Nairobi Securities Exchange (NSE) investors have severely punished loss-making and highly indebted companies as well as those with corporate governance issues, causing their stocks to shed at least 40 per cent of market value in the past 12 months.
Athi River Mining tops the list of big companies whose shares have tanked, shedding 63 per cent in one year, followed by troubled lender National Bank of Kenya, which has lost 60 per cent of its value, and retail chain Uchumi (53 per cent).
Also in the list of stocks that have come under the most pressure in the bear market are troubled sugar miller Mumias, which has shed 40 per cent of its value, national carrier Kenya Airways (40 per cent), and East African Cables (53 per cent).
Uchumi’s share erosion effectively began with last year’s exit of top managers and directors and the release of a forensic audit report showing insiders had become major suppliers of the company, exposing it to insider theft.
Uchumi has since fallen into a deep pit of losses that have left it insolvent with liabilities in excess of assets.
“This clearly shows that investors are getting fed up with poor results and bad corporate governance and want an end to this. Effectively it means companies that are not being favoured by the business environment should be restructured,” said Raymond Kipchumba, an investment analyst at ABC Capital, a subsidiary of ABC Bank Group.
The stocks have suffered disproportionately (shedding 40 per cent or more) relative to the NSE 20 Share Index where the bear run has eroded nearly a quarter of wealth in the past 12 months.
Analysts at Investment firm Cytonn said the plummeting of share prices has been linked to information investors have been getting about the companies, much of which has been negative.
“This fall in prices has everything to do with the fact that investors react to information they receive and often choose to cut their losses by selling their shares,” said Elizabeth Nkukuu, chief investment manager at Cytonn.
Ms Nkukuu said investors continuously monitor the performance of their investments and will not continue holding where the future is uncertain.
“It is possible to anticipate some of the problems that companies experience by looking at their operations,” she said, adding that for Uchumi it was low stock, lack of variety on the shelves and serious governance issues that emerged thereafter.
The retail chain has recently sold a number of its branches as it sought to restructure its balance sheet.
The big fall in share prices at the NSE has also been attributed to a lack of a clear path of how troubled companies plan to recover lost ground.
Firms that demonstrate forthrightness with investors tend to experience less turbulence, with those like Standard Chartered Bank — which have cultivated a degree of confidence in the market despite the significant fall in profitability — managing to maintain fairly stable prices.
“When you show that you are transparent with investors, they tend to hold on to the stock even when profits have fallen because they can see a way out. But if something is discovered all of a sudden as was the case with National Bank of Kenya, the punishment tends to be very severe,” said Mr Kipchumba.
National Bank reported an unexpected loss after providing for large non-performing loans that appear to have come to light in the last three months of last year, leading to the suspension of its top managers.
The bank, which is 22.5 per cent owned by the government and 48 per cent owned by National Social Security Fund, remains among the few lenders where the State has retained a huge influence.
National Bank’s top managers have in recent weeks been questioned by the police but little is known about what they disclosed.
Financial services firm Britam, whose share price is down 56 per cent, has been the victim of revelations that its single largest Mauritius-based shareholder Dawood Rawat was involved in a pyramid scheme scandal that saw his Mauritian empire taken over by the government.
Britam has also been affected by the announcement that its 2015 financial results were likely to fall by at least 25 per cent.
Stability has more recently returned to Britam after some of the Kenyan shareholders offered to buy Mr Rawat’s stake.
Ms Nkukuu said some of the challenges facing the listed firms have been resolved through management changes but others required much broader solutions — including the reversal of bad investment decisions.
She cited the example of investment firm TransCentury, which she said had made a bad investment in Rift Valley Railways but has been helped by its investment in East African Cables whose future looks bright.
TransCentury has recently struggled to repay Sh8 billion bond to investors and got seven extra months to do so.
Athi River Mining has suffered from the reported Sh469 million loss in the first nine months of the financial year compared to a profit of Sh1.1 billion in the same period the previous year.
Mumias has had corporate governance issues and faces stiff competition with the expected opening up of the regional market, while Atlas Development lost money as some debtors, including oil explorers, could not pay due to financial difficulties resulting from low international commodity prices.