Nigerian Stock Market and the State of IPOs November 18, 2011

For many exchanges, the business of attracting flotations has lost its appeal, bringing in little more than initial listings fees. Instead, exchanges especially large ones are diversifying into derivatives and clearing, where margins are higher; and rolling out new technology to attract highfrequency traders." - Kate Burgess, Jeremy Grant and Telis Demos

Stock markets over the years have played an integral part in enabling businesses raise capital to expand and grow their businesses. But this basic function has increasingly come into question in the aftermath of the global financial crisis, as things look less rosy They are expected to be the most significant source for companies to raise fresh funds (business capital), allow businesses to be publicly quoted - to raise additional financial capital for expansion by selling shares of ownership of the company in a public market. The liquidity that an exchange or stock market provides affords various investors the ability to swiftly and without difficulty sell securities. An article published in a Financial Times (FT) reports that claims are now being made that the biggest stock markets are no longer helping companies raise money efficiently. With the US and Europe mired in recession, high unemployment and deep debt, European and US stock markets also seem unable to mobilize investments in corporate growth and innovation that has in the past created employment for millions. The trend is also apparent when one looks at the number of Initial Public Offerings (IPOs) that have hit the markets. In Europe and the US certainly, the number of fresh companies listing has dropped sharply in the past five years. Since 1999, there have been on average 192 IPOs a year, a start contrast compared with 547 a year in the 1990s. Record numbers of IPOs have been announced and then delayed or withdrawn before completion, says Dealogic, the data provider just over a quarter of flotations launched globally to raise more than $150m in 2011 to date. In the US, 34 per cent of companies have dropped plans to list this year. In Europe, the Middle East and Africa, about 45 per cent of IPOs have been launched but failed to list this year. According to an FT report, IPOs in emerging and Asian markets, where this is a supply of fast-growing companies seeking to go public, have been relatively buoyant. There has been a shift from developed markets raising capital, says Alexander Matturri of S&P, the index provider. It is easier to raise money in Hong Kong, where the prices are higher and investors have capital to invest. Activity has slowed in recent months, and some floats have been repriced or delayed though largely because of global market volatility, say bankers. In Europe, however, the problem seems to be more deep-seated. Prof Marsh says: There is something wrong in IPO land. I think investors are fed up with paying too much for IPOs. There has been a quiet investor strike on price. There are other things too. For starters, post the crisis, quite a few companies are probably focusing on being cash rich and are looking to fund any CAPEX plans through internal accruals thereby obviating the need to raise capital from the stock markets. Irrational expectations from IPOs also abound. Many companies come out with IPOs at astronomical valuations which do not make it an attractive proposition for serious long term investors to invest in. A short term and speculative outlook also creates unnecessary volatility thereby detracting serious businesses from going in for a listing.
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In Nigeria, the situation is not any better. For a country/market that witnessed an increased number of Public Offers, IPOs and Rights Issues during and after the banking consolidation exercise with many companies coming to the capital market to access funds from Nigerian and foreign investors, the allure has faded. Between 2006 and 2010, the market recorded about one hundred and eighty (180) different such offers - The number of IPOs alone in the market within the stipulated five (5) years period was eighty-eight (88), Public offers numbered up to fifty-four (54) while thirty-eight rights issues (38) were witnessed. In 2006, the number of securities (IPOs, Public Offers & Rights Issues) offered to the market was seventy-nine (79) while the figure dropped drastically to eight (8) in 2010 indicating that the capital market is less efficient in channeling the required capital that is needed for business expansion. See table below
Category Initial Public Offer ( New Issues) Public Offer (New Listings) Rights Issues Total Grand Total
Source: Proshare Research/NSE

2006 62 10 7 79

2007 5 22 20 47

2008 21 4 5 30

2009 0 14 2 16

2010 0 4 4 8

Total 88 54 38 180

Emmanuel Ikazoboh, the ex- NSE Interim Administrator had sought to address this development when he expressed optimism about a return to the market of not a few initial public offerings (IPOs) in the second half of the year (2011), after Nigeria's elections, and that more would start "trickling in" in 2012. Recently, Oscar Onyeama, the CEO of the Nigerian Stock Exchange, while assuring stakeholders that the Exchange was putting in place measures that would discourage listed companies from exiting and encourage new ones to enter the market with an indication emerging that the exchange could witness the listing of an indigenous manufacturing firm on its Daily Official List before the end of the 2011. These will be good and welcome when it appears we it would realistically appear as if the heydays before the global crisis is still stuck with us. IPOs will not emerge by the dozens in the market anymore and for good reason too. Post the local and global crisis; many companies withdrew their listing plans citing market volatility. This critical value point, coupled with the unrealistic price(s) and the focus on 'listing gains' which accompany IPOs but hardly do much in rewarding shareholders in the long run will act as disincentives to the re-emergence. But the bigger challenge comes from the disconnect between the markets which the recent NSE market segmentation seeks to address in part. The issue however goes beyond the recent financial crisis as the chit-chat emanating from todays Registrars conference would seem to suggest. It was clearly evident that distrust has built up between registrars, the exchange, SEC, companies listed and private, the bankers, financial advisers and investors. Nothing bares this out better than the sustained negative returns on investments in most securities listed on the bourse. See table below
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Company

