When the board of C&I Leasing decided late last year to do a capital restructuring which will shore up the price of the stock by reducing the number of outstanding shares, the goal was ensure that “the company to have enough unissued shares to accommodate future plans to raise capital through the equity capital market” according to the company. However, the outcome of the reverse stock split as it is called in finance parlance, has been disastrous for the company.
The stock opened at N9.04 in mid-January after the Nigerian Stock Exchange lifted the suspension on the stock allowing the stock to trade freely in the market after the restructuring process was complete, the stock price took a severe hit. Investors rushed to sell shares thinking they had struck gold as the stock which traded at N1.78 before the restructuring was suddenly trading at 5 times its value at the end of the restructuring process. They rushed to sell to collect profits without realizing that the number of shares they owned had now been adjusted lower to reflect zero change in the value of their shareholdings despite the higher price per share in the company. The resultant effect is that the stock price has now declined around 27 percent since the suspension was lifted as at Friday.
The main problem was investors’ honest misunderstanding of the capital restructuring process that had happened. In finance, a reverse stock split or reverse split is a process by which shares of corporate stock are effectively merged to form a smaller number of proportionally more valuable shares. This activity does nothing to the core business as the changes in the balance sheet are merely accounting gimmicks to enable the company to have more un-issued share capital.
“The reverse split which brought total number of outstanding shares from 1.88 billion shares to around 370 million shares translates to a total market capitalization of about N2.4 billion as against the N12.4 billion currently stated on market information sources including Bloomberg. The overstatement in value is due to the use of the old number of outstanding shares which was 1.88 billion shares instead of the new number of outstanding shares. This mistake is bound to overstate C&I Leasing as an overvalued stock which it is not,” according to an investment note sent to Clients by EUA Intelligence.
It now appears that the market may need to rework their mistake soon rather than later. EUA analysts say the stock is set for a strong rebound as the company is expected to report earnings per share around N3.7 per share for full year 2018, putting trailing PE ratio at around 1.7, making C&I Leasing among the cheapest stocks in the market today.
IFEANYI JOHN
