Tough times: Can MTN’s pandemic IPO revive dull stock market?

Six-year drought. Uganda since 2010 has only had two local listings including Umeme in 2012 and Cipla Qality Chemicals Uganda Limited in 2018, which marked an end to a six-year drought at the Securities Exchange.

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MTN and Airtel are expected to be the newest companies on Uganda’s stock exchange premiering as the first telecom companies on the bourse.

This follows a requirement in the national telecom operator licence under which they both operate, to float 20 per cent of their companies on the Uganda Securities Exchange by 2022. It was also prescribed in the national broadband policy of 2018.

MTN will be the biggest Initial Public Offering (IPO) on the bourse since Umeme in 2012. Uganda since 2010 has only had two local listings including Umeme in 2012 and Cipla Qality Chemicals Uganda Limited in 2018, which marked an end to a six-year drought at the exchange.

Dull stock market

In floating shares, the telecoms will be making an entrance into a not so vibrant stock market. 

Uganda’s 24 year-old stock market has a membership of 17 companies, with nine of them locally listed while eight are cross listed. However, USE is characterised by few local listings and low liquidity.

Low liquidity means there is a limitation in buying and selling shares on the secondary market which is the point where shares are traded after a company has sold shares at the IPO stage. This means that you do not have the liberty to easily dispose of your shares in a company because there is no willing party demanding for them [low demand].

In part, the low liquidity is attributed to the static share prices of the companies on the bourse.

Mr Aeko Ongodia, the chief executive officer, Xeno investment management, a technology assisted company that helps individuals and institutions plan, save and invest for their financial goals, says sustained double digit returns on the stock market were last seen between 2013 and 2015.

“The stock price performance of the currently listed companies has been flat over the years, although the underlying businesses themselves have performed well and consistently paid dividends to investors. None of them has put on amazing growth in share price to excite investors, especially retail investors,” he notes.

He emphasizes that no listed company has seen explosive year-on-year growth in revenue to be classified as growth stocks. Most companies are either mature or in mature/saturated industries, limited by geography with no plans of expanding regionally or internationally to drive growth and not innovating enough to launch new products to open up other revenue streams.

“Therefore, there is very little expectation for such companies to reward investors with phenomenal capital growth, rather most of the reward will come through a consistent dividend which in some cases does not match the return on risk-free debt instruments issued by the government,” he opines.

According to the Capital Markets Authority (CMA), report 2019/20, the USE total market capitalisation, which means the total value of companies at the exchange, fell by 15.7 per cent to Shs19.09 trillion at the end of the review period from Shs22.66 trillion at the close of 2018/19. This drop is mainly attributed to the decrease in the share prices of all the cross-listed counters.

Domestic market capitalisation that represents the value of locally listed counters closed lower at Shs4.27 trillion, representing a drop of 13.1per cent, from Shs4.91 trillion at the end of

2018/19. This was mainly due to share price losses registered on local listed counters.

CMA attributed the fall in share price to, among other things, sell-offs by offshore investors due to the strengthening of the dollar before the Covid-19 pandemic.

Redemption

Experts, however, believe that a large IPO such as that of MTN can drive liquidity back to the stock market.

Mr William Nyakatura, a financial advisor, says the MTN listing will most likely drive interest in Uganda’s stock market from regional and foreign investors.

“Just like we saw with Umeme, people bought not only Umeme shares but also Stanbic and dfcu shares so that shows off the country as a potential point of investment,” he notes.

Nyakatura is reiterated by Mr Kitariko who also explains that an IPO shines the spotlight on other companies on the bourse from new investors or investors liquidating positions from one counter to a new one.

“It could be out of interest and the other in the event that you apply for a given number of shares but are not necessarily allocated all of them so you have cash to invest in another company,” he explains.

Mr Ongodia anticipates that MTN is likely to have a significant weight on the local securities index and dominate trading in the short to medium term depending on the fraction of the company that is floated on the local exchange.

“A new stock listing always produces excitement especially for retail investors whose first participation in the stock markets has traditionally been through a high-profile IPO,” he notes.

Citing reduced yields from government bonds internationally, Mr Nyakatura believes the MTN IPO is critical at times like these to act as an alternative investment destination for foreign investors which in turn will drive interest from them (foreign) and regional investors to Uganda’s stock market.

The MTN IPO, he also said, presents an alternative opportunity to local investors in a country where investment in land dominates as lucrative.

If successful, he emphasizes, the IPO could also encourage local companies to view the stock market as a potential source of raising capital.

