December 17, 2018

Primary issues market rebounds by 44.2% to N1.6trn

equities,week, Stock market

Nigerian Stock Exchange

  • FGN bond records highest listing; corporate listings remain low 
  • Stakeholders seek tax cut, other incentives

By Peter Egwuatu

Contrary to the bearish sentiments in the secondary equities and bond market of the Nigerian Stock Exchange, NSE, the primary market segment has recorded its most bullish performance in five years, jumping 44.2 percent in the first 11 months of 2018, over 2017 full year performance.

Specifically, new listing for government, corporate bonds and equities for the 11 months to November, 2018 stood at N1.555 trillion as against N1.04 trillion in the whole of 2017.

But Financial Vanguard findings showed that the bullish primary market was public-sector driven as government securities recorded the highest listing on the Exchange with N1.2 trillion, thus accounting for almost 77 percent of the total primary market transactions listed on the Exchange or 10.7 percent of the total NSE market capitalisation in 2018, while the corporate bond and equities listing during the period stood at N354.9 billion, accounting for 23 percent of the total primary market transactions.

Nigerian Stock Exchange

The government securities in 2017 stood at about N610.6 billion representing 58.8 percent of the total primary transactions listed on the Exchange or 4.5 percent of market capitalisation during the period.

Further analysis of the new issues listed on the Exchange shows that corporate bonds and shares stood at N429.7 billion in 2017, thus accounting for 41.3 percent of the total value of primary transactions listed on the Exchange in 2017.

However, while some stock market stakeholders commended the primary market performance others said that the number of entities listed on the Exchange was not encouraging.

They added that government should design incentives like tax cuts that would trigger more corporates to list on the Exchange while also educating them on the benefits of being a publicly quoted company.

The stakeholders stated that regulators in the capital market must interface with government to create appropriate regulation, tackle liquidity problem, and review other stringent listing rules.

The stakeholders, who spoke on the dearth of Initial Public Offering (IPO) in the stock market, argued that aside government withdrawing from business, it must introduce fiscal and monetary policies that would stimulate private sector investment.

According to them, a deliberate policy on incentive would attract more multinational firms’ in the telecoms, and oil and gas sectors to float IPOs, which would ultimately resuscitate the primary market segment, improve the current illiquidity and deepen the market.

Analysis of the new listing on the Exchange for the period under review shows that government securities stood at N1.2 trillion. This accounted for 77 percent of the total value new listing on the Exchange. There were only two states (Plateau and Lagos) bonds, listed on the Exchange with a total value of N113.3 billion and 113.3 million units. This represents about 9.4 percent and 9.7 percent of the total value and volume of the total new listings of governments’ securities respectively. The large chunk of about 90.6 percent of the total represents the federal government securities.

Corporate securities

Corporate entities recorded N355 billion worth of securities and 21.4 billion units of shares, thus accounting for 23 percent and 95 percent of value and volume of the new listings on the Exchange respectively.

The top five corporate entities in terms of value   include Lafarge Africa’s N131.7 billion,   Notore Chemical,   N100.8 billion, Union Bank, 49.7 billion, Flour Mills of Nigeria Plc, N39.9 billion and UAC of Nigeria Plc, N15.4 billion.

Measure in terms of volume the top five corporate entities shows up Union Bank with 12.1 billion shares, Lafarge Africa, N3.1billion shares, Notore Chemicals,   1.6 billion shares, Flour Mills, 1.5 billion shares and Consolidated Hallmark Insurance with 1.0 billion shares.

Analysts’ views

Commenting on the primary market performance the Head of Research and Investment, FSL Securities Limited, Mr Victor Chiazor   stated: “The number of listing done this year on the Exchange has been commendable. However as reported, the listing has been tilted towards the FGN instruments which provides a safe haven for investors. We have continued to see little or no corporate listing because the market has not been very favourable to the already listed companies except a few and this position has continued to send negative signals to those who would have loved to list their companies. The regulators and government would have to design incentives like tax cuts etc. that would trigger more corporates to list while also educating them on the benefits of being a publicly quoted company.

The Managing Director, Chief Executive Officer, SOFUNIX Investment and Communications Limited, Mr Sola Oni said: “The paucity of new listing portends weak market depth. The more companies get their shares listed on a stock market, the deeper the market in terms of absorptive capacity. Dearth of new listing also symbolises fear of quoted companies that such offer might be undersubscribed, given investors’ apathy to long term investment. Any offer whose subscription falls below 25 per cent shall be aborted by the Securities and Exchange Commission.

Also the FGN’s instruments are regarded as the safest in terms of risk. They are backed by the sovereign power. Fear of unknown has turned many investors who are predominantly risk takers to risk averters. In any FGN instrument, one is cocksure of his yield and recouping the principal is certain. This is unlike equity with high risk and high return.

“However, government instruments are not insulated from inflation risk, foreign exchange risk and a host of others. At the moment, as a result of continuous slide in equity prices, investors are taking flight for safety. The government’s instruments are therefore crowding out investment in equity as many equity investors are counting loses. But smart ones know that the future of equity investment is bright and they are beefing up their portfolios by taking advantage of share prices below intrinsic values. They know that market fundamentals remain strong. Companies shall opt for new issues if the operating environment enhances optimal performance with handsome rewards for investors in terms of steady dividend and other forms of return on investment. It has been said repeatedly that government can encourage more listing through some incentives such as tax holiday of at least three years and deliberate patronage of products and services of such companies. This is done in other countries.”

Commenting, the Managing Director, Seplat Petroleum Development Plc, Austine Avuru, in an interview with Vanguard explained that there is need for government to come up with fiscal incentives in the areas of taxation, custom tariff structure, and robust credit facilities. Seplat Petroleum is one of two companies that have made public offerings in the last six years.

Avuru said: “All that government needs to do is to stimulate the growth of the private sector, and they can only do so by withdrawing themselves completely from private business, and come up with both fiscal and monetary policies that will stimulate the private sector.

“For instance, what kind of customs tariff structure do you have and how much protection does it offer without offending WTO rules? Again, you look at the banking sector, how much credit is available to private sector to expand, and at what cost?

“Borrowing at 22-28 per cent cannot grow the private sector, whereas competing countries are borrowing at single digit interest rate. These are key issues; once these are tackled, you start seeing major growth in the private sector, and then you’ll see entry into the capital market.”

Capital market operator and Chief Executive Officer, Cowry Asset Management Limited, Mr Johnson Chukwu, in a chat said the current ownership structure of International Oil Companies (IOCs) would not allow them to list on the Exchange.

According to him, a framework that would enable IOCs to operate as a fully incorporated business with operational assets in Nigeria must be established.

Chukwu, also explained that government must create appropriate policies to encourage multinationals, which may not have compelling need to raise capital within the local market.

Commenting as well, the Publicity Secretary, Independence Shareholders Association of Nigeria, Moses Igbrude, said: “The capital market is a barometer for measuring the economy of a country. Any government who understand this metric will use the market to its advantage.

“Huge percentage of the new listings are FGN instruments and other debts and not from private sector. While the FGN is taking advantage of the market the private sector are not because of the harshness and unfavourable environment factors in the country. “Most investors prefer to invest in FGN instruments because of their stability and steady rates of returns.   Why would companies want to list when all the companies in the exchange are under value?

“If companies or private sector are unwilling to list in the market it means then that the advantages of being a limited Company is great or more than being a listed company on the floor Exchange.

“To reverse this trend the management of NSE and SEC should look critically into those things that is scaring away private sector, if the advantages and incentives for being a listed company is more then, you will see that company will come willingly to be listed in order to benefit from such advantages.”