Another 19 still in limbo
By Nkiruka Nnorom
A TOTAL of 19 quoted companies may now be under threat of hostile take-over in the Nigerian Stock Exchange, NSE, following the crashing of their stock prices below par value in the last two weeks. The stocks were exposed to low valuation when NSE removed the decades-old par value price floor of 50 kobo below which stock prices could not go down.
Subsequently, prices of these companies began dropping below the 50 kobo with Consolidated Hallmark Insurance Plc leading the pack recording the lowest share price of 27 kobo in the market at close of trading last weekend.
Other insurance stocks which have been stuck in the 50kobo base line under the old policy, seem to be more vulnerable with more companies in the sector registering price decline since the commencement of the rule on January 29, 2018. Of the 19 companies that have been affected so far, 14 are insurers, while the remaining five are from other sectors.
Financial Vanguard analysis showed that in addition to Consolidated Hallmark Insurance Plc, Lasaco Assurance Plc, Unic Diversified Holdings Plc, Multiverse Mining and Exploration Plc, ABC Transport Plc, Royal Exchange Plc and Japaul Oil and Maritime Services are some of the companies that have been heavily affected.
Other companies that have experienced heavy downward movement in share price include African Alliance Insurance Company Plc, Equity Assurance Plc, Prestige Assurance Plc, UnityKapital Plc, First Aluminium Nigeria Plc, Cornerstone Insurance Plc, Guinea Insurance Plc, Courteville Business Solution Plc, FTN Cocoa Processing Plc, Sovereign Trust Insurance Plc, Mutual Benefit Insurance Plc and Niger Insurance Plc.
However, capital market operators and shareholders, who spoke to Financial Vanguard, said that the new par value rule policy that now allows quoted entities to trade to as low as one kobo, may eventually lead to forceful acquisition and change in management. They called on companies that are threatened by the policy to retool their processes ad re-stategise to deliver optimal value to the stakeholders to avoid further erosion in their share prices.
The new pricing rules
Under the new pricing methodology, the NSE classified stocks into three different groups, A, B and C. According to the rule, stocks in Category A comprises equities that are priced at N100 and above. Equities in this category require 10,000 units to move the price, while the tick size – mark up or down limit – for this group was pegged at10 kobo.
Stocks in category B consists of equities that are priced at N5 and above but below N100. The volume required to move their price was pegged at 50,000 units, while the minimum tick size was put at five kobo.
Stocks in category C, which consists of over 67 percent of companies listed on the NSE, comprises equities that are trading below N5. The volume required to move their price was put at 100,000 units, while the tick size was pegged at one kobo.
The Exchange cited improved liquidity, material price improvements, and market efficiency as benefits of the amended rules. The NSE also highlighted that price discovery for every listed shares under the new par value rule shall remain determined by market forces and thus, equities may now trade below the erstwhile price floor 50kobo per unit.
Losses recorded so far
Financial Vanguard’s analysis of the market since the policy kicked off showed that insurance companies have recorded a flurry of activity with Consolidated Hallmark Insurance leading price decline at N0.23 or 46 percent to close at N0.27 from N0.50. UNIC Diversified Holdings Plc and Lasaco Assurance Plc depreciated by N0.18 or 36 percent to close at N0.36 from N0.50 each.
Multiverse Mining and Exploration Plc trailed behind with N0.015 or 30 percent decline to close at N0.35 from N0.50; Japaul Oil and Maritime Services Plc was down N0.14 or 28 percent to close at N0.36 from N0.50, while First Aluminium Nigeria Plc went down by N0.13 or 26 percent to close at N0.37 from N0.50.
Royal Exchange Plc and ABC Transport Plc went down by 24 percent or N0.12 within the review period to close at N0.38 per share each.
Similarly, UnityKapital Insurance Plc went down by N0.12 or 24 percent to close at N0.38 from N0.50 each. Courteville Business Solution Plc, an auto-reg company based in Lagos, recorded N0.04 or eight percent decrease in one single day to close at N0.46 from N0.50 per share. At the close of transaction on Friday, the share price had fallen by N0.12 or 24 percent to close at N0.38.
Further analysis showed that African Alliance Insurance Company Plc’s share price dropped by N0.10 or 20 percent to close at N0.40 from N0.50. Equity Assurance was down N0.08 or 16 percent to N0.42 from N0.50.
