CMA raises red flag over top five firms’ dominance

The Capital Markets Authority (CMA) has flagged the dominance of five companies — including Safaricom — in the 65-stock Nairobi bourse as a big risk, with the performance of their shares dictating whether the market goes up or down on any given day.

The top five firms at the Nairobi Securities Exchange (NSE) have grown their share of the market’s total investor wealth to 76.4 percent, up from 65 percent three years ago. This has made it difficult for investors to measure the true performance of the bourse due to the companies’ outsized influence on key market indicators.

The combined market value of Safaricom #ticker:SCOM, Equity Bank Group #ticker:EQTY, East Africa Breweries Limited (EABL) #ticker:EABL, KCB Group #ticker:KCB and Co-operative Bank #ticker:COOP now stands at Sh1.669 trillion, compared to the total NSE market cap of Sh2.183 trillion.

Safaricom alone is worth more than all the other listed firms combined, with its valuation of Sh1.181 trillion accounting for 54.1 percent of the NSE’s market capitalisation.

“Market concentration remains a key risk within the Kenyan capital markets landscape… the top five companies by market capitalisation accounted for an average of 74.14 percent (in quarter one), the highest in the last four quarters, further increasing the exposure risk that the Kenyan market faces,” said the CMA in its market soundness report for quarter one 2020, released last month.

Their influence is particularly seen on the NSE All Share Index, which is weighted on market capitalisation meaning the larger firms have bigger weight on the index.

One of the factors behind the dominance of the five firms is the drought in big ticket listings at the Nairobi bourse in recent years.

Delisting of firms like KenolKobil and erosion in value of hitherto blue chip stocks like Kenya Airways #ticker:KQ and Kenya Power #ticker:KPLC has cemented the stranglehold by the five firms.

Three of the dominant firms — Safaricom, Equity and Co-operative Bank — came into the market during the IPO boom years of 2005 to 2009.

The CMA now says that it needs fresh listings of high value firms to correct the market imbalance. “To diversify the number and quality of listed entities the CMA is working with market players – Privatisation Commission, Kenya Private Sector Alliance, Kenya Association of Manufacturers amongst others in identifying potential issuers within the Kenyan market – both large cap and SMEs as a way of increasing diversity within the Kenyan market,” said the regulator.

Dominance by Safaricom, KCB Group, Equity Group and EABL has been magnified by the stock market movements in the wake of the Covid-19 pandemic.

The four accounted for about 76 percent of the paper wealth erosion when the bourse hit its lowest level in mid-March as the spread of the Coronavirus and other economic headwinds sparked an exit of foreign investors.

The four have also accounted for about 94 percent of the paper wealth gain at the NSE since March 25, underlining their impact in shaping the performance of the NSE. Since March 25, the NSE has gained Sh290.4 billion, which suggests a share price rally at the Nairobi bourse.

But about 41 counters failed to register gains during the period while some like Kenya Airways, Home Afrika #ticker:HAFR and Flame Tree #ticker:FTGH posted capital gains with little impact on the overall market valuation.

Over the last 20 days, Safaricom has seen its market valuation increase 24.3 percent or Sh238.39 billion, while Equity Bank is up 6.1 percent or Sh7.5 billion. EABL has gained 20.6 percent or Sh22.74 billion in the period. Co-operative Bank is up 3.4 per cent, equivalent to a market cap gain of Sh2.3 billion, while KCB gained 1.4 percent, equivalent to a Sh1.53 billion increase.

The large caps have also been able to hold and grow their value better than the smaller firms over the years, offering a steady flow of dividends and capital gain opportunities at the bourse.

The firms are the most profitable at the market, led by Safaricom which reported a net profit of Sh74.7 billion for the year ended March 2020, and KCB, Equity and Co-op whose net earnings for 2019 stood at Sh25.1 billion, Sh22.6 billion and Sh14.3 billion respectively.

All four are also better cushioned from the economic shocks brought home by Covid-19, which has seen firms shed jobs and send staff on unpaid leave. This has made them attractive to high-net worth investors like pension schemes and insurance firms as well as foreigners.

The firms are also liquid stocks, offering investors an opportunity to enter and exit the counters with ease, analysts say.

Meanwhile, other firms at the NSE whose sectors have been hard hit by the economic downturn have been issuing profit warnings and laying off staff or sending them on unpaid leave, which has contributed to their share prices falling in tandem.

The performance of the large stocks has also contributed to the divergence between the market’s performance and that of the real economy, where job losses and falling growth have resulted from the Covid-19 containment measures.

A study released by the Kenya National Bureau of Statistics (KNBS) last month showed that half of households surveyed reported that they were either unable to pay their rent or had barely managed to make partial payments.