An effective short sell research negatively impacts the brand equity, OMV, and credit worthiness of the targeted company…African, Indian, and Chinese PTC that benefit from American financing are optimal targets of short selling research because of their higher statistical probability of non-compliance with accepted accounting, governance, and ethical standards (and rules). Some of them engage in fraud, including accounting fraud (e.g financial statement fraud) and compliance fraud (e.g tender fraud). Fundamental analysis usually exposes such non-compliance (as was evident in the short sell research into Adani Group and Sino-Forest Corporation).
Does Research-Backed Short Selling Manipulate the Capital Markets, or It Promotes Efficiency and Competency in the Financial Markets?
Table of Contents
In a previous post, it was mentioned that there will be an upcoming report titled Safaricom Group: The Chimeric Entity with Uncertain Future that is Careening on Legal Minefields. This upcoming report will be the first in a series of reports on publicly listed companies (PLC) that Kagirison Research assesses to be unfairly valued in the securities market. Among these companies are Safaricom PLC, TransCentury PLC, Centum Investment Company PLC, and Equity Group Holdings Limited.
Why Safaricom PLC?
As Safaricom PLC loses its brand equity due to negative publicity, it is internally assailed with compliance issues, politicized workplace, and supply chain fraud (including bid rigging) that has allowed supporters of Rigathi to benefit from preferential tender awards. The upcoming report will consider the issue of Safaricom employees using companies that they own through proxies to trade with Safaricom PLC.
I have already sent questions concerning these issues to Safaricom PLC via email, and Kagirison Research has been promised answers. The names of these companies, as well as Rigathi’s “people” in Safaricom will be mentioned in the report.
All the same, the core of the report will focus on fundamental analysis and technical analysis, which are the basis of any report that assesses the long-term viability of any publicly listed company (PLC).
This upcoming report is not a short sell report nor an investment report, but it can support shorting of Safaricom PLC stock. Still, the report will not be an ideal report for shorting this stock. This is despite the fact that the report will describe the lawsuits brought against Safaricom PLC, including a US$2.38 billion (~KES 307.31 billion) class lawsuit in 2023 and another KES 800 million lawsuit brought against this company by Saikumar Allaka – a former analytics manager of Safaricom.
The report will also cover the company-bursting KES 115 trillion (US$ 891 billion) lawsuit brought against Safaricom following a data breach that exposed PII (personally identifiable information) of 11.5 million Safaricom customers.
Most concerning is that there are potential lawsuits against Safaricom PLC in the near future that will be related to human rights abuses and aiding/abetting crimes against humanity. This is informed by an October 2024 expose by a leading Kenyan media. These potential lawsuits can bleed resources from Safaricom PLC, hence making it lose some of its profitability potential, besides suffering a further decline in brand equity. Already, journalists, media companies, and human rights defenders have accused Safaricom of harassing and intimidating them. Among these accusers are Nation Media Group that published the October 2024 expose, Kenya Human Rights Commission (KHRC), the Civic Freedoms Forum (CFF), and Muslims for Human Rights (MUHURI).
Delisting Versus Exit of the CEO
The ideal research to support shorting of a specific publicly listed stock should trigger investigations and legal proceedings that lead to the targeted PLC being delisted from the securities exchange. An even better outcome is the delisted company declaring bankruptcy just like Sino-Forest Corporation did as explained in Does Research-Backed Short Selling Manipulate the Capital Markets, or It Promotes Efficiency and Competency in the Financial Markets?
Delisting leads to the loss of the PLC status of the targeted company, and this converts to 100% profit for the short seller as the stocks of the delisted company have become worthless. An example is the short sellers who shorted the stock of Silicon Valley Bank (SVB) in March 2023, and made a profit of US$ 513 million just before the bank was seized by the Federal Deposit Insurance Corporation (FDIC) on March 10, 2023.
