The long awaited Cipla Quality Chemicals Ltd initial public offering launches at the Uganda Securities Exchange this month, with shares selling at between Ush253.3 ($0.07) and Ush283.7 ($0.08) each, in a transaction valued at over $43 million.

The drug manufacturer is making 657 million shares available for sale with a book value of over $250 million.

Around 18 per cent of the pharmaceutical company’s shares will be listed on the bourse, according to documents obtained from foreign investors.

Confirmed transaction figures will be published in the final prospectus to be released on the launch date.

Whereas the company’s IPO was previously scheduled for the second quarter of 2017, changes in the procurement guidelines of one of its major client — Global Fund — last year prompted Cipla Quality Chemicals Ltd to suspend the IPO.

Business potential

Under new procurement guidelines, related companies are prohibited from submitting different bids for supply tenders offered by the Global Fund — ending a practice that allowed a firm and its parent company to table two competing bids, with one carrying a higher price than the other, sources say.

Following the delayed public offer, Cipla Quality Chemicals Ltd opted to prepare a fresh prospectus last year that contained updated financial performance data.

The new prospectus was submitted to the Capital Markets Authority and the stock exchange for approval — a process that took months to conclude.

Signs of renewed interest in the IPO surfaced sometime in June, when Cipla Quality Chemicals Ltd submitted a new prospectus, paid IPO registration fees and informed the stock exchange management that they intended to launch the public equity offer in August.

The management roadshow and book building phase — marketing a corporate bond or equity offer to institutional investors — started on July 26 and is scheduled to end on August 9.

According to Nairobi-based Renaissance Capital, who are the transaction advisers, the initial public offering will be tentatively open to the general public from August 13-24 while the shares will be officially listed on the stock exchange on September 24.

Crested Capital of Uganda is the lead sponsoring broker. Ernst & Young Uganda are reporting accountants while Bowmans Uganda/AF Mpanga Advocates are legal advisors for this transaction.

However, the quality of the memoranda of understanding signed between Cipla Quality Chemicals Ltd and some African governments has raised questions.

For example, an agreement signed between the company and the Zambian government last year carries a procurement value of $10 million over a period of 20 years, which translates into $500,000 per year.

But procurement patterns tied to this deal are likely to fluctuate over time, resulting in reduced future sales revenues. Under the MoU, Cipla Quality Chemicals is assured of solid supply orders for the first two years while the remaining period is subject to varying order sizes based on changing local needs in the Zambian market, the documents show.
A ten-year tax holiday the company has been enjoying is due to expire next year raising concerns on how that will impact its future earnings.

Although the firm forecasts higher profits in 2020 and 2021, the impact of an expiring tax exemption on its profits after tax remains unclear to investors.

“We are doing our own valuations on the company but its client risk remains a challenge. That company has about three big clients who are either government or quasi-government organisations and this clientele sometimes suffers from serious default related problems in various business transactions,” said a financial analyst who requested anonymity.

“They have not defaulted on their procurement bills but the risk lingers. There is a chance that the government will replace this tax holiday with smaller tax incentives offered within its operations so as to encourage future investments in this critical drug manufacturing enterprise but that is uncertain,” the analyst added.

“There is no problem with the IPO’s basic numbers because the market is still thirsty for a new IPO after a long transaction drought. Though its price range is slightly higher than that of some previous IPOs, the market is so eager for a new IPO and would not mind paying as much as Ush900 ($0.24) per share,” observed Andrew Katumba Kaggwa, a bank supervisor at Bank of Baroda Uganda in charge of Baroda Capital Markets Limited.

“The Cipla Quality Chemicals IPO price may be closer to that of the Umeme IPO and offers an attractive to many retail investors. This will eventually ensure a high subscription. Strong participation from local and foreign institutions plus Ugandan retail investors could yield oversubscription just like in the Umeme one in 2012.

However, the two weeks allocated for retail participation is rather short compared with the average transaction window of three weeks usually set aside,” Isaac Mwigo, a stockbroker at Equity Stockbrokers Ltd said.

According to the analyst’s report, Cipla Quality Chemicals’ total revenues increased from $48.6 million in 2016 to $60.7 million in 2017.

Total revenues grew to $62.7 million by end of March 2018 and are forecast at $70.2 million by close of March 2019.

Profit after tax was $12.8 million in 2016 but fell slightly to $12.1 million in 2017. It increased slightly to $12.3 million by end of March 2018 and is projected to reach $12.8 million in 2019.