Monday, May 19, 2014


For once, we may want to look at the UMEME glass as half full not half empty.  This is what I came up with. A  quack-intellectual attempt at financial analysis and investment appraisal!
If I had Ugx 10,000,000 today, I wouldn’t buy a plot of land in Matunga or Mukono or put it on a Fixed Deposit Account in a bank to earn 12% in interest a year! I would buy UMEME shares currently going for Ugx 340 per share. WHY?
If you bought UMEME shares worth Ugx 10,000,000 you would get 29,411 shares. (Ugx 10,000,000 divided by Ugx 340 price per share).  If you buy these shares by 8th June 2014, you will be entitled to a dividend. UMEME is paying Ugx 16.8 per share as a part of the dividend for FY 2013. The proposed total dividend per share for year ended December 2013 is Ugx 24.8. A portion of this, Ugx 8 per share was paid in June 2013 as an interim dividend, so they are paying a balanced of Ugx 16.8 per share mid this year 2014.  So, with 29,411 shares this would fetch Ugx 494,105 (Ugx 16.8 multiplied by 29,411 shares) in dividend earnings within one month of buying! If we offset 15% withholding tax (WHT) charged on this dividend earning, we will be left with Ugx 420,000 in cash. So we can comfortably say that after an initial investment of Ugx 10,000,000 in share purchase, we have Ugx 420,000 cash in earnings within one month! This means that our initial investment/ cash outlay is Ugx 9,580,000. (Ugx 10,000,000 less Ugx 420,000 in dividend earnings) We can say that our 29,411 shares actually cost us Ugx 9,580,000.
So now we go into the subjective stuff. If you had Ugx 10,000,000 today, you could alternatively invest it on a Fixed Deposit Account with a bank at 12% or buy a plot of land in Mattuga or Mukono. For the land investment, if you are lucky, the value of your land will appreciate to Ugx 15,000,000 by 2019! Real estate valuations rarely go up by more than 50% in low end real estate! A property in Ntinda can easily appreciate by 50% or 100% within 5 years but this is not possible for real estate  in a Mukono or Matunga neighborhood. Most likely the value will be Ugx 12,000,000 or 13,000,000. But let us use Ugx 15,000,000 for our analysis.
Since 12% is the interest rate or opportunity cost of capital, we shall use it to discount (or bring the future to the present) all our future values and future cash flows!  If the value of the land shall be Ugx 15,000,000 in 2019, what is its value today? It is not the Ugx 10,000,000 you have paid Jomayi Estates for the Land! It is the value you get after bringing this future value of Ugx 15,000,000 to today, the present day! We shall use 12% to discount the future value of the land. Why 12%? Because it is the opportunity cost of capital or the interest rate that you could have earned if you had fixed it with the bank on a Fixed Deposit Account. It is an opportunity cost of capital because you have now made a decision to buy land not do fixed deposit at interest rate of 12% with the bank!
We have already suggested a value of Ugx 15,000,000 in 2019 (5 years from now) for the land bough for Ugx 10,000,000 today. Using the interest rate/ opportunity cost of capital of 12% to discount this future value of the land to today/ to establish its present value, the value of Ugx 15,000,000 in 2019 is equivalent to Ugx 8,511,402 today! The other way to look at it to say if you had Ugx 8,511,402 today and you invest it at 12% per annum, you will have Ugx 15,000,000 in 2019 (in a period of 5 years). So it is clear that the land a negative net present value. Why? Because its value today/ present value of Ugx 8,511,402 is less than the Ugx 10,000,000 paid for it/ paid to acquire the asset. For something worth Ugx 8,511,402 today, we are paying Ugx 10,000,000! That is not a good investment.

