29 August 2007

Kenya Re Share Price Drops Sharply On Second Day of Trading

In a rare price movement for a newly-listed security, Kenya Reinsurance Corporation shares fell by the maximum allowed daily limit of 10 per cent at the Nairobi Stock Exchange as margin traders rushed in to cart away profits.

The stock closed the day at Sh14.60 per share compared to Sh16 on Monday when it debuted at the bourse. Huge oversubscription of the share in the primary market was expected to lift the stock towards the Sh20 per share mark, but oversupply appeared to have become the driving factor with the majority of investors waiting for refunds from the Kenya Commercial Bank.

During yesterday's trading, the stock price see-sawed between Sh15.60 and Sh14.40 - way below the high of Sh18.50 struck when Kenya Re chairperson Nelius Kariuki rung the traditional bell signifying the start of the sale on Monday morning.

"Some investors have panicked. I see it as an opportunity to buy," Dyer and Blair Investment chairman Jimnah Mbaru said. Brokers were yesterday morning frantically calling investors to give buy orders for the shares to stem the collapse.

From the board, a surplus was evident with 96,100 shares on offer at Sh14.50 each against a demand of 7,800 at Sh14.45 towards the close of the session. Some 5.6 million shares were dealt against 13.2 million shares the previous day, providing some indication towards a possible rally today.

The development brought into sharp focus the increasingly speculative nature of a market where a majority of investors are no longer keen on long term positions.

"We had a lot of speculators rushing in to take away profits. They were willing to sell at that price because it was around 50 per cent of the offer price of Sh9.50 anyway," Mr Chris Munene, of Bob Matthews said moments after the close of trading yesterday.

Analysts said the poor start by Kenya Re traces back to moments after it began trading as speculators flooded the market with its shares denying it an up shoot in value as traditionally witnessed whenever stocks begin trading at the bourse.

"It was so surprising because it had been expected to perform well through this week but speculators began frustrating its run from the onset. It however remains a good buy and we expect it to stabilise soonest," Ms Miriam Muhindi of Drummond Investment Bank said.

The analysts however said the stock would regain its footing in the short-term with the exit of speculators, expectation of financial results and refunds to investors.

"I foresee the Kenya Re price rallying up once again very soon because the firm is expected to announce its half-year results and the diehard speculators will be at it again trying to bank on the development," said Ms Muhindi.

She added: "Serious investors such as insurance firms are also keen on Kenya Re and this would further boost it."

Yesterday's performance confirmed analysts fears that investors would suffer the wrath of speculation in the medium term as short term buyers struggle to leave the counter.

Small investors are expected to continue their dominance of trading - a move that is expected to have a negative impact on price stability.

To curb the wild swings, transaction advisors have recently resorted to innovative structuring of IPOs in favour of institutional investors, who tend to hold on to the shares for much longer thus ensuring some degree of price stability.

Such structuring was first used during technology firm AccessKenya's initial public offering with Kenya Re following suit.

The creation of the Qualified Institutional Investors category aims at ensuring that corporate investors get larger share allocations than other groups of investors.

But by giving a substantial allocation to QIIs, the arrangers of the IPO kill two birds with one stone as heavy institutional presence in the counter ensures price stability.

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