09/08/2014
for the would investors here is a good opportunity to get into the stock market by Buying NSE shares at an IPO
This offer will expire o Tuesday 12.8.2014. NSE is selling 66m shares at 9.50 per share. the minimum shares one can buy is 500. below are afew things i thought u shud know about the IPO:
first are you an Investor or a trader?
An investor in an IPO is someone
genuinely interested in the company
and intends to hold the shares for a
medium to long term. A trader
would subscribe to an IPO with the
intention of making gains on listing.
While subscribing to an IPO, it's
important for you to be clear about
whether you are considering the
company's future prospects or if you
are betting on the entire buzz
around the IPO to make a quick
buck on listing.
As an investor, you have to study the
track record of the company and pricing. You need to study the prospectus of the cpmpany
Study prospects
As an investor in an IPO, it is
extremely important to understand
the business of the company and
how it compares with its peers in
the industry. The track record of the
management, past performance of
the company, risks that the company
faces and the purpose of raising
finance along with expected returns
on investment are other crucial
factors to be considered. The grade
given by the credit rating agency
may also be a good indicator about
the company's prospects. However,
grading does not indicate if the
issue is priced at a fair level.
You need to evaluate pricing
A company may have good prospects
but if all the positive factors are
priced in completely, there may be
little scope for the price to
appreciate after listing. Also, an
over-priced issue, however good the
company may be, may correct to its
fair price eventually.
By comparing the pricing with
respect to peers in the industry, you
may judge if the issue is
underpriced or over-priced.
Finally, avoid falling prey to all the
buzz and market stories. Also, over-
subscriptions do not indicate that
the listing price will be high, so
steer clear of all such myths.
Investing in an IPO is no different
from investing in a listed company.
All aspects of analysis and basics of
investing should be applied to an
IPO and you should subscribe to it
only if the rational investor in you
gives a go-ahead.
After reading the NSE prospectus I found out the following
How Dm the NSE Make Money
I’ll start by gaining an
understanding of how exactly the
NSE makes money. Page 84 of the
IPO prospectus breaks it down
nicely.
The transaction levies are the
NSE’s primary source of operating
income. In 2013, these levies
amounted to more than Kshs405
million.
Transaction levies are fees charged
on share trades. Currently, this levy
is fixed at a rate of 0.24% of total
trade value.
So, if you bought 10,000 shillings
worth of Safaricom shares, the NSE
would collect 12 shillings from you
plus another 12 shillings from the
seller for a total of 24 shillings.
Kshs10,000.00 x 0.0024 = Kshs24.00
Thus, the NSE makes money from
each shilling’s worth of shares
traded.
In the same table, we also see that
the NSE collects annual listing feyges.
These are fees charged to each
company that lists its shares for
trade on the market.
Note that this income has been
relatively stagnant over the past five
years. This is because only a few
new companies have joined the
exchange during this time frame and
some others have exited for one
reason or another.
Page 85 of the prospectus shows
some other sources of income. These
range from interest on investments
to rental income.
How Much Money Does the NSE
Make?
Now that we have a bit of an idea
how the NSE makes money, let’s try
to figure out how much it earned
from recurring sources in 2013. We
want to derive a baseline earnings
figure – one that we can be
confident that the NSE will collect
year after year even if the business
stops growing.
The income statement on page 80 of
the prospectus indicates that the
NSE earned Kshs379,341,000 before
taxes in 2013.
We need to adjust this figure to
account for income and expenses
that aren’t likely to occur again next
year.
Further up the income statement, we
see that the NSE reported
Kshs115,574,000 from the recovery of
doubtful debts in 2013. That’s great
for the NSE, but it’s probably not
going to happen again next year. So,
let’s subtract it from pre-tax
earnings. We’re left with adjusted
pre-tax earnings of Kshs263,767,000.
Kshs379,341,000 – Kshs115,574,000 =
Kshs263,767,000
Now, let’s go back to page 85 to see
if any of the income reported there
looks like it’s unlikely to be
repeated.
The only doubtful income stream I
see is the “Market Access Fee” of
Kshs40,000,000. It suddenly
appeared in 2013, and I don’t know
what it is. To be safe, let’s subtract
it from our total.
