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Beginner’s Guide To Investing In Nigeria

Found the minibook, A Beginner’s Guide to Investing in Nigeria, on the Proshareng website.

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Why investors should take advantage of IPOs, private placements

Here is a very good article on the benefits of investing in IPOs and Private Placements in Nigeria as published in the Punch Newspapers.

Why investors should take advantage of IPOs, private placements
Published: Sunday, 9 Sep 2007

The capital market is akin to any other market by providing an avenue to facilitate exchange. Unlike commodity markets, however, the item of exchange in the capital market is long-term funds. The capital market intermediates the surplus unit of the economy (i.e. households and firms that are savers) with the deficit unit of the economy (governments, households and firms that borrow). The surplus unit is, therefore, those investing and the deficit unit is that which needs to utilise funds for capital projects of various nature. The consideration for the exchange of funds includes dividend, interests, options etc.

The capital market is composed of the primary and secondary markets. The primary market is a market where fresh long-term funds are mobilised using instruments such as equity (ordinary shares), debenture, government bonds, hybrid securities etc. Funds are mobilised in the primary market through various means. Funds could be mobilised through private placement whereby shares are issued “privately” to investors especially institutional investors or to the general public through Initial Public Offering (first time offering), Offer for Subscription or Offer for Sale.

The existence of the secondary market (stock exchange) facilitates activities in the primary market. The stock exchange provides a market place to allow for exchange of existing securities (those subscribed for in the primary market) among investors. It affords those who have invested in the primary market to relinquish their holdings when necessary. In short, the stock exchange provides liquidity and hence, gives encouragement to make subscriptions in the primary market. It is also opined that activities in the secondary market affect timing of new issues in the primary market.

Capital markets all over the world are highly regulated with the primary focus on investors’ protection. For instance, all securities offered to the public by means of offer for subscription, sale etc have to be registered with the regulatory authority – Securities and Exchange Commission. Similarly, the secondary arm of the market is highly regulated by both the Securities and Exchange Commission and the Nigerian Stock Exchange. Companies’ securities, for instance, may only trade on the exchange after the company has met rigorous requirements of the Exchange, known as Listing Requirements.

The strength and vibrancy of the capital market have tremendous effects on the economy. The capital market signifies the productive capacity of the economy as it indicates the extent of long-term capital that can be mobilised for production and development.

The Nigerian capital market (both primary and secondary), has witnessed a lot of transformation and growth in recent years. Various companies in different industries have raised several billions of naira through the market. The recent recapitalisation of banks and insurance companies has further deepened the market. Several offers (both IPO and offer for subscription) have been concluded in the past 52 weeks and the secondary market has equally witnessed increased activities, recording transaction value in excess of N1tn from January to date, with the All Share Index, which indicates price appreciation in the market, hitting 51,000 points mark.

Given the size of the amounts raised in the primary market in the recent past and the offers, which will open before the year ends, we have decided to review a couple of public offers made in the last 52 weeks in terms of the size, returns from past offers and the effect on the capital market.

Details of recent public offers:

Year 2007 has witnessed quite a number of big ticket public offerings, which includes offer for subscription of major banks like Oceanic Bank (N55.4bn), UBA (N53.4bn) and the recently concluded N100bn mega offer by First Bank. Funds were raised in the market through Rights Issues, Initial Public Offerings and Offer for Subscription. Apart from First Bank and UBA, which made combined Rights Issue and Public Offer (Hybrid offer), DEAP Capital Management Plc, which had an Initial Public Offering, also made a hybrid offer applying to raise a total sum of N924m.

A sizeable percentage of the companies (31.25 per cent) that have raised funds to date opted for Rights Issue. These include companies like Universities Press Plc (N269.6 m), Fan Milk Plc-an unquoted company (N699.8m), Guinea Insurance (N2.81bn), Eterna Oil (N1.49bn) and Cement Companies of Northern Nigeria (N1.56bn). Some offerings in the year came in special forms. For example, Guaranty Trust Bank, through an offer for subscription, raised a sum of N31.5bn using a dollar denominated instrument – Global Depository Receipt – issued in the local market. Also, the private placement of Livestock Feeds to raise N346.8 m opened for two days (August 1 – 2, 2007) and that of Diamond Bank Plc was a foreign direct investment by Actis Capital, a private equity firm, with an equivalent naira value of N17.2bn opened from April 24-26, 2007.

About N400bn has been raised by 16 companies in the capital market over the past eight months from January 2007 to date, compared to N344.0bn raised by 37 different companies in 2006. In 2007, 97 per cent of the total funds raised (N328.3bn) went into the banking sector relative to 34 per cent or N116.9bn that went into the sector in the prior period.

While the recorded figure of N339.3bn is based on the application of the companies raising funds, the actual amounts raised is no doubt far in excess of this figure given the current norm of huge ”oversubscriptions”. Moreover, several public offers are still pending and at various stages of processing. Approved public offers pending is in excess of N65bn. Several offers are still going through the process of approval.

