Nigeria stock rout claims IPOs as issuers seek best value

Issuers prospecting Initial Public Offerings (IPO) in Nigerian stock market are faced with difficulty of valuing their shares to attract buyers, as they move to test the waters of a downbeat market.

Analysts say concerns about the Nigerian economy and jitters in credit markets are prompting skepticism about issuers that are not very profitable or are carrying heavy short-to-medium term debt loads.

While many IPO issuers set out to achieve best value for their first public share sell, prospective IPO investors are taking a new look at companies planning to come to the market.

New questions like – “Can we make it through a tough stretch?” –become the feeling of investors who have seen how Nigerian equities are taking a beat due to volatile forex and macroeconomic concerns.

“Investors now are much more focused on the fundamental earning power of companies, as opposed to the financial engineering component”, said Matthew Rubin, director of investment strategy at Neuberger Berman, a private investment management firm which manages equities, fixed income, private equity and hedge fund portfolios for institutions and advisors worldwide.

From record highs in 2008, there has been a lull in Nigeria’s IPO market in 2015 as most companies resort to delay strategy.

“You will agree that investing in a firm (especially equity) is not just on the merit of the strong fundamentals of the company, the price/valuation must also be right. So, you buy the right asset at the right price and at the right time”, Rasaq Abiola, head, investor relations, UBA plc had told BusinessDay. 

“This is why we often say the stock of a good company is not necessarily a good investment because the valuation may be stretched already (that is the stock may be overvalued),” Abiola added.

Nigeria’s Pension Fund Administrators (PFAs) are sitting on pension assets worth about N4.9trillion ($22billion) despite the provision for about 25percent investment in equities –which is enough to elicit needed liquidity in the local bourse.

As at last weekend, the Year-to-Date (ytd) return of Nigerian equities was at -13.92percent; which implies a value loss of about N984billion. The Nigerian bourse looks well for increased liquidity with the proposed Initial Public Offerings (IPOs) and listing by major brands in telecoms, oil & gas and aviation sectors.

Arik Air, one of the largest Nigerian-owned airlines plans to list the carrier on the floor of the Nigerian Stock Exchange (NSE) in May 2016 as part of its management’s efforts to boost the airline’s capital base and acquire even more aircraft.

Also, MTN Nigeria is planning to become a Public Liability Company (Plc) in 2016 by listing its shares on the floor of the Nigerian Stock Exchange, by way of public offer for purchase by interested members of the investing public.

Similarly, Sahara Group, a Nigerian energy company will be raising as much as $1.4 billion (N277billion) through a dual listing of its oil and gas unit on the London and Nigerian Stock Exchanges, along with a debut dollar bond sale.

Also, there are indications that Interswitch Limited, a payment processor and debit card provider is considering a dual IPO on both the London and Nigerian Stock Exchanges next year, as it plans an expansion into new African markets.

The company has discussed share sales with banks including Bank of America Corp., Barclays Plc and Standard Bank Group Ltd. and may choose advisers for a transaction within a few months, Mitchell Elegbe, Chief Executive Officer, Interswitch Limited said in the second-quarter of this year.

Interswitch is about 70 percent-held by London-based private equity group, Helios Investment Partners LLP, South Africa’s Adlevo Capital Managers LLC and the International Finance Corporation, a unit of the World Bank, according to Elegbe.

“If offering is of good quality with good fundamentals, sound corporate governance, it will attract sizeable investible funds”, Saheed Basir, head research at Meristem Securities said.

Pabina Yinkere, head of research at Lagos-based Vetiva Capital Management Limited, had earlier this year, said that with the many uncertainties seen in the market, “subscription levels for any IPO will depend largely on the timing and strength of the issuer.”

“Stock prices have been driven majorly by negative investor sentiments and weak corporate earnings. Emerging markets indices drop as traders dump emerging market equities” said a Lagos-based research and intelligence company, Financial Derivatives.

The analysts, who said JP Morgan index delisting implementation would hurt Nigerian equities this month, added that “exchange rate uncertainty will hurt market sentiment.” They noted in their October monthly economic news and views presentation at Lagos Business School that fund managers asset mix shows they dumped equities in third-quarter of 2015 “as poor corporate results and volatility erode market capitalisation.”

Currently, emerging markets and advanced economies are moving in opposite growth directions.  The International Monetary Fund (IMF) World Economic Outlook for October 2015 forecasts global growth at 3.1% for 2015 and 3.6% in 2016 noting that global growth which declined in second-quarter of Q2 2015 reflects further slowdown in the emerging markets and a weaker recovery in advanced economies.

Iheanyi Nwachukwu