NSE chairman Eddy Njoroge (from left), Vision 2030 Secretariat director-general Mugo Kibati and Home Afrika chairman Lee Karuri during the bell ringing ceremony, marking the company’s debut at the NSE on Monday. Photo/Salaton Njau
What you need to know:
Home Afrika revealed last week it has plans to sell shares through an initial public offering (IPO) “within the next one year.”
Stock market analysts said the current valuation of the company could put off potential participants in the IPO, terming the share price as being overvalued.
Home Afrika was priced at Sh19.95 at the close of trading on Friday.
The valuation of Home Afrika stock could complicate the real estate developer’s plans for an IPO, analysts said, as they predicted a further drop in the firm’s share price.
Home Afrika revealed last week it has plans to sell shares through an initial public offering (IPO) “within the next one year.”
Stock market analysts , however, said the current valuation of the company could put off potential participants in the IPO, terming the share price as being overvalued.
“If they are going to raise additional capital their multiples may be too high,” said Eric Musau, a research analyst at Standard Investment Bank.
The real estate firm’s price-to-earnings (PE) ratio stood at 48.66, which is higher than the NSE’s average of 14.94.
Being the only listed property developer, the closest comparison for Home Afrika is Centum Investment’s PE ratio of 6.1 times.
Centum has real estate investments in its portfolio, though it has a diversified portfolio. TransCentury, which had a PE ratio of 20.93 at the close of the week, also has interests in real estate and infrastructure.
“Home Afrika is currently overvalued,” said a coverage note by Davis Mika, a research analyst at Contrarian Investing assigning the firm a fair price of Sh12.40.
In an annual general meeting notice released last week, Home Afrika said it would ask shareholders to approve various capital raising options for the company.
“Home Afrika Limited will issue corporate bonds or commercial paper as the board of directors may determine from time to time and will do an IPO within the next one year or such other period as the board may determine,” says the AGM notice.
The AGM notice also said that under consideration was doubling the developer’s share capital to Sh1 billion from Sh500 million, which is a signal that it has plans to raise additional capital through share sales.
The general manager for NIC Securities, Samuel Gichohi, was of the view that Home Afrika’s high valuation ratios are a reflection of investor’ expectation of strong growth for the company.
“With growth stocks especially in areas like technology, energy and in this case in a booming real estate industry, the valuation is based on the Net Present Value of Growth Opportunities and not on dividend growth, which may not take into consideration the underlying growth of both the company and the industry,” said Mr Gichohi.
He added that such companies are capital intensive and dividends earned at the present are usually ploughed back into the business on expectations that shareholders will harvest more money in the future and through capital gains.
The real estate sector’s double-digit growth rate will also result in the firm’s assets appreciating, argued Mr Gichohi.
Home Afrika Limited will pay out a Sh0.10 dividend for the 2012 financial year, which at Friday’s closing price gives it a Sh0.50 dividend yield.
The company is planning to have a $1 billion (Sh87 billion) portfolio by 2017 and expand its operations to Tanzania, Uganda, Southern Sudan, Ethiopia and Rwanda; which will require a huge capital injection.
