Negative sentiments, socio-economic uncertainties lull capital market buoyancy

In an ideal economy, an efficient and vibrant financial system mobilises savings and allocates them to investments by private entrepreneurs, as well as, ensures that dynamic parts of the economy are well funded.

The Nigerian Stock Exchange (NSE) is a key determinant of the country’s financial system, and it provides the essential facilities needed by companies and government to raise money for business expansion and developmental projects through investors, who own shares in companies for the ultimate economic benefit of the society

Indeed, the Lagos bourse is primed to be the most significant source of funds for companies as it allows businesses to be publicly quoted-to raise additional capital for expansion by selling shares of ownership of the companies in a public market.

Unfortunately, this basic function has increasingly been called to question in the aftermath of the global financial crisis, as things look less auspicious.

For instance, Initial Public Offerings (IPOs) were very common in 2007 and 2008 before the market witnessed a downturn, but since 2008, companies have been avoiding IPOs and embracing mostly rights issues and bonds.

Only Seplat Petroleum Development Company Plc., and Transcorp Hotels Plc., issued IPOs in the last few years. While Seplat’s, which was a global IPO, was 100 per cent successful, that of Transcorp recorded 50 per cent subscription.

The Nigerian capital market has been incapable of providing funds required to fortify the equity standings of several listed companies that are in clutches of debt overhangs, and debts to equity ratios have risen sharply in the last two years as investors pull money out of the financial system, making IPO’s doubtful.

Analysts believe that the overall weak macro-economic scenario, the sustained negative market sentiments in the year, coupled with other factors, such as falling oil prices, and the tension in the socio-political space, have not encouraged successful primary market activities in the past few years.

Also, given that many companies have low debt on their books, they are likely to raise funds as they plan to wait out the bad period. However, rights issues seem to be the only alternative for most companies presently.

Some other planned IPOs were placed on hold due to the prevailing negative market sentiments, driven by growing uncertainties on the back of falling oil prices and other macro-economic challenges.

There have also been growing agitations for multinationals in the telecoms, as well as, oil and gas sectors to list on the nation’s bourse by way of public offer for purchase by interested members of the investing public.

On this, experts are contending that compelling big corporations in niche sectors of the economy, especially telecommunications/oil and gas companies to list on the exchange will significantly raise the capitalisation of the stock market, which is currently estimated at slightly above N9t.

Nonetheless, sectorial analysis of the market shows that the telecommunication sector is under-represented. MTN, if listed would become the first major national telecom company, which shares are traded on the NSE.

The MTN Group Ltd, which is facing a combined $10b in claims from government said it may no longer seek to raise capital through an initial public offering on the country’s stock exchange.

The firm, which is Africa’s largest mobile carrier is reconsidering the IPO amid a dispute with authorities in its biggest market, which wiped more than a third of the company’s market value over a period of three weeks. MTN pledged to list the shares after being fined $1b for not disconnecting about 200, 000 SIM cards two years ago.

All these notwithstanding, the telecom outfit is looking at other ways to trade the stock in Lagos, and this includes a so-called introduction, in which existing shares are listed, its Chief Financial Officer, Ralph Mupita, said in an interview in Johannesburg.

The MTN’s board still needs to make a final decision, he said.

“The IPO type of listing has become challenging under current market conditions,” Mupita said. “We are exploring other options. The Nigerian business would not get fair value under current market conditions.”

The Chief Executive Officer of the NSE, Oscar Onyema, had in 2014 at the 5th Standard Bank West Africa Investors’ Conference, in Lagos, assured stakeholders that the equity market would witness increased number of IPOs from prospective companies.

Onyema’s optimism was hinged on efforts made by the NSE since 2012 to roll out initiatives that would compel companies, especially multinational firms to list on the NSE.

Specifically, to engender a willingness to participate in the market, the listing rules of the exchange was reviewed so as to make it easier for these companies to access the capital market and eventually list their shares.

NSE also provided a legislation that covers incentives, unbundling of stringent eligibility requirements that create high barriers for potential entrants and hinder participation by willing businesses, adopting of options that promote foreign investment under terms that support national interest without exposing the market to the dangers of the past.

