Moving the market: Increasing listings from new issuers is a top priority

One of the exchange’s more pressing needs is developing a new supply of listings from both primary and secondary issuers to add depth to a market that poorly represents the structure of the Nigerian economy. Market movers remain the banking, fast-moving consumer goods and building materials sectors, while dynamic sectors like telecoms, power, and upstream oil and gas remain largely absent from the bourse. The Nigerian Stock Exchange (NSE) has passed reforms aimed at increasing the market’s capitalisation to $1trn by 2016, including new and restructured inducements to list, while it is trying to work with the regulator, the Securities & Exchange Commission (SEC), to simplify rules to widen the pool of potential listings.

With a restructured alternative market board launched in April 2013, the exchange is expanding advisory services available to prospective issuers. Meanwhile, the launch of a new over-the-counter (OTC) market for unlisted stocks should enhance price discovery for unlisted firms and create a pipeline for public listings over the next three years. Although the migration to International Financial Reporting Standards (IFRS) for all listed companies by 2012 and for other firms in 2014 may stagger the pace of initial public offerings (IPOs) over the next three years, NSE management expects to diversify share offerings significantly.

IPO TRICKLE: The pipeline of new issues has slowed since 2008, with no new IPOs from 2011 to 2013 and only a handful of rights issues and public offerings. From a peak of 79 new issues in 2006, including a record 62 IPOs, 10 public offers and seven rights issues, the frequency was sustained in 2007 with 47 new listings (including five IPOs) and 30 listings in 2008 ( including 21 IPOs), according to the NSE. In total the five years to 2010 saw 180 offers including 88 IPOs, 54 public offers and 38 rights issues. While IPOs largely dried up after 2008, the market hosted 14 public offers and two rights issues in 2009, although the value of equity raised stood at N86bn ($541.8m) compared to a peak of N1.3trn ($8.2bn) in 2007. Activity continued to decline despite a market uptick in 2010, a year that saw only four rights issues and four public offerings, as core investors sought to recapitalise their companies.

The single IPO of Dangote Cement, valued at $14bn after October 2010 when it sold a 5.2% stake for $154m, added a quarter to market capitalisation. “Dangote Cement was given special dispensation to list less than 20% of its equity on the NSE since it would otherwise have accounted for more than half of market capitalisation,” Solape Hammond, CEO of Calag Capital, said. Meanwhile, the NSE’s increasingly stringent enforcement of listing requirements and trading activity caused the number of listed equities to slump from 215 in 2010 to 192 by 2012, according to World Bank figures.

SECONDARY ISSUES: While low equity prices and poor confidence dampened prospective issuers’ ambitions, companies have increasingly showed preference for debt financing and secondary rights issues. Although most banks have raised additional Tier-2 capital since the banking sector’s recapitalisation and sanitising between 2009 and 2011, they have turned increasingly towards the Eurobond and London-based global depository receipt (GDR) markets and, to a lesser extent, the domestic fixed-income market, rather than rights issues. Lagos-based Financial Derivatives Company (FDC) points to their reticence to dilute existing shareholder stakes as the main driver of this trend.

Following the third bank GDR issue, by Zenith Bank in early 2013, a number of banks, including Fidelity Bank, Diamond Bank and FBN Holding, are expected to issue in the year. Companies with foreign ownership have typically sought additional funding from their parent companies to avoid high local funding rates and poor liquidity on the NSE up to 2012.

With significant gains priced in by 2013, however, listed companies increasingly tapped the market for additional equity. These cover a range of sectors including insurance (Wapic Insurance and Prestige Assurance), savings and loans (Aso S&L and Resort S&L), energy (Oando), industry (African Paints Nigeria) and financial services (Skye Bank, Sterling Bank, Wema Bank, Diamond Bank and TransCorp). Another 11 companies announced secondary rights issues in mid-2013, in sectors such as cement (Lafarge WAPCO and Cement Co. of Northern Nigeria), aviation (Nigerian Aviation Handling) and property (UACN Property Development).

