Investors have such a pessimistic view of the prospects of some companies listed on the Nairobi Securities Exchange that they believe the firms are worth more if taken over, an analysis of a key performance metric by the Business Daily has showed.
The price-to-book ratio of eight companies out of the 20 that make up the NSE 20 Share Index is below one, meaning that the market value of their stock is below their net assets value.
Sasini, WPP Scangroup, KCB , DTB, Stanbic Holdings Plc, Kenya Power, Kenya Electricity Generating Company (KenGen) and Centum are the eight firms that are trading at a discount to their liquidation value.
Electricity distributor Kenya Power is the cheapest on the list, trading at 0.19 times its net assets of Sh85.6 billion.
It is followed by power producer KenGen whose market value is 0.22 times its tangible assets of Sh172.7 billion.
Agricultural firm Sasini is trading at 0.31 times its book value, followed by investment firm Centum (0.56), DTB and Stanbic (both at 0.75), WPP Scangroup (0.83) and KCB (0.95).
Some of the major undervaluation may be a reflection of the two-year bear market, itself a demonstration of investor despondency that has fuelled the sell-offs.
For investors — large and small — how to respond to discount prices remains a vexing one.
On the one hand, it presents a great buying opportunity for new long-term investors who are likely to benefit from streams of dividends and capital appreciation as a bull market cycle resumes.
Those who are bleeding from the share price declines have also resorted to the sit-tight approach, with a dearth of bold investors limiting other options that would pull them out of their current misery.
Takeover of undervalued listed firms, perpetrated by deep-pocketed activist investors in developed economies, have been rare in the local market.
Institutional or individual investors offer to pay some premium to the market value of an undervalued listed company with a view to realise a large gain from restructuring it or selling some of its divisions to other parties.
Kenya experienced such a rare takeover in 2015 when British brothers Richard and Jeremy Robinow fully acquired agricultural firm Rea Vipingo in a transaction where retail investors made out like a bandit.
Viewing the company’s market value of Sh1.6 billion as dirt cheap against its vast land holdings, the Robinows in November 2014 made a buyout offer of Sh40 per share to acquire the 43 per cent stake they did not already own.
This represented a 45 per cent premium on the share price which had languished at Sh27.5.
But things got even better when investment firms Centum and Vania joined the fray, sparking a bidding war that eventually saw the Robinows complete their takeover of the company after raising their buyout price to Sh85 per share. This was a 209 per cent premium on the last trading price, a return achieved in less than one year.
Mr Richard Robinow told the Business Daily in March 2015 that it would be easier for the brothers to make new capital expenditures in the company as the only shareholders unlike the previous situation where they were answerable to thousands of other investors.
“These ventures have higher risks and take time to pay off. It is easier to risk my own money,” he said in reference to a new Sh1.3 billion investment in power generation and expansion of vegetables production at the time.
Another means of unlocking shareholder value, widely practised in the West, is to buy back shares when they are trading at a major discount using surplus cash.
This benefits continuing shareholders by boosting their stake as the volume of outstanding shares declines, a move that also supports the share price.
The new Companies Act has opened the door for listed Kenyan firms to implement share buy-backs, with Centum, among the companies, has indicated it could use the option.
Centum’s director and largest single shareholder Chris Kirubi has decried the company’s share price — currently at Sh40 — which he argues is significantly below its intrinsic value of more than Sh100.
Despite its ability to unearth undervalued firms, some analysts argue that a low price-to-book ratio is not infallible and should be used in combination with other measures of value.
“Like all financial ratio analysis the price-to-book ratio cannot be used as a standalone measure of value. The ratio makes more sense if one is comparing companies in the same industry, that is, like for like,” says financial analyst Mohamed Wehliye.
The price-to-book ratio, however, remains a fundamental tool of analysis and is particularly useful when studying companies in losses which make the price-to-earnings ratio mathematically useless.
According to Eric Musau, a senior research analyst at Standard Investment Bank, utilities such as KenGen and Kenya Power tend to trade below book value, often because these companies are reinvesting heavily, meaning that return on equity is low.
These companies also tend to use a lot of debt and the prices they charge customers are regulated.
Mr Musau says that, globally, it is not unusual for utilities to trade below book. Even then, a utility such as the Power Grid Corporation of India trades consistently around twice its book value.
Minority investors in Kenya Power and KenGen cannot expect to benefit from share buy-backs or takeovers because the controlling shareholder — the government — is more interested in delivering a public service than maximising profit.
- Investors valuations signal eight NSE companies that are ripe takeover targetsThis has left them marooned in unbalanced portfolios where token returns filter through in the form of dividends and tens of billions of shillings are held up in land and infrastructure that are not for sale.
The opposite of utilities are major consumer goods manufacturers with relatively little reinvestment needs, allowing them to churn out large profits consistently over the years.
They include East African Breweries Limited (EABL), British American Tobacco and Bamburi Cement which are the darlings of the market, maintaining premium valuations through bear markets.
The EABL is trading at 16.7 times its book value, followed by BAT (13) and Bamburi (2.1).
Mr Musau says investment companies, on their part, may often suffer from investors discounting the totality of their holdings.