Regrettably, the nation’s capital market has recorded unprecedented lull due to volatile forex and macro-economic concerns. The market experienced sustained volatility as investors’ exited positions and speculators went bargain-hunting.

After posting a 26 per cent loss in 2016, the Nigerian equities market gathered momentum in 2017 with an increase of N4.5t in market capitalisation. This was from N9, 158t at which it opened the year on January 3, 2017 to N13. 519t as at December 28, 2017. The All-Share Index (NSE ASI) rose by 43 per cent during the year under review from 26, 616.89 to 37,990.74.

The rally extended to the current financial year, as market capitalisation of listed equities stood at N13, 617t as at January 2, 2018, and rose by N2, 074t or 13.2 per cent to N15, 691t as at Friday, January 26, 2018.

Also, the ASI, which opened the year 2018 at 38, 264.79 rose by 5, 508 points or 12.6 per cent to close at 43, 773. 76.

Surprisingly, after the January and mid-February rally, the market recorded unprecedented reversal in performance contrary to analysts’ predictions. The capitalisation, which stood at N15, 549t as at Wednesday, February 28, 2018, now stands at N11, 829t as at Wednesday, October 24, 2018, representing N3, 720t or 31.5 per cent loss.

Also, the ASI declined by 10, 926. 94 points or 33.7 per cent to 32, 403.60 points from 43, 330. 54, achieved as at February 28, 2018.

This is in spite of strategies and strict regulatory framework and reforms introduced by the regulators to reposition the market for growth and development, as well as, increase the dividend yields of shares to investors.

The long reign of bears has become a cause for concern to both retail and foreign investors. For retail investors, the continuous depreciation in stock prices has become a justification for their apathy to investing in the stock market.

An investment analyst, Johnson Chukwu, explained that IPOs cannot thrive in an environment where the secondary market is not vibrant.

Chukwu said: “Several reasons entice companies to list on the exchange. One, they expect that the market will appropriately buy them and that the market has a premium to the intrinsic worth as to justify investors having to trade their equities; again, that there is liquidity in the equities market so that people can actually buy and trade their shares. Lastly, that the listing will give them better access to credit.”

Chukwu, who is also the Managing Director of Cowry Asset Management Limited, argued that the stock market has become unattractive to companies because of the absence of these three factors.

“Unfortunately, in a bearish and dampened equities market, these factors are not present. Until there is a significant recovery in the secondary market, one should not expect a re-launch in IPO.

“The economy is weak and the market pricing reflects the earning capacity of companies and these earning capacities have been weakened by inflationary period that the economy is witnessing,” the investment analyst said.

He attributed the weak economy to hostile and inconsistent macro-economic policy and regulatory environments, and lack of transparency in economic management, adding that government should develop more focused strategies that will economically empower indigenous firms and multinationals and ultimately stimulate their interests in investments.

An independent investor, Amaechi Egbo, explained that government should make listing in the nation’s bourse less stringent and consider abolishing withholding tax on dividends.

Onyeama

While advising that government should also provide more incentives to companies that are listed on the stock exchange, he argued that this may mean some loss of revenue to the government at the initial stage, but the actual benefits to the company would more than compensate for any previous losses.

Corroborating Egbo’s view, a stockbroker who spoke on condition of anonymity explained that aside ensuring macro-economic stability, the NSE must review the entire listing processes and requirements.

According to him, the NSE’s cost of listing still remains one of the highest when compared with other emerging markets. “So, government should provide some incentives to companies that are listed on the stock exchange. It will reduce the operating costs of most enterprises and the cost of new projects. This would demand greater innovations and efficiency of our stock market. As the pace of economic activities increases in the market due to relaxed listing requirements, so will the financing requirements and the need to enhance savings mobilisation,” he added.

Multinationals, IOCs Shun Listing On NSE 
Stakeholders in the market have argued that efforts by the NSE to woo multinational companies in the telecoms, oil and gas to list on the nation’s bourse may continue to “hit the brick wall” unless government withdraws completely from private businesses.

More so, regulators must interface with government to create appropriate regulations, tackle liquidity problems and review other stringent listing rules.

Capital market stakeholders, who spoke on the dearth of Initial Public Offerings (IPO) in the stock market, argued that aside withdrawing from private businesses, government must introduce fiscal and monetary policies that would stimulate the private sector.