The market is still awaiting companies like Japaul Oil which intends to raise N5bn from the market as well as Ecobank Transnational Incorporated, which has plans to raise a sum of N12.6bn in the Nigerian market and concurrently in Togo and Cote d‘ Ivorie. Also, Dangote Flour Mills, Gold Link Insurance, Cornerstone Insurance (Private Placement), International Breweries, Champion Breweries, Nigerdock, NAHCO and Niger Insurance Plc will be approaching the primary market. Similarly, banks like Fidelity Bank, First City Monumental Bank and Sterling Bank are at different stages of processing for their public offers.

Value from past offers:

Public Offers, from past statistics, have proven to give high returns to investors. Sovereign Trust for instance, has recorded 245 per cent capital appreciation over 80k private placement price within a period of 12 months. Similarly, Lasaco and Mutual Benefits returned 281 per cent and 440 per cent capital appreciation respectively over 11 months period. Apart from insurance companies whose prospects reflect the positive post-capitalisation outlook of the industry, other companies including banks have equally recorded very high returns. For instance, May and Baker Plc, which is in the pharmaceutical industry, recorded a capital appreciation of 176 per cent over the offer price of N4.00 in a 12-month holding period. Banks like Zenith and Intercontinental also recorded similar returns. (See Table 3 for more details).

The huge returns reaped by investors from primary issues can be attributed to the fact that private placements and public offers are usually made at a discount to current market prices (and in some cases to the intrinsic value) of the shares of the company in question. Besides, coming to the market signals to investors the future prospects of a firm since it shows that the firm has investment opportunities at hand. This is, however, unlike the notion in advanced capital markets that companies issuing equity are less optimistic of the future and that if they were; they should have raised the required funds for investment through the issue of debt. Given the fact that companies do not usually raise long-term debt in Nigeria, the issue of equity could actually signal good prospects.

Implications for the capital market:

Activities in the primary market indicate emerging economic potential as the funds raised in the market are to be channeled into economic and development activities. Huge public offers are supposed to translate into increased investment in the economy and they suggest improved economic outlook because firms will raise funds when they expect such to be used to earn returns above the cost of the funds. The multiplier effect of this includes increased productivity in the economy, more employment opportunities for Nigerians and higher return to investors.

While the capital market mobilises capital, it also reallocates capital. Funds from non-performing sectors or companies are mobilised and invested in promising companies or sectors. Therefore, during public offers, it is not unusual to find investors selling off some of their holdings in the secondary market to participate in the primary market.

Public offers are good for the stock market because they improve the depth of the market and enhance liquidity because new/additional shares are available to trade on and investors can buy and sell more easily. However, the selling pressure during the offer period, arising from some investors liquidating their existing holdings to be able to participate in Primary market offerings, can bring about a dip in the secondary market.

A very simplistic investigation of this is the comparison of returns from the stock market before and after a high concentration of public offers. In 2006, the public offers were concentrated in the third quarter of the year; the return of the market in the subsequent quarter was just 1.95 per cent compared to 24.4 per cent of the preceding quarter. Similarly, the return of the market in 2007 has continued to dwindle, quarter after quarter as more and more public offers are handled in the primary market. Though this observation is simplistic and may of course be random, it may not be unconnected with the activities in the primary market through the market correction mechanism.

Public offers bring about market correction. Most often, companies‘ financial advisers recommend to their clients to raise funds from the market when they perceive that the company‘s stock is overvalued. They believe that at this time, investors will be encouraged to purchase the stock in the primary market at a discount. Since some investors will offload some of their existing holdings to participate in primary offerings, the selling pressure may work to correct securities prices, bringing the prices back to the correct level. Thus, the recent plethora of public offers might have affected the tempo of the market just as we had in 2005 when there were so many offers. The market correction mechanism of public offers is necessary when markets become overheated and it comes automatically.

In summary, public offers generally indicate, in most cases, that companies are more optimistic of deploying resources into very profitable use. This eventually translates into promising returns to investors especially in relation to post-listing capital gains. Several primary offers coming at the same time, especially when very large, may depress the secondary market but this is temporary and does not have any negative long run implications to investors.

We are therefore of the opinion that investors should always take advantage of good public offers/private placements as they represent gold mines in the capital market; while at the same time take advantage of the fairly low prices in the secondary market to increase their portfolios with value stocks with sound fundamentals and bright prospects.

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Investor Delight - A Delightful Tool for Monitoring Your Stock Portfolio

I just discovered the site, Investor Delight, today. It is a wonderful site for monitoring your Naija stocks online. It is a very neat web 2.0 site. You can add and edit multiple portfolios. It also allows you to add your stockbroker names and their charges. When you add a new stock, you have the option of also adding the brokerage fees you paid. The system automatically calculates your gains/losses based on the current price and the purchase price for the stock.  

The major difference between Investor Delight and Karakata Online is that with Karakata, you can only add a stock once to your portfolio but with Investor Delight, you can add a stock multiple times. For example, with Karakata, say you initially bought Oceanic Bank at N5 and then bought it sometime later at N16.50, you can only add one instance of the stock. But with Investor Delight, you can add it multiple times.The site is really really impressive. Big up to the website admins.  