IPO PROSPECTS: NSE management announced a target of 20 IPOs in 2013, having held discussions with some 500 firms over possible listings. While this may prove ambitious, the market requires large-cap listings to diversify its structure. Although unlisted firms have typically valued their information advantage on the market, growth in valuations in 2012 and 2013 has enticed an increasing number of firms. “Private equity fundraising in Nigeria still involves the usual players,” Ngozi Oluwatoyin Edozien, the CEO of Actis West Africa, told OBG. “However, in recent years we have seen an increase in investment from sovereign wealth funds and African institutional investors.”

Over the medium term, capital-intensive sectors like oil exploration and production, power and agriculture are likely to yield prospects. Although bidders for the unbundled Power Holding Company of Nigeria generating and distribution companies have been financing through local and international banks, at relatively competitive rates of around Libor+7.5%, a number of these could turn to the equity market to fund the remainder of sales and their investment programmes in 2014.

Similarly, in oil and gas, marginal field operators and indigenous operators of blocks divested by the oil majors are also relying on bank debt to finance their investment programmes.

“We estimate more than 3bn barrels of reserves will be distributed to indigenous oil firms in the coming five years, based on ongoing government initiatives and divestments by international oil companies,” Osam Iyahen, Africa Finance Corporation’s senior vice-president of natural resources, told OBG. “This will drive significant funding requirements, and alongside a growing role for private equity we also expect a rising number of IPOs both onshore and on key exchanges offshore such as London’s AIM.”

In the past year alone two independent oil companies – Eland Oil & Gas and Lekoil – listed on AIM to fund their Nigerian operations, showing pent-up demand for equity in Nigeria. Meanwhile, Dangote Cement is moving ahead with plans to list on the London market in 2013. “We don’t expect Dangote Cement’s London listing will do anything to reduce liquidity in other Dangote shares on the NSE,” Layi Olaleru, Cordros Capital’s head of operations, told OBG.

CUT RED TAPE: In March 2012 the exchange amended its listing rules to include set floors for profit, market capitalisation, price and public float (at least 20%), among others, to improve issuers’ flexibility in raising capital. The NSE has also strengthened its compliance and transparency oversight. Yet management wants to go further, launching a wholesale revision of its listing rules in 2012, benchmarking against New York, London, Johannesburg and Singapore. “Many leading exchanges have greater flexibility than we do, particularly in quantitative requirements in the area of profit, market capitalisation, price, public float and others,” Oscar Onyema, the NSE’s director-general, told OBG. The requirement for five-year financial and operating records has drawn particular criticism. Approval by the SEC was still pending in mid-2013, delayed by the suspension of SEC funding by the House of Representatives. The requirement for IFRS compliance, in force since 2012 for listed companies, has also delayed some listings for up to three years, according to the SEC.

ALTERNATIVES: The NSE is adopting an increasingly consultative role for prospective issuers. In November 2012 it partnered with Thomson Reuters for investor relations advisory services to attract new listings and improve reporting standards. In 2013 the exchange restructured its existing second-tier securities market into an alternative securities market (ASeM), dedicated to mid- and small-cap listings, with less stringent requirements. The three-year requirement for audited financials is lowered to two years for ASeM listings, while flat listing rates were lowered to N300,000 ($1890) in April 2012, more accessible than the N4.2m ($26,500) required for listing on the main board. There is no minimum capital required on the ASeM.

Although OTC markets have long operated in Nigeria for unlisted equity, the first OTC market platform was launched in July 2013, by the National Association of Security Dealers (NASD). Aimed at providing a market for efficient price discovery for equity and debt issued by unlisted firms, the NASD platform uses the Central Securities Clearing System as its clearinghouse and six banks (Stanbic IBTC, UBA, GTB, FBN, Access and Sterling) as settlement banks. The OTC market expected 200 unlisted securities with N3trn ($18.9bn) in capitalisation to trade upon launching, out of an estimated pool of 19,000 firms trading OTC in Nigeria with daily turnover of N3bn ($18.9m), according to the NASD. While shortterm pricing corrections will always affect the timing of new issues, Nigeria holds a significant pipeline of unlisted companies with pent-up demand for equity.