Safaricom’s bid to reduce share float sparks debate

It is more than a year since Safaricom went public, but the valuation of the mobile phone company continues to generate heated debate among investors.

With the company having lost a quarter of its value since its Sh50 billion IPO debuted on the Nairobi Stock Exchange, scepticism is rising among investors over the future prospects of the share price.

In the last couple of weeks, however, stockbrokers and fund managers have been showing growing enthusiasm for a plan that seeks to reduce the number of Safaricom shares in the market — a process known as consolidation — in a bid to shore up the share price.

Supporters of consolidation argue that there are too many shares in the hands of 800,000 small investors who have been selling their tiny holdings, causing volatility on the Safaricom counter.

“That is the best way for Safaricom to go. The number of shares in the market overwhelms everybody and puts pressure on the price,” says John Wakiumu, the head of fund management at Amana Capital.

He argues that with the Sh10 billion Safaricom shares out in the market, a good chunk of which remains in the hands of retail investors, it has been difficult for institutional investors to accumulate any meaningful positions on the counter.

The expectation is that if Mr Michael Joseph, the Safaricom chief executive, mopped up the excess volume of shares by issuing certificates that show, for instance, that an investor who owned 1,000 shares each worth Sh1 (or Sh1,000) with a new one showing that he or she owns 100 shares each worth Sh10 (or Sh1,000) this would help boost Safaricom’s price on the NSE.

This is because consolidation reduces outstanding shares but leaves the value of the company unchanged, so the economic reality does not change for investors.

Analysts argue that such a move would encourage rich investors and big portfolio managers such as pension funds and foreign hedge funds to get to the Safaricom counter.

Consolidation, the analysts argue would benefit investors in a number of ways.

Because investors in Kenya pay two per cent commission for trading shares on the value of the transaction, a consolidation would therefore lower shareholders transaction costs per trade.

“Consolidation needs to happen for the market to recover,” says Mr Nkoregamba Mwebesa, the chief executive officer at CfC Stanbic Financial Services and the former CEO of the Nairobi Stock Exchange.

Share consolidation has not happened in Kenya but in the recent past the market has experimented more with share splits to make some companies more attractive to small investors after their share prices rose too high.

Companies usually consolidate their shares in order to make them more attractive to institutional investors.

Some investment funds are prevented by their guidelines from putting money in shares that trade below certain price levels such as the so called penny stocks that trade below $5 in the US (which works out to Sh400).

Such guidelines, which are not rigidly followed in emerging markets, would prevent foreign institutional investors from putting money in Kenyan companies whose shares are priced below Sh400, meaning almost all the major listed firms in the market.

A share consolidation usually results in companies reporting higher earnings per share, an accounting effect.

The dividend yield could rise or fall depending on whether the actual payout remains the same, decreases or falls in subsequent periods.

Some analysts have argued that increased interest from big investors and lower transaction costs would help improve the liquidity of a share, help in discovering its true value — which the management in this case would expect to be higher than the current market price.

Total value

This, however, could be a tricky proposition for stockbrokers who derive their livelihood from selling and buying shares, even as they desire that small investors trade less often.

Safaricom accounts for at least 80 per cent of all shares traded at the NSE daily — an indication of how its dominance is central to their survival.

Some brokers are not convinced that consolidation could address the core issue that has depressed Safaricom’s share price, which is low investor confidence.

“Consolidation at this stage will not help,” says Mr Job Kihumba, the executive director at Standard Investment Bank, “Even if you do so, the participation of local institutional investors is just not there.”

He says that while consolidation can have some effect on the share price such as doubling its nominal value after consolidation, it will not alter the total value of the company.

Whether that could alter investors’ perception of the market and the overall state of the economy is hard to predict.

Even as the board could easily tinker with the cosmetics of the share certificate the company issues, it cannot window dress the economic reality that the mobile phone sector in Kenya faces.

With four players in the market—three of whom have been reporting losses—it is becoming increasing harder to make money in this business.

This is evident in the fact that Safaricom’s growth has been slowing, even as it continues to report impressive numbers and lead with product innovations such as M-Pesa.

Huge number

Since listing at the NSE, Safaricom has lost 25 per cent of its value to stand at Sh3.75, which prompted investors to raise the issue at the recent annual meeting with directors.

The huge number of issued shares (40 billion) was cited as the reason why the company paid a dividend of 10 cents per share, which in aggregate amounts to Sh4 billion.

However, even if management wanted to pay a higher dividend, Safaricom is still a fast growing and cash hungry business that demands reinvestment of profits to buy assets to fund future growth.

While investors who bought the IPO have not done well, those who came in later have been picking up good bargains.

While Safaricom is trading 7.41 per cent lower in the last year to date, the share has gained 31.58 per cent in the last six months and 4.17 per cent in the last three months.

Institutional investors looking for a bargain would be happy that they can buy Safaricom cheap and those who bought high can bring down the dollar average cost of their Safaricom holdings by buying cheaper and increasing opportunities for capital gains should it start performing better and equity markets recover.

This is a strategy that worked well for investors who waited for a decade for Kenya Airways share price to rise after it collapsed in the months after its 1996 IPO.