Furthermore, Cornerstone Insurance Plc went down by N0.05 or 10 percent to close at N0.45 from N0.50, while Guinea Insurance fell by N0.04 or eight percent close to N0.46 from N0.50.
FTN Cocoa Processing Plc also fell by N0.04 or eight percent to close at N0.46 from N0.50; Prestige Assurance Plc nose-dived by N0.02 or four percent to close at N0.48 from N0.50 after recovery from initial losses. Sovereign Trust Insurance Plc depreciated by N0.02 or four percent to close at N0.48 from N0.50; Mutual Benefit Insurance Plc saw N0.02 or four percent price decline to close at N0.48 from N0.50, while Niger Insurance also fell by N0.02 or four percent price decline to close at N0.48 from N0.50.
Retool, quit or be acquired, stakeholders urge
Operators and shareholders, who spoke to Financial Vanguard on the development said that companies that feel threatened by the continuous erosion in their share prices and possible outcome of the move should take steps towards managing their companies better to stem further devaluation in their share prices.
Analysts at United Capital Plc, a Lagos-based investment banking firm, affirmed that the policy may result in sharp depreciation of up to 37 listed securities which have not traded above 50kobo for a long time, especially insurance companies and other stocks that closed at 50kobo on Friday, January 26, prior to the take-off of the rule. “With reduced minimum price of one kobo, stocks in the C categories that are intrinsically less than 50kobo may be more prone to strategic trades or possible acquisition.
Some of the insurance names are the biggest suspects, especially as the sector remains ripe for further consolidation, amid the proposed implementation of more stringent risk-based supervision guidelines by the regulators,” they said.
They, however, stated that the policy would likely increase market liquidity and improved price discovery, especially for lowly priced stocks.
Though Mr. Ezekiel Oluyori, Chief Executive Offiecr, Investment One Stockbrokers International, also expressed fear of the possibility of the new policy leading to aggressive acquisitions, he said that it has improved liquidity in the insurance stocks.
He argued that the rule is more advantageous than the concerns expressed by the stakeholders, saying, “since the rule commenced, most of those stocks that were trading at 50kobo are even enjoying liquidity. Some of them that have gone to as low as 40kobo are now returning up again. But for almost three, four years, those holding these stocks were stuck because they were 50kobo and nobody was buying. “Immediately they start trading at 40 kobo and below, people began to see value and they began to buy them. So if I am an investor and I want to exit, it becomes easy for me to do that”.
“So from liquidity point of view, I think it is a good rule. May be from issuer point of view, they can see it as a threat to them because if the stock becomes too cheap or the price becomes so low, it can lead to hostile take-over and I think the issuers should see this as a challenge,”he emphasised.
Igbrude Moses, General Secretary, Independent Shareholders Association of Nigeria, ISAN, said that the development may force the core investors of such companies to use their cronies to mop up the shares in order to check hostile takeover.
He added that where there is a core investor and other substantial shareholders, it could lead to board room fighting to the detriment of other shareholders, adding that it could result to a situation where an investor will takeover a company and strip the company of its assets, while also resulting in more delisting.
According to Adebayo Adeleke, former General Secretary, ISAN, “It is making a lot of those stocks to have market determined prices. It will probably make shareholders of those companies to query or remove boards and management. It may also make them more attractive to serious investors who can turn them around. I think if the shares of a company fall radically below the par value, the board should sack the management or the shareholders sack the board.”
For Mr. Patrick Ajudua, the par value rule is not in the interest of minority shareholders as it will only favour the big time market players and foreign investors, who could take advantage of the free fall to buy over the companies at a ridiculous price far below the incorporated nominal value.
“This will, therefore, result in forced acquisition or a situation where the existing directors would opt for outright delisting. So, it isn’t a safe rule for stocks with no fundamentals to back up their performance,” Ajudua added.
Oluyori of Investment One Stockbrokers advised companies that are afraid of hostile take-over to sit up and manage the business well so that there will be value in it. “If a company is doing well; if it is paying dividend and it is announcing good results and people can see value in it, they will not value it at 20kobo or 10kobo or one kobo.
“So, this is a call to action on the part of the companies to see it as challenge that they must begin to run their businesses professionally in such a way that they can add value to the shareholders. If an issuer feels that the price of the stock is falling, he has the option to delist, or he needs to ensure that people that do not see value begin to see value in the stock,” he said.