In January 2013, the Nairobi Securities Exchange launched the Growth Enterprise Segment trading board which was tailored to accommodate small and medium enterprises. After six months of listing drought, Home Afrika became the first company to list on the GEMS on July 15 2013.
The home developer listed 405 million shares at Sh. 12 per share, with a market valuation of Sh. 10 billion. Within hours of listing, Home Afrika shares shot upwards to its highest price to date of Sh. 25 per share. By the end of trading on that day, 21,400 shares were traded, with a very weak demand that stood at 21,200 bids of between Sh. 5 and Sh. 22.
This was in sharp contrast to a supply that came in at between Sh. 25 and Sh. 26 per share, and perhaps betrayed a looming tumble. Effectively, though, the mega share rise catapulted the firm’s market value by a whooping Sh. 5.3 billion from the listing valuation of Sh. 4.8 billion. By then, the firm’s price to earnings ratio was at 48.66, a mega 33.72 ballooning from the NSE’s average of 14.94.
It all looked too good to be true but little did investors know that the Sh. 25 per share price would be the ripest price they’d see on the counter for years to come! Why, you may ask? Within two months, the share price shrunk from a high of Sh. 25 to just over half of its NSE debut price. By the third month, Home Afrika’s founders sold 24.8 million shares worth about Sh. 158 million.
Some of the biggest gainers in the sell-off were Patrick Ng’ang’a, Home Afrika Continental, Stimela Co-op, Hansan Investment, and Seyani Brother & Co who offloaded 5.8 million shares, 2 million shares, 2.4 million shares, and 534,900 shares respectively. According to Eric Munywoki, an investment analyst at Old Mutual Securities, “this sale betrayed an element of profit taking!”
The share’s nose dive was unstoppable! In July last year for instance, Home Afrika lost a whopping 23.9 per cent. By then, the stock had lost 43.2 per cent in value within a 52-week period. Currently, Home Afrika is trading at the Sh. 3.60 per share range, with a Sh. 3.20 all-time low and a Sh. 6 high in the past one year. Apparently, any investors who bought the share at Sh. 5.50 over the past one year is stuck in the red zone of a share that is nearly half a Sh. 5 entry price!
But where did the rain start to beat Home Afrika? According to Mr. Munywoki, Home Afrika first suffered from a price discovery after the listing, which saw the counter’s share price settle at levels of Sh. 9 per share. “The high price to earnings and price to book were seen as overly expensive for the stock and the price decline was seen as way to correct this.” The sharp profit declines announced last year by Home Afrika did little to improve the stock’s deficient health.
“Things worsened later last year after the home maker restated its accounting policy for revenue recognition and considered extended guidance available under International Financial Reporting Standards (IFRS) relating to real estate business,” says Mr. Munywoki. In its latest financial results released in August last year, Home Afrika reported a 73 per cent drop in its first-half net profit to Sh. 42.9 million from Sh. 115.49 million. Consequently, earnings per share dropped to 0.08 shillings from 0.9 shillings.
The company attributed the profit decline to the adoption of new accounting rules which apparently demanded that the firm records sales once buyers pay fully for their properties. Further, costs associated with the development of its properties were recognized, effectively reducing the bottom line. The firm is currently looking to release its full year results for 2014 within the next two months.
Strikingly, Mr. Munywoki observes that going by the adjusted 2013 financials, Home Afrika still looks overvalued! “With the current 405 outstanding number of shares, the Earning Per Share (EPS) is at Sh. 0.05 which gives it a PE of 74 at a price of Sh. 3.70. This is an overvaluation going by the adjusted financials.” But that is not where the muddy path Home Afrika is trekking on ends!
At the time of listing, the firm had indicated that it would be constructing 10,000 housing units in Machakos County. But according to a statement by the Standard Investment Bank on Home Afrika at the time of listing, the property maker had failed to disclose whether it had enough funds to complete its billion shilling multiple projects especially that it had already started three projects that at the time were valued at Sh. 10 billion. Home Afrika later announced that it would be seeking to raise at least Sh. 2 billion in capital through the Real Estate Investment Trusts (REITs).
In August last year though, Home Afrika announced that it would be issuing a corporate bond seeking at least Sh. 900 million. “We have seen increased activity in the bond market and believe there is liquidity in the market and the costing if much more favourable,” said Home Afrika’s CEO Ng’ang’a Njoroge.
The bond offer opened in late November for a two-week sale period. Interestingly, it was at a premium of up to 2.63 per cent on two of the current government coupons. Shockingly, despite the juicy interest rates, the market wasn’t done with whipping Home Afrika yet and the five-year bond failed to tickle investors. After the failure, Home Afrika turned to its last option and borrowed Sh. 500 million at a premium of 13.5 per cent. Of these monies, 83.3 per cent will be dedicated to the completion of infrastructure at the Migaa development in Kiambu.
Lakeview Housing project located in Kisumu County and Llango Dvelopment located in Kwale County will get Sh. 50 million each! Currently, the firm claims that it is involved in five mega housing projects that are valued at over Sh. 18 billion on paper!
The firm’s flagship Migaa project requires about Sh2.5 billion in the next three years to set up infrastructure. Launched in March this year, its Lake View project in Kisumu needs about Sh1 billion even as Tiwi project in Kwale requires hundreds of millions of shillings. The firm’s Tamarind estate is expected to be complete by quarter two of this year.
Nevertheless, Home Afrika has since announced that it will be returning to the debt market by June 2016. According to a statement by the Standard Investment Bank, Home Afrika’s bond may have failed due to investor fear that the 13.5 interest payments would be problematic given the company’s unstable financial grounds.
Further, Mr. Munywoki observes that Home Afrika had a poor bond selling strategy, which undermined any lingering chances of its success at a time when investor perspective regarding the company is clouded with a confidence crisis.
According to Mr. Ng’ang’a, the market may be of the view that the real estate is not performing well, but this isn’t the case on the ground.
“In the stock market, you expose yourself to all sorts of market perceptions. It’s the short term market sentiments that have affected the stock. Things are not happening as quickly but a lot of infrastructure is being laid out in our projects,” he said in defense of Home Afrika’s NSE performance last year. But to shareholders, Home Afrika is all set to be the long-wait counter reserved for those with the patience of a monk!
Says Mr. Munywoki: “This being a real estate counter, its projects could take between 3-5 years before cash flows are recognized or even 10-15 years for certain projects to break even,” he says, giving the counter a HOLD recommendation for long-term investors.