Uganda’s stock market trades poorly against its regional counterparts which industry players believe is a gap that can also be filled by local companies.

Involving local companies

Mr Keith Kalyegira, the chief executive officer  of CMA, the regulator, says it is common phenomenon for foreign companies to list because of how big they are, since listing is a function of size. Nonetheless, the Authority is undertaking initiatives to increase local company participation at the stock market.

“We have a programme implemented by financial sector deepening Uganda with support from the European Union that will raise awareness among local companies around market based financing such as listing, private equity and corporate bonds. Many companies think it is complicated and it is our job to make them realise it is not,” he says.

Furthermore, performance of companies on the bourse is also pivotal to the growth of the stock market.

“Are the companies scaling? Are they in a market that is growing if it is not just Uganda, have you extended your performance or output to other markets where you can get a better return?” Mr Nyakatura questions rhetorically.

Citing Equity bank, which has diversified its presence in various countries across East Africa, Nyakatura advises that scaling could drive growth and better performance for companies leading to a good dividend yield, thus attracting investors. 

A good dividend yield coupled with deliberate efforts by stock brokers to share a beautiful story of the listing to potential investors, Nyakatura says, could also drive liquidity at the market.

Increased liquidity at the stock market will make for an attractive investment option as one can easily buy and sell stock when in need of money.

Listing during pandemic

While excitement brews amongst Ugandans waiting for a chance to own a piece of the telecom companies, one wonders, as the pandemic persists and the country slowly slips back into lockdown, characterised by social distancing and limited movement, how feasible is an IPO?

“It has not happened before,” Mr Kalyegira, the regulator confirms that Uganda has never had an IPO during a pandemic.

If they list, telecoms MTN and Airtel will become the first listings in the country during the rare occurrence of a pandemic.

According to Mr Kenneth Kitariko, an industry expert and former chief executive officer African Alliance, a listing during the pandemic creates an opportunity for the country to test its digital potency in the financial markets especially since most companies have accelerated digital aspects of their business.

“For a long time, capital markets have been trying to engage investors into digital aspects of investment. So perhaps it might be interesting in the sense that you may have a far wider reach. This might provide that stepping stone to get people to invest in shares digitally rather than physically which will have a far wider reach,” he notes.

Mr Kitariko believes that a digital mode of investing could allow MTN’s subscriber base of about 11 million people, to own shares, meaning more people would be financially included.

Currently, to buy shares, investors need to own a securities central depository (SCD) account which allows them to purchase through stock brokers stationed at their offices.

Worth noting is that the country has only 40,000 SCD accounts countrywide.

However, to digitise investment at the capital markets, Mr Kitariko says some system reforms ought to be put in place.

“It is important to ensure that the systems are interfaced, from the mobile money payment, the SCD system of the securities exchange and the IPO itself so if those three are in sync, you will be able to have a much wider group of investors coming in, especially on the retail side,” he said.

But IPO modalities aside, we cannot turn a blind eye to the harsh economic times that could arguably impact an IPO.

Ms Catherine N. Sebunya, head of department compliance and risk, Crested Capital admits that for a company looking at listing, the investor pool is a picky one in this season given that the resources remain limited yet the cost of living is high.

However, she adds that listing offers a new dawn on the market especially since there are investors who are looking for opportunities to diversify into businesses that are not greatly affected by the pandemic or those whose recovery has been tremendous.

“Some sectors remained resilient given the nature of their products,” she notes.

IPOs held during pandemic

According to the World Federation of Exchanges, there was a significant drop in the number of IPOs registered globally compared to those in 2019. 

However, virtual roadshows could present a challenge in the African setting where most countries have low Internet penetration and literacy levels especially in rural areas.

Listing could drive interest at bourse

Experts, however, believe that a large IPO such as that of MTN can drive liquidity back to the stock market.

Mr William Nyakatura, a financial advisor, says the MTN listing will most likely drive interest in Uganda’s stock market from regional and foreign investors.

“Just like we saw with Umeme, people bought not only Umeme shares but also Stanbic and dfcu shares so that shows off the country as a potential point of investment,” he notes.

Nyakatura is reiterated by Mr Kitariko who also explains that an IPO shines the spotlight on other companies on the bourse from new investors or investors liquidating positions from one counter to a new one.

“It could be out of interest and the other in the event that you apply for a given number of shares but are not necessarily allocated all of them so you have cash to invest in another company,” he explains.

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