily been falling (mainly due to the bonus which culminates into a cheaper share) to the current Shs. 200. This implies the share is selling at PE ratio in the regions of 9.5, which is slightly higher than the sector average. Impressive though is the bank’s huge retained earnings. In fact, it easily responded to BOU’s requirement by capitalising some of these earnings through the bonus issue. The bank’s growth prospects are also quite high given the fact it enjoys a sizeable share of the Indian business community in Uganda. With such strong fundamentals and an expected average annual net profit growth north of 20%, we could consider BOBU undervalued and hence a perfect buy that will lead to sizeable future gains on its price.

Uganda Clays Limited (UCL)
The infamous brick maker has been loss making for the last three consecutive years. 2011 half year financial results however saw it edge into profitability with a meager profit of Ushs. 1.2 Billion. Could this have meant the dawn of a new day for UCL? Well, quite worrying is its huge loan book which resulted into huge interest payments that led to negative 3Billion half year operating cash flows. Thanks to NSSF (major shareholder) for extending a cheap loan to the brick maker, the company would otherwise be a bed time story now. With cheap cost of capital at hand, UCL presents one of the best opportunities for gains on its stock price which currently stands at Shs. 45. Notably, the company substantially upgraded its manufacturing front last year (2010) which led to significant cost savings in 2011. Basing on the current turn of events it’s a must buy evidenced by the fact that it’s currently selling at an impressive PE ratio of 35.2(Based on half year results).

British American Tobacco Uganda (BATU)
The leaf business has overtime been a ‘must invest’ for most seasoned investors. Actually, Warren Buffet was once quoted to have said, ‘I’ll tell you why I like the cigarette business. It costs a penny to make. Sell it for a dollar. It’s addictive. And there’s fantastic brand loyalty.’ A snap shot at BATU relative to other listed companies at USE should tell you it’s the cash cow to scramble for. This fact alone has made BATU a bullish counter unlike all the others. Notably, for the year ended 2010 shareholders bagged an impressive Shs. 228 dividend per share. Tell you what... no other company at USE can match this. What makes the difference? I suppose the dividend policy at BATU. Notably, during the financial year 2009 when BATU’s retained earnings stood at NIL, the company went ahead and paid out Shs. 2.8 B to shareholders. With such a generous dividend policy you can only expect loyal shareholders, hence at the current price of Shs. 1840 there is still room for appreciation.

Ultimately, it’s worth noting that we are likely to experience a reversal of the current trend (plummeting stock prices) at USE in the near future as the effect of different economic and non-economic factors on share prices evens out. The average Ugandan investor will therefore moan at the complete change of events but I guess it will be too late.