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Editors Pick

How does the capital restructuring of C&I Leasing affect me as a shareholder?

Following the proposed and ongoing capital restructuring and the subsequent suspension of trading on the shares of C&I Leasing Plc,

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C&I Leasing Plc, Nigerian Stock Exchange, NSE, Suspension

Following the proposed and ongoing capital restructuring and the subsequent suspension of trading on the shares of C&I Leasing Plc, I received a couple of emails from concerned shareholders asking me how the restructuring will affect them as shareholders. My simple answer to them and through this medium, to other shareholders, is that it has no impactful effect on your current investment in the company. Though they call it a restructuring, it is nothing more than a reverse split. A reverse split is a corporate action where a company reduces or decreases the number of its issued share capital.

In most cases, the reason for such corporate action is to shore up the price of the shares, especially where the stock price is so low that the issuer risks being either delisted or classified as “penny stock”. But according to the SEC filing, the reason for this corporate action, as noted by the company, is not to shore up the price, even though it will, but to create some leverage for the company to be able to issue additional shares in the future. If that is actually the true reason, the company could, however, have been able to achieve that result by passing a resolution to increase its Authorised share capital rather than going through a reverse split. It is most unlikely that the reason for the reverse split is to shore up the price. Be that as it may, below are what happens with a reverse split and how the shareholders are affected.

With a reverse split, quantity of shares outstanding decreases, Price increases and Market capitalization remains the same. What this means is that if you have 200 shares priced at N8 per share worth N1600 prior to this corporate action, you will now have 50 shares, priced at N32 per share with a market value of N1600. You can see that what you seem to have lost in terms of number of shares, you gained in terms of price increase, and you are home and dry, with the value of your investment intact.

Cost Basis Adjustment

However, there are a few areas that are usually affected whenever there is a stock split or reverse split. One area is the cost basis of your investment. Although the total cost basis of your investment does not change, the cost basis par share will. So, you will need to adjust your cost basis to reflect the reduced number of shares you are now holding. Assume that you had bought 200 shares that you bought at a price of N4 per share before the reverse stock split, now that you hold only 50 shares as a result of the split, your cost basis will now be N16 per share. The essence of cost basis is that it is the basis on which your realized and unrealized gain or loses are calculated.

Fractional Shares

Fractional shares often times result from splits when shareholders are having shares in multiples that are not quite divisible by the ratio on which the split is based. In such a case, you will be forced, as it were, to sell the fractional shares assuming you are not allowed to hold fractional shares in your portfolio. The way it works is that the company, through its registrar or whoever the elected for that purpose, will pool together all the fractional shares, sell them and distribute the proceeds to the affected shareholders in what is called “cash in lieu of fractional shares”. In that case, you will record a sell of the fractions for the cash distribution received.

Public Perception

Reactions to the announcement about the reverse split has really been negative judging from the trend in the stock price since the announcement, as can be seen below. It does look like investors or shareholders or the public interpreted or are interpreting the reduction in the number of shares as reduction in the market value of their investment. That is a wrong interpretation.

This interpretation underscores the urgent need for investor education in Nigeria. Investors need to be educated on the ways some of the corporate actions work and how they affect them, among other things. As it stands, it is not the corporate action of a reverse split that is hurting the shareholders of C&I Leasing now, but the wrong signal and wrong interpretation that the announcement is sending and receiving among the Nigerian investment environment which is causing the price to fall. Maybe, other companies hoping to undertake such corporate actions should find time to explain the effects to their shareholders during the approval stages of the shareholder meetings so as to reduce the incidence of misinterpretation. Stock split and reverse split are very common corporate actions and shareholders should get used to them because they are coming.

Uchenna Ndimele is the President of Quantitative Financial Analytics Ltd. MutualfundsAfrica.com and mutualfundsnigeria.com (both Quantitative Financial Analytics company website) is a leader in supplying mutual fund information, analysis, and commentary on African mutual funds. We provide reliable fund data; and ratings information that will add value to fund managers, the media, individual investors and investment clubs.

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    Currencies

    DEVALUATION: CBN updates website to official rate of N360/$1

    The central bank of Nigeria has devalued its official exchange rate from N307/$1 to N360/$1.

