After four months of low activity in East Africa’s securities market, players are optimistic of a rebound in public equity transactions during the second half of 2014, despite fears that controversy over share allocations in an integrated stock market is likely to affect demutualisation.
Analysts blame the scarcity of initial public offerings (IPOs) between January and April on seasonal market patterns that favour higher transaction activity in the first six months of the year, leaving the first two quarters starved of transactions.
Many companies tend to rely on annual financial results of the previous year to project performance indicators and determine future capital needs, a practice that pushes fundraising into the second half of the year.
The reluctance among many firms to undertake major transactions at the beginning of this year has been blamed on lower growth in revenues and profits in 2013.
In Uganda, major IPOs expected between July and December include Crane Bank Ltd, which plans to list on the Uganda Securities Exchange (USE), and MTN Rwanda on the Rwanda Stock Exchange (RSE).
But the much anticipated listing of Quality Chemicals Industries Ltd, Uganda’s pioneering producer of HIV/Aids and malaria drugs, appears uncertain, with the firm’s local and foreign shareholders still divided over a new shareholding plan.
Although Crane Bank’s listing was widely anticipated by the end of June, industry sources said book-building campaigns undertaken by the lead transaction advisor and sponsoring broker took longer than expected, and the unimpressive results for 2013 have slowed down the transaction.
While book-building campaigns have attracted leading private equity firms in Europe and the US — an investor segment expected to buy nearly 50 per cent of available shares prior to the offer period — details about the proposed share price and number of shares available for sale are still unclear.
Whereas Crane Bank Ltd’s credit portfolio grew by 13.9 per cent to Ush655.6 billion ($259.7 million) by end of December 2013, profit before tax fell by 37 per cent to Ush65 billion ($25.8 million) during the same period, a setback that ended 18 years of consecutive profit growth.
Lengthy internal discussions at MTN Group have reportedly delayed MTN Rwanda’s entry into the bourse.
Market insiders also anticipate notable transaction activity in the rather sleepy Growth Enterprises Market Segments (Gems) at the USE and Dar es Salaam Stock Exchange (DSE) after months of limited interest among potential issuers.
Progress on demutualisation of the region’s stock exchanges — an integration process for local bourses prior to full implementation of the EAC Monetary Union — appears steady but debate among stockbrokers over ownership of shares in a regional stock market could overshadow previous gains.
“We are hopeful about Crane Bank’s listing before the end of July. We also anticipate two transactions on the Gems platform at the USE before the end of the year. Issues of ownership in the demutualisation process have proved controversial, with stockbrokers unable to find a suitable compromise on the matter. In spite of that, stockbrokers still believe in the principle of a demutualised regional exchange owned by trading firms and not the public,” said a source at the USE who chose anonymity.
“We plan to execute one IPO after the first four months of 2014. But we believe Gems rules need to be relaxed further to encourage listings on that platform. The growth of IPO transaction volumes has also been affected by long turnaround times of 12-24 months usually pegged to specific deals,” said Patrick Mweheire, executive director at Stanbic Uganda, transaction advisers for Actis’s latest equity divestiture from Umeme Ltd.
Regulators are equally optimistic about IPO transaction activity, but some are worried about low levels of initiative among market players.
“I anticipate notable activity at the Rwanda Stock Exchange with the entry of MTN Rwanda, while the DSE is likely to post better performance on its Gems segment. But we still need to push market players to generate more equity transactions that will attract bigger investors, boost incomes for regulators and reduce reliance on government support,” said Keith Kalyegira, chief executive officer at the Uganda Capital Markets Authority.