The seizure of SVB by FDIC immediately halted the public trading of SVB stock, and thus the short sellers could not repurchase the shares they had sold. The delisting of SVB meant that they were no longer obligated to return the shares they had loaned from brokerage firms, but they were instead entitled to get back their loan collateral. Still, this inability to repurchase shares should be recognized by brokerage firms who usually continue charging daily stock loan fee during the wait-to-collect period. The short sellers in the SVB short interest had to pay their daily stock loan fee until their brokerage firms recognized the delisting of SVB and returned their loan collateral.
Now, let us consider another scenario.
What happens if the short sell does not lead to delisting? If the targeted company is not delisted following the release of a short sell report, then the next best outcome is for its CEO (Chief Executive Officer) to be forced to resign and be barred from joining the board of directors of any PLC/PTC. This is the outcome that activist short sellers seek as explained in Activist Investing, Shareholder Activism, and Activist Short Selling.
Lawsuit Against Researchers
Normally, the targeted company will retaliate to a short sell report by suing the researcher(s), and this sets the stage for litigation that can result in the CEO and the company being fined by both the court and regulatory authorities. Nonetheless, this outcome depends on the quality and veracity of the research, as well as the brilliance of the researchers. As I explained previously, Sino-Forest Corporation retaliated to the publishing of a negative research report by Muddy Waters Research by filing a defamation lawsuit against Muddy Waters Research and demanded US$4 billion in damages.
The ideal research to support shorting of a specific publicly listed stock should trigger investigations and legal proceedings that lead to the targeted PLC being delisted from the securities exchange. An even better outcome is the delisted company declaring bankruptcy. This assures the short seller of maximum profit in the short position.
Why Safaricom Cannot Be Delisted
The fact that no short seller can get a high short interest on Safaricom PLC stock means that activist short selling cannot result in delisting, but would at best generate investigations that could potentially tail into court cases. For reference, Adani Group was saved from delisting because Hindenburg Research could not acquire a high short interest in the stocks of Adani Group, but the outcome of the short was remarkable as Adani Group lost over US$100 billion, and was forced to abandon a planned FPO, as well as face legal action in the USA.
The reason why there was no high short interest in the Adani Group is because the free float stock was less than 25% of the outstanding shares. For Safaricom PLC, the free float stock is about 25% of the shares outstanding.
The free float ratio is inversely proportional to price volatility of the stock. The reason for this is quite straightforward – a low free float ration means that few shares are available for trade in the securities exchange, and if their price drops, then the full market capitalization of the PLC falls.
Consider a free float ration of 0.2 for a company. If a short seller is loaned 10% of the outstanding shares, he will be in possession of the 50% of the public float. Despite this short seller having a short interest of only 10%, if the stock in his possession is successfully shorted so that it loses 50% of its stock value; then the profit of the short seller will be less than 5% of the full market capitalization of the company, but the company will lose 50% of its full market capitalization. This shows how a low free float ratio exposes the equity of a company to value volatility.
Usually investors are averse to a company with a low free float ratio because of how exposed such a company is to share price fluctuations. This also applies to index providers. Equally, the index market prefers float-adjusted market capitalization, and index providers use the float-adjusted OMV when calculating the index for a stock in their basket.
When Hindenburg Research publicly expressed their short position in the stock of Adani Group, the brand equity of this company (Adani) fell immediately. This was followed shortly by loss of US$104 billion in market value, thus reducing the company value from US$206 billion to US$102 billion – a 50.49% loss (in value). Morgan Stanley took notice of this decline in market valuation of Adani Group, and used the float-adjusted market capitalization to calculate a new weighting for the stock of Adani Group in its index pool, which is offered via the Morgan Stanley Capital International Capital (MSCI). The MSCI index affected by valuation of the Adani Group was the Global Investable Market Indexes (GIMI). As expected the stock of Adani Group lost weight in GIMI, and this led to 10% decline in the share price of Adani stock in February 2023.
As mentioned earlier, the targeted company will retaliate to a short sell report by suing the researcher(s). Adani Group sued Hindenburg Research, even seeking the support of the Supreme Court of India. The Indian Supreme Court called for a probe into the conduct of Hindenburg Research during its research into Adani Group. This direction to probe Hindenburg Research was in the judgment issued by this court in January 2024. Interestingly, this laughable judgment was ridiculed by the Indian public. The capital markets took little notice of this laughable judgment, and Adani stocks continued their nose-dive.
