From left, NSE vice chair Bob Karina, Kenya Airways CEO Sebastian Mikoz, NSE chief executive Geoffrey Odundo and Kenya Airways acting finance director Hellen Mwariri are taken through the trading of KQ shares by a trader of Kestrel Capital (seated) on November 29, 2017. PHOTO | SALATON NJAU | NMG
Those who have sought to sell – using their old shareholding to work out their paper profits — got a rude shock when brokers informed them of their diminished ownership.
KQ's stock’s massive paper gains has largely benefited the 10 banks that converted their Sh22 billion loans into equity.
An aggressive rallying of the stock has seen the airline’s market capitalisation increase by a cumulative 12.8 times in eight days.
Retail investors in Kenya Airways #ticker:KQ were last Friday grappling with the sudden realisation that a recent reorganisation of the airline’s capitalisation had cut their number of shares in the firm by more than half.
The investors said the shrinkage in their stakes had made it impossible to take profits in the wake of a recent skyrocketing in the stock price at the Nairobi Securities Exchange (NSE) #ticker:NSE.
Thousands of individual investors, who wanted to sell their Kenya Airways shares or review their capital gains as the airline’s stock hit daily maximum gains of 10 per cent, were surprised to find that their stakes had dropped by a factor of four -- a crucial part of the airline’s capital restructuring plan they had failed to grasp.
The steep reduction in the volume of shares held by retail investors means their portfolios are still in the red and will only break even once the stock hits Sh21.2, a level that is 21.4 per cent higher than Friday’s closing price of Sh17.45.
“I knew there was dilution but I did not expect the number of shares I held to drop,” said David Kamau, an investor whose share ownership declined from 10,000 units to 2,500 when Kenya Airways shares resumed trading on the NSE on November 29.
Those who have sought to sell – using their old shareholding to work out their paper profits — got a rude shock when brokers informed them of their diminished ownership.
“Two hours after the shares resumed trading, we started getting sell orders from investors wanting to take profits,” an operations official at Suntra Investment Bank told the Business Daily.
“Those orders have continued to date, but we have had to inform investors of their actual portfolios. It appears Kenya Airways did not adequately communicate the restructuring.”
The Kenya Airways stock’s massive paper gains has largely benefited the 10 banks that converted their Sh22 billion loans into equity.
An aggressive rallying of the stock has seen the airline’s market capitalisation increase by a cumulative 12.8 times in eight days to hit Sh101.6 billion last Friday.
The banks, including KCB #ticker:KCB and Equity #ticker:EQTY, are now sitting on paper gains of more than Sh16 billion while retail investors, who held shares as the airline went into the restructuring exercise, are still down 17.6 per cent.
That divergence in fortunes has disappointed many retail investors.
“There is no gain to pre-existing shareholders and a gain can only happen to pre-existing shareholders,” Krispo Okuku wrote in an email to the Business Daily.
Assuming their shares had not been slashed, the minority investors would have seen the value of their stake in Kenya Airways rise from an aggregate of Sh3.4 billion to Sh11.3 billion using Friday’s share price.
That would have left them with a paper gain of Sh7.9 billion.
The consolidation, however, saw their combined ownership drop to Sh2.8 billion, a loss of Sh609.8 million.
Unprecedented rally
The loss may be wiped out in the coming days if the airline’s stock maintains its unprecedented rally. The share price cooled off on Friday when it gained 0.29 per cent, having hit the maximum gain of 10 per cent in most of the previous days since it resumed trading.
While Kenya Airways disclosed the impact of the capital restructuring, it was contained in a circular which most individual investors either did not read, understand or get a copy.
The airline may also have avoided trumpeting the share shrinkage to avoid a panic sell-off ahead of the stock’s suspension from trading on November 15.
Kenya Airways made it clear that it would take actions supportive of a share price rally, presumably in the interest of the banks that will be looking to exit in the shortest time possible.
“The consolidation will reduce the number of shares in issue but may increase the market value of each share as compared to immediately prior to the consolidation,” the company said in the circular.
Unsophisticated shareholders
The disappointment seen among retail investors is the latest demonstration of the informational disadvantage afflicting unsophisticated shareholders.
A majority of retail investors buy, hold or sell stocks indiscriminately in what amounts to random bets on the general market.
This means they run the risk of having more losers than winners, hurting their total returns.
Institutional investors and wealthy individuals on the other hand do their own in-depth research or rely on advisers to make select investments they believe will fare best.
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