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Kenya: Nation Media stock repurchase could prompt further buybacks

By David Whitehouse
Posted on Tuesday, 8 June 2021 15:33

Inside the Nairobi Securities Exchange. REUTERS/Thomas Mukoya

Plans by Nation Media to carry out Kenya’s first share buyback may be copied by other companies needing to reward shareholders as stock prices languish.

The company proposed buying back up to 10% of its stock in a circular sent to shareholders on 31 May. The buyback, subject to shareholder approval, will run until 24 September.

Share buybacks (repurchase of existing stock from the market) reward shareholders by reducing number of shares in circulation thus increasing the size of remaining stakes. They don’t generate tax liabilities as with dividend payments, and are seen as a sign of management confidence in the company. All else being equal, they will cause the share price to rise.

Legislation in 2015 made buybacks possible in Kenya. Part of the reason for the long wait since then is lack of regulatory detail on how to carry them out, says Churchill Ogutu, head of research at Genghis Capital in Nairobi. The holdup ended when the Capital Markets Authority finally published guidelines on share buybacks in June 2020.

The option is cheaper for companies when share prices are low.

  • Kenya’s NSE 20 index at 1,904 remains close to its 10-year low of 1,723 reached in August 2020.
  • The index has lost 65% of its value since its high of 5,499 reached in March 2015, and trades at 53% of its 10-year average of 3,605.

Nation Media’s buyback will take up a maximum of 38.6% of the company’s available cash, according to research from Cytonn Investments in Nairobi, so there would be scope to repeat the operation. The buyback also means Nation Media could resell the shares back into the market if the price appreciates, and therefore make a profit.

Candidates

The Nation Media operation “is likely to have given other companies confidence” in buybacks, says Ruto Kellie, a financial analyst at Maitri Capital in Nairobi. The option “will be now more visible” to other companies, she says. Insurance company Jubilee Holdings on June 7 asked shareholders to amend its articles of association to make buybacks possible.

Most likely to follow suit are very undervalued companies with sufficient capital, says Sarah Wanga, head of research at AIB Capital in Nairobi.

Centum, which invests in real estate, private equity and traded securities and is also listed in Uganda, is a possible candidate to carry out a buyback, Wanga says.

  • The shares trade at a hefty discount to underlying net asset value, which makes the option logical.
  • In March, the company, which is debt-free, gave the value of its portfolio as KSh45bn ($420m) but its market value of KSh10.5bn is less than a quarter of its assets.
  • Previously, Wanga says, most of Centum’s money was tied up in illiquid investments.
  • “Its cash position has improved and the company is undervalued,” she says. “It should consider this option.”

Ogutu from Genghis Capital cites Crown Paints, which in 2017 expressed its intention to buy back shares before regulator guidelines existed, then dropped the plan in 2018 as the share price rose.

  • The stock now trades at KSh38.60 a share, well below the 2017 level of 57.

Stanbic Holdings, the Kenyan subsidiary of South Africa’s Standard Bank, is another possible candidate for a buyback, says Renaldo D’Souza, head of research at Sterling Capital in Nairobi.

  • Standard Bank has been increasing its stake towards a target of 75%, and plans to have Stanbic retain its Nairobi listing.
  • The parent bank has obtained regulatory exemption from making a full takeover offer for the unit.

Bottom line

Buybacks are a low-risk way for Kenyan companies to shore up their backing from long-suffering shareholders.

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