Short sellers prefer companies with low free float ratio, high proportion of locked-in shares, and significant unexercised shares.
Safaricom’s Public Float
A low free float ratio allows company insiders – if they deem it necessary – to release significant allotment of shares to the stock market to stabilize the share price. This increases the free float ratio. A company with a high free float ratio cannot be easily shorted as the volume of shares traded will need to be high for the company to register significant loss in market value. This explains why short sellers prefer companies with low free float ratio, high proportion of locked-in shares, and significant unexercised shares.
It is rare for any brokerage firm to be holding inordinately large volumes of shares of a company with a high float ratio, and even if it does hold such volumes, it is unlikely that it will loan it off to a single short seller. This explains why short sellers have been unable to successfully short Alphabet (the parent company of Google), Tesla Motors (that manufacturers Cybertruck), and Meta Platforms (which owns Facebook and Instagram). Interestingly, Muddy Waters Research argues that Tesla Motors stock can be short in 2025.
As is evident, a high free float ratio is congruent with low volatility in share price. Likewise, share price can be stabilized by the market in case of a short sell if the company has a high float ratio.
Can Safaricom PLC stabilize its share price? If it can do so, then it can shield its equity value from a volatile stock market. However, if it cannot, then the volatility of its equity value will mirror volatility in its public float share price.
The free float ratio of Safaricom PLC is 0.2503, which exposes it full equity to share price volatility. As will be mentioned later in this post, if the share price of the float stock falls to 5 Kenya Shillings (KES 5), then Safaricom PLC will lose 71.26% of its market capitalization. Equally, if the share price of the public float rises to KES 45.25, then the market capitalization of Safaricom will increase by 160.06%.
As I mentioned previously, it is unlikely that any report on Safaricom PLC can cause it to be delisted (in the NSE), but it can set into motion a series of events that leads to the exit of the CEO and some members of the C-Suite. However, this will likely follow a court case that Safaricom PLC will initiate against the researcher.
The targeted company will retaliate to a short sell report by suing the researcher(s). Adani Group sued Hindenburg Research, even seeking the support of the Supreme Court of India. The Indian Supreme Court called for a probe into the conduct of Hindenburg Research during its research into Adani Group. This direction to probe Hindenburg Research was in the judgment issued by this court in January 2024. Interestingly, this laughable judgment was ridiculed by the Indian public.
Is Safaricom Worth KES 1.08189 Trillion? Can Safaricom’s Market Capitalization Reach KES 1.81317 Trillion?
In 1993, a department to experiment with ETACS (Extended Total Access Control System) cellular network was established by the now defunct Kenya Posts and Telecommunication Corporation (KPTC). ETACS was the first generation (1G) cellular network. In 1996, the second generation (2G) cellular network rolled out in Kenya. This 2G digital cellular network used international protocols collectively designated as the Global System for Mobile Communications (GSM). Three years later, the aforementioned KPTC department applied for license to operate GSM network for a period lasting a quarter of a century. It is at this moment in 1999 that this department was renamed Safaricom – a portmanteau of Safari and Communications. Shortly thereafter, KPTC was made obsolete in compliance with the 1998 Kenya Information and Communication Amendment Act. Then, all the 12,000 KPTC subscribers were migrated to Safaricom. With this subscriber base, Safaricom entered the Kenyan market to compete with KenCell and Telkom Kenya.
Safaricom became a PLC eight years after Vodafone Group PLC had acquired 40% stake in the company (in May 2000). The listing of Safaricom on the Nairobi Securities Exchange (NSE) in 2008 was accompanied by a loss of about 1 billion KES because the appointed bookrunner for the foreign investor (or international) pool avoided transparency during book-building. This bookrunner who had underwritten 2 billion shares was Morgan Stanley, which had then partnered with Dyer & Blair investment bank for this venture.
