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Why strong capital market is strategic to IPOs’ resurgence

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Nigerian Stock Exchange

Since the global meltdown of 2008, the country’s primary equities market has been inactive. Until recently, investors’ interest in equities never rose to the point of emboldening issuers to access the market with subscription offers.

The Nigeria Stock Exchange (NSE), as an important component of the capital market, plays a significant role in the capital formation process because of the tremendous opportunities that its activities offer. Among other things, the exchange is expected to mobilise long-term savings to finance long-term investments, by providing risk capital in the form of equity, or quasi-equity to entrepreneurs.

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New issues are savings mobilised for investment purposes by companies and governments, and the new issues market represents the primary arm of the capital market, which shows how many financial resources are invested in the long-term securities of corporate bodies and governments, while the secondary market deal with buying and selling of securities.

Before 2008, the primary market for equities was an important hub of activities, and the persistent offering of new issues kept the tempo of market expansion and capital formation for the economy.

The primary market is also where securities are created, while the secondary market is where investors trade those securities.

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Still, in the primary market, companies sell new stocks and bonds to the public for the first time, such as is the case with initial public offerings (IPOs).

While the capital market was widening and deepening, investors had a field day grabbing opportunities, both in the primary and secondary markets.

At the height of market prosperity in 2008, the NSE generated N2.6bt new capital via equities for the real sector of the economy while the value of shares traded in the secondary market was N2.4b. Up till 2010, activities in both primary and secondary markets were balanced.

However, in recent times, the equities’ market has been standing on one leg. For instance in 2018, 10 years after the bloom, the value of new equities issued was a paltry N32b whereas, the value of shares traded in the secondary market was N1.2t.

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According to analysts, the overall weak macroeconomic scenario sustained negative market sentiments in the past few years, coupled with the tensed socio-political space, has not encouraged successful primary market activities.

It is also on record that some planned IPOs have remained on hold due to prevailing negative market sentiments, driven by growing uncertainties fuelled by falling oil prices, and other macro-economic challenges.

Since the global financial crisis of 2008 till date, no fewer than six companies have approached the market for IPO issuance.

However, the listing of Seplat Petroleum Development Company Plc., and Transcorp Hotels Plc., in 2015, ended several years of IPO drought in the capital market. While Seplat’s, a global IPO, was 100 per cent successful, Transcorp Hotels recorded only 50 per cent subscription.

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After four years of zero record from 2015, hope of a return of the era of IPOs was rekindled with the offer for sale of SAHCO Plc’s 406, 074, 000 ordinary shares of 50 kobo each at N4.65 per share in 2018. Since then, no company has approached the market for a new listing.

The Chief Executive Officer of the NSE, Oscar Onyema, while briefing the media, the stockbroking community, analysts, and other stakeholders on the performance of the market in the preceding year (2017), and prognosis for 2018, noted that equity market activity improved from what was obtained in 2016 as market turnover increased by 121 per cent to N1.27 trillion from N0.58 trillion.

“IPO activity in the year remained mute. However, there were several other positive indicators, including the revival of supplementary listings and the return of new issuances,” Onyema said, adding that, “the value of supplementary listings increased by 27 per cent bringing the total value of equity issues in 2017 to N408 billion.”

He also informed that the NSE recovered from the macroeconomic overhang of the commodity down-cycle to become the third best-performing market in 2017 globally, with a 42 per cent return in the NSE ASI index.

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At the NSE’s 2020 market recap and 2021 outlook held recently, Onyema said, while the value of supplementary issues increased by 851.37 per cent to N1.42 trillion, from the N148.77 billion achieved in 2019, IPO activity was mute.

“At the close of the year, the NSE’s equity market capitalisation was up by 62.42 per cent, from N12.97 trillion in 2019 to N21.06 trillion in 2020 while market turnover saw an uptick of 7.25 per cent, from N0.96 trillion in 2019 to N1.03 trillion in 2020.

“Although IPO activity was mute, the value of supplementary issues increased dramatically from 2019, rising by 851.37 per cent to N1.42 trillion, from N148.77 billion.

“Also noteworthy is that for the second consecutive year, equity market transactions were dominated by domestic investors, who accounted for 65.28 per cent of market turnover by value (retail: 44.98 per cent, institutional: 55.02 per cent), while foreign portfolio investors accounted for 34.72 per cent.

