Investors keep off Uchumi rights as market price falls
What you need to know:
- The cash call was approved by shareholders in December 2012 and its delay has seen Uchumi struggle with supplier debts and stock-outs, forcing the retailer to turn to borrowing for working capital.
Investors shied away from buying Uchumi rights yesterday as the market price fell below that of the offer raising questions as to the whether the efforts to raise money would succeed.
Analysts say the drop of the retailers share price to Sh8.05, which is below the rights share offer price of Sh9, presents a hurdle to Uchumi achieving its target of Sh896 million from the rights issue. The counter gained slightly yesterday by five cents, with 217,000 shares changing hands.
“I think it’s quite a hard sell for Kenyan investors to take up Uchumi rights at a premium price relative to the market, meaning high probability of failing to meet their subscription target,” said Genghis Capital analyst Silha Rasugu.
The cash call was approved by shareholders in December 2012 and its delay has seen Uchumi struggle with supplier debts and stock-outs, forcing the retailer to turn to borrowing for working capital.
Had the company issued the rights in 2013 as planned, it would have benefitted from a share price that remained relatively stable at between Sh19 and Sh21, meaning that it could have raised at least Sh1.5 billion from the sale of 99.5 million shares factoring in a discount.
In 2014, the counter has shed 57 per cent, leaving the company to revise downwards the target to below Sh1 billion.
STRATEGY CHANGE
According to ABC Capital corporate finance manager Johnson Nderi, the rights issue has come at a time when the market is vulnerable as it feels the effects of the capital gains tax due to kick in next year, which has seen investors rush to lock in profits.
Mr Nderi said the market has also made several assumptions over the Uchumi stock, drowning out the voice of management on the company’s change of strategy towards co-opting more debt financing.
“The market has misread some signals, especially on the story of the debt, by failing to account for the fact that management has a strategic plan behind their actions,” said Mr Nderi.
“There is a reason why the banks are willing to do business with Uchumi, and looking back at their recovery from the 2006, they were able to repay their debts and return to profitability,” added Mr Nderi.
Diversified insurance and investment firm Britam also suffered from investors failing to account for a strategy change. For two years after its 2011 listing it held largely below the offer price of Sh9 even as the company diversified further into the lucrative real estate sector. The counter has over the past year seen a surge.
Analysts say Uchumi may yet get a boost in the rights from a strategic investor looking for an easier way of getting into the counter. Such investors being long term in nature would be unlikely to be put off by the price premium on the rights issue, Mr Nderi says.
Investors from the region may also view this as an opportunity to buy into the company.
The government has committed to defend its stake in the rights issue, with the delay of issuing that commitment being seen as the biggest reason for the delay of the Uchumi rights.
KenGen will also be watching keenly the results and investor attitude to the Uchumi rights for its Sh15 billion issue, which has been postponed untill the first quarter of next year.
The article first appeared in The Business Daily.