Morgan Stanley investment bank preferred to sell these allotted shares to bidders who had accounts with Morgan Stanley. These bidders turned out to be speculators who acquired these shares as growth stock rather than dividend stock. The sale of these growth stock after the IPO caused the price of Safaricom shares to decline, with supply of Safaricom shares in the securities market exceeding demand. This event marked the infancy of Safaricom PLC as a listed company.
Safaricom PLC managed its teething problems quite well, and has grown into a chimeric entity that provides telecommunications services and financial services to its subscribers. It has also been accused of flouting data privacy laws, as well as failure to protect data in its custody. Despite these legal and ethical concerns, the company has performed relatively well, but not as well as it should have if it adhered to global principles of good governance and consumer protection.
At the moment, Safaricom PLC is the wealthiest PLC is Kenya with a market capitalization of KES 705.15 billion (or US$ 5.45 billion based on exchange rates on December 23, 2024).
The fact that no short seller can get a high short interest on Safaricom PLC stock means that activist short selling cannot result in delisting, but would at best generate investigations that could potentially tail into court cases.
In November 2024, the CEO of Safaricom, Peter Ndegwa, stated that Safaricom stock is undervalued and he believes that the share price should be between KES 25 and KES 27. He even said that “our share price is undervalued by 50%”. This is interesting because I believe that the share price is overvalued. For now, let us consider stock valuation from the perspective of this CEO.
On January 3, 2025 EAT (East Africa Time), the share price of Safaricom PLC was KES 17.40, which means that the full market capitalization of this company on the same day was KES 697.22 billion. As mentioned in a previous post, Safaricom PLC has 40.07 billion shares outstanding. The floating stock is about 10.03 billion shares. Now, let us compute the stock valuation using the upper share price that Safaricom’s CEO believes is the “right stock value”.
Considering the share price of KES 27, the full market capitalization of Safaricom PLC would be about KES 1081.89 billion or KES 1.08189 trillion. If we consider the share price to be KES 25, then the full capitalization computes to KES 1001.75 billion or KES 1.00175 trillion. If we consider the figures of Peter Ndegwa, then the market capitalization of NSE in November 2024 should have increased by about KES 400 billion from KES 1,810 billion to KES 2,210 billion.
Safaricom price has exhibited spikes and troughs since it was listed. On March 28, 2008, the par value of an ordinary Safaricom share was KES 0.05 (which is higher than Apple’s Inc par value of US$ 0.00001). This par value set the floor of Safaricom’s equity capital at KES 2.0035 billion. During its IPO, Safaricom stock traded at KES 5, which gave this company a market capitalization of about 200 billion. In February 2021, the share price had increased to KES 38, which gave Safaricom a full market capitalization of KES 1.52 trillion, which was about 63% of the entire market valuation of NSE (which stood at KES 2.4 trillion then).
In August 2021, the share price of Safaricom reached an all-time high of KES 45.25. If this is to happen again, then Safaricom PLC will achieve an all-time high full market capitalization of KES 1813.17 billion or KES 1.81317 trillion. If this happens in January 2025, and this increase in Safaricom value is the only increase in the market valuation of NSE from its current value of KES 2 trillion, then the increase in Safaricom’s OMV by KES 1,115.95 billion will push NSE to break into KES 3 trillion market valuation – signifying a 55.80% increase in value of the Kenyan stock market.
This shows how significant changes in the share price of Safaricom PLC cause significant shifts in valuation of the entire Kenyan stock market. This also means that a sudden devaluation in Safaricom share price will depress the Kenyan capital market as explained in Shorting the Kenyan Economy.
If the share price of the float stock falls to KES 5, then Safaricom PLC will lose 71.26% of its market capitalization. Equally, if the share price of the public float rises to KES 45.25, then the market capitalization of Safaricom PLC will increase by 160.06%.
Can Safaricom’s Market Capitalization Sink to KES 200.35 Billion (~USD 1.5 Billion)?