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“Capital-raising activities in the fixed income market increased significantly in 2020. The NSE’s bond market capitalisation rose by 35.52 per cent from N12.92 trillion in 2019 to N17.50 trillion.

“Continuing the trend in recent years, the Federal Government of Nigeria dominated issuances, raising over N2.36 trillion, which comprised 92 per cent of total bond issuances. Corporates also leveraged the low yield environment to fund expansion objectives and pursue debt refinancing, raising a total of N192 billion,” Onyema stated.

The listing activities on the NSE are currently dominated by supplementary offers, listings by introduction, debt issuances, mergers and divestments, since 2015.

Onyema, who also disclosed several initiatives that the NSE was putting in place to attract new listings, added that the launch of the Premium Board in 2015 was meant to showcase deserving companies that have met the highest requirements on liquidity, corporate governance, and sustainability.

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“The premium board offers issuers the benefits of greater visibility and opportunities to attract liquidity from impact investors and Sovereign Wealth Funds,” he said.

Onyema continued: “The exchange recently launched its Corporate Governance Index (CG Index) to provide investors with additional data points and strengthen listed companies, by tracking their corporate governance practices.

“The exchange is also developing a co-branded index series with MSCI, a globally recognised index service provider. This index could potentially generate higher-order flow into our market, as it showcases the index constituents on a respected, global platform with trusted index methodology. Issuers could leverage on this initiative to attract sustainable funding for their growth objectives.”

Besides the premium board, Onyeama said the exchange has also created the Main and the Growth Boards. There is also the Alternate Securities Market (ASeM) which is a tailored market segment that provides high-growth SMEs with the opportunity to access equity finance at lower listing fees and requirements.

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He disclosed that the ASeM platform, which was launched in 2013, is currently being expanded to a full-fledged growth board to cater to SMEs irrespective of their current stage in the growth cycle.

Over the years, several factors combined to dampen issuer and investor’s confidence in the primary market for equities. First, was the high-interest rate regime in the economy post-2008 global meltdown. It crowded funds away from equities to debt.

In the last 10 years, most stocks have been priced below their book values in the secondary market. This equally served as a disincentive to issuers, who normally issue stocks at a discount to the market.

Fortunately, recent huge gains in the market have changed that scenario. The meteoric rise in the prices of several stocks recently may have placed them above their book values. Therefore, stocks can now be issued at discount to attract investors.

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Operators have, on their part, stressed the need for government to leverage the current and unexpected transformation in the equities secondary market to revamp the primary market. They insisted that if this was not done, no useful gain would be achieved in the economy.

At the end of the 2020 financial year, the performance index soared by 50.03 per cent, making Nigerian stock the best performing globally. From a negative return of 14.60 per cent in 2019, the All-Share Index (ASI) that stood at 26, 842.07 basis points at the beginning of the year closed at 40, 270.76 points as of December 31, 2020, representing 50.03 per cent growth. Similarly, market capitalisation increased by N8, 098t to N21, 056t from N12.958t at which it opened trading for the year.

According to them, the unprecedented rebound was due to policy directives, which caused fixed income yields to decline precipitously, thereby offering some respite to the domestic bourse.

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They urged the government to intensify its intervention efforts by extending a bailout to other critical sectors to mitigate the effects of the Coronavirus (COVID-19) pandemic and sustain market rebound.

The operators noted that the rollout of more intervention measures would quicken economic recovery, as shown by the recent marginal improvement in macroeconomic indices.

Performance indices improved reasonably in 2020 due to the combination of expansionary monetary and fiscal policy, which helped mitigate the initial shock of the pandemic in the first quarter of the year.

For instance, the NSE Industrial Goods index led with a 72.88 per cent gain. The NSE premium index followed with a gain of 60.41 per cent, while the NSE insurance index rose by 48.04 per cent.

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The NSE Lotus II, NSE 30, NSE Pension, and NSE Banking indices closed the year in positive territory with a gain of 46.14 per cent, 33.15 per cent, 30.82 per cent, and 10.76 per cent, respectively.

On the other hand, the NSE oil and gas in the period under review declined by 14.01 per cent, while the NSE consumer goods shed 2.81 per cent.

