Firms dust cobwebs off capital raising as stock market swings to life
Nigeria’s stock market rally is spurring listed companies to dust the cobwebs off plans to raise equity capital for expansion projects, even as it is encouraging unlisted firms to make a move on initial public offers.
Stocks have rallied to a near two-year high since the introduction of a new foreign exchange window by the Central Bank, with investors pouring over N1 trillion into stocks to lift total market capitalisation beyond N11 trillion.
The bearish trends that dominated the equity market in the last two years- characterised by acute dollar shortages and declining company profits, had caused many companies to abandon the stock market as a source of raising long-term capital. The companies feared that pricing may be unfavourable.
As the stock market gradually recovers and profitability improves, the option is back on the table.
Given that equity capital usually goes into funding expansion plans, rising appetite for rights issues and IPOs is a boost for jobs in Africa’s most populous nation, where unemployment rate is at a six-year high of 14.2 percent.
“The current stock boom has flung the door open once again to companies looking to raise capital and deleverage their balance sheet,” said Tajudeen Ibrahim, head of research at investment bank, Chapel Hill Denham.
WAPCO, Unilever, UPDC, Guinness, Lafarge Africa and Forte Oil are among companies pushing for rights issues and “more companies will follow because the market sentiment is in support,” Ibrahim said by phone.
Issuing houses are said to be approaching several companies, making pitches of the opportunity presented by the stock rally for Initial Public Offers (IPOs) and rights issues.
Femi Ademola, executive director, corporate finance at BGL Capital told BusinessDay of plans to initiate “Book-Building” for their clients, as investors warm to the stock market.
Book building is a process by which an underwriter attempts to determine at what price to offer an initial public offering (IPO) based on demand from institutional investors.
“We are seeing improved investor confidence in the stock market,” Ademola said by phone, “The market has been accepted and we now need to test it.”
Book-building gained popularity after companies feared possibilities of unfavourable market pricing of their shares in a market reeling from low activity and weak investor confidence.
The stock market has however received new life in the last three weeks on the back of increased dollar liquidity and improved company earnings.
Taiwo Oyedele, a partner and head of tax and regulatory services however thinks it will be premature for companies to test the market. “The rally is barely three weeks old and still needs time before conclusions are made on its sustainability,” Oyedele said by phone.
The All Share Index has almost doubled from a low of around 23,000 points in 2016. On Wednesday, the index rose 1 percent to 33,360 points.
The market’s one year return has towered to 2,687 percent, while the Year-to-date return is 24 percent, the highest return globally after Egypt, according to Bloomberg data.
The YTD return is almost double the rate of inflation which was 17.24 percent in April, thereby giving investors a positive real return of seven percent.
The return on stocks is also higher than the average yield of 22.95 percent on the 364-day Nigerian Treasury bill.
“The current rally in the equity capital market offers a great incentive for quoted companies to access the market to raise the needed equity capital for their expansion projects,” said Ayodele Akinwunmi, head of research at FSDH Merchant bank.
“As activities increase in the primary market segment of the equity market, the demand for debt capital may drop. Consequently, we expect the interest rate and yields on the fixed income securities to drop,” Akinwunmi said by email.
The major factor responsible for the rally is the creation of the Investors’ and Exporters’ window.
In what is viewed as tentative steps toward freeing its currency amid economic turmoil caused by a shortage of dollars, the apex bank introduced a new window for Investors and Exporters- NAFEX- on April 24.
The exchange rate at the new window is said to have the flexibility investors want, and has stoked a stock rally since its creation.
The naira closed at N373 per US dollar on Monday at the new window, weaker than the black market rate of N360 per dollar and much weaker compared to the CBN quoted rate of N305.
Other factors responsible for the appreciation in the equity market include the improvement in the Q1, 2017 results of quoted companies compared with the corresponding period of last year and the prospect of better performance in subsequent quarters.
Improved crude oil production has also helped lift oil stocks, with indigenous oil company, Seplat, rising to a two-year high on Friday, after the force majeur on the Forcados terminal was lifted.
Stanbic IBTC Holdings, UBA, GT Bank, Access Bank, and Zenith Bank all recorded impressive appreciation in their share prices on the strength of the impressive Q1 2017 results the banks announced.
Since the market bubble and collapse of 2009, the Nigerian Stock Exchange has been in a comatose state with little to no major deals. Investors lost confidence in the market due to the regulatory lapses in the market at that time.
This was further exacerbated recently when Nigeria instituted capital controls due to the depreciation of the value of the Naira, which led to foreign portfolio investors to exit.
Foreign participation on the Nigerian bourse tanked in 2016, with domestic participation outpacing foreign for the first time in six years.
This tipped the NSE into negative territory, with investors losing money.
The trend forced companies to review plans to list their shares or do a public offer in a depressed market, knowing they won’t get fair value for what their shares are worth.
It led companies like MTN Nigeria and Interswitch, which intended to list, to postpone their IPOs till market conditions improve.
“Companies that shelved IPOs will start looking to leverage the stock rally to renew their interest,” said Pabina Yinkere, head of institutional business at Vetiva Capital.
“It is a positive development for jobs and the economy,” Yinkere said by phone.
The NSE experienced the strongest IPOs activity between 2006 and 2008, with about 88 IPO’s in the period. IPOs slumped to less than 20 in 2016, according to PriceWaterhouse Cooper’s data.
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