Market thirsts for IPOs despite record listings

The Nigerian stock market has seen new equity listings this year comprising private placements, introductions, and other forms of listings, but it remains thirsty for Initial Public Offerings (IPOs).

Some of the motivations for companies undertaking an Initial Public Offering (IPO) include raising capital from the sale of the shares, providing liquidity to company founders and early investors, and taking advantage of a higher valuation.

IPO proceeds by region according to PwC Global IPO Watch for the third quarter (Q3) of 2023, show Europe, the Middle East and Africa (EMEA) attracted the least IPO proceed of $7billion, Asia Pacific ($18billion), and Americas ($9billion).

Read also: Flutterwave IPO hunt ignites review of listed African pioneers

The IPO proceeds represent a record low when compared to 2021 high of $18 billion for EMEA region, Asia Pacific ($42billion), and Americas ($57billion). China, USA, India, Romania, Saudi Arabia, Germany Japan, Hong Kong, South Korea, and Turkey are major destination countries for the IPO proceed.

Guinea Insurance plc did private placement worth N9.1billion. VFD Group plc listed its shares worth N46.53billion by introduction. Also, Chapel Hill Denham NIDF worth N92.53billion was listed in the review period by introduction.

Further check at the Nigerian Exchange Limited (NGX) in the review ten-month period shows that MTN Nigeria Communication plc listed its shares worth N12.82billion from Scrip Dividends scheme.

Fidelity Bank plc did a private placement valued at N13.97billion. Sterling Financial Holdings Company plc scheme of arrangement (from Sterling Bank) was valued at N46.06billion.

FTN Cocoa Processors plc listed shares worth N850million from convertible debt, while Neimeth International Pharmaceuticals plc did a rights issue of N3.68billion.

“In 2023, we observed new listings on the NGX with VDF Group and the Nigerian Infrastructure Debt Fund; however, the year did not witness any IPOs.

“The prevailing high-interest rate environment, coupled with uncertainties surrounding the economic outlook, dissuaded private equity from seeking funds through equity issuances,” according to Chidozie Daniels’ team of analysts at Vetiva Research in their 2024 Outlook.

“Nevertheless, the country is actively exploring the sale of stakes in 20 state-run enterprises, with Nigerian National Petroleum Company Limited among the firms potentially subject to divestiture, as noted by Armstrong Takang, chief executive officer at the Ministry of Finance Incorporated. The agency is contemplating various options, including strategic sales and initial public offerings with the aim to execute the plan within the next 18 months,” the analysts added.

Vetiva analysts said in the 2024 outlook titled ‘New year dawns with hopeful caution’, that the global equity issuances have faced significant headwinds due to rising interest rates.

Read also:

“The aggregate amount raised in IPO markets this year has been constrained, averaging only $101 billion per quarter through Q3’23, a stark contrast to the $215 billion invested per quarter in 2021/2022. Investors have adopted a risk-averse stance amidst ongoing turmoil in the U.S. banking system, heightened economic uncertainty, and elevated financing costs that have eroded potential returns,” the research analysts further noted.

“IPO market activity will be heavily dependent on the stability of the macroeconomic environment as well as a positive track record of recent post-IPO performance. Pricing of recent IPOs points to the fact that private equity valuations may require adjustment to align with pricing in the public equity market.

“A solid equity story, supported by a more established business model, financial track record and strong marketing programme, combined with a price range balanced to achieve investor demand, were key to the success of recent IPOs.

“Going forward, investors will continue to look for a balance between growth and profitability at a reasonable price,” PWC said in its Global IPO Watch.

The market has seen new equity listings valued at N212.76 billion comprising private placements, listings by introduction, and other forms of listings on the Bourse.

The equities market’s return this year printed at 39.59 percent as of Friday, December 8, driven majorly by oil & gas, banking, and consumer goods, and insurance stocks.

In the oil & gas sector, stocks that have helped push the market higher this year with over 100 percent returns as of the week ended Friday are: MRS (+602.1percent), Japaul Gold (+471.4percent), Conoil (+226.4percent), Oando (+164percent), and Seplat Energy (+110 percent).

In the banking sector, investors have this year shown remarkable interest in shares like UBA (+196.1 percent), Sterling Bank (+171.4percent), Access Corporation (+138.2percent), Fidelity Bank (+110.3percent), and FBN Holdings (+118.8percent).

Also looking at consumer goods sector performance, Northern Nigeria Flour Mills has risen this year by 526 percent, NASCON (+386.5 percent), Golden Guinea (+288.9 percent), BUA Foods (+206 percent), Dangote Sugar (+257.6 percent), and PZ (+125.6 percent).

Transcorp is up 503.5 percent this year, CWG (+612.9 percent), Chams (+750 percent), Transcorp Hotel (+610.4 percent), Skyway Aviation (+407 percent), NAHCO (+290.6 percent), Ikeja Hotel (+340 percent),

This year, Sunu Assurance has risen by 334.5 percent, Lasaco (+118.4 percent) and Axa Mansard (+115 percent). FTN Cocoa is up this year by 441.4 percent, Berger Paints has risen by 116.7 percent, among other stocks that have outperformed the market.

The equities market opened this year with its All Share Index (ASI) and equities capitalisation at 51,251.06 points and N27.915 trillion, but it rose to 71,541.74 points and N39.149 trillion respectively as of last Friday.

CardinalStone Research noted that last week, their rebalancing efforts, “which saw our notional banking position rise from 13.5 percent to 20 percent, paid off after consecutive gains in FBN Holdings and expectations that the likely bank’s recapitalisation could further strengthen the overall banking sector culminated into a broad-based banking rally and contributed 88 basis points (bps) to the Model Equity Portfolio (MEP) performance”.

“The buying interest was not limited to the locals, as we saw notable offshore participation in GTCO. However, with the FBN Holdings rally already losing steam, we expect to see some profit-taking across banking names this week,” CardinalStone Research analysts added.

Guy Czartoryski-led team of analysts at Coronation Research in their December 4 note titled ‘How to beat the equity market’ said: “These have been very good years for equities, quite simply because listed companies have, for the most part, continued to increase their earnings while Naira interest rates have been extremely low (well below the rate of inflation)”.

“Lacking adequate returns from fixed income investments, Nigerian investors have turned to risky assets, and in large measure this means equities.

“Given that naira interest rates are now going up, which implies that investors may move back into fixed-income investments; this era of past performance may not be a good guide to the future – much depends on where rates go from here.

Focus shifts to ‘Santa rally’ as year ends

“All the same, we will continue with the Model Equity Portfolio. If nothing else, it gives us empathy with Nigerian equity market investors and gives us a reason to focus on the market,” Coronation Research analysts added.

The stock market had at the beginning of the 11th month of this year hit an all-time high, as the Index crossed the 70,000 mark. Investors have shown remarkable buy-interest in stocks with good performance following the third quarter 2023 earnings season.

“We anticipate the positive sentiments to extend into this week as investors continue their quest for value. We expect buying interest to persist in the market (particularly the banking sector) driven by an optimistic outlook.

“Also, stocks that shed points last week (such as BUA Cement) pose appealing entry points, thus, prompting buying interest. Despite the scheduled fixed-income auctions this week, we do not foresee a substantial flow of funds from the equities market given the buoyant system liquidity. Thus, we expect the NGX-ASI to close positive this week,” Meristem research analysts said in their December 11 note.