According to them, a deliberate policy on incentive would attract more multinational firms’ in the telecoms, oil and gas to float IPO, which would ultimately resuscitate the primary market segment, improve the current illiquidity position and deepen the market.

For instance, the Managing Director of Seplat Petroleum Plc, Austine Avuru, maintains that there is need for government to come up with fiscal incentives in the areas of taxation, custom tariffs’ structure and robust credit facilities.

“All that government needs to do is to stimulate the growth of the private sector and it can only do so by withdrawing completely from private businesses and coming up with both fiscal and monetary policies that will stimulate the private sector.

“For instance, what kind of customs tariffs’ structure do you have and how much protection does it offer without offending WTO rules. Again, when you look at the banking sector, how much credit is available to the private sector to expand and at what cost.

“When players in the private sector are borrowing at 22-28 interest rate that cannot grow the private sector when competing countries are borrowing at single digit interest rate. These are the key issues, once these are tackled, you will start experiencing a major growth of the private sector…”

An IPO is the first time that the stock of a private company is offered to the public. Smaller, younger companies seeking capital to expand often issue IPOs, but they can also be done by large privately-owned companies looking to become publicly traded.

However, MTN Nigeria had formally unveiled plans to raise about N153b ($500m) from the sale of shares in its Nigerian business this year despite the challenges trailing the decision.

Analysts had expressed optimism that the IPO would be the biggest in the history of the Nigerian capital market, but that depends on the way and manner MTN handles the issue.

For the Publicity Secretary of the Independent Shareholders Association of Nigeria, Moses Igbrude, there is no incentive in the market presently that would attract these multinationals to list in the market.

“Listing on the capital market means losing ownership to allow investors to be members of the company and such decision will be based on the perceived benefits that will accrue to the initial owners.

“The question is, are there intrinsic benefits that companies listed on the exchange are enjoying that limited companies are not enjoying? There is nothing attracting them to the market presently.

“For these companies to list on the exchange, it depends on how the management of NSE is able to make clear, the intrinsic benefits or advantages they would enjoy when they come to the market.

“Because listing of their shares will deepen the market, the exchange needed to do more to convince, encourage, persuade these IOCs and multinationals to list their shares on the exchange,” Igbrude said.

A Glimmer Of Hope On The Horizon
Hope for IPO resurgence seems to be slowly returning to the capital market with the recent announcement that the Bureau of Public Enterprises (BPE), plans to make public share offerings for some of the privatised state-owned enterprises, which the Federal Government had diluted a significant amount of its equity.

Among those scheduled for the IPOs are; Indorama Eleme Petrochemicals Limited; Skyway Aviation Handling Company Limited (SAHCOL), 100 per cent owned by the Sifax Group and Nicon Insurance Limited.

Under the plan, the IPO for the shares of the Nigerian Machine Tools (NMT), Osogbo, Osun State, will be done next year, BPE Director, Development institution and National Resources, Mr. Joe Anichebe, told journalists recently at a seminar in Abeokuta, Ogun State.

Responding to why government has not been able to offer the shares of some of the privatised SOEs, or list them on the NSE many years after the divestment, Anichebe explained that it was a risk the BPE could not afford, as many of the SOEs were not profitable.

“You know that the first rule to listing on the NSE is that you have to be profitable, and we don’t want to risk the money of poor Nigerians by offering IPOs for those companies when they are not profitable,” he said.

Notore Industries Plc, which was privatised by the Federal Government in 2015, last month took the bull by the horns by getting listed on the NSE, a development that both regulators and stakeholders have applauded as a step in the right direction to lift the stock market.

Notore, an agro-allied and fertiliser company, was in dire need of working capital, and achieved a N100.75b ($330m) valuation by listing on the NSE, with a free float of 16 per cent. It listed 1.61 billion ordinary shares at N62.50 each.

Notore’s Chief Executive, Onajite Okoloko, told stockbrokers during the listing that the offering will increase access to capital to fund its growth plans. “We have now secured funding to carry out the required Turn Around Maintenance (TAM) programme of the plant, which is expected to be completed by the third quarter of 2019,” he assured