Listing Dates 4-Feb-08 11-Feb-08 12-Feb-08 22-Feb-08 26-Feb-08 9-Apr-08 25-Apr-08 9-May-08 27-May-08 4-Jun-08 18-Jun-08 23-Jun-08 14-Jul-08 23-Jul-08 14-Aug-08 11-Sep-08 24-Sep-08 26-Sep-08 8-Oct-08 21-Oct-08 28-Nov-08 27-Jan-09 17-Mar-09 1-Apr-09 18-May-09 9-Jun-09 9-Jul-09 10-Jul-09 17-Sep-09 7-Oct-09 20-Oct-09 19-Nov-09 23-Nov-09 17-Dec-09 18-Dec-09 2-Jul-10 26-Oct-10 1-Nov-10 2-Nov-10 1-Dec-10

No of Shares Listed bn 5.00 16.00 4.55 6.00 0.02 6.22 8.68 28.00 6.67 1.50 2.94 3.21 6.88 2.20 1.55 3.55 4.62 8.00 4.06 4.20 4.89 4.40 4.58 2.96 4.04 4.97 0.40 4.20 20.59 3.72 7.93 10.00 13.18 13.00 0.20 0.25 15.49 3.72 0.79 2.29

Listing Price 15.00 1.94 1.89 1.94 105.00 4.09 3.67 1.36 1.75 7.87 5.14 3.67 14.33 2.85 6.50 3.00 2.62 5.25 2.15 3.89 4.00 5.25 6.61 2.62 2.92 2.50 10.00 4.8 3.67 2.5 8.50 3.00 0.95 2.38 0.98 52.50 135.00 3.00 3.90 1.50

Current Price (16Nov-2011) 5.35 0.50 0.53 0.50 100.00 1.50 0.50 0.50 0.50 1.29 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 1.44 0.50 2.73 7.28 0.50 0.50 0.91 5.11 5.04 0.50 0.50 3.09 1.50 0.50 0.50 1.02 50.00 103.5 1.40 0.60 0.87

% Return -64.33% -74.23% -71.96% -74.23% -4.76% -63.33% -86.38% -63.24% -71.43% -83.61% -90.27% -86.38% -96.51% -82.46% -92.31% -83.33% -80.92% -90.48% -76.74% -62.98% -87.50% -48.00% 10.14% -80.92% -82.88% -63.60% -48.90% 5.00% -86.38% -80.00% -63.65% -50.00% -47.37% -78.99% 4.08% -4.76% -23.33% -53.33% -84.62% -42.00%

Current MKT Cap (N'bn) 26.75 8.00 2.41 3.00 2.00 9.32 4.33 14.00 3.33 1.93 1.47 1.60 3.43 1.10 0.77 1.77 2.31 4.00 2.02 6.04 2.44 12.01 33.34 1.48 2.01 4.51 2.04 21.16 10.29 1.85 24.50 15.00 6.58 6.50 0.21 12.50 1,603.63 5.21 0.48 1.98

% Contribution 0.42% 0.12% 0.04% 0.05% 0.03% 0.15% 0.07% 0.22% 0.05% 0.03% 0.02% 0.03% 0.05% 0.02% 0.01% 0.03% 0.04% 0.06% 0.03% 0.09% 0.04% 0.19% 0.52% 0.02% 0.03% 0.07% 0.03% 0.33% 0.16% 0.03% 0.38% 0.23% 0.10% 0.10% 0.00% 0.19% 25.01% 0.08% 0.01% 0.03%

DANGFLOUR UNIVINSURE GOLDINSURE HMARKINS SKYESHELT BAGCO ASOSAVINGS IAINSURE REGALINS FIDSON OMATEK TANTALIZER STARCOMMS FTNCOCOA CAPHOTEL UNIONDAC CHAMS DAARCOMM MULTIVERSE ABBEYBDS MTI IHS PNG COURTVILLE AFROMEDIA MTECH PORTPAINT ETRANZACT AFRINSURE BECOPETRO HONYFLOUR GTASSURE RESORTSAL UNITYKAP MCNICHOLS UHOMREIT DANGCEM MULTITREX PAINTCOM NPFMCRFBK

Source: Proshare Research/NSE

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Indeed, if businesses are confident of what they want to do and remain realistic about the price that they hope for their shares, there is no reason why they will not garner investor interest even in this volatile time. Yet, the reality today presents a different challenge as actions from the Central Bank of Nigeria against an incoherent fiscal side complement continues to drive a wedge between our recovery and developmental needs. The hope must now turn to the intricate management of the legislative-regulatorexchange matrix required to develop a deepening of the market through the integration of the telecoms sector (as a first level engagement) and the size-fitting of the energy, power, utilities, agriculture, mining and oil & Gas sector into the capital market. In short, the economic model of how stocks are traded has changed and we must now change the conversation in our market place and recalibrate existing discussion on the priorities of the exchange, regulators and the legislature to one driven by a selfenlightened interest the exchange is not just a source of raising capital but one for economic opportunity for the resident country and job creation through the linkage between the economic and the market. For now, the exchange has ceased to be a fair barometer for the economic well being of the country and its businesses. DISCLAIMER/ADVICE TO READERS:
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