Analysts say shares are overvalued by up to 30 per cent

The stock market may be overvalued by between 10 and 30 per cent going by fundamentals of the companies and economic performance, analysts warned even as an apparent bull-run kicked off Tuesday.

Financial stocks’ values are particularly seen as beyond what is justifiable by current and future performance.

The economy is only expected to improve slightly to five per cent this year from 4.7 per cent last year.

Analysts have cited KCB and Equity Bank as overvalued but as well as Uchumi and East African Breweries Limited (EABL) as being well above their fair prices.

According to the market watchers the return of foreign investors to the market and the peaceful elections has brought some momentum to the Nairobi Securities Exchange (NSE) but this is unsustainable on the basis of economic realities.

READ: Market analysts forecast stock gains at NSE

“We concluded that relative to 2012, the market is overvalued by about 30 per cent,” said Dyer and Blair Investment Bank in their report on the state of the market.

Looking at the NSE as it approached the 5,000 point mark in Kenya’s Capital Markets: Taking Stock, the analysts at Dyer and Blair Investment Bank said a return to normalcy in the market would pressure the 20-share index down.

“Although market confidence is expected to remain high … this high momentum is not sustainable. A return to normalcy will trigger price correction,” said Dyer and Blair Investment Bank report.

As at last Thursday, the NSE 20-share index had lost just over 100 points from its previous position of nearly 5,000 points two weeks ago, read as a sign of correction.

READ: Nairobi bourse closes week on upward trend

The widely followed Morgan Stanley Capital International Frontier Markets Index shows the price to earnings ratio — a rough indicator of the extent to which a company’s share price is justified by its profit — stands at about 11.4 against Kenya’s 11.6.

The figures mean that, in overall terms, Kenya’s NSE is only slightly more expensive than other comparable markets globally.

Eric Musau, senior research analyst at Standard Investment Bank (SIB), said it was not all counters that were overvalued though. “We think that the prices of most of the banks are on the high side and are approaching the ‘hold’ recommendation,” he said.

Mr Musau said SIB usually puts a “hold” recommendation on a stock when it has an upside of 15 per cent. If it is more than that 15 per cent upside, it recommends “sell” – meaning it is highly overvalued.

Dyer and Blair explained that it had valued the market on the basis that last year was a fairly representative of normal business conditions.

“We valued the equity market on the assumption that the NSE 20 average for 2012, at 3,696.17 points, is a reasonable representation of the market’s intrinsic price. This is because the equity market’s performance in 2012 was fairly representative of normal business and operational conditions,” said Dyer and Blair analysts.

It added that this assumption allowed factoring out “the effects of the rally on the market and selected counters.”

Caleb Mutai, a dealer at financial advisory firm Tsavo Securities, said he believed the market was overvalued by about 10 per cent.

“The market has been bullish and any time now we expect some correction, some realignment. The financials are among those where prices are quite high, especially because they have just released their annual results,” he said.

Mr Mutai, however, said long-term investors, especially foreigners, might still buy even when local investors see the market as overvalued.

The overvaluation of bank shares is an analysis that has also been arrived at by market watchers at multinational Citibank.

Just like Dyer and Blair Investment Bank, Citi analysts recommended that both KCB and Equity banks are candidates for selling because their prices are already quite high. The implication is, therefore, that was a high chance that the share prices would fall going forward.

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