According to operators, the fall in oil prices triggered multiple devaluations for the economy, in addition to the devastating effect of the COVID- 19 crisis within the period.

They stated that the fundamentals were not strong enough to drive a natural correction in the equity market, noting that the two contending issues negatively affected the stock market, causing investors’ wealth to decline by 20 per cent in the first quarter.

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But deliberate actions by the fiscal and monetary authorities to drive interest rates down significantly, in addition to various intervention programmes, were the primary triggers of the gains.

However, some analysts told The Guardian that the current trend was not sustainable as some stocks were already trading in multiples of their price-to-book value, and high per earnings ratio.

They stressed the need for the government to develop focused strategies that would economically empower indigenous firms and multinationals, as well as stimulate their investments’ interest, and sustain the current uptrend witnessed in the market.

Reacting to the dearth of IPOs in the market, the Vice President of Highcap Securities, Imafidon Adonri, stated that if the current unexpected transformation in the equities secondary market is not used as a tonic to revamp the primary market, the economy would end up achieving no useful gain.

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“If this unexpected transformation in the equities secondary market is not used as a tonic to revamp the primary market, no useful gain would have been achieved by the economy. The primary market is the essence of the Capital Market; it forms equity capital, which the Nigerian economy direly needs to create wealth, and generate productive employment for the teeming youths.”

He said for issuers to approach the market to raise capital, there must be some reasonable level of recovery in the economy to sustain the current bull run in the stock market, while also pointing out that there was a need for the government to initiate strategic policies that would grow businesses in-country, even as stockbrokers must also ensure that issuers raise money in a manner that is competitive, and less expensive.

“We need an economy where issuers can see growth. The growth must impact their businesses, and it is when the business expands that companies can approach the market to raise capital. Issuers must also see a market that is growing. They must see that the market is right for an issuer to come,” the Highcap Securities chief said.

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He charged the Federal Government to restrategise to address the current macroeconomic concerns that are impeding the nation’s economic stability, and promote issues of national development. According to him, this would help tackle the prevailing stock market volatility, restore the market to a sustainable rebound, and attract new issues to the nation’s bourse.

Adonri who described the relaunch of IPO as the only option for capital market stability, however, maintained that the offerings cannot thrive in an environment where the economy is not vibrant, pointing out that IPOs’ resurgence would deepen the market, and make it capable of providing the needed funds required to fortify the equity standings of several listed companies that are now in the clutches of debt overhang.

Furthermore, it would boost the Nigerian stock market’s average, in terms of volume of activities and contributions to GDP, which is currently rated low when compared to other emerging markets.

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With the Nigerian economy bedeviled by a massive mismatch in the financing, several long-term projects, which require equities, have been financed with debt, and they need urgent refinancing to survive.

Focusing attention on the primary market for equities is long overdue since it is the principal avenue for direct investment in the economy, which is vital for sustainable development.

However, experts strongly believe that the present opportunity that the country has should not be treated like the ones she had in the past hence the need for the new equities capital formation drive to be more strategic, carefully planned and executed to impact heavily on the strategic infrastructure that the country needs to make the economy self-reliant.

Adonri urged the government to set up a national committee, comprising of ministers of finance; investment; solid minerals; steel; science and technology, education, health, and transportation, alongside the director-general of the Securities and Exchange Commission (SEC), and other regulatory authorities to work out modalities for raising equity capital to finance the country’s engineering infrastructure; transportation infrastructure; chemical industry infrastructure; education infrastructure, and healthcare infrastructure as leaders of the country’s economic council,

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“Unlike in the past, when every Tom, Dick and Harry besieged the equities market, the new initiative for capital formation should only be reserved for financing critical infrastructure. Meantime, no stock exchange should approve any primary issue of equities until the critical infrastructure issues penciled down by the proposed Prof. Yemi Osinbajo’s critical infrastructure committee are completed.

“If monetary policy stance remains accommodative in 2021 and the economy successfully withstands inflationary pressures, the equities market can serve as a veritable source of capital formation to strengthen the foundation of the Nigerian economy. The equities primary market is a far better alternative to foreign loans as a source of capital for infrastructure development to avoid the country being suffocated by debt in the future,” he said.

