Uganda: Listings outlook brightens after Cipla IPO

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Cipla Quality Chemicals’ share sale is good news for Uganda’s capital markets, but is still something of a rarity. Investors have little choice when it comes to picking stocks: government borrowing remains high and puts the focus on bonds, while family-owned businesses tend to be wary of opening up to outside investment.

By Rachel Savage

Keith Kalyegira CMA - Paul Bwiso USE -780
Keith Kalyegira (left), CMA, and Paul Bwiso, USE


When Cipla Quality Chemicals announced in August that it was going to list on Uganda’s stock exchange, it marked the end of a six-year drought of initial public offerings (IPOs) in the country. Just a few weeks later the government said it would be prodding Uganda’s largest mobile network, MTN Uganda, to follow suit in what could be an exciting opportunity for local investors.

There are plenty of factors keeping the East African country’s capital markets small and static. But the government’s announcement in September that it would make listing shares a condition for renewing telecoms companies’ operating licences is a welcome move. It could mean an IPO of MTN Uganda, Uganda’s largest mobile network, with 10.5 million subscribers and a 55% market share. 

MTN’s parent, also Africa’s largest mobile telecoms company, is facing pressure to list locally from governments across the continent. If it goes ahead, the listing could breathe new life into Uganda’s moribund capital markets.

Kampala-based Cipla makes generic drugs including anti-malarials, anti-retrovirals used to treat HIV infections, and medicines to treat hepatitis B. In its IPO, it sold only 18% of its shares, raising USh166.6 billion ($44 million); a further 2% will be sold in the next two years, to take the sell-off to the legally required 20%. 


Capital market growth follows economic growth, it doesn’t lead economic growth 
 - Keith Kalyegira, Capital Markets Authority

Some of those working in the financial industry tell Euromoney that the shares looked expensive given a price-earnings ratio of 20.9 times for the year ending in March 2018 – and particularly for a company that doesn’t do its own research and development, according to its prospectus. 

Of that initial stake, 90% was sold to institutional investors, most of whom are likely to hold onto shares rather than actively trade them, while the pharmaceutical company’s Indian parent is hanging onto a 51% controlling stake.

Cipla is only the ninth local company to list on the Uganda Securities Exchange (USE); the remaining eight non-Ugandan companies are seldom-traded Kenyan cross-listings, including Kenya Airways, Equity Bank and East African Breweries Limited.

Few Ugandan companies want to float. Most of the businesses that are large enough to list – such as the Mukwano Group, which has interests in agriculture, manufacturing, property development and logistics – are family-owned and don’t see the benefits of opening up their books. Indeed, even units of these conglomerates, for example Mukwano’s tea business Rwenzori Commodities, are potentially big enough to list by themselves. And some of those companies that might be interested in listing are deterred by the costly process.

Investor demand

There is also a more fundamental issue of investor demand. Uganda is a small, poor country with a savings rate of just 16.5% – normal for sub-Saharan Africa, but below the global average of 25% of GDP. What little formal savings there are mostly go into a government pension scheme that sits on its investments. And the majority of those investments are in safe-haven, government bonds.

“To a large extent [capital markets are] a function of the size of the economy,” says Keith Kalyegira, the head of the Capital Markets Authority.

“Capital market growth follows economic growth, it doesn’t lead economic growth,” he says, adding: “Ultimately, it’s dependent on increasing savings.”

However, an IPO by MTN could spur interest in equities from middle-class Ugandans who currently put their money into land and property, and from local pension funds and foreign investors looking to diversify their portfolios.

Uganda’s stock market was set up in 1997 to sell the government’s stakes in companies such as British American Tobacco Uganda and development bank DFCU, as liberal economic reforms swept across Africa after the end of the Cold War. But it was a slow start. The first security was a four-year, USh10 billion (or $8.7 million at the time) bond issued in 1998 by the East African Development Bank. The first IPO, of tile- and brick-maker Uganda Clays, was not until 2000. Even after the listings of companies such as media group New Vision and Stanbic Uganda, the local arm of South Africa’s Standard Bank, the Ugandan stock market’s capitalization was only USh27.4 trillion ($7.2 billion) by the end of August.

USE-market capitalization-graph-780


The index has risen just 2% so far in 2018, after rising 25% last year, but there is very little liquidity in the market. Daily turnover in the 2016/17 financial year was a mere USh410 million, or $108,000.