After removing the market access
fee, we’re left with adjusted pre-tax
earnings of Kshs223,767,000.
Now, we must account for taxes.
Kenya’s corporate tax rate presently
stands at 30%. After applying this to
the pre-tax amount, we are left with
net income of Kshs156,637,000.
Kshs223,767,000 x 70% =
Kshs156,636,900
How much is this per share?
The prospectus tells us on page 19
that the NSE’s total share count will
be 194,625,000 at the conclusion of
the IPO, assuming that the offer is
fully subscribed.
Divide our adjusted net income by
this figure, and we’re left with
earnings per share of Ksh0.80.
Kshs156,637,000 / 194,625,000 =
Ksh0.80
This EPS is the amount of income we
can reasonably assume the NSE will
collect year after year even if its
growth stagnates.
So, on a normalized basis, the NSE
IPO is set at a Price/Earnings ratio
of 11.8.
Kshs9.50 / Ksh0.80 = 11.8
How Fast Will the NSE Grow?
This is where things get tricky.
We want to make a good guess as to
how quickly the NSE will grow its
earnings in order to determine
whether Kshs9.50 is a fair share
price.
If the NSE’s earnings stagnate right
now, we’d receive an adjusted
earnings yield of 8.4%.
Ksh0.80 / Kshs9.50 = 0.084
That’s not great – especially when
Kenyan bond yields are hovering
around 11%.
So, we’ll need the NSE to grow
earnings to make the IPO
worthwhile.
Over the past four years, the NSE
grew its adjusted earnings at a
yearly pace of 113%. That’s an
exceptionally rapid rate, and it’s not
likely to be sustainable much longer.
What might be a more reasonable
expectation of earnings growth over
the next five years?
One way to moderate our forecast is
to consider growth in operating
income instead of net income.
Operating income tends to be less
volatile than net income, and,
therefore less likely to be skewed by
abnormal events.
If we return to the income
statement on page 80, we can see
that operating income rose from
Kshs164,387,000 in 2009 to
Kshs488,766,000 in 2013.
Plug these figures into this
calculator, and we find that the
NSE’s operating income rose at a
rate of 31.31% over the past four
years.
Is this a sustainable earnings growth
rate over the next five years? It may
be considering that trade volumes
are reportedly up 37% through the
first half of 2014 .
But let’s be extra conservative and
assume that a reasonable earnings
growth rate over the next five years
is the nice round figure of 20%.
Is the NSE IPO a Bargain?
If the NSE’s adjusted earnings per
share grew at an average rate of 20%
over the next five years, they would
equal Kshs1.99 in July 2019.
Ksh0.80 x 1.20 ^ 5 = Kshs1.99
Let’s conservatively assume that the
market will value the shares at a P/E
ratio of 10 at that time. This seems
reasonable considering the NSE’s
growth rate and the fact that shares
of the Johannesburg Stock Exchange
presently trade at a P/E of 16.
A P/E ratio of 10 gives the shares a
value of Ksh19.90 in 2019.
Kshs1.99 x 10 = Kshs19.90
So that means they will have more
than doubled in value from their
Kshs9.50 IPO price. Not bad!
Plus, we mustn’t forget dividends!
According to page 19 of the
prospectus, the NSE paid out a
dividend of Kshs49,000,000 in 2013.
This is equivalent to Ksh0.25 per
share after the IPO is complete.
If we conservatively assume that the
IPO will pay a dividend of Ksh0.25
per year for the next five years,
holders of the stock will collect total
dividends of Kshs1.25.
Now, let’s put it all together.
If NSE shares are priced at
Kshs19.90 in 2019, and the company
pays out a total of Kshs1.25 in
dividends over the next five years,
then investors will reap a total
return of 122.6% – an annualized
return of 17.4%.
(Kshs19.90 + Kshs1.25) / Kshs9.50 =
122.6%
122.6 ^ 1/5 – 1 = 17.4%
Is 17.4% a decent annual return? I
believe it is, and, therefore I think
the NSE IPO is one that you can invest in if you can invest in if you r hoping to become an investor.but if you r interested in trade, an IPO is the last thing to get into.
