Lesaka’s liquidity challenges
• Trading activity from a small group of shareholders can result in big swings in the share price
Movements in Lesaka Technologies ’ s share price last week highlight the importance of the group’s plan to increase the number of shares for trading by turning around the business and making it a more attractive stock.
The group, valued at R4.49bn, has a primary listing on the Nasdaq and a secondary one on the JSE, and uses its banking and payment technology to distribute low-cost financial and value-added services to small businesses and consumers.
Formerly known as Net1, the group suffers from having too few shares available for trade. This means buying or selling activity from a small group of investors can result in big swings or movements in the share price.
In stock trading, float refers to the number of shares a company has issued for public trading. It is calculated by subtracting the number of closely held and restricted shares from the number of total outstanding shares. Float is an important number for investors because it indicates how many shares are actually available to be bought and sold by the general investing public.
Just in March, the group’s shares gained as much as 21.07% on one day, but fell 16.52% on another and 8.2% on Tuesday last week.
The group is working on a plan to improve this situation.
CEO Chris Meyer previously told Business Day he hoped the success of Lesaka’s turnaround would help to drive interest in the share.
“Liquidity continues to be a challenge. We see very small volumes trading in the market. Most of that is in the US compared to SA on the JSE,” he said at the time.
“I think what we need to see is the value unlock starting to come through, then we might see some more liquidity in the share.”
The group has a small group of shareholders with more than 50% of its equity.
Part of the rationale is that long-term investors may be more willing to sell their shares, thereby increasing the number of shares available to trade, if the value goes up and a decent return is made.
Unum Capital analyst Lester Davids explains that “low float stocks are often controlled by a smaller number of investors”.
This may “make initial accumulation slightly more difficult when compared to a liquid counter ”.
He also says the spread between the bids and the offers
— prices at which investors are willing to buy or sell a share — are often wide when controlled by a smaller number of investors. As such, “it may take only a few trades to make wide swings occur”.
Davids also says that selling or “exiting the share” may take longer than usual while investors may also possibly not be able to obtain the best or a desired price for their shares.
About 70.58% of Lesaka’s shares are held by 20 shareholders. Michael Porter, joint head of trading at Unum Capital, said: “These top 20 shareholders are usually investors that hold these stocks longer term and don ’ t tend to trade in and out often unless they adjust their weightings.”
The company’s top shareholders include local investment firm Value Capital Partners run by former Brait executives Sam Sithole and Antony Ball, the International Finance Corporation as well US investment banks Morgan Stanley and Goldman Sachs.
In February, Lesaka reported its first quarter of profit for its once ailing consumer business.
The group is showing progress on its journey to profitability as it narrowed its net loss to $6.6m from $13.3m in its previous comparable quarter and its headline loss per share, a measure that strips out impairments and one-off items, more than halved to $0.11.
Revenue for the period quadrupled to $136.1m from $31.1m in the previous matching quarter “driven predominantly by strong outperformance in the Merchant division”, the group said.
Net1 ’ s image was tainted by the Constitutional Court ruling in 2014 that its payment arm, Cash Paymaster Services, unlawfully secured the R10bn contract to pay social grants between 2012 and 2018.
The company suffered huge losses after the contract was terminated in 2018 when it was challenged in court by one of the unsuccessful bidders, AllPay, which argued the tender process was irregular. The backlash the company received led to an overhaul of its executive leadership and board in a bid to salvage its operations and position.
Since then, the company closed its loss-making International Payments Group business in 2021 and bought the Connect Group on April 14 in a R3.7bn deal that will expand its footprint in the small, medium and micro enterprises (SMME) sector in Southern Africa. The Connect Group, founded in 2006, provides fintech solutions to nearly 44,000 SMMEs.
The group is now made up of two main divisions: a merchant segment and consumer segment, which accounted for the majority of revenue in the past financial year.
The consumer unit focuses on products such as unsecured credit, transactional banking, microinsurance and valueadded services through its EasyPay platform.
THE BACKLASH … LED TO AN OVERHAUL OF ITS EXECUTIVE LEADERSHIP AND BOARD IN A BID TO SALVAGE ITS OPERATIONS