What is the future for Uganda’s public listings?

Businesses normally go public to raise capital, do strategic marketing, or the desire of current private shareholders to get cash by selling their stakes to other investors.

This also allows them to diversify their debt sources by shifting them from only credit financial institutions to shareholders via rights offerings, lowering their cost of capital.

Before MTN went public in 2021, Ugandan companies took long to list—sometimes going more than four years without an Initial Public Offering (IPO)—but the pace of listing on the securities exchange is slowly gaining momentum especially after Airtel Uganda listed, which now prompts an evaluation of how these offerings have fared for both the companies and investors.
Is it a glimmer of hope or paranoia?

A number of Uganda’s early IPOs, such as British American Tobacco Limited in 2000 and Umeme in 2012, have returned their IPO shareholders with sizable dividends and capital gains.

When Umeme listed on the stock market in 2012, it was trading at Shs275. Later in 2014, Umeme Limited conducted a secondary offer in which it offered to sell part of its stake atShs340.

By November 8, 2023, its share price has increased to Shs414, representing a 50.5 percent appreciation in capital gains per share.

British American Tobacco Uganda Limited as well. The cigarette manufacturer has given its IPO investors a 1,400 percent increase in capital gains since it went public in 2000 where its share was priced at Shs1,000. As of 2023, it has risen to Shs15,000.

But something has changed. The last three firms to list on Uganda Securities Exchange (USE) have been forced to heavily rely on the one institution: the National Social Security Fund for large share sales due to low IPO participation and subscriptions from the public.

But that is not it all – their value has dipped and their IPO investors’ wealth has decreased tremendously as a result of what some market experts say is linked to a market that is not ready.

And yet, a new government law mandates companies that hold licences to run telecoms to list at least 20 percent of their stock to Ugandans.
Aside from national regulations, many firms are anticipated to sell some of their stake on the stock exchange as high-capital-intensive companies like banks and manufacturing private firms continue to face rising borrowing costs - a bitter pill for investors to swallow, after burning their hands in the last three IPOs.

Investors in MTN’s IPO, for example, have collectively lost more than Shs600 billion after the company’s value of shares dipped from Shs4.5 trillion in 2021 when it listed, to Shs3.81 trillion in 2023.

Investors wandering
Foreign investors, which account for over 60 percent of the total trading on the local bourse are also becoming wary of investing in local companies following the government’s decision to unanimously not renew Umeme’s concession which ends in 2025, despite being the most trading counter on the exchange.

Umeme is a profitable company that has offered some the highest dividends on the exchange.

Similarly, as per the Uganda Development Corporation’s 2017-18-2032/33 strategic plan, the government is compelling companies in which it has stake to list, similar to what is happening to telecom companies.
“It’s not right to just say ‘you must do it’ at this particular time. There must be proper studies to assess the market demand and market competition, so that companies list at an appropriate time with a certain level of confidence, to pull their initial public offerings off,” said Stephen Kaboyo, a financial markets expert.

“[When you force companies to list] at the time when the market is depressed, this is what one would expect [under subscription of Airtel IPO]. There are also other competing market products like government securities that have less risk, easy to understand, and are more appealing to the retail segment of the market.”
He adds that fixed income investments guarantee high interest rates and coupon timing. In contrast to stocks where, for instance, a company like Airtel offered incentives to its investors and promised a very alluring dividend policy of 95 percent of its profits after taxes wasn’t enough to save it.

The lack of offshore investors—which also saw them fleeing emerging markets for Europe because of the risen interest rates that surged returns on investment in the west economies—meant that local investors could not save the telecom’s IPO to have substantial subscription.

Airtel, the eleventh local company to list on the Uganda Securities Exchange, had a 54.45 subscription where the National Social Securities Fund (NSSF) purchased 10.55 percent of this IPO. 

NSSF has saved failing IPOs and it has paid for it at margins. In September, it registered foreign exchange losses worth Shs1 trillion, mostly from equity investments, in its financial statements for the 2022/23 financial year.

Capital Markets Authority chief executive officer Keith Kalyegira says if you trust a given company’s fundamentals you want to list in, keep your savings there for at least 24 months to get a substantial return on your investment even though it is not guaranteed by investing in both its primary and secondary markets.

All the last three Ugandan companies to go public - Cipla Quality Chemicals, MTN Uganda, and Airtel Uganda have had unappealing initial public offerings even though NSSF has tried to purchase a large chunk of their floated stock. 

The Fund, which is the largest institutional investor on the local exchange, has accumulated assets worth Shs18.56 trillion and 12.51 percent of its investments are held in equities.

Companies’ discretion
Most Ugandan large companies are either family-owned businesses or foreign firms that are hesitant to give away control through selling shares to external parties.

Experts observe that, in spite of the financial advantages associated with public listings, such as cheap long-term capital and extensive marketing, many companies would rather fail by accepting simple, yet costly, bank loans than becoming open to public investment, since some fear opening up their books.

“Private equity investors invest big money of about $20m in companies with ease and yet with public listings, you get a few retail investors and the institutional ones which take the most stake are given a maximum they can invest in a company which is $15m,” said Mr Keith Kalyegira, the Capital Markets Authority chief executive officer.

In a typical private equity deal, an investor buys a stake in a private company with the hope of realising an increase in the value of that stake.

More local companies are being drawn away from the capital markets by private equity firms. But since private equity investors are often more aggressive with valuation, more private equity deals could translate into more IPOs if those investors look to exit. 

Enterprises involved in private equity are also apprehensive about a 30 percent capital gains tax and the expenses incurred by different advisors, which may amount to 9 percent of the funds raised for the exchange listing.

In addition, institutions like insurance companies, pension funds and unit trusts are drawing more capital because of the secure returns they offer to their investors by investing 80 percent of their funds in treasury bills and bonds. 

Businesses such as Lyca Mobile Uganda are waiting to enter the market due to their licence requirement that mandates them to list. This is a bit worrying because its big peers’ IPOs were under subscribed. It is now attempting to expand its ideal business model of selling data services to obtain a mobile money arm as well, for which it has already requested permission from Bank of Uganda.