HF Group Plc, a prominent financial services company in Kenya, has announced a rights issue offering up to 1,499,995,255 new ordinary shares to its existing investors at KSh 5 per share. The rights issue, which includes a 30% greenshoe option, represents a significant opportunity for shareholders and marks a strategic move by the company to strengthen its capital base amid a challenging economic environment.

Details of the Rights Issue

In a decision made on August 12, 2024, HF Group’s board resolved to offer the new shares to its existing shareholders at a ratio of three shares for every one share held. This decision follows the company’s impressive performance in the first quarter of 2024, where it recorded a profit after tax of KSh 150 million. The growth in non-interest income was a key driver of this profitability, showcasing HF Group’s ability to adapt to the evolving financial landscape.

As of December 31, 2023, Britam Holdings held a 19.4% stake in HF Group, with Britam Life Assurance Company accounting for a total of 22.03%. This strategic relationship with Britam, a leading financial services group in Kenya, has provided HF Group with a solid foundation to expand its operations and diversify its revenue streams.

The rights issue is subject to approval by the shareholders, the Capital Markets Authority (CMA), and the Nairobi Securities Exchange (NSE). Additionally, the Central Bank of Kenya (CBK) must provide a “No Objection” statement for the transaction to proceed. This level of regulatory oversight ensures that the rights issue is conducted transparently and in the best interests of all stakeholders.

Understanding the Greenshoe Option

The greenshoe option, also known as an overallotment option, is a provision in an initial public offering (IPO) underwriting agreement that allows the issuer to sell more shares than initially planned if demand for the securities exceeds expectations. In the case of HF Group, the 30% greenshoe option provides the company with the flexibility to issue additional shares, thereby raising more capital if the demand is strong.

This option is particularly advantageous for HF Group as it allows the company to capitalize on investor interest and secure additional funding for its growth initiatives. The greenshoe option is a common feature in IPOs and rights issues, as it helps stabilize the share price post-issuance and provides a buffer against volatility.

HF Group’s Market Position

HF Group, formerly known as Housing Finance Limited, has a rich history dating back to its listing on the Nairobi Securities Exchange (NSE) in 1992. The company operates under the ticker symbol HFCK and has established itself as a key player in Kenya’s financial services sector. HF Group’s business interests span mortgage lending, corporate and retail banking, property development, and bancassurance.

The company’s share price closed at KSh 4.15 on the previous trading day, representing a year-to-date gain of 19.3%. This upward trajectory reflects investor confidence in HF Group’s strategic direction and its ability to deliver value to shareholders. The rights issue, priced at a premium to the closing price, underscores the company’s belief in its future growth prospects.

Strategic Rationale Behind the Rights Issue

The decision to undertake a rights issue is driven by several strategic considerations. Firstly, the additional capital raised will enable HF Group to bolster its balance sheet and enhance its capital adequacy ratios. This is particularly important in the current economic climate, where financial institutions are facing increased regulatory scrutiny and are required to maintain higher levels of capital.

Secondly, the proceeds from the rights issue will be used to fund HF Group’s expansion plans, including its mortgage lending and property development businesses. The company has identified significant growth opportunities in Kenya’s real estate sector, driven by increasing urbanization and demand for affordable housing. By expanding its capital base, HF Group is well-positioned to capitalize on these opportunities and drive long-term growth.

Thirdly, the rights issue aligns with HF Group’s broader strategy of diversifying its revenue streams and reducing its reliance on interest income. The company has made significant investments in its non-interest income businesses, including bancassurance and property development, which have started to yield positive results. The additional capital will support further investments in these areas, enhancing HF Group’s ability to generate sustainable returns for its shareholders.

Regulatory Approvals and Market Impact

The rights issue is subject to multiple layers of regulatory approval, reflecting the complexity and significance of the transaction. The Capital Markets Authority (CMA) will play a key role in ensuring that the rights issue is conducted in accordance with the applicable regulations and that the interests of minority shareholders are protected.

The Nairobi Securities Exchange (NSE) will also be involved in overseeing the issuance process and ensuring that the new shares are listed and traded in a transparent and orderly manner. The Central Bank of Kenya (CBK) will provide a “No Objection” statement, which is a critical step in the approval process. This statement will confirm that the rights issue does not pose any risks to the stability of the financial system and is in line with the CBK’s prudential guidelines.

The market impact of the rights issue is expected to be significant, given the size of the offering and the greenshoe option. Investors and analysts will closely monitor the demand for the new shares, as well as the company’s post-issuance performance. HF Group has advised shareholders and the public to exercise caution when dealing with the company’s shares, as the transaction may have a material effect on the share price.

HF Group’s Commitment to Shareholder Value

HF Group’s decision to undertake a rights issue with a 30% greenshoe option reflects its commitment to delivering value to its shareholders. The company has a track record of prudent financial management and has consistently generated positive returns for its investors. The rights issue provides existing shareholders with an opportunity to increase their stake in the company at an attractive price, while also supporting HF Group’s growth objectives.

In conclusion, HF Group’s rights issue is a strategic move that will enable the company to strengthen its capital base, fund its expansion plans, and diversify its revenue streams. The 30% greenshoe option provides additional flexibility to raise more capital if demand exceeds expectations, underscoring the company’s confidence in its future growth prospects. As HF Group navigates the regulatory approval process and prepares to issue the new shares, all eyes will be on the company’s performance and its ability to deliver value to shareholders.

photo source: Google

By: Montel Kamau

Serrari Financial Analyst

14th August, 2024