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    CBN website states oil price is still $61, Naira under pressure as Nigeria records poor export earnings, 4 key sectors the CBN plans to pump money into

    Just as Nairametrics reported, the Central Bank of Nigeria has devalued its official exchange rate from N307/$1 to N360/$1. The apex bank has now reflected this change on its website signaling a confirmation. The bank is yet to issue a press release to this effect.

    The CBN has now officially devalued by 15% moving from N307/$1 to N360/$1. Depreciation at the “market-determined” I&E window is 5% having moved from N360/$1 to N380/$1

    Devaluation: Nairametrics reported yesterday that the Central Bank of Nigeria (CBN) sold dollars to banks at N380/$1 in a move signifying a devaluation of the currency. Banks trading at the Investor and Exporter (I&E) window bought dollars at N360/$1 from the CBN on Friday, March 20, 2020. The I&E window is the official market where forex is traded between banks, the CBN, foreign investors, and businesses. The central bank typically buys or sells in the market as part of its intervention program.

    The CBN has updated its website with the official exchange rate.

    Nairametrics also got hold of a letter from the CBN to banks informing them of the new exchange rate for dollars flowing from the International Money Transfer Operators (IMTOs). According to the CBN, IMTOs will sell to banks at N376/$1 while banks will sell to the CBN at N377/$1. The CBN will sell to BDC’s at N378/$1 while the BDC’s will sell to end-users at “no more than” N380/$1.

    Single Exchange Rate: A report yesterday also suggested that the CBN also planned to move to a single exchange rate policy for determining the price of the dollar. A senior central bank official who does not want to be identified, said, ‘Today we allowed the rate at the importer and exporters (I&E) window to adjust in response to market developments.’

    The central bank has now made an apparent u-turn after it had initially that the “market fundamentals do not support naira devaluation at this time” detailing reasons why it did not need to devalue.

    Falling oil price: Oil prices fell to under $20 on Friday before climbing back up to settle at $23 per barrel. Nigeria’s Bonny light trades at $26 while the benchmark Brent crude trades at $29 per barrel. In response to the crash in oil price, Nigeria’s announced a cut to its 2020 budget by N1.5 trillion as it faced the reality of a potential drop in its revenues. Nairametrics also has information that state governments are getting jittery about their ability to sustain salary payments as a reduction in their federal allocation “FAAC” is anticipated.

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    Career tips

    Investment options for salary earners

    Investment options for the salary earners
    #Investing #Entrepreneurs #Investment #Salary #Wages

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    Investment options for salary earners - bank loan

    Recently, one of the readers of my articles asked to know what investment options are open to salary earners. A salaried individual is like everyone else except that he or she has a fixed monthly income. This implies that their investments and expenses have to be managed strictly according to their fixed monthly income.

    Since salary is assumed to be the only source of income for the salaried, it is advisable that such an individual fortify himself financially before investing so that adverse investment performance will not have untold effect on him and his family. Therefore, if you are a salaried prospective investor, you need to:

    READ: Where to invest N500,000 right now

    Get life insurance

    Most families in Nigeria are single income families so much such that if anything bad happens to the income earner, the family gets shattered, at least financially. Again, given the risks inherent in capital market investments, it is only prudent to have a life insurance as a first step in one’s investment journey. It is very baffling to see many investors very deep into the market, yet they do not have life insurance.

    [Read Also: Understanding the risks in bond investing]

    Life insurance is and should be a basic part of any financial plan. Life insurance is a protection for loved ones against financial hardship arising from the death of a breadwinner. This is even more important today than ever before with high cost of funeral expenses, college education and medical bills. So, the first investment option for a salaried individual is to get a life insurance.

    Prepare for financial emergencies

    Life is full of surprises, emergencies do happen, jobs are lost without notices, and even good investment opportunities emerge sometimes suddenly. There is, therefore, the need for a cash reserve to help weather the financial storms and emergencies when they come calling.

    READ: SEC issues pre-notice on cancellation of certificates of 157 inactive CMOs

    Cash reserves do not only provide for emergencies, they also help to ensure that investments are not liquidated prematurely or at inopportune times to cover unexpected expenses. There are no hard and fast rules on what the exact amount of the required cash reserve should be, but most financial experts and planners will advise that an amount that equals about six months of living expenses be set aside.