Cipla’s Ugandan business was set up in 2005 as a joint venture between the Indian pharmaceutical company and a group of local businessmen, at a time when new HIV infections in the country were still rising and the drugs to treat HIV/AIDs, malaria and hepatitis were all imported. Most of the share sale is from Cipla’s European subsidiary offloading its entire 12.5% stake; in a statement in the IPO prospectus, the Ugandan unit’s executive chairman stated the listing was not a capital-raising exercise.

Family-owned businesses

As in much of sub-Saharan Africa, most of the larger companies in Uganda are either foreign subsidiaries (for example of telecoms companies such as India’s Airtel and South Africa’s MTN) or else family-owned, as in the case of the Madhvani Group. The latter, which owns Kakira Sugar, claims to employ 10,000 people and to be the largest private sector investor in Uganda. These family-owned empires are often wary of ceding control, or of welcoming in any outside investment.

Ramathan Ggoobi, who teaches economics at Makerere University Business School, thinks this aversion stems in part from former president Idi Amin’s “economic war” in the 1970s, when the dictator ordered the expulsion of Ugandan Asians and the expropriation of their businesses.

“People feel that they should own their business, as a family, as individuals. Whether it is struggling or it is doing well, they don’t mind,” says Ggoobi. “Businesses would rather fail than open up for others to invest in.”

Kalyegira of the Capital Markets Authority says that “most of the businesses that should be raising capital in the primary or secondary market in Uganda are just not aware of the benefits,” which include longer-term capital and the marketing that comes with a higher public profile. “Companies think it’s good to be opaque.”


Development partners approach it from the social need and not necessarily growth and trying to help companies stand on their own 
 - Paul Bwiso, Uganda Stock Exchange

Most Ugandan businesses would rather take out easy-to-obtain, but expensive, bank loans.

“Bankers are in their face,” says Salima Nakiboneka, an investment analyst at the Ugandan arm of Stanlib, a South African asset manager. Awareness of capital markets, on the other hand, is low. Headline commercial lending rates are much higher than corporate bond coupons, but banks tend to reduce rates if a company threatens to issue a bond, she notes.

Development finance institutions are yet another factor keeping Uganda’s capital markets small. While providing much-needed liquidity and foreign exchange, they provide an alternative to capital markets, particularly when it comes to corporate and municipal bonds. Since 1998 there have been only 12 corporate bonds listed on the Uganda Securities Exchange, worth USh291 billion.

“Development partners approach it from the social need and not necessarily growth and trying to help companies stand on their own,” says Paul Bwiso, the CEO of the USE.

The USE is, however, holding discussions with the Kampala Capital City Authority and the National Water & Sewage Corporation about potentially issuing bonds, Bwiso says. And another two corporate bonds are due to list in the next six months.

Taking on private equity investment can also prove more tempting for Ugandan companies than an IPO. Although Kenya attracts the majority of investment in East Africa, 85% of private equity firms think the region will be the most attractive for investment on the continent in the next few years, according to the African Private Equity & Venture Capital Association. That is likely to mean more private equity firms luring Ugandan businesses away from the capital markets.

Private equity

“There is a preference for private equity versus going to the stock market, because of the tedious process involved,” says Abubaker Mayanja, a Kampala-based investment adviser. Plus, with private equity, usually “you’re dealing with one party.”

More private equity deals may eventually mean more IPOs if investors seek an exit.

“I hope they will be listing, just like Cipla did,” says Kalyegira. “But the danger of private equity exiting through the markets is the valuation. They tend to be a little bit more aggressive when it comes to valuation. And that is only suitable for long-term investors.”

A capital gains tax of 30% is also an impediment to private equity exits, and share sales in general, notes Mayanja. And the cost of all the various adviser fees, which can reach 7% of the amount raised, deters many companies from listing.

“I’ve convinced maybe four, five companies to list, but when they [saw] what the cost will be [they pulled out],” he says.

The campaign by the USE and others for tax incentives for investors is likely to fall on deaf ears, particularly if the Ugandan government follows through on its promise to force telecoms companies to list, while it is also scrabbling to raise extra revenue (for example through an unpopular tax on social media usage).

“You have to be able to show where the benefits will accrue for government,” says Bwiso. “Unfortunately, it’s kind of a ‘chicken and egg’ scenario. We cannot give them an analysis without a company [to demonstrate].”


