The share prices of 17 Nairobi Securities Exchange (NSE) #ticker:NSE listed firms have fallen below Sh5 per unit in a stock market bear run attributed to a mix of corporate governance weaknesses, a tough economy and over-indebtedness.
Five of the stocks are trading below one shilling, effectively making them penny stocks by Kenyan standards.
The bloodbath at the bourse reflects the huge paper losses investors have suffered in the current market bear run that has pushed the NSE 20-Share Index to a 10-year low of 2,539 points as at close of trading last week.
Collectively, the 17 firms have seen their market capitalisation fall by 45 percent or Sh39.1 billion to Sh47.8 billion since the beginning of the year.
Kenya Airways #ticker:KQ has accounted for the biggest fall in capitalisation, losing Sh34.1 billion to be valued at Sh16.4 billion after its share price dropped from Sh8.90 to Sh2.89.
Market analysts say the fundamental issues ailing some of the affected firms have persisted longer than the current bear run, indicating a weak investment case for the stocks.
Investors would ordinarily eye a falling market as an opportunity to buy under-valued stocks, positioning for future capital gains.
Some companies such as Mumias Sugar #ticker:MSC , Uchumi #ticker:UCHUM and Kenya Airways are in negative equity position, indicating a complete erosion of shareholder wealth that would require capital injection for the firms to return to being going concerns.
“Whether these companies have an investment case is purely case-by-case specific, but most are facing corporate governance issues, and/or, their business model is drastically challenged,” said Harrison Gitau, head of research at ApexAfrica Capital investment bank.
The stocks include hitherto blue chips such as Kenya Airways (Sh2.89) and Kenya Power #ticker:KPLC (Sh3.67), insurance firms Kenya Re #ticker:KNRE (Sh3.05) and CIC Insurance #ticker:CIC (Sh3.00), and lenders HF Group #ticker:HFCK (Sh3.86) and National Bank of Kenya #ticker:NBK (Sh3.75).
Others are Eveready #ticker:EVRD (Sh1.05), EA Cables #ticker:CABL (Sh3.62), Olympia Capital #ticker: OCH (Sh2.15), TransCentury #ticker:TCL (Sh3.62), Flame Tree Group #ticker:FTGH (Sh2.87) and Sameer #ticker:FIRE (Sh3.75).
Uchumi (Sh0.32), Home Afrika #ticker:HAFR (Sh0.58), Nairobi Business Ventures #ticker:NBV (Sh0.90) and Mumias Sugar (Sh0.30) have been trading below Sh1 for some time, as was fashion retailer Deacons #ticker:DCON (Sh0.45) before its suspension in November 2018 for going into administration.
The NSE has 64 listed securities, which include the Stanlib I-Reit and NewGold Exchange Traded Funds (ETF).
For the State-owned firms on the list, poor corporate governance or mismanagement has been the underlying issue.
Kenya Power, which is a monopoly power distributor, has made negative headlines after its top management was implicated in corruption where billions have been lost through dubious deals.
Similar mismanagement woes have contributed to the decline in the fortunes of Mumias Sugar, which is now barely milling any product.
The same applies to Uchumi, which is struggling to keep branches open, while NBK #ticker:NBK is currently relying on a proposed takeover by KCB #ticker:KCB to survive.
Kenya Airways was saved by a State-engineered bailout after accumulating huge debts to finance its ill-fated expansion project. MPs have recommended nationalisation of the airline as a solution to its problems, which would see thousands of retail investors pushed out of ownership of the airline.
The slowdown in the real estate sector has negatively affected mortgage financier HF, raising its stock of non-performing loans and eating into its profitability.
The same problem has affected housing developer Home Afrika, which has found it tough to deliver returns to investors.
Other firms such as Deacons and NBV, which deal with clothing and shoes, have been hit by a struggling economy that has hurt their sales as purchasing power wanes among their target markets.
Olympia Capital’s problems can be traced back to the loss of its key logistics business at EABL #ticker:EABL, while EA Cables has suffered from cheaper counterfeits from China.
Insurer CIC has been caught in the wider troubles for listed insurers, who are staring at reduced investment income from their equities investments this year.
Re-insurer Kenya Re on the other hand has seen its share price correcting downwards due to the dilution effect of a bonus share issue, which increased its issued shares from 699.9 million to 2.8 billion.
Some of the low-priced firms have however made a positive price movement in the year-to-date, indicating that investors still see value in them despite their current problems. They include Eveready, Sameer, EA Cables, Olympia, Flame Tree and TransCentury.
In the longer run, one possible solution being mulled by the CMA on under-performing firms which have fallen into negative equity is to move them to a special trading board, known as a recovery board.
It would allow them to be rehabilitated over a set period, after which they would either be re-admitted into the main market if their books have recovered, or otherwise be delisted.
Markets such as India and Hong Kong have such a board, which also serves to alert investors to trade with caution since they are dealing with troubled firms.
Such a move would need an amendment to the NSE listing and trading rules.
Mr Gitau said that merely being moved to such a board would not by itself be a magic pill for these firms, and that they would need to show that they are taking concrete steps to put right their books and structures.
“The solution to the challenged firms is enhanced corporate governance, change in business models and injection of both equity and debt capital,” he said.