6 September 2017

Uganda: DFCU to Float Largest Rights Issue Ever on Use

DFCU Ltd is seeking to mobilise Ush200 billion ($54.8 million) in a rights issue this month - the largest transaction of its kind on the Uganda Securities Exchange's history.

But market concerns about the offer price have unsettled some investors while expectations of increased liquidity on the company's counter appear high after this transaction.

A recent transaction brief issued by African Alliance Uganda - the bank's transaction advisor - revealed the rights issue carries an offer price of Ush760 ($0.21) per share compared with a current average trading price of Ush758 ($0.2).

The rights issue bears an allotment ratio of 0.53 to one rights share out of a total of 263,157,895 new shares on offer. The transaction will raise DFCU Ltd issued shares from 497,201,822 to 760,359,717 shares.

The bulk of the funds raised will be deployed towards clearing a $50 million loan recently obtained from Arise B.V, the company's majority owner with 55 per cent shares, and recapitalisation of its balance sheet following its acquisition of Crane Bank in January.

The rights issue will open on September 4, and close on September 25.

Under absorption

Local stockbrokers feel the transaction risks under absorption as retail investors opt to purchase cheaper shares on the stockmarket.

The DFCU rights issue is a major departure from previous rights issues of companies trading on the USE, which offered discounted prices.

The transaction advisor is therefore banking on the company's investor profile to spur uptake of new shares in light of steady institutional interest witnessed on its counter over the years that has led to concentration of nearly 90 per cent of DFCU's shares among foreign and local fund managers.

"The funds to be mobilised from this rights issue are meant to raise new capital for a bigger, more demanding business and the offer price reflects that fundamental based on a fair valuation of Ush950($0.26)-Ush1,200($0.33) per share," said chief executive at African Alliance Uganda Kenneth Kitariko

Mr Kitariko said he expected strong uptake from institutional investors who hold around 90 per cent of DFCU Ltd shares traded on the USE.

"However, retail participation could be affected by low immobilisation of paper share certificates on the DFCU counter. Currently, only 800 investors on this counter have opened Central Depository System accounts while about 2,900 are still holding paper share certificates," he said.

Spillover effects

Some stock brokers anticipate spillover effects against other stocks traded on the USE as investors seek to exit certain counters in order to raise money for the DFCU rights issue.

Equally, improved liquidity levels - the relationship between demand and supply patterns for traded financial securities -- are expected after the rights issue.

"The transaction advisor has told us the company's valuation has increased significantly since the acquisition of some assets and liabilities from the former Crane Bank but the big question is how many retail investors are willing to buy rights shares at Ush760 ($0.21) while the current trading price is at Ush758 ($0.2) per share?", the manager for equity financing at Crested Capital Ltd Joseph Kibuuka asked.

Retail investor Andrew Muhimbise said the offer price is abnormal and is based on new assets and liabilities acquired from the former Crane Bank "whose real risk levels remain unclear to us."

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