MTN revenues larger than Dangote shows equities fail to track economy

Dangote Cement, the largest company listed on the Nigerian Stock Exchange (NSE) is a behemoth in the Nigerian economy, controlling 70 percent of the fast growing domestic cement market. However when placed next to the unlisted Nigerian arm of South African telecommunications group MTN, Dangote Cement pales by comparison.

Dangote Cements nine month revenues of N288.98 bn and projected FY 2013 revenues of N364.11 billion (Morgan capital), is dwarfed by MTN, which last week reported full year revenues of N793.6 billion for its Nigerian operations.

The lack of listings on the NSE by companies in the telecom, Agriculture, power and oil and gas sectors – that make up the bulk of Nigerian GDP - mean that the stock exchange with a market capitalization of $76 billion (equities) is failing to adequately track the economy.

This has left investors exposed by a lack of diversification and pension funds fearing the possibility of a bubble in stocks in two to three years.

 “The upstream companies have access to funds from various sources, so they do not therefore want to expose themselves to the regulatory and potential equity dilution that could come from listing on the Nigeria Stock Exchange,” said Oladiran Ajayi, energy expert and a senior associate with Templars law firm.

“To encourage listing, the government can either put some more favourable fiscal and regulatory incentives to companies that list or make it a requirement for companies in certain industries to list.”

The Nigerian Stock Exchange’s benchmark index soared 47 percent in 2013 beating returns posted by major Africa equity gauges. Most of the rally was powered by gains in Dangote Cement and Bank stocks which combined make up over 50 percent of total stock market capitalization.

The NSE, with a $1 trillion market capitalization target by 2016, is failing in its attempts to bring IPOs to the exchange, managing to attract only three listings in 2013 (UPDC REIT, Computer Warehouse Group and Infinity).

Listing a company and maintaining listings is very expensive in Nigeria compared to other African exchanges, analysts say. In Kenya for example, new listings pay a lower corporate tax rate of 20 per cent for five years.

“What we need is an enabling environment for listing in Nigeria i.e. easy access for foreign investors to invest and repatriate funds, an efficient trading and settlement system, tax incentives.When the FG/regulators impose restrictions on companies, it increases the cost of doing business which is already high,” said Tairat Tijani, head of debt capital markets, FBN Capital.

The average value of stocks traded daily on the NSE was equivalent to N234billion ($1.4 billion) in the fourth quarter of 2013, according to data from the Central Bank of Nigeria (CBN).Total equity capitalization was 27.8 percent of GDP, compared to 153 percent in South Africa.

The price-to-earnings (P/E) ratio of stocks included in the benchmark index is currently at 13.81 xs compared to 20.05 xs for major African markets, suggesting the overall Nigerian equity basket is still cheap according to data from research firm Meristem Securities.

Stocks may not remain cheap for long however as Pension and Asset managers fret about the possibility of a dearth of investible assets leading to bubbles. The low free float in most listed Nigerian stocks also suggests that a modest movement by PFAs towards increased equities allocation would have an outsized impact on stock prices.

“Some equity valuations show a lack of depth in the markets,” said Yvonne Ike, CEO West Africa, at investment bank Renaissance Capital, at a recent investment conference.

“What we need to do is improve the product offering,” she said.