    So, as a salaried person, your next investment should be to have a cash reserve. A cash reserve should not necessarily be in a savings account or under the mattress; it could be in an interest-bearing money market account, money market mutual funds with low to zero luck-up period or another form of very liquid investment that is readily convertible to cash without loss of value.

    [Read Also: Understanding the risks in bond investing]

    Know your risk appetite

    As a salaried and fixed income individual, your risk appetite is most likely going to be low as well as your risk tolerance, although your extended family profile could change all that. You need to know or understand your risk tolerance before you engage in any capital market investment.

    Your risk tolerance will and should drive the type of investments you go into. Your risk tolerance depends on your psychological makeup, your current insurance coverage, presence or absence of cash reserve, family situation, and your age among others.

    READ: Here’s what will happen to Nigeria’s insurance sector in the short to medium term

    Talking about family situation, it is reasonable to think that a married individual whose children are still in school will be more risk averse than an unmarried person. On the other hand, older people have shorter investment time horizon within which to make up for any losses. the reason for this is because the older you get the less time you have to work to recoup on losses.

    Jaiz bank

    In that case the risk tolerance of an older man will be less than those for younger folks. Again, the more cash reserve and insurance coverage you have, the more your propensity to take risk. Now having known your risk tolerance based on the underlying factors, you can then define your investment objectives

    [Read Also: Important tips on how to profit in a bearish market]

    Set your Investment objectives/goals

    Having met those essentials above, you are now ready for a serious investment plan or program. A good investment plan starts with investment objectives. Investment objectives are the force that determines what you invest in. Investment objectives range from capital preservation, to capital appreciation and constant income generation.

    Capital preservation as an investment objective implies that you, the investor, aim at minimising the risk of loss by maintaining the purchasing power of your investment. So, if you are risk averse or you will need money from your investment soon for children’s education or for building a house or you are nearing retirement, this should be your objective.

    READ: CBN debits banks N216.1 billion for CRR compliance

    Investors whose aims are to see their investment portfolios increase in real terms over a period of time are better suited for capital appreciation as an objective. This is better for investors that are more risk tolerant and those with more potential to recoup on losses along the way.

    If you are already retired or nearing retirement, and therefore depend on your retirement plan supplemented by investment income, you need an investment that generates income rather than capital gains. In that case, your investment objective should be current income generation. It is always good to have investment goals stated in terms of risk and returns.

    [Read Also: I-Invest generates over N2 billion transaction in less than 6 months]

    app

    Decide on asset allocation

    Armed with the knowledge of your risk appetite and investment objective, you are now ready to decide on what to invest in, and how much to invest in any asset class. This takes you to asset allocation decisions. Asset allocation involves dividing an investment portfolio among different asset classes based on an investor’s financial requirements, investment objectives and risk tolerance.

    A right mix of asset classes in a portfolio provides an investor with the highest probability of meeting his/her investment objectives. Asset allocation is the most important investment decision an investor can make in a portfolio because it demonstrates an investor’s understanding of his or her risk preferences and return expectations.

    READ: How to build a profitable Mutual Fund Portfolio

    It is good to strive for a diversified portfolio. Unfortunately, the Nigerian market does not provide a lot of asset classes for optimal diversification, but diversification can be achieved across sectors or industries within the few asset classes in the Nigerian stock market.

    Decide on how to invest

    There are different ways to invest in the capital market. You can invest directly by making the stock selections by yourself, thanks to the online stock trading platforms that abound the world over. This implies that you have what it takes to conduct the required research and analysis of the companies whose shares or stocks you wish to buy.

    [Read Also: How I Would Invest My Mother’s Retirement Funds]

    It also implies that you have what it takes to know when to sell or add to existing positions. Another method is to have someone “do the heavy lifting” for you. In this case, that someone, often times called fund manager or portfolio manager, does the research and analysis and selects shares that suit your investment preferences, investment objectives, risk tolerance and appetite as well as your investment time horizon.

    This route is most suitable for investors that lack the knowledge and time for the required research and analysis. If you decide to go this route, mutual funds are the best bet for you.

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