Sola Oni argues that Lafarge, despite recent setback, is only manifesting market efficiency
It was literally a blackÂ MondayÂ for Lafarge Africa Plc. on April 9, 2018 when the famous manufacturer of building components suffered massive sell-off of its shares on The Nigerian Stock Exchange. The investorsâ€™ reaction to the companyâ€™s disappointing after tax loss of N34.6 billion plunged the index of Industrial Â Goods Sector on The Exchange by -3.87 per cent on that fateful day.
Quoted on the Exchangeâ€™sÂ prestigious Premium Board, Lafarge had announced its 2017 financial yearÂ result at the weekend before the black day and blamed the unpleasant performanceÂ on huge operational cost as reflected â€œin N12.4 billion cost of the evacuation of road under construction at UNICEM and N3.3 billion cost of ASHAKACEM Kiln precheater projects,â€ among others.
Apparently apprehensive of likely negative reaction from the shareholders, the companyâ€™s board had recommended a gross dividend of N13.01 billion, translating into N1.50 per share despite its loss in order to calm perceived frayed nerves. Unfortunately, the nervous shareholders could not be assuaged by the cash dividend and consequently embarked on share dumping, an option that they can exercise at any time.
This is the meaning of investor sentiment. It may be positive or negative. Shares are priced on the stock market on the strength of a companyâ€™s future growth potential. If investors anticipate robust earnings and dividend, they shall demand for the companyâ€™s shares and this may elicit upward movement of the share price. As a corollary, once there is perceived uncertainty in the future of a quoted company, investors may dump their shares in order to hedge against massive future losses and this can bring about depreciation of the share price.
Â At the most fundamental, the share price of a listed company on an organised market is determined by the companyâ€™s performance, demand and supply and market hearsay. At a higher analytical level, public information on political, economic and social issues can affect pricing of shares positively or negatively.
Â In a normal market, no person or institution decides a share price. However, if there is a proven case of severe mismatch between demand and supply or evidence of insider abuse (privilege information) that a particular stock price is being manipulated, the management of the stock exchangeÂ is obliged to suspend trading on the stock until the problem is addressed in order to protect investment of innocent shareholders and ensure market integrity.
Â The story of Lafarge is not a case of breaching The Nigerian Stock Exchangeâ€™s Post Listing Requirements in the area of prompt dissemination of information.Â It is simply a situation where shareholders expressed dismay at the companyâ€™s financial performance. This brings into fore, the relevance of Efficient Market Hypothesis (EMH) despite its limitations.
Â Developed by a joint Nobel PrizeÂ WinnerÂ in Economics, Eugene Fama in 1970, EMH states that â€œit is impossible for an investor to outperform the market because all available information is already built into stock pricesâ€. But the weakness of Famaâ€™s thesis is that celebrated Warren Buffet whose investment strategy is purchase of undervalued stocks had made billions of dollars by beating the market. Similarly, thereÂ are skillful portfolio managers that have also recorded track records of beating the market.
Â Market efficiency has three forms: The Weak Form is the one in which stock prices reflect only publicly available past information. This can probably apply to a stock market in its most rudimentary form if it exists. The Semi-Strong Form implies that stock prices reflect both publicly available past and present information. This is the most common form of efficiency as Lafarge Africaâ€™s recent public information on its 2017 financial performance prompted shareholdersâ€™ negative reaction. The third variant called Strong Form appears utopian as stock prices are believed to reflect not only past and present public information but hidden informationÂ or insider knowledgeÂ This is hardly practicable.
Â Antagonists of EMH insist that it lacks quantitative measure of market efficiency, cannot explain excess volatility and price fluctuation is unpredictable. In an ideal form, efficient markets are expected to reflect all available information, otherwise, investors with privileged information may benefit abnormal returns.Â In an efficient market, prices are random and unpredictable. A market can become efficient if it is large and liquid and the transaction cost is cheaper than the anticipated profit. In the final analysis, no market can be absolutely efficient or inefficient. However, globally, degree of market efficiency is fast increasing with improvement in Information and Communication Technology (ICT). Information is becoming readily available even in remote areas.
But investor psychology is not a rocket science as it is replete with biases. This explains why their reaction to publicly available information about quoted companies can never be the same.
In the early 1990s, Nigerian Breweries Plc declared a bonus share of one-for-one. Within one week, the companyâ€™s share price depreciated by almost 50 per cent as elated shareholders off-loading their free shares to realise profit. This is normal.
As a Finance Correspondent for The Guardian, I engaged the then companyâ€™s Managing Director, Mr. Felix Ohiwerei in an exclusive interview on the continuous depreciation of the share price and he volunteered information on Nigerian Breweriesâ€™ plan to acquire Swchepes Francise.
Â The exclusive story became the lead for The Guardian the following day and shares of Nigerian Breweries was on massive demand.Â Within 48 hours, the share price appreciated! Â Stock market is information driven. Investors through their certified investment advisers, the stockbrokers have seen the value that such an acquisition will bring to Nigerian Breweriesâ€™ bottom line. ThisÂ expectation has been factored into the share price immediately.
Â The current situation with Lafarge will be short lived. The company is a metaphor for market efficiency.Â Lafarge Africaâ€™s fundamentals are strong.Â It parades people with intimidating credentials on its board and management. The companyâ€™s foreign core investor, Lafarge Holam has demonstrated high confidence in the business by planning to increase its equity in the Nigeria subsidiary to 76.32 per cent through a rights issue by converting its dollar-based loan to equity. Ultimately, this is a strategic move to have controlling stake in the premium -quoted company.
Lafarge whose brands include West Africa Portland Cement (WAPCO) and AshakaCem has a bright future. But it needs to do a lot of engagement with shareholders, stockbrokers and financial press to ensure that its efforts to bounce back are communicated to the right people at the right time. Modern day investors are highly sophisticated and they need prompt information for immediate investment decision.
The story of Lafarge is a signal to management of quoted companies. Irrespective of the efforts being put in place to remain competitive, customer relation and investor relation must be aligned with media relation for enhanced brand positioning and loyalty.
Â Oni, financial Journalist and Chartered Stockbroker is the CEO, Sofunix Investment and Communications Ltd.