Safaricom PLC, one of Kenya’s leading companies, is facing significant scrutiny due to its brand equity, operational market value (OMV), and creditworthiness being impacted by negative short sell research.
This research often highlights issues like non-compliance with accounting, governance and ethical standards, prevalent in companies with international financing, particularly from Africa, India and China.
According to an article published on Kagirison.Org, an upcoming report that will be published on the same platform titled, “Safaricom Group: The Chimeric Entity with Uncertain Future” will delve into these matters, potentially affecting investor perceptions and market dynamics.
The focus on Safaricom PLC stems from its recent challenges, including loss of brand equity due to negative publicity, internal compliance issues and allegations of supply chain fraud. This has led to a politicized workplace environment and preferential tender awards, potentially damaging the company’s reputation and operational integrity.
The publisher has reportedly initiated communication with Safaricom PLC, seeking clarifications on these issues. According to Kagirison, the report will not only cover fundamental and technical analyses but also discuss significant legal battles, including a US$2.38 billion class-action lawsuit and a KES800 million lawsuit from a former employee, highlighting the financial and reputational risks Safaricom faces.
A critical aspect of the report will address potential future lawsuits related to human rights abuses and complicity in crimes against humanity, following an expose by a Kenyan media outlet in October 2024. These legal challenges could further drain resources, impacting profitability and brand equity.
The effectiveness of short sell research can be measured by its impact on the company’s stock. Ideally, such research could lead to delisting, as seen with companies like Sino-Forest Corporation, where short sellers profited immensely upon the company’s bankruptcy declaration. However, for Safaricom, the direct path to delisting seems unlikely due to its market structure.
Instead of delisting, the more probable outcome could be the resignation of high-level executives, including the CEO, due to the pressure from negative research. This scenario was reportedly discussed in relation to activist short selling strategies that target corporate governance changes.
Companies often retaliate against short sell reports with lawsuits, as was the case with Adani Group and Hindenburg Research. The quality and veracity of the research are crucial in determining whether such lawsuits succeed or backfire, affecting the company’s and researcher’s reputation.
Safaricom’s low free float ratio of 0.2503 makes it less susceptible to high short interest but more vulnerable to share price volatility. This situation could shield the company from aggressive short selling but also exposes it to significant market cap fluctuations if the share price moves drastically.
The report will explore Safaricom’s market valuation, questioning whether its current market cap of KES 705.15 billion is justified. The CEO, Peter Ndegwa, believes the stock is undervalued, projecting a share price of KES 25-27, which would significantly inflate the company’s market cap if realized.
Historically, Safaricom’s stock has seen both highs and lows, with its market cap peaking at KES 1.81317 trillion in August 2021. This volatility underscores the company’s pivotal role in the Kenyan stock market, where its performance can sway the overall market valuation.
The possibility of Safaricom’s market cap plummeting to around KES 200.35 billion is discussed within the context of extreme scenarios driven by negative market sentiment or successful short selling, which could drastically reduce investor confidence.
Short selling strategies often target indices associated with major stocks like Safaricom, affecting not just the individual company but also broader market indices. This interconnectedness means that movements in Safaricom’s stock can influence other listed companies and the market as a whole.
While Safaricom PLC navigates these multifaceted challenges, from potential legal battles to market valuation debates, the forthcoming research report could serve as a catalyst for introspection and possibly reform, influencing both its corporate strategy and how investors view its future prospects.