adminEmergent Research explains that when a parent company spins off one of its business units through a share dividend, some of the shareholders suddenly find themselves holding shares of a smaller company they do not want to own.
With Innscor Africa Ltd set to complete its unbundling of its Quick Service Restaurants (QSR) business – Simbisa Brands — today Emergent Research’s head of research Mr Ray Chipendo says spin-offs provide the best time for potential investors to buy into a company at a discount.
“The idea behind profiting from special situations is that a spin-off usually goes on sale shortly after being unbundled.
‘‘Such an unusual and temporary share price dip provides a buying opportunity for investors and traders alike.
“With time, prices climb back. For example, Proplastics the most recent spin-off opened at 3 cents and went down to 0,8 cents within a week before rising to 2 cents in a month and now presently at 2,4 cents.
‘‘If you had bought into the business at 0,8 cents by now you would have realised a 200 percent profit,” said Mr Chipendo.
Emergent Research explains that when a parent company spins off one of its business units through a share dividend, some of the shareholders suddenly find themselves holding shares of a smaller company they do not want to own.
For institutional investors, such as pension funds, most spin-offs would not fit in their investment guidelines.
For example, some pension funds cannot invest in companies that are smaller than a certain threshold.
Such investors are bound to dispose of such shares no matter the loss. Actions of this nature immediately send the share prices spiralling downwards.
Adds Mr Chipendo: “The share price plunge has nothing to do with fundamentals. It is just a technical matter.
After this price overreaction, other investors start to learn about the company and the share price moves back to match fundamentals. Our theory is to enter the market right at the time of the plunge.”
The unbundling process also tends to significantly benefit both the parent company and the spin-off as has the potential to boost the latter’s profitability and market presence.
Simbisa Brands has 171 operations in Zimbabwe and 196 in the region, namely in Kenya, Zambia, Ghana and the Democratic Republic of Congo as well as franchised operations in Swaziland, Lesotho and Malawi. The regional operations weighed in with $52 million in revenue in FY2014, while the Zimbabwean counters — where the group has an 82 percent market share — contributed $98 million. —BH24.
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