The Chief Executive Officer of Cowry Asset Management Limited, Mr. Johnson Chukwu, on his part, explained that several factors were responsible for companies listing on the NSE while stressing that there should be liquidity in the equities market to enable people to buy and sell shares.

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“There should be liquidity in the equities market so that people can actually buy and sell their shares. Importantly, getting listed on the exchange gives companies better access to credit facilities. But unfortunately, in a bearish and dampened equities market, these factors are not present. Until there is a significant recovery in the secondary market, one should not expect a re-launch in IPO,” he stated.

Chukwu continued: “The economy is weak and the market pricing reflects the earning capacity of companies, which now has been further weakened by the inflationary period that the economy has witnessed.”

He attributed the weak economy to hostile and inconsistent macro-economic policy and regulatory environments, as well as the lack of transparency in economic management.

For instance, from a six per cent Gross Domestic Product (GDP) six years ago to recession in 2016, with post-recession fragile recovery below two per cent till date, in addition to the current recession, businesses, investing entities and the economy have had no form of respite from these economic vagaries.

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Indeed, the nation’s economy has been grappling with a weak recovery from the 2014 oil price shock, to the 2016 economic recession with the GDP growth tapering around 2.3 percent in 2019.

Beyond the different cases of fiscal mismanagement that the country has recorded over the years, it has also lost advantages of the “boom cycle” by virtue of its sole commodity offering (crude oil) in the international market as it is public knowledge that the economy relies heavily on proceeds from crude oil, which accounts for between 65 per cent and 70 per cent of its total revenue- it generates about 90 per cent of the country’s foreign exchange earnings.

Trading at over $100 a barrel for years, the country had every opportunity to save in expectations of the cyclical “burst” but it failed to.

Alternatively, it could have invested heavily in infrastructure, such that at this point, domestic activities would have been raved up through diversification.

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Relatedly, the country’s debt profile has been a source of concern for policymakers and development practitioners as the most recent estimate puts the debt service-to-revenue ratio at 99 per cent as of Q1, 2020, which is likely to worsen amid the steep decline in revenue associated with falling oil prices.

On how to revive the IPO segment of the capital market, the Publicity Secretary of the Independence Shareholders Association of Nigeria, Moses Igbrude, said the regulators must make concerted efforts to ensure that the market is attractive to “would-be companies.

“The benefits of being a publicly quoted company must be clear and concise, but presently, such incentives are not there and that is why many companies have delisted and more are planning to delist.

“Again, the Federal Government must compel, or ask multinational companies, where the government still has shares to be listed on the market. They should also encourage telecommunications companies and other multinationals to list on the market, by giving them some incentives.

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“The regulators should be more flexible in their listing requirements, while policymakers should know the importance of the capital market, and how the market can be repositioned to grow the economy,” he said.

An independent investor, Amaechi Egbo, urged the government to make a listing in the nation’s bourse less stringent and consider abolishing withholding tax on dividends.

Insisting that there was the need for the government to also provide more incentives to companies that are listed on the stock exchange, he argued that this may mean a level of revenue loss to the government at the initial stage, but the actual benefits to the companies would more than compensate for any previous losses.

According to him, for issuers to approach the market to raise capital, there must be a reasonable level of recovery, adding that there was the need for the government to initiate strategic policies that would grow businesses in the country. Stockbrokers, he said, must also ensure that issuers raise money in a manner that is competitive and less expensive.

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The President of the New Dimension Shareholders Association, Patrick Ajudua, said the government must develop and establish a support base economy that would encourage indigenous firms, and grant them access to foreign exchange at the official rate, in addition to other incentives.

He said: “Capital market investors will gain more from IPOs as it creates opportunities for portfolio divestment and capital appreciation, as well as opportunity to be initial part owners of the company.

Part of the reasons that companies list on exchange includes greater accessibility to financing, global visibility, credibility through corporate disclosure, and link to foreign investors. But unfortunately, most of the above factors have evaporated into the air.

“With high interest discouraging local firms from sourcing funds from banks, high transaction costs and multiple taxations are also discouraging companies from floating IPOs, or even right issues to access fund via the market.

“There is a need to develop and establish a support base economy. Multinationals should be given tax waivers for new products and inventions. There is also the need to review transaction costs and other listing requirements,” he said.

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