Ogilvy takeover drives demand for Scangroup shares

Scangroup’s share price hit an all time high on Monday since the firm went public in 2006, buoyed by the takeover of its competitor Ogilvy Africa and rising media spend across East Africa.

The media services firm’s share price hit Sh54.50 on increased demand as investors eyed bigger returns arising from the buyout.

The share price has appreciated by 125 per cent since the start of the year, meaning that for every one shilling an investor put in January, his investment had grown to Sh2.25 by the close of trade last Monday.

The firm’s share price on Wednesday stood at Sh53.50.

“We observed increased foreign demand on the counter and we see it setting new levels in the coming days,” says Mr George Bodo, an investment analyst at Genghis Capital, adding that the buyout news was driving demand for a piece of the firm.

Stockbrokers say foreign investors have shown more interest on the counter in recent weeks.

Scangroup is set to acquire a 50 per cent stake in Ogilvy East Africa and a 51 per cent stake in Ogilvy Africa in a cash and stock transactions worth Sh418 million.

The deal has the potential of growing the profits attributable to Scangroup shareholders by 10 per cent.

The twin Ogilvys generated a combined profits of Sh68 million in 2009, which means that Sh34 million could have flowed directly to the shareholders of Scangroup.

But the deal will give Scangroup access to high net worth clients in Kenya such as Barclays Bank, Kenya Airways, India’s Bharti Airtel, and Telkom Kenya-—which promise to rev up its profits given the huge media spend of these blue chip firms.

Scangroup has in the past three years completed multi-million acquisition deals across the East African market as it sought to boost its presence in the telecommunication sector, with its focus being the mobile telephony market.

With the telecommunication sector emerging as the largest marketing spenders across the region, egged on by stiff competition and super profits, the sector has become the focus of media and advertising firms.

In 2007, the firm acquired part of Redsky Uganda, in a move that gives it a piece of telecommunication business in that country after it added Uganda Telecom to its client list.

It also acquired Redsky Kenya, which handles the Safaricom advertising budget that is said to be the biggest across East Africa.

Safaricom media spent stood at Sh2.66 billion in the year to March, 2010.

In 2006, it acquired a majority stake in FCB Tanzania, the agency that handles Vodacom Tanzania and the biggest media spender in Tanzania.

“This deal (Ogilvy buyouts) assures Scangroup advertising across Africa,” says David Mataen, Faida Investment Bank’s head of corporate finance.

Ogilvy Africa has 19 affiliate operations across Africa, boasting a client base that includes multinationals SABMiller, Unilever and BAT.

Optimism over the recovery of the Kenyan economy has spurred a rally in media spend, offering firms such as Scangroup healthy returns.

Companies are spending more to capture fresh demand that is being created by economic recovery.

Corporate Kenya spent Sh20 billion in the six months to June, close to the 2008 spend.

Second half

This pushed Scangroup’s profits to Sh200.2 million in the six months to June, compared to Sh146.7 million in a similar period last year, and the firm expects a better second half.

“Consumer goods sector is performing well and since the performance is highly correlated to economic growth, their ad spend should increase,” says Mr Alex Muiruri, an independent research analyst.

But the Genghis Capital analysts reckon that the firm’s high price to earnings ratio points to an overpriced counter, warning that the share was likely to fall as investors factor in its realised financial numbers.

Scangroup’s price-to-earnings ratio is 29.8 against the 13.55 commercial segment’s average ratio.

“The price to earnings ratio is way above its level,” says Mr Bodo. He added that a significant portion of demand on Scangroup share is being driven by speculation, adding that the share could fall as investors exit after profiting from the capital gains.