Unity Bank Plc closed trading Thursday at a price of N2.75 becoming the biggest loser of the day. But that is not the true story here. The real story is here is how a decision to reconstruct the shares of the company has cost it over N26billion in value lost within a month. Here is what happened.
Dormant share price
Unity Bank has for over a year remained stuck at a price of 50 kobo per share as it could not go lower than the floor set by the NSE. The company also had over 116.8billion shares outstanding with tens of millions put on offer everyday with very little buyers available. Investors were not just ready to stick out their money for a company that was on a brink and just going through a transition period.
Company reacts – Plan A
The company then decided to change management and brought in a new Managing Director. The company also realigned its operations and by the end of 2014 it reported a profit after tax of N10.7 billion from a loss position of N22.5billion a year earlier. It also reported a N3.6billion profit at Q1 2015. However, that was not enough. The company as at the end of March still had over N52.8billion in negative retained earnings. And with just over N10billion in share premium it had a long way to go to fill that hole with profits. It will need to post N10billion profits in the next five years to be able to even pay dividends.
Plan B
The next plan was to look for ingenuous ways to increase value of the company’s equity, so that it can remain attractive to investors. This made sense for a number of reason but one stands out. If its share price is attractive, it could get foreign investors to invest in the company helping it pack some in its share premium account. Then it will have the ideal capital structure that can help it compete and perhaps pay dividends.
They could achieve that by only one means. If it increased its market value through a share scheme its share price will rise above the “cursed 50 kobo per share” and become attractive and tradable by its investors. Also, it will reduce its shares outstanding by a huge amount saving it additional cost of maintaining such a high volume of shares outstanding.
Share reconstruction
And so it embarked on a share reconstruction scheme that saw the share price rise to about N5 per share. It basically reduced its outstanding shares by having just 1 new share for every 10 shares held. That jacked up share price from 50 kobo to N5 and reduced shares outstanding from 1116.8 billion shares to 11.68billion shares. Of course, after the share reconstruction market cap remained at N58.4billion. It will either continue to go up as they had hoped or down as they hoped not.
Up or down?
Share reconstructions can be as rewarding as it can be as catastrophic for a company’s valuation. A reduction in value just means the value of your company is now even worth less from what it was had you left it that way. Unity Bank shares nose-dived and the share price tanked from N5 to N2.75 within a month. The market cap is now worth just N32billion and a whopping 45% less than what it was worth before they took this decision.
To put it into better perspective, the share price is now worth less than the 50 kobo it was trading for at the time even though the share price is now N2.75.
The company has just lost N26billion in value and the worst could just be yet to come.
I appreciate your very incisive analysis & commentaries.
Well done.
Thanks a lot
Nairametrics always give medcine after death information. Unity bank situation has been happening for 2 weeks. Vitafoam analysis they made was total mis-leading piece of info. Never trust this website for market decision!
Hi, thanks for your comments. It will be nice of you to explain which of aspects of the analysis was mis-leading and what your opinion is.
Good analysis by nairametrics. The reconstruction has given investors who want to exit opportunity to do so. Other investors now find the price attractive at N2+ levels (20kobo pre reconstruction price). The stock will return to the N5.00 it is coming from. N3.00-N3.20 by end of H115 and N4.0 to N5.0 by FY15.