Our ultimate dream is for Uganda to join the frontier market category of the MSCI index 
 - Keith Kalyegira, Capital Markets Authority

Rising government borrowing continues to crowd out capital market investment. In March, the central bank said borrowing had nearly trebled in the last three years to 50% of GDP.

“The return is good and… the risk of me losing that money is close to zero,” says Nakiboneka of Stanlib. Asset managers typically put 80% of funds into government securities, the upper limit permitted by their investment policies, she says.

However, a decline in the yields on government paper prompted some investors to look more seriously at other investments, says Nakiboneka. Last year, yields on treasury bills dropped below 10%, reflecting strong demand from the local banks for government securities. In the last 12 months, yields have climbed steadily to above 13%.

As for the prospective buyers of shares and bonds, Uganda’s investment landscape is still dominated by the National Social Security Fund (NSSF), which tends to be a buy-to-hold investor. Most of the few Ugandans who do save formally, do so with the NSSF. Its assets grew 20.6% to just under USh10 trillion in the 2017/18 financial year. Around 18% of those assets are equities and it owns 70% of the stock market’s free float, according to Bwiso of the USE.

The NSSF “do not need to deal with all that liquidity, so they rarely sell the securities that they invest in”, says Nakiboneka.

So unless the government’s borrowing requirements in the bond market decline, and the economy and savings grow significantly, demand for equities and corporate bonds may not increase much.

Ggoobi says: “Capital markets, they are for patient investors. But most of the people in Uganda are quite impatient. They are not willing to defer gratification.”

If telecoms IPOs do go ahead, it remains to be seen whether and how the share sales will be opened up to customers.

Meanwhile, the USE and CMA continue to fight their corner, mainly by focusing on the supply side of the capital markets equation.

Energy, construction materials, mining, agri-processing and manufacturing more broadly are all sectors where they are trying to persuade more companies to list and issue bonds, says Kalyegira.

By next year, the USE should have a system in place whereby companies can start complying with the regulations and disclosures required of a listed firm. Only after three to five years on this “specialist market” would they have to actually sell shares, says Bwiso. The hope – rather ambitious given there aren’t any more voluntary IPOs lined up after Cipla – is that between 15 and 20 companies would embark on this process in the next five years.

But two IPOs a year - whether forced or not - would be deemed a success.

MTN Uganda

An MTN listing would probably be coerced to some degree. “MTN, I think, are not keen… I don’t see them coming willingly,” Bwiso told Euromoney before the government’s announcement.

MTN Uganda was looking at “localizing” ownership, its chairman Charles Mbire told Bloomberg a day before the cabinet meeting at which the renewal of its operating licence, which expires in October after 20 years, was agreed.

The government said that telecoms listings would “help mitigate capital flight, among other benefits”. It is unclear yet how and over what time period it is proposing to implement the new policy.

FAn MTN Uganda listing wouldn’t be unprecedented for the wider company. MTN Ghana’s shares started trading on September 5. But the planned IPO of MTN Nigeria has been thrown into doubt after the Nigerian government demanded the company hand over $8.1 billion it alleged had been taken out of the country illegally.

“I think they are open to selling to pension funds,” Bwiso says of MTN Uganda. “Why do a private placement to a few specialized institutions, and not come to market to people who actually support and grow your business?”

A public share sale would be the more politically sensible move, for an unpopular government and perhaps even for a company that, perhaps inevitably, gets lots of customer complaints.

The IPO of power company Umeme, the largest energy distributor in the country, offers a potentially positive example for MTN Uganda. Private equity firm Actis sold a 40% stake in 2012 and completed its exit in December 2016.

“They moved from being that foreign-owned company, that company that we’re giving our money to and they’re taking everything out of here, to… a local company,” says Nakiboneka.

“I’ve attended AGMs which turn out to be complaint-resolving meetings. Different people from different areas of the country will come [to complain],” she says. “That feedback has helped them as well.”

Meanwhile, those running the country’s capital markets continue to aim high.

“Our ultimate dream is for Uganda to join the frontier market category of the MSCI index,” says Kalyegira, who is about to finish his first five-year term at the CMA and hopes to have his mandate renewed for another five years.

With the possibility that the Ugandan government may push MTN and its peers to market, this dream no longer seems like a complete fantasy.