Let us now look at the UMEME option as illustrated in the a table
UMEME paid a divided of Ugx 15 last year 2012. They are paying Ugx 24.8 for 2013. We can suggest that in the next five years, they will pay dividends to the tune of Ugx 30, Ugx 35, Ugx 40, Ugx 45, and Ugx 50 for 2014, 2015, 2016, 2017, 2018 respectively. I wish to think these are conservative estimates. The dividend would be paid in the successive year/ period. Just like the 2013 dividend is being paid in 2014, the 2014 dividend would be paid in 2015. The same is true for all the other years under consideration. Secondly, UMEME share price was at Ugx 275 one year ago, it is now at Ugx 340. It has gained Ugx 65 in one year! If we make another conservative assumption, that UMEME shall be trading for Ugx 500 in 2019. If we assume that its share price shall gain value by Ugx 160 in the next 5 years, then we can do the analysis and investment appraisal. So the 29,411 shares would be worth Ugx 14,705,500 in 2019 (assumption is Ugx 500 share price in 2019 multiplied by the 29,411 shares)
We shall discount both our future divided earnings and future total share value using 12% as our opportunity cost of capital. Our discount factors are based on 12%. (Refer to table below). The dividend earning in 2015 of Ugx 750,000 (Ugx 30 per share multiplied by 29,411 shares less Withholding tax) is equivalent to Ugx 669,750 today (2014). If you had Ugx 669,750 today, and invested it at 12%, you would have Ugx 750,000 one year later (in 2015)! The Ugx 1,250,000 dividend earning in 2019 is equivalent to Ugx 708,750 today. Why? Because of the fundamental concept of the time value of money! A shilling today is better than a shilling tomorrow! A dollar today is better than a dollar tomorrow. So the sum of the present values of both the future value of your UMEME shares in 2019 and the dividend earning s over the next 5 years is Ugx  11,841,394 compared with the initial investment outlay of Ugx 9,580,000! In essence what is happening is that for an investment worth Ugx 11,841,394 today (sum of present values), you are paying just Ugx 9,580,000! This translates to a net present value of Ugx 2,261,394. This is good investment by all standards. 

The UMEME Investment Scenario.
It is clear that based on the assumptions made, UMEME is a better investment than buying land or fixing the Ugx 10,000,000 on a fixed deposit account.  The assumptions are not wild assumptions; they are very conservative in light of UMEME’s growth potential. A dividend payment of Ugx 30, Ugx 35, Ugx 40, Ugx 45 and Ugx 50 per share for the years 2014, 2015, 2016, 2017 and 2018 respectively is a bit conservative considering UMEME’s growth and profitability. Secondly, UMEME seems bent on paying dividends every year (including an interim divided every 6 months) and this will surely continue to drive up the share price. UMEME‘s profitability can only keep going up! They are implementing the pre-payment YAKA model which is important for their working capital requirements! Finally, the demand for electricity is going through the roof and their losses are coming down implying that they are going to be selling more electricity in the years ahead!
If you want to make a quick buck, UMEME is the stock to buy. If you are pessimist, then you can sit on the fence and watch other devour up this investment apple.
Twitter; @RugabaAgaba

Disclaimer; This article is for information and illustrative purposes only and does not purport to show actual results. It is not, and should not be regarded as investment advice or as a recommendation regarding any particular security or course of action. Opinions expressed herein are current opinions as of the date appearing in this material only and are subject to change without notice. Reasonable people may disagree about the opinions expressed herein. In the event any of the assumptions used herein do not prove to be true, results are likely to vary substantially. All investments entail risks. There is no guarantee that investment strategies will achieve the desired results under all market conditions and each investor should evaluate its ability to invest for a long term especially during periods of a market downturn. No representation is being made that any account, product, or strategy will or is likely to achieve profits, losses, or results similar to those discussed, if any. No part of this article may be reproduced in any manner, in whole or in part, without the prior written permission of the author. This information is provided with the understanding that with respect to the material provided herein, that you will make your own independent decision with respect to any course of action in connection herewith and as to whether such course of action is appropriate or proper based on your own judgment, and that you are capable of understanding and assessing the merits of a course of action.

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