NSE rally masks risk of low free float
Nigerian stocks are rallying but investors should pay attention to risks posed by a free float less than 50 percent of total market capitalisation
Fig 1: Free Float Market Cap of NSE 30
Source: BMI Research
The Nigerian stock exchange has gained 4.9 percent this year as a 10 day rally helped reverse ytd losses for the bourse.
Total market capitalisation for the NSE has inched back up to N9.75 trillion as the rally in big cap names lifted the index and the good times seem to be rolling back again for equity investors.
However a danger for the rally is the low free float of most stocks on the exchange.
Businessday calculations show that the NSE – 30 index which tracks the top 30 companies in terms of market capitalization and liquidity, has a free float capitalisation of only N4.12 trillion, compared to a market capitalisation of N9 trillion.
The NSE – 30 by the way is equivalent to 92 percent of the total market cap of listed companies.
The “float” of a stock is the number of shares available to the public for trading.
It doesn’t count shares owned by company officers and insiders.
Because of their limited supply, stocks with small floats can make major moves-either to the upside or downside.
With so few shares available to trade, the impact on supply and demand can be significant and the mismatch can artificially push up share prices and result in possible mispricing of the stock.
Shares with a higher free float are also often associated with better governance since the founder/promoter has less of an influence and other shareholders have more power to exercise their rights.
Owners/founders may also find it easier to manipulate low float stocks for their gain.
According to BMI research, 7up, Access Bank, Dangote Sugar, Guaranty Trust Bank (GTB), Lafarge Africa, FBNH, Okomu oil and Presco have the highest percentage of free floating hares as a percentage of total shares outstanding (see chart).
On the flip side Conoil, International Breweries, Dangote Cement, Nestle, Seplat Petroleum, Stanbic IBTC, and Union Bank have the lowest free float as a percentage of total outstanding shares.
The case of Dangote Cement Nigeria’s largest listed company is particularly striking.
The firm with a market capitalisation of N2.95 trillion has total outstanding shares of 17.04 billion and a free float of only 1.51 billion.
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