The recent drought of initial pubic offerings (IPO) at the Nairobi Securities Exchange looks set to persist in the New Year with low market valuations discouraging companies from raising capital through sale of equity to the public.
There have only been two low-key IPOs at the bourse in the past five years — the self-listing of the NSE Ltd in 2014 and the Stanlib I-Reit offering last year.
In the preceding five years (2006 to 2011) the bourse recorded eight IPOs, which brought into the market some of the largest listed firms including Safaricom, KenGen, Co-operative Bank and Britam, and with them thousands of new investors.
New IPOs give the market a new pool of investors who stimulate trading activity, which last year fell by a third compare to 2015.
Analysts say large firms such as Commercial Bank of Africa, Keroche Breweries, Nakumatt and Tuskys supermarkets, Kevian Kenya (makers of the popular Afia and Peek N Peel juices) and some big parastatals may be lacking sufficient incentive to list, especially since most would easily meet the reporting rules required of listed firms.
“Listing requirements in Kenya are fair and I can’t particularly point out key barriers for large firms, precisely because most already adhere to corporate governance and financial requirements outlined in CMA and NSE listing guides. What is critical here is IPO incentives… if large firms were incentivised to list with more tax and capital-raising related perks, we might see an improvement,” said Dyer & Blair head of research Linet Muriungi.
“Aside from new listings, if you take a look at the equities market as it is at the moment, trading activity is skewed; about 10 counters account for more than 80 per cent of trading volumes and market capitalisation out of 68 listings. This in itself is a market aberration.”
Large firms are also unlikely to go for a public offer as a means of raising capital when the market is underperforming.
The market has been in a bear run since March 2015. However, the bull run of 2012 to 2015 did not stimulate a jump in IPO’s.
“Valuation is a big factor. Companies look at how much they will fetch once they go public and compare it with other avenues of funding such as private equity and debt,” said Standard Investment Bank analyst Eric Musau.
lthough companies have not been actively listing through IPO’s, eight small companies have come into the market over the past five years through introduction — without raising cash — which is a cheaper and faster way of listing.
Most of the listings have been on the Growth and Enterprise Markets segment (GEMS), which targets small firms looking to gain visibility and value discovery.
Home Afrika, Flame Tree Group, Kurwitu Ventures, Nairobi Business Ventures and Atlas Development have listed on GEMS since 2013.
Companies listing by introduction usually do a private placement beforehand — targeting high-net worth investors to raise capital, meaning they tend to bring in fewer new investors into the market.
On the other hand, IPO’s especially those done by larger firms bring in thousands of investors into the NSE.
The 2006 KenGen IPO attracted 280,000 applicants while the Safaricom IPO two years later attracted 860,000, with both having a significant impact on the market.
“The companies coming in should be quality ones, bringing in good numbers of investors. Those not bringing big numbers should be in a position to attract a strategic investor to the market down the line, like we saw with ScanGroup and WPP, and Access Kenya do with Dimension Data,” said Mr Musau.