As explained in Activist Investing, Shareholder Activism, and Activist Short Selling, the attempt to generate short interest in a publicly listed company is driven by conviction that the PLC is overvalued. Therefore, any attempt to short Safaricom’s stock is driven by the conviction that its share price is overvalued, despite the fact that Safaricom Group generates most of its revenue from its financial services rather than mobile telephony and data services. Interestingly, Safaricom has added more financial products to its portfolio of service that it offers to the public. This explains the attempts to break up Safaricom PLC so that its financial services can be offered by a separate company that is regulated by the Central Bank of Kenya (CBK). If Safaricom Group is broken up, will its stock valuation be negatively impacted?
Despite offering more financial products, the share price of Safaricom stock has remained varied. In November 3, 2023, it sank to KES 11.50, which is less than half of the share price of KES 24.15 that was recorded in January 2023. Therefore, in 2023, Safaricom lost about 52.38% of its stock value. Nonetheless, KES 11.50 is not the all-time low share price. Just months after listing, Safaricom stock traded at KES 3.1 on January 26, 2009, and this loss of value can be attributed to speculation that was mentioned earlier. I do not believe that Safaricom’s share price can plunge again to KES 3.1, but what stops it from declining to KES 5?
A brilliant and persuasive research into Safaricom PLC should be able to accelerate price discovery of its share price. This acceleration is dependent on whether the public float is shorted or not. If the research proves that Safaricom has been engaged in fraud and corporate misgovernance, then its share value can collapse – even to KES 5 per share depending on the severity of the alleged illegalities.
At a share price of KES 5, the full market capitalization of this company will be KES 200.35 billion (or approximately USD 1.5 billion). Such a decline in company value would shock Kenyans and stupefy East Africans. It will also negatively impact the confidence that investors have in the Kenyan capital market. This loss of confidence will bleed into the operations of the Nairobi Securities Exchange where trade in Safaricom shares represent its most significant trades. This would also affect the public perception of Safaricom Group, including its Ethiopian subsidiary – Safaricom Telecommunications Ethiopia PLC.
If Safaricom Group has engaged in illegalities, then it risks reputational damages, as well as financial losses which will be compounded by loss of investor confidence, which will definitely impact the good standing of the major stakeholders in Safaricom. As mentioned in a published post, “Vodafone Group PLC has significant stakes in ensuring the viability of Safaricom PLC, as well as (ensuring) that Safaricom’s governance structures and policies are updated to reflect globally-accepted standards, especially if Vodafone does not want to jeopardize its access to the American capital markets”.
If Safaricom Group suffers a decline in market value, then both Vodafone Group PLC and Vodacom Group Limited will acknowledge a loss in their investment, besides being exposed to the risk of failing to rein in the acknowledged illegalities in Safaricom. Basically, the risk in Safaricom PLC will extend to Vodafone and Vodacom.
Shorting NSE Indices Associated with Safaricom
A good research report should impact Safaricom’s ability to access the bond market where it issues corporate bonds to investors. This impact can be positive if Safaricom PLC proves that it is an outstanding company with good corporate governance and great future ahead. On the other hand, this impact can be negative if Safaricom PLC is found to have flouted corporate laws and allowed fraud and corporate misgovernance to be entrenched in the company. Likewise, if digital Darwinism is proved to exist in Safaricom, then the company will suffer loss of value.
A suave short seller who wants to short Safaricom PLC for maximum profits would short Safaricom, as well as NSE indices associated with Safaricom, such as the NSE All Share Index, NSE 20 Share Index, and FTSE NSE Indices. That way, the decline in Safaricom share price occurs in tandem with loss of points in the shorted indices. In addition, any ETF that bundles Safaricom stock can be shorted alongside these indices. This can include industry-specific ETFs.
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The preliminary report will first be shared with selected audience including companies of interest, before the full report is publicly released by Kagirison Research. The final report will be released in a portable document format (PDF) so that its contents cannot be changed, with any later revisions being publicly acknowledged by Kagirison Research.
A suave short seller who wants to short Safaricom PLC for maximum profits would short Safaricom, as well as NSE indices associated with Safaricom such as the NSE All Share Index, NSE 20 Share Index, and FTSE NSE Indices. That way, the decline in Safaricom share price occurs in tandem with loss of points in the shorted indices.