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More info on the Access Bank offer.

Check out this Access Bank Powerpoint on their share offer. It seems that they have their acts together.

acccess-share-offer.ppt

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Access Bank’s Share Reconstruction

I must admit, ever since I heard about Access Bank’s stock split late last year, I have been apprehensive about their recent return to the stock market to purchase more shares. But the article below on the ProShare blog provides some explanation on the benefits of the reconstruction. It seems that those who held on to their stock after the adjustment have actually seen an appreciation in their holdings. You can Access Bank Analyst Report. Read the article for yourself:

Pre-reconstruction in October 2006, Access Bank had approximately 13.96 billion shares outstanding and the stock was trading at approximately N3.00k. Upon completion of the 1 for 2 share reconstruction, the total number of outstanding shares decreased to $6.98 billion at an adjusted post reconstruction price of N5.98k.

To illustrate, an investor with 10,000 shares pre-construction, had their holdings adjusted to 5,000 shares, but at exactly the same valuation (See schedule in attached report above). The share reconstruction and the subsequent value of investors’ shares have been confusing to many investors, because the impact of the reverse split on investor’s holdings was not properly explained. Majority of Access Bank’s investors are unhappy about the reverse split and the run up in price prior to the announcement of the secondary offering.

However comparatively, it appears that the share prices of other banks that recently completed their secondary offerings surged shortly before and after the announcement of their intentions to raise new funds from the capital markets.The surge in the prices of these shares might have been an intentional mop up by the institutions, or by smart investors buying shares ahead of the offering to enable them sell into post offering up swing.

However, a review of the value of investors portfolio post reconstruction through the technical suspension by NSE in the trading of Access Bank shares on May 18, 2007, indicate that investors who held on to their shares post reconstruction experienced a significant appreciation in the value of their portfolio.

ILLUSTRATION:An investor with 10,000 shares pre-split at N3 paid N30, 000 (10,000 x 3 = N30, 000) originally for the shares. After the 1 for 2 reverse split, the investor received 5,000 share at N6 still valued at N30, 000 (5,000 shares x N6 = 30,000). If the investor did not sell the 5,000 shares received from the split, the shares are worth N96, 640, a gain of N66, 600 or 222% as of May 18, 2007. Even at the discounted offering price of N14.90, the portfolio gain is N44, 500 or 148.3% post reconstruction as indicated in the schedule in the report above.

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Dangote Flour Going Public

It seems that it has now been confirmed that Dangote will be going to the market again for an IPO for the flour division. Here is the news article:

Dangote Flour Mills goes Public 

In an exclusive interview with the Group Executive Director, Corporate Finance of Dangote Group, Mr. Uzo Nwankwo, Proshare Invest-Africa gathered that Dangote Flour Mills will be coming to the Capital Market very soon with an Initial Public Offering which will last for ten (10) business days.  

Dangote Flour Mills Plc started operation in 1999 with 500 MT per day capacity at Apapa and within a short space of time the factory rolled out high quality bread flour bread, Pasta Semolina, Danvita and wheat offal and is presently expanding and evaluating cereals, extruded snacks and feeds as natural extension of their current product range.   

Current total installed capacity of Dangote flour mills is 4,000MT per day. All productions are readily absorbed by the market. The public offering therefore, according to Mr. Nwankwo confirmed will be the  Dangote Groups attempt to allow members of the general public to partake in the growth prospects open to the company.  

The total number of shares for the company when listed should be about 5 billion shares with about 750 million shares being the number available for the public offering.

 Dangote Flour is coming to the market at N15 which is yet to be confirmed as this is waiting approval from SEC. Dangote Flour has achieved spectacular growth since its inception in 1999 when it started with its first 500 Mt/day milling unit in Lagos (Apapa).    Dangote Flour, he said controls more than 25% of the flour market share with surplus installed milling capacity.  

Dangote Flour is continuously researching possible new product developments using their current superior milling facilities and raw material to expand into other markets.  It is expected that once this offer is concluded, next operation to go public will be Dangote Cement, a division modestly valued at about $15billion with factories at Benue owning about 50% shareholding of Benue Cement Plc (BCC), Obajana in Kogi, Ibese in Ogun State and Odukpani near Calabar.  

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Proshare Ng Blog

I just discovered the blog, Proshare Blog this morning. I will recommend this blog for anyone interested in getting some inside information into businesses in Nigeria.

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Investing in Nigeria

In recent weeks, I have become hooked to the site, Nairaland. The different conversations and discussions in the forums are usually insightful. I will impore people to check out the site. A very resourceful section of the site is the Investing forum. If you are planning to invest in Nigeria, check out this section first.

I have come to the conclusion that the Nigerian stock market is one of the most profitable in the world. These stocks are growing at spectacular rates. Examples are Oceanic and Dangote Sugar. Both have grown by at least 100% in the last year. I just hope that these companies continue to be well managed.

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