Business Daily (Nairobi)
Geoffrey Irungu
30 April 2008
Millions of Kenyans who applied for Safaricom shares are likely to get between 30 and 35 per cent of what they hoped for in the recently concluded initial public offering.
Those who applied for 2,000 shares worth Sh10,000 can expect to get a minimum allocation of 600 worth Sh3,000.
This is expected to come as emerging reports show that Safaricom's share could rise by at least 20 per cent in the initial days of trading on the Nairobi Stock Exchange to match the Sh6 to 6.50 per share that foreign investors have offered for the stock.
Analysts regard the foreign IPO price level as a key indicator of how the share will behave once it starts trading. However, with such a low share allocation, refunds for small investors are estimated to hit tens of billion shillings.
It is emerging that the privatization has attracted over Sh120 billion from both small and big investors in Kenya and abroad - almost two and a half times more than the Government wanted to raise, which means the refund cheque could reach Sh70 billion. Normally, this level of oversubscription shows that the Government and its advisors grossly underestimated the demand for the share.
But even as the IPO processing period is in the initial stages, questions are emerging as to whether the Government should leave Sh70 billion on the table, when the country is in desperate need for money to finance Vision 2030, the new development plan that is expected to overhaul Kenya's public infrastructure and transform the economy into a middle-income nation.
If the Government was to decide to keep the Sh120 billion it has raised, it would be forced to sell at least 25 per cent of the 35 per cent it is holding and probably auction the remaining 10 per cent to Vodafone at some point in future.
This would not be the first time that the Government has caved in to investor demand for more shares as a precedent was set with Centum (then known as ICDC Investments) in 1966 when President Kenyatta ordered the public to be allocated more shares.
While the Treasury has been justifying the need to continue owning a large stake in Safaricom based on possibility of better future valuations, this argument is already being undermined by the fact that Kenya will have four mobile phone companies operating in the next six months, three of which the Government does not own any shares in, extinguishing the basis of taxpayers owning Safaricom for strategic reasons.
The increasing competitive environment will make it harder for Safaricom to continue making super-profits, meaning that its value proposition, all things remaining constant, will not be as attractive to investors as it is now.
Yet, after the post-election violence, which has slowed down the economic momentum and scared off some foreign investors, the need for the coalition government to speed up the transformation of the economy to create millions of jobs by overhauling the public infrastructure is growing.
Finance minister Amos Kimunya however continues to face conflicting demands to support an impoverished country with massive social spending and the urgent need for money to speed up development to break the poverty trap.
The Government is expected to convene an investment and donor conference this year to drum up investments for Vision 2030, which are estimated at between Sh300-Sh400 billion annually if Kenya is to meet its development goals. The money is expected to be used to rebuild Kenya's shabby transport system, modernise agriculture, tourism, and education, put up more hospitals and a host of other urgently needed social and development projects.
With the IPO portion reserved for domestic investors, who include all citizens of east Africa, having been set at five shillings a share, it was expected that foreigners would pay a higher figure from the book building exercise - in which the price would be determined by receiving proposals from interested investors.
With up to six shillings being the possible minimum price from the IPO after the launch of trading, shareholders will have received a major return given that it is much above many local fixed-income securities set at roundabout 10 per cent annually. Even at Sh6, the share would already be 20 per cent above the IPO price.
Sources revealed that the foreign portion had been subscribed to the point of roundabout 200 per cent, meaning that it had brought in Sh35 billion already but with a price of Sh6.25 at the minimum this would translate into over Sh40 billion.
It also emerged that the retail segment had more than Sh40 billion while qualified institutional investors bought Sh40 billion worth of shares. Thus the total netted so far was no less than Sh120 billion - representing 240 per cent subscription.
Despite the over subscription, the retail segment is unlikely to benefit from the claw back of the 15 per cent because its over-subscription level is at 135 per cent as compared to the 200 per cent in the prospectus.
Had the advisors and the Government used the word "subscription" in the prospectus instead of "oversubscription," the realised applications of up to Sh40 billion would be a subscription of 235 per cent meaning that retail investors could have received an extra total allocation of 1.5 billion shares.
The critical passage in the prospectus says: "If the domestic pool is over-subscribed by more than 200 per cent, the domestic pool may be increased by up to a total of 15 per cent of the offer shares, on a pro-rata basis to maintain the ceiling of 200 per cent over-subscription, if possible, with a corresponding decrease in the international pool."
Mr Hassan Mohamed, the co-CEO at Dyer & Blair Investment Bank that partnered with Morgan Stanley International to give transaction advisory services for the Safaricom IPO, would not reveal the figures but he expected that the oversubscription would be heavy - probably more than twice. "We don't know the figures yet but we anticipate the demand to be high even on the international segment," he told the Business Daily.
One issue might be that a Sh6 price would immediately raise the company's price-to-earnings ratio, a measure of how much investors are willing to pay for the earnings of a company to 20; two times the average PE on the commercial and services sector of the stock exchange.
In this case, investors value the earnings of Safaricom twice as high as competitors in that sector.
This means that for the valuation to remain at the same level, investors expect earnings to grow by a minimum of 20 per cent, implying that the profits should grow to Sh21.6 billion or 54 cents.
Perhaps the company's shares could benefit from the fact that there are some companies on the sector with bigger than average PE such as AccessKenya, Nation Media Group, Uchumi Supermarkets and Standard Group - whose PE ranges between 21 and 58 as at April 25.
One of the factors likely to influence the trading prices after the launch at the NSE, is the huge refund that will come back from investors after the allocations.
The lowest that foreigners were expected to apply was Sh17.5 billion to have their portion fully subscribed but if the price ends up at Sh6 they would have raised Sh21 billion instead.
The retail part was expected to be a minimum of Sh32.5 billion - which would amount to 6.5 million shares. In total, therefore, the government could raise Sh53.5 billion, Sh3.5 billion more than it had budgeted.
When the budget was read in 2007/8, the amount factored in was Sh34 billion - thus at nearly Sh20 billion more the IPO will be considered a runaway success on the side of the state and the budget makers.
At a time when there is need for increased spending as a result of the allocations intended for the internally displaced persons, this can only come as a boon.
Mr Peterson Mwangi, the CEO of Afrikan Investment Bank, said in an interview that he expects the share will trade for at least Sh10 once it opens because of the monies returned to the applicants. If indeed Sh120 billion is realized, then Sh70 billion will be returned to the applicants in refunds.
For a market that already has a market capitalization of Sh880 billion, another Sh120 billion injected into the stock market would be a major boost and could see the wealth level edge towards the trillion-shilling mark.
"We expect that some of the money that will be refunded will be go back into the stock market. This should impact on trading," he said.
In a recent interview, Mr Humphrey Gathungu of Stanbic Investment Services, said he expected some of the refunds to find their way into the stock market - a development that would serve as a boost for the Safaricom shares after the trading is launched.
However, Mr Gathungu stressed that the company needed to expand because of the increasing competition and the need to upgrade technology. As a result of this, he said, the company would give a dividend of about 40 to 50 per cent, showing that it could take several years before it can give something close to a full dividend.
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