Friday, March 29, 2024

Ndindi Nyoro: why Kengen rights issue might fail… or succeed

To many who are not enthusiasts of the Nairobi Securities Exchange, Kengen is having a rights issue that started on Monday. This rights issue will fail…. but also succeed.Stay with me….

The only reason it will succeed is that the Government of Kenya has committed to take up its rights. Interestingly, it is not paying any money for it. The government will only have its debt converted into equity – in other words, the government will be defending its 70 per cent in a company that will eventually have a better balance sheet after the Rights. With 70 per cent taken, the rights issue has already met the threshold and therefore successful.

The reasons for failure are many though; To begin with, the ratio of the rights is abnormal as the company is selling 2 shares per one held. Secondly, the Rights are being sold at Ksh. 6.55 which is higher than Monday’s trading price of the share at Ksh 6.30. Thirdly, the company is primarily raising money to pay debts as opposed to funding expansion. Out of the money to be raised from the rights issue, only Ksh. 8 billion or below 30 per cent is going to projects. Lastly, people have burnt fingers with a company that is trading below its Initial Public Offer (IPO) price for over 10 years since it was launched on the NSE.

Anyhow, anyone who would buy Kengen in terms of assets would be rich thereafter. You only sell below 20 per cent of the assets to recover the entire valuation of the company in the market. Capital markets sometimes undervalue companies by only focusing on the bottom-line – Profitability and Dividend payout.

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