James Abola
15 June 2008
opinion
Kampala — During the initial public offering for Safaricom shares, in April I pointed out that Ugandans participating in the IPO would face three definite risks, namely: the risk due to oversubscription; the risk of moving money, and foreign exchange risk; then there are those who took loans to finance their Safaricom application.
I said this then: Given the recent history of IPOs in Kenya as well as the interest that investors have indicated for the Safaricom IPO the question is not whether or not the IPO will be oversubscribed but rather by how much.
Now that the share allocation has been done and the shares begun trading on the Nairobi Stock Exchange, it is a good time to review. A rough calculation shows that the short term or speculative investor may well get burnt by the Safaricom IPO.
The Safaricom IPO was over marketed and the result was that too much demand was created compared to the amount of shares available. Unfortunately, for many retail investors and speculators it is required that share applications are accompanied with cash. For every 100 shares applied for only 21 were allocated to retail investors. A low allocation amplifies the other risks especially for speculative investors.
For the small investor the cost of moving money between Uganda and Kenya can be significant. My estimate is that it cost at least Shs 50,000 to move money one way. If you invested Shs1 million you may spend about Shs100,000 in money transfer costs when sending the money and when receiving refunds.
The habit or practice of leaving things until the last minute did not help to protect many investors against foreign exchange risk. When the IPO period was about to close, is when most people placed in their application and the Kenya shilling shot up to about Shs28.5 for each Uganda shilling. My guess is that when refunds begin the exchange rate will drop to about Shs24.5. For the person in a hurry to sell and get back their money, the exchange rate spread will cost between 10 percent and 15 percent.
How about the person who took a loan to invest in Safaricom? Because of the challenges occasioned by low allocation and foreign exchange risk, it is a very steep hill to make money by using borrowed funds for speculating in the Safaricom IPO. Again some rough calculation: assume a 2 percent processing fee and annual interest of 24 percent for a Shs20 million loan.
The earliest time of repaying after selling shares is after three months. The processing fee and interest will cost Shs1.6 million. In order to make money, the speculative investor will have to sell his share at not less than Shs 11 per share. There are a couple of lessons from the Safaricom IPO, namely:
The days of making loads of money from participating in an IPO and selling the shares in the first week of trading are in the past. At least for the Nairobi Stock Exchange.
The statement that share prices can go up or down is a common disclaimer made by stock brokers but is very sensible. When you invest with a short time horizon there is a good chance you can get caught when the price is down, the way people get caught while skipping ropes.
When investing, it pays to understand the fundamentals and not depend solely on reading the sentiments of the market. Most of the expectations of the share price tripling were based more on sentiment than on fundamentals.
Borrowing amplifies the opportunity to make profits or take losses and the magnification can be extremely high for shares.
While speculators will be having few kind words for the Safaricom IPO, long term investors will find a good reason to smile. That is life.
Mr Abola is the team leader for Akamai Global
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