Why Quickmart IPO may not be the golden egg investors are hoping for

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The company says it will be giving about 80 percent of its net profit as dividend to the shareholders. It is also important to note that the last year, it made a profit of Sh1.7 billion.

So, we can do some quick math and see that the shareholders will be earning about Sh0.34 per share. The total outstanding shares are 4 billion, with only 2 billion being listed by the exiting shareholders. It also means that for an investor to get back his initial investment from the dividends, he or she would need to get a consistent dividend of 0.34 shillings for the next 22 years.

I deliberately ignored anything to do with dividend growth over the years because we all know the history of Kenya’s retail market. It is quite competitive and is littered with deaths of former giants that would have been considered too big to fail. Again, Quickmart is not the market leader in its sector, Naivas is.

Suppose we use the dividend discount model to value the share and assuming we use a 14 percent required rate of return. The share would be worth 2.43 Kenya shillings only, as at today.

You can compute the value using any other rate of return, now that we know that treasury bonds, especially the tax free infrastructure bonds range from 12 percent – 17 percent. I only tried to use a mid point rate which could be a fair rate of return for computing the share value.

This means that the share price of Kenya shillings 7.5 shillings is overvalued. The investors are getting a premium, probably for investing early and growing the supermarket chain to what it is today.

Quickmart Supermarket to list over 2 billion shares on NSE

For a low margin high cost business, it would also have made sense for Quickmart to raise capital via the IPO. It is not raising any new capital this time. The IPO is purely an exit for the existing shareholders, especially the private equity firm, Adenia Capital. Liquidity problems remain a huge problem for the retail sector and have made all the failed retail chains come down. A liquidity problem can soon spiral into a solvency problem and it can go down quickly from there.

Anyway, I will stop there for now, because I am not your corporate finance lecturer. You can consult your professor with a PhD in finance for investment advice, now that some of you have this habit of trying to divert our attention by telling us that the process has been undertaken by PhD holders and thus, we shouldn’t question it. Feel free to bring your findings here for scrutiny.

My piece of writing above is purely my own personal opinion based on the available data. You can also go ahead and compute the value of the shares using any other method you may like and compare the results, but I know the methods may not be much different from the figures we arrived at above. Anyway, all the best to you all as you invest in this new hot stock in the NSE.

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