[2008-09-11]  Share spilt: Is Uganda Clays fairly valued?
UGANDA Clays share price rose to sh225 in the post-split week of trading, registering a historical Price Earning (PE) level of nearly 100 at the Uganda Securities Exchange (USE), analysts said.

The PE ratio is a quick way of determining whether a share is fairly valued compared to the market. The higher the ratio, the more the suggestion that it is overvalued.

However, if a share has a high PE and high profit growth prospects, the share maybe considered fairly priced.

Rumbidzayi Nyabadza, the ReNaissance general manager, attributed the rise in share price to investors’ sentiments, whose expectations he said could not be guaranteed.

“The issue of whether UCL is a buy at sh200 is a function of the expectations of earnings growth in the future and the sustainability of such growth. That price level could mean there are high expectations on the Kamonkoli’s contribution to the bottom-line, the acquisition in Rwanda and Sudan sales office.

“Whether these new lines will aggressively grow earnings, we are all yet to see,” he explained.

Nyabadza suggested that investors should study the fundamentals of the company prior to making decisions.
“Key aspects to be considered include the cash generation capacity of the business, ability, skill and experience of management to deliver profit growth, corporate governance, market demand trends and product quality, innovation and adaptability of the business,” he added.

UCL posted an increase in net profit of sh1.4b in the first half of the year, from sh1.0b the same period last year. Last year, UCL recorded a net profit of sh2.1b from sh1.3b in the previous year.

Industry players warned that with a growth rate of less than 100% in the last year, the high PE level was unsustainable.

UCL announced a stock split by a ratio of 1:100 after a sustained price that had pushed it to sh11,350 per share at the time of the first split.

This means that the number of shares amount to 900m from nine million. Trading in the second split shares at the bourse commenced on August 28.

The split is expected to boost liquidity of the UCL stock at the bourse because there was a psychological barrier associated with a stock priced at over sh10,000.

“Pricing UCL at sh100 breaks that barrier. Share prices can have a psychological impact on whether or not an investor will invest their money. As the price goes higher and higher, some investors may feel that the price is too high or that the shares are unaffordable,” said Grace Semakula, a broker at African Alliance.

“Though the actual value does not change, the psychological barrier is overcome by breaking the share into smaller bits,” he said.

However, analysts warn that new investors should not interpret the new price as a bargain since the underlying variables will be diluted. Stocks split make shares appear psychologically cheap.

“Because of the extra shares, earnings are diluted and reduce per share. Previously, the earnings were divided by the nine million shares but with the spilt, the earnings will be divided by the 900m shares,” an analyst explained.

But for shareholders who are holding the UCL stock, selling post-split would earn them a good return.


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