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Why NSE listing drought may persist

By Wainaina Wambu | January 19th 2021 at 08:30:00 GMT +0300

NSE Chief Executive Geoffrey Odundo. [David Gichuru, Standard]

After four years, Homeboyz Entertainment seems to have ended the listing drought at the Nairobi Securities Exchange (NSE), becoming the first entertainment firm to join the bourse. 

The listing by way of introduction came through the Growth Enterprise Market Segment (Gems).

Gems was set up in 2013, targeting small firms, but has since attracted only five such entities whose shares have been on a disappointing run and have largely failed to excite the market. 

These are Home Afrika, Flame Tree Group, Kurwitu Ventures, Nairobi Business Ventures (NBV) and Atlas Development.

However, Atlas Development, which had also cross-listed on the London Stock Exchange, was struck off from the segment for lack of a nominated advisor and has since been delisted from the NSE.

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Missed targets

Gems was expected to list 19 firms by 2017 and 39 by 2023, but it appears local small and medium enterprises (SMEs) have no appetite for the capital markets. 

Mike Rabar, CEO of Homeboyz Entertainment during the firm's listing on NSE's Growth Enterprise Market Segment by introduction. 

Homeboyz, best known for its urban radio station Homeboyz Radio, listed 63.2 million shares, with its share is priced at Sh4.66.

However, in its debut trading, it offered 50,000 shares, attracting a bid price of Sh1.50, with no shares changing hands at the time. 

Kenya has many SMEs in need of funding, but a majority have shunned the capital markets as a source of funding.

Vasu Abotula, the founder of NBV, which listed in the Gems section in 2016, said the country has huge potential to list many SMEs but they need a confidence booster from the capital markets regulators.  

“They need to be convinced that when they come to the NSE, they’ll be protected,” he said.

Abotula noted that very few SMEs can get bank financing as it is too expensive.

“When you want more money, the market will give you. Bank lending is always a trap,” he said.

He added that capital market authorities need to do a lot of marketing to build up the confidence of the many eligible SMEs in the country.

NSE Chief Executive Geoffery Odundo, however, said the challenges facing the Gems section are not unique to the Kenyan market.

“It’s not peculiar to us. The segment world over has had that kind of movement sometimes .... There’s going to be a time when companies have seamless entry and exit, and it’s not going to be an issue, especially when the market size is good,” said Odundo.

He noted that some companies in the segment, such as NBV and Flame Tree, had done well.

“Let’s not use a few examples of companies that were challenged as an indictment of the whole platform, but as lessons on what we need to do to improve,” said Odundo.

He said the supply line for companies looking to list, such as the Ibuka Programme, is strong.

Specialised services

Homeboyz was in the programme, which is an accelerator board that targets to host select Kenyan companies that require specialised transaction advisory services to prepare them for capital markets financing.

“It’s a good focus area for us, so there’s nothing to be worried about. I know a few companies that have had a bad experience, but in the long run, this is how markets behave; there’s success and failure,” said Odundo.

ICEA Lion Assets Management Chief Executive Einstein Kihanda said more confidence needs to be built, especially for SMEs as they fear the disclosures that come with listing.

Listing means laying bare the business structure, including shareholding and regular financial disclosures.

“What you need to do is build confidence that firms are better off with a bigger pie. That they’ll have more investors, their profile will rise, and it will enhance the growth of their business,” said Kihanda.

He added that it is a “two-way street,” and capital markets authorities needed to do more.

“A lot of these things are historical and haven’t changed much. Capital market players need to look at how they can make it in the interest of firms to list,” said Kihanda.

Johnson Nderi of ABC Capital noted that listing is facing stiff competition from private equity funds.

“Firms list for two reasons – to secure funding and to unlock the value of their shares,” said Nderi.

“Listing now is facing competition from the private equity space, which offers better valuation.”

Nderi also noted that it’s expensive to list for many businesses to come to the capital markets.

“It’s costly to list, especially the transaction costs to achieve the corporate governance needed .... Available structural issues also make it difficult to come to the market,” he said.

The last initial public offering (IPO) by a Kenyan company on the NSE was Deacons East Africa in 2016. 

Since then, at least four companies have delisted. These are National Bank of Kenya, KenolKobil, Access Kenya and CMC Holdings.

NSE Chief Odundo said they are working with the government to revive requirements for listing at the bourse.

Last year, Treasury Cabinet Secretary Ukur Yatani said the government is looking to cut on foreign borrowing by raising money through the capital markets.

“We are really engaging with them to see if there is an opportunity for the government to bring some more companies to the market,” said Odundo.

Whenever the government has offloaded its stake in companies, there has been a huge rally and oversubscription by investors in the NSE.

KenGen’s IPO in 2007 opened a floodgate for retail investors when it offered 658.9 million ordinary shares at Sh11.90 each. The IPO was oversubscribed by more than 200 per cent.

It was the same case when Safaricom shares went up for sale, with the IPO being oversubscribed by 532 per cent.

Odundo is “hopeful” that there will be a further selldown of government shares in companies, eventually leading to IPOs.

He said the market is selling a “value proposition” to the government “it’s not about raising money but also about good governance”.

He noted companies such as Safaricom and KCB have excelled in this front.

Odundo said the other way they are trying to get more companies to the capital markets is through bonds.

He said the government could raise in excess of Sh250 billion from the capital markets to fund its projects.

Kenya has also been on a corporate bond drought, with five of the firms to have floated the debt instrument at the NSE in the last five years having collapsed.

However, Odundo noted that firms, especially those in manufacturing, can borrow from the capital markets to chart their post-Covid-19 strategies.

“Corporate debt is more affordable than bank debt. We are trying to encourage large firms to raise corporate bonds and in the process, they’ll understand how to go through listing and learn how to raise equity capital as well,” said Odundo.

He added that the Ibuka Programme is set to add more listings.

Last year, the NSE launched the Unqouted Securities Platform (USP), which facilitates the trading, clearing and settlement of securities of unquoted companies.

Issuers can now access the capital markets for long-term funding through private placement, minus tough listing requirements and obligations.

Odundo explained that the USP provides a very good potential pool for future listings.

“Some companies are not ready to list immediately, and some are currently trading in the private market through broking houses, providing you an opportunity to actually have your private shares trading in an over-the-counter market without necessarily complying with listing rules,” he said.

The bourse chief said two Real Estate Investment Trusts (Reits) and three companies are about to take up the USP.

He added that USP and Ibuka would provide a steady supply of companies for listing.

NBV started as a retailer selling shoes and leather accessories under the K-Shoe brand.

It became the first shoe retailer to list at the NSE. However, headwinds in the retail scene saw it recently restructured after being acquired by Delta International, an infrastructural and industrial conglomerate operating across East Africa. Delta is best known for its chemical manufacturing business, Shreeji Chemicals.

Abotula advised other companies facing difficulties to be open to ceding majority control to save their businesses from collapsing as NBV did.

Following the restructuring, NBV will now focus on importing and selling raw materials used by cement and steel processors and other companies in the infrastructure sector.

“Firms should always be open to partnerships and capital injection, and must diversify,” he said.

The transaction saw its shares shoot up and also provided a perfect entry for Delta into the NSE, reducing the hustles of a listing.

Odundo supported the move by NBV, which would have otherwise delisted following the collapse of its retail business, saying it was able to find a strategic investor.

“Absolutely, if you can get a partner who can come and boost your business and keep the minority shareholders safe, we must explore options,” he said.

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