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Wednesday, June 23, 2010

KCB Rights Issue Seen Causing Price Swing

The planned KCB Bank rights issue is expected to lead to price volatility on the counter.

Additional shares, analysts say, will create a volatile swing due to a bigger trading float.

"The additional shares will lead to a price correction with the potential for a downward swing as market adjusts to the increased supply," said Geoffrey Odundo, the managing director of Kingdom Securities.

However, Mr Odundo explained, the market has already factored in the rights issue and the prices were likely to remain stable in the run to the actual listing in August.

The KCB rights issue involves the selling of 887 million shares at a discounted price of Sh17 to shareholders who will be entitled to two new shares for every five ordinary shares.

While releasing the rights timetable, Martin Oduor-Otieno, the KCB CEO noted that the share prices were fairly stable and the expectation was the issue would not cause dilution.

A research note by Sterling Investment Bank (SIB) says the KCB rights issue will push the ongoing price volatility in the foreseeable future.

Small investors

"The share has been on a downward trend since January, a clear underperformance to the market and a reaction to the increased liquidity arising from the injection of 208 million shares in 2008. Accordingly, this scenario is likely to be replicated in the short term, with the issuance of a further 887 million shares at a price of Sh17," said the research note.

In 2008, KCB Bank raised Sh5.2 billion through its second rights issue by issuing 208 million shares.

It involved shareholders buying one share for every nine held at Sh25. The prevailing market price at the time was Sh31.5.

The first rights issue was in 2004 where the bank raised Sh2.3 billion.

The Sterling note indicates the additional 887 million shares will increase the total shareholding from the current 2.2 billion to 3.1 billion which is expected to dilute the bank's earning in the short term with small investors coming worse off.

"We view this as a loss to the small investors despite the discounted offer price of Sh17 as the rights are not offering a good bargain, given that the return on equity is 17.91 per cent which is quite low compared to its peers."

Barclays Bank's return on equity is at 37.18 per cent while Standard Chartered's is at 48.34 per cent.

Immediate gain

With KCB planning to use the funds raised in the next two years, shareholders will have to contend with holding their position for at least two years to realise their sweat.

For the bank, the immediate gain may be the lowering of the expensive wholesale deposits on its books.

Business
Mr Oduor-Otieno reckons that the bank will retire an estimated Sh44 billion as part of its wholesale deposits which accounts for 25 per cent of the bank deposits.

However, Sterling reckons there are no guarantees that the investors will be able to realise their investment as "investors are faced with the risk of not achieving real positive returns within the projected duration of two years."

With a large chunk of the funds to be used on its mortgage business, which is long term, the bank returns are not likely to be rosy for short term investors.

In addition, the bank will use part of the proceeds to strengthen its operations across the region, especially for the units yet to break-even.

Mr Oduor-Otieno says the bank will retain Sh3 billion as buffer capital, hence strengthening its key ratios which have been eroded by the payment of dividends and expansive loan book.

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