Most new faces in Nairobi bourse drop below IPO price

Half of the stocks that listed on Nairobi securities Exchange (NSE) through Initial Public Offer (IPO) are trading far much below their issue price, giving negative returns to investors.

Out of the 12 companies that launched their IPOs on the bourse between 2000 and 2016, four are trading below IPO price, one has been delisted while another has stopped trading pending completion of deregistration process.

This has seen the market run into IPO drought as the latest additional offers and listings fail to excite investors like it was in hay days when most IPOs were oversubscribed, giving companies an easy time to raise capital.

Analysts attributed the poor performance of the new faces in the local bourse to economic downturn and underlying performance of a particular company.

Going forward, investors may be hesitant to pump in money in companies wishing to list in the bourse seeking for capital.

Last year, Fusion Capital failed to raise Sh2.3 billion it targeted from its Development Real Estate Investment Trust (D-REIT). The firm only achieved a 38 per cent subscription despite extending the deadline twice. It collected Sh873 million with only four investors against the requirement of seven, therefore failing its bid to get listed.

According to Aly-Khan Satchu, chief executive officer of Nairobi-based Rich Management Ltd, with NSE20 index at eight year low and All Share index at 42 month low, the market is now at disequilibrium.

In an emailed response to Business Beat, Satchu said that shares should be sold at a discount if the IPO drought is to be cut. He feels that not much is being done to re-ignite the shareholder revolution on the bourse.

“The signal is a seriously negative one. The stock market‘s vibrancy which saw about two million Kenyans troop to the Stock Exchange, whose apogee was around the Safaricom listing has dissipated. Efforts are not being made in earnest to resuscitate the markets and once more get the IPO show on the road,” said Satchu.

With the market turning net negative returns, Sundeep Raichura, CEO of Alexander Forbes Kenya, a financial and risk services firm, says the depressed market conditions since 2015 have contributed to poor run from companies which made a debut through IPO.

He adds that the pricing of IPO may also have been high, especially in terms of gauging future prospects. This is supported by Einstein Kihanda, an asset management CEO at ICEA-Lion Group.

“The share price is a reflection of the underlying performance of a particular company. The pricing that was arrived at the time of IPO may have been beyond its actual value,” said Mr Kihanda in a phone interview.

For instance, Mumias Sugar, which got listed in November 2001 floating 300 million ordinary shares at Sh6.25, has suffered the steepest hit. Its share price has slumped by 83.2 per cent to just Sh1.05.

Straight from a successful IPO, the firm came back to market for more money in 2006 through additional offering, this time selling each share at an offer price of Sh49.50.

However, mismanagement and losses have eroded investor‘s confidence in the counter leading to it being axed from the NSE 20, an index for top 20 blue-chip companies, in June 2014. In the same year, Capital Markets Authority (CMA) blocked its bid to raise Sh4 billion on grounds of pending audit queries. For Eveready East Africa, the company that holds the oversubscription record (830 per cent), a shift in technology and rivalry from cheap imports has reversed its fortunes. From an issue price of Sh9.50, the share is now averaging Sh2.35 being more than four times lower than its IPO price.

According to Mr Kihanda, a company‘s share price going below IPO price can be a source of concern since it negatively affects the perception of investors. However, singling out stocks such as Eveready, he adds that the performance may be a reflection of the challenges and dynamics that have affected particular organisations.

“The fact that you are buying shares in a company is an indication you are buying into its future which may be affected by many factors such as overall economic environment, sectoral problem, governance issues as well as dynamics of the business,” he said.

KenGen‘s IPO in 2006 had opened a floodgate of retail investors when it offered 658.9 million ordinary shares at Sh11.90 each.

The share jumped to a record Sh49 on just the first day of trading exciting investors to a 333 per cent oversubscription level.

The share has taken a beating, with KenGen offering it at Sh6.55 in a rights issue last year. It took the Government, a principal shareholder to convert its debt into equity to make the issue a success. Unlike the case of its initial IPO, it just managed 92 per cent subscription level.

With subscription levels fading, Mr Raichura reckons that it may be a sign that ordinary investors are not seeing opportunities for quick rallies in share prices.

“People are now very fatigued because of what is happening to the previous IPOs. Usually, people go for IPOs with expectation that they will get an immediate price gain. But what we have seen are prices going up slightly and shortly then going down,” said Mr Raichura.

For Stanlib Fahari Reit, which made a debut on the market in October 2015, it only managed subscription level of 28.96 per cent. It was offering 625 million shares at Sh20 each.

On this, Mr Kihanda said that lack of information could have led to the lower subscription and poor run of the share thereafter.

“There was not so much investor awareness about this product so the complexity of it also affected its performance on the market. It necessitates a lot of intervention from NSE and CMA in educating investors,” he said.

With less than 15 months on the bourse, the share is averaging Sh12.05 (as at January 25) meaning that investors who wish to sell it now will be courting losses.

Since then, there has been no new IPO on the bourse making it the fourth longest drought. This comes after a period between September 2011 and September 2014 that only saw two offerings from Britam and NSE limited.

Access Kenya, which was suspended from trading by CMA on May 7, 2013 was trading at Sh9.85, below the IPO price of Sh10.

For Africa Lakes, a British firm that got listed in March 2000 with just 4 million shares at Sh94.50 exited the stage in 2003. Another firm that exited the bourse with faded fortunes to investors is East African Packaging.
In the recent years, companies appear to be favouring equity and debt at the expense of using the NSE to raise capital. However, Mr Raichura cautions that this takes a lot of calculated effort especially on the future of the firm.

In a phone interview with Business Beat, Mr Raichura said that the falling share prices and election jitters mean that the stage may not be right for any IPO this year. “I see a cautious approach as investors hold their decisions. This year may not be ideal for an IPO and we are not likely to see any on this side of the year until after election process,” said Mr Raichura.

The introduction of Growth and Enterprise Markets segment (Gems) for small firms in 2013 has only attracted Home Afrika, Flame Tree Group, Kurwitu Ventures, Nairobi Business Ventures and Atlas Development. But their performance has also left short-term investors in pains.

The share price of Home Africa has been on a disappointing run. From a price of Sh4.10 in 2014, the share shed 37 per cent of its value in 2015 followed by a further 52 per cent drop last year. It is now priced at Sh1.05.

Atlas Development, which was also cross listed at London Stock Exchange, was struck off the London bourse for lack of nominated advisor. On NSE, its trading was suspended at Sh1.05, being a 10th of its listing price of Sh11.50.

Speaking to Business Beat, Ferdinand Othieno, a practicing scholar in finance as well as head of transaction services division at Centerprise Africa Limited said that the laborious and expensive process of IPO has left private equity and debt as an attractive alternative.

“IPO and private equity are like moon and sun. Even for Gems, CMA knew that they had to be trained to reach the level of raising capital from the market. Very few companies are willing to meet that cost,” he said.

Despite this stormy performance on the bourse, a few stocks such as Safaricom, Kenya Re, Cooperative Bank and NSE Limited are trading above IPO price.
While Safaricom‘s share price is now more than three times the IPO price, that of Kenya-Re has slightly more than doubled the IPO issue price. According to Mr Othieno, investors will have to shift to taking long term approaches if they are to create wealth from shares.

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