Is the tide about to turn for the Nigerian Stock Exchange (NSE)? With major companies trading at very low P/E ratios, and with prospects of greater political stability, surely this is an emerging market that has been too long overlooked? Nigerian Bottling Company managers seem to think so. In March NBC did a N3.5 billion ($38 million) rights issue, Nigeria's largest ever.
Atedo Peterside, CEO at Investment Banking & Trust Company in Lagos which led the issue, says: "It was the first large-scale deal to be launched after February's presidential election. It was certainly at least in part a vote of confidence in the future Nigeria's largest soft drinks company would hardly have been prepared to launch a jumbo rights issue if it had no faith in the political outlook."
But sceptics will require a lot more convincing. Despite being sub-Saharan Africa's largest equity market, the Nigerian Stock Exchange (NSE) has failed to live up to its potential. Set up in 1960 it has suffered from low volumes, poor liquidity, political interference and pyramid schemes. As of December 1998 its 186 listings had a combined market capitalization of N260 billion, just 7.87% of GDP. The latest threat is a new stock exchange in Nigeria's capital, Abuja due to open in September which could steal NSE business.
Lagos-based bankers complain that one problem at the NSE is that the market does not mirror the economy. A scattering of oil marketing companies are listed but oil and gas exploration and production companies are not. The result, says Godwin Obaseki, managing director of Lagos-based stockbroker Securities Transactions & Trust Company (SecTrust) is that "energy represents about 90% of the economy but is hardly reflected at all in the market".
Another difficulty, say Lagos bankers, is that the NSE's reputation has repeatedly been sullied. Multinationals' mistrust of the market dates back to the late 1970s and to the so-called indigenization programme when they were forced to float stakes on the NSE. "We almost created a market by default," says a local broker, "because companies listed unwillingly at prices which were fixed by the government." Local investors have more recent sour memories, with many having fallen victim to pyramid funds.
Foreign companies' block holdings of their own shares, twinned with an absence of local confidence, have led to feeble volume in the NSE, which estimates that about 47% of total market cap is held by foreign companies (not by portfolio investors). These shares are virtually never traded, nor are the majority of those held by local institutional investors, estimated at around 18% of the total. So only 35% freely floats.
Liquidity levels are low even by African standards. According to a report on sub-Saharan African markets published in January by Merrill Lynch, total turnover in the NSE in 1997 was $132 million. This was better than 1995, when $14 million turnover was lower than in smaller markets such as Botswana or Ghana, but it still meant total turnover in 1997 was only 4.5% of market cap, compared with 40% in Zimbabwe, 10.4% in Botswana, and 7.5% in Mauritius.
But the report hinted at better times ahead. "Despite weak macroeconomic fundamentals in the near term," it notes, "the new administration's commitment to reform and democracy has attracted the interest of some emerging-market investors."
For investors bold enough to dabble in the NSE, valuations look compelling. "This country's biggest textiles company is currently selling at a P/E ratio of less than three," says IBTC's Peterside.
Olawale Edun of Denham Management in Lagos says the big hope is that expatriate Nigerian money will flow back. Denham is launching a new fund for local and international investors. The N2 billion Nigeria Global Investment Fund, which Denham will run with Commercial Bank (Credit Lyonnais Nigeria) and Paris-based Credit Lyonnais Asset Management will focus on offering investors liquidity.
NSE director general Hayford Alile is upbeat about prospects, both in terms of listings and enhanced liquidity. He expects new listings from privatization and the oil sector. "The figures we hear for the potential market capitalization of {telecoms company] Nitel, for example, are between $3 and $8 billion," he says, "That would double the size of the market."Philip Moore