31.1 C
Kenya
Friday, November 15, 2019
  • INVESTMENT

Why you should sell Scangroup at NSE

Must Read

State to buyout KQ, delist it from NSE

KQ Buyout: The national government is set to buyout the troubled national carrier Kenya Airways. The government will buy...

Revealed: Kenya pays Uhuru’s mom over Sh. 500,000 monthly salary

Mama Ngina Salary: It has now emerged that taxpayers have been paying mama Ngina Kenyatta a salary of over...

Co-op Bank’s net profit soars to Sh. 11 billion in nine months

Co-op Bank 3rd Quarter Results: The Co-operative Bank Group has posted Sh. 15.45 billion profit before tax for the...

The following analysis by investment expert Rufus Mwanyasi was first published in the Business Daily.

As listed marketing services firm Scangroup celebrates its re-branding to WPP Scangroup, its shareholders have little to be jubilant about. The share price of the marketing services company has lost almost half of its value since touching highs of Sh75 almost two-and-a-half years ago.

In simple terms, Sh1,000 invested in the stock would have lost Sh460. What’s worse, throughout, the NSE 20 Share and the NASI rose 3.91 per cent and 48.24 per cent respectively.

In this article, I explain the reason behind its dwindling fortunes in the market.

Since debuting in the market in 2006, it became apparent that WPP-Scangroup wanted to expand and do so fast. Mergers and acquisitions (M&A) became a favoured strategy to fulfil this goal.

Through cash-and-stock transactions, the company has managed to establish itself in key regional markets.

At present the NSE-listed firm operates in Ghana, South Africa, Tanzania, Nigeria, Uganda, Zimbabwe, Namibia, DR Congo, Senegal, Cameroon and Zambia.

In the past 12 months, it has been on a hunt for more deals armed with a Sh1.8 billion war chest.

Although the firm is known to use a combination of cash-and-stock transactions to finance its buying target companies, the stock-for-stock option has been the most dominant of the mix.

It is this slant toward use of share swap agreements that is behind much of its share price problems. In the quest to deliver services to its clients across all geographies in sub-Saharan Africa, this approach has come at a great cost to its shareholders.

Since 2010, the company has created a total of 107 million new shares to finance acquisitions with 80 per cent created in 2013. Shares outstanding now total 378.8 million.

With the increase, investors have had to absorb an almost 30 per cent dilution of their holdings. What’s more, earnings per share (EPS) have also dropped from Sh2.13 (2010) to Sh1.5 (2014) due to an increasing base of outstanding shares.

Pointing toward more selling pressure is the fact that current earnings multiple (27) sits 14 per cent above its five-year average indicating an overvaluation.

This could possibly add more pain if value investors head for the exit. The stock closed at Sh40.5 on Monday.

The only thing left for investors is hope. Hope that the new assets and liabilities of the target firms will neutralise the dilution effects in the long run. Should the past M&A activities prove beneficial and provide sufficient synergy, current shareholders may stand to gain from appreciation provided by the assets of the target companies which hopefully should be reflected in the share price.

Meanwhile, investors are better off demanding for a switch in strategy in favour of more cash transactions.

Through emprical evidence, researchers have consistently found that at the time of announcement, shareholders of acquiring companies fare worse in the stock transactions than they do in cash transactions.

Furthermore, early performance differences between cash and stock transactions become greater over time. But is this investor action possible? I think not.

Key shareholders control over 60 per cent of the shares. I guess if you do not have the patience you are better off scouting for opportunities elsewhere.

- Advertisement -

Leave a Reply

This site uses Akismet to reduce spam. Learn how your comment data is processed.

125,184FansLike
11,142FollowersFollow
7,798FollowersFollow
189SubscribersSubscribe

Latest News

State to buyout KQ, delist it from NSE

KQ Buyout: The national government is set to buyout the troubled national carrier Kenya Airways. The government will buy...

Revealed: Kenya pays Uhuru’s mom over Sh. 500,000 monthly salary

Mama Ngina Salary: It has now emerged that taxpayers have been paying mama Ngina Kenyatta a salary of over Sh. 500,000 every month. According to...

Co-op Bank’s net profit soars to Sh. 11 billion in nine months

Co-op Bank 3rd Quarter Results: The Co-operative Bank Group has posted Sh. 15.45 billion profit before tax for the third quarter of 2019 compared...

From poor Mandera village to multi-millionaire businessman

Somali Millionaires: Growing up in the rough and dry terrains of the remote village of Girissa Rhamu in Mandera County, Saeed Abdirahman’s life appeared...

Martin Oduor Otieno appointed EABL Chairman

Martin Oduor Otieno EABL: Former Kenya Commercial Bank chief executive officer Martin Oduor Otieno has been appointed as the EABL chairman. Mr. Otieno will assume...

More Articles Like This

- Advertisement -
%d bloggers like this: