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Why Rights Issue of Shares is the Preferred Option on the Nigerian Bourse

Category: Public Offers Private Placements

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Why Rights Issue of Shares is the Preferred Option on the Nigerian Bourse

 Sunday, June 30, 2013 8:28 PM / The Analyst

It is a trite fact that the Nigerian economy continues to witness a steady GDP growth which is expected to translate into increased investment flows, lower unemployment and reduced poverty. The waiting period however is proving a rather inconveniencing reality; and its impact on the Nigerian bourse is negligible if ever a nexus existed.

The exchange rate has been stable, external reserves is at a 3-year high of $48.8bn, inflation figures has remained in single digits since the beginning of the year and inching closer to a 5-year low of 8.6% in the year while interest rates remains at a high figure of 12% thus affecting the availability of credit to businesses and entities in and out iof the real sector.

Given the positive macro-economic indices, one would imagine that the investing public; having ‘benefitted’ therein would be a veritable market for funds. Alas, this is not the case. The WHY is not too farfetched – there is no trickle-down effect of the GDP growth to the populace due to a myriad of reasons as adduced by economic development experts – income inequality, inequal wealth distribution, import dependent economy, lack of real sector activity relative to economic size etc.

The real concern however for the capital market must be the lack of breadth and depth in the market, highlighted through the disconnect between the key growth areas of the economy and the composite entities making up the bourse – the single fastest growing sector, TELECOMS is not represented, the emergent power sector is conspicuously absent and the ubiquitous oil & gas sector only has a consumer section of the downstream sector represented.

Raising funds therefore post a meltdown will obviously present moment for scratching of heads. The option therefore open to firms at this time is the rights issue of shares route; and in this single factor alternative, a second look is advised.

What is a Rights Issue of Shares?
A rights issue is when a company issues its existing shareholders a right to buy additional shares in the company. The company will offer the shareholder a specific number of shares at a specific price. The company will also set a time limit for the shareholder to buy the shares. The shares are often offered at a discounted price to encourage existing shareholders to take the company up on their offer. If a shareholder does not take the company up on their rights issue then they have the option to sell their rights on the stock market just as they would sell ordinary shares, however their shareholding in the company will weaken.

Reasons for a Rights Issue of Shares
A company will offer more shares to its shareholders to raise extra money for the company. Companies with a poor cash flow will often use a rights issue to increase cash flow and pay off existing debts. Rights issues however are sometimes issued by companies with healthy balance sheets in order to fund research and development projects or to purchase new companies.

Discounted shares issued by a company can be tempting but it is important to find out first the reason for the rights issue of shares. A company, for example, may be using the rights issue as a quick cash fix to pay off debts masking the real reason for the company’s cash flow failing such as bad leadership. Caution is advised when offered with a rights issue.

Environmental Scan
The fast approaching 2015 elections is expected to bring along distortions in money supply and inflation control, this along with the resolution of market altering bills before the National Assembly should impact the allocation and availability of funds and new offers in the market. Be that as it may, analysts and fund managers insist that there could not be a better time (that cliché again?) to go scouting for fundamentally strong stocks given the momentum of the market recovering (despite hiccups experienced). This is premised on the key steps and initiatives taken by the new management of the Nigerian Stock Exchange.

On the back of these initiatives, the equity market index is treading positive having recorded a +28.55% YTD gains in the year-to-date, a little below the +35.45% returns recorded in 2012; suggesting that the market is poised to close better in the current year than it did in 2012. Instructively, the All-Share Market index (ASI) still has a long way to go before it could get to its 2008 peak, falling short by -45.62% and suggesting that equities listed on the bourse still have enough room to improve.



Rights Issues Consummated & Planned
In recent times, equities quoted on the Nigerian bourse have engaged in capital raising exercises through the instrumentality of rights issues of shares; even as the information contained in some of the prospectus tends to ‘stretched’ in terms of justifications, forecasts and expected returns on investment. The resort to ‘imaginative’ representations as we have seen in some cases remains a source of concern even as we remain convinced that the necessary regulatory oversight on this instrument at this point in time needs to be ramped up. 

To date, the market has witnessed three different offers in 2013 - Oando Plc’s rights issue which was described has been oversubscribed and will be listed on July 01, 2013; UPDC Plc’s Initial Public Offer (IPO) which debuted with one of the properly structured real estate investment trust (REIT); and the Transcorp Plc’s rights issue.

Quoted companies such as Skye Bank, Diamond Bank, Sterling Bank, Wema Bank and Wapic Insurance amongst others; also plan to hit the market with their offers later in the year with a majority coming through rights issue of shares.

Noteworthy must be companies that have planned IPO’s but have had to put siuch plans in abeyance – Promassidor, Notore Chemicals and two others.

Why has Rights-Issues become a Preferred Option Today?

 *The collapse of the capital market post 2008 had shown that the market was liquidity-driven more than it was fundamental, variable-driven; with illiquidity remaining a key concern for both the listed firms and the investors alike;

* Banks have become equally cautious of lending (or playing in the capital market) due to post 2008 realities and the regulatory interventions that have taken place since (with new regulations on margin lending and retraction of the universal banking concept that was largely unregulated and is singled out as the dominant cause for the financial recklessness that ensued) - the net effect of which resulted in higher provisioning for non performing assets arising from the unregulated regime that existed. This points to revealing facts that Nigerian banks needed to be larger, and better structured in order to finance Nigerian Companies growth.

 *Existing quoted companies need additional funds for expansion and some of the entities, including banks are planning to fund new growth sectors of the economy undergoing privatisation; so fresh capital is required and in the current environment, probably possible through rights from existing shareholder;

*Rights issues are inherently, a relatively cheaper way of raising capital for a quoted company under this scenario; since the costs of preparing a brochure, underwriting commission or press advertising, media engagement and other related service costs involved in a new issue of shares are largely avoided.

* A rights issue can offer a quick fix for a troubled balance sheet, even as that doesn't necessarily mean that management will quickly address the underlying problems that weakened the balance sheet in the first place.




Implications on the Capital Market

It will drive primary market activity given the current market realities while we believe that expected profitability may boost dividend payout ratio, and brighten the outlook of return on investment for the investors.

IPO Market since 2008 

A cursory analysis of the performance of stocks listed on the Nigerian bourse between 2008 and now reveals that only two (2) out of the forty (40) stocks presented to the market are currently trading above their listing prices - with MCNICHOLS and DANGCEM recording +77.55% and  +39.26% while the remaining thirty-eight (38) stocks are trading below their listing prices with STARCOMMS and DAARCOMM leading the value losers with -96.51% and -90.48% respectively.



Related Reports:

1.Why Right-Issues dominate the primary market - Investors pause on IPOs
2.IPO’s in the works: Opportunities and Threats for Potential Private Firms
3. Market optimism spurs fresh capital raising; SKYEBANK plans rights issue

4. Do Foreign Investors time Market Entry?

5. Aliko Dangote - 1 Year in Charge of the NSE Presidency

6. SEC - 32 Benchmark Stocks: Performance Review


Disclaimer/Advice to Readers:
While the website is checked for accuracy, we are not liable for any incorrect information included. The details of this publication should not be construed as an investment advice by the author/analyst or the publishers/Proshare. Proshare Limited, its employees and analysts accept no liability for any loss arising from the use of this information. All opinions on this page/site constitute the author’s best estimate judgement as of this date and are subject to change without notice. Investors should see the content of this page as one of the factors to consider in making their investment decision. We recommend that you make enquiries based on your own circumstances and, if necessary, take professional advice before entering into transactions. This information is published with the consent of the author(s) for circulation in/to our online investment community in accordance with the terms of usage. Further enquiries should be directed to the author whose e-mail is

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