Managing Director of APT Securities & Funds Limited, Mallam Kasimu Kurfi, in this interview, spoke on how banks' borrowing affected the performance of manufacturing companies quoted on the Nigerian Stock Exchange, NSE, and investors' confidence in the stock market.
By Peter Egwuatu
MOST manufacturing companies quoted on the Nigerian Stock Exchange, NSE, are financing their operations through bank borrowing. Why are they scared of coming to the capital market to raise cheaper fund and what is the implication?
The manufacturing companies were scared of coming to the capital market to raise money because many of them felt they may not be able to succeed especially during the earlier period of 2017 when the market was down. The low investors' confidence really affected most companies from coming to the capital market to raise fund. They had to consider many factors before coming to the market; they have to consider the time, economic situation, and the readiness of existing shareholders among others.
Coming to the market at the time the share price of these companies was low could not have been the best for them. For example, Guinness Nigeria Plc came to the market at N58 but now trading above N100 per share. They could have come to the market when the price was around N90 per share. That is, 50 percent above the previous price. I foresee more companies raising funds from the capital market this year once the economy continues to grow.
However, the implication of using banks' loans to finance operations is that companies have to pay higher interest as we have seen interest expenses from the manufacturing companies rising in quarter one and two of last year. But in equity funding, you do not pay such money.
It is not even compulsory to pay dividend, and even if you must do that it has to come from profit. Nevertheless, bank borrowing has helped manufacturing companies to still continue to remain in business in the short term. It has helped companies to sustain their working capital.
Would you say investors' confidence has returned to the stock market and if yes, how sustainable?
Investors' confidence really has improved in our market. We can now see both local and foreign investors participating in the market. The foreign investors understood our market very well. When the economy and market were not favourable, we saw them ignoring our market. The performance of the market is very interesting gaining 45 per cent in six months only June to date. This was not achieved in the last eight years. The Banking sector have achieved over 70 per cent in the same period while many banking stocks gain over 100 per cent such as Diamond Bank, Access, Zenith, GTB and others gained from 150 per cent to 250 per cent such as Fidelity, UBA, FBHN, StanbicIBTC.
The major challenge of the market then was monetary policy by Central Bank of Nigeria, CBN. The market did not respond until when the CBN introduced the Investor and Exporter Foreign Exchange, FX window policy which restored confidence of foreign Investors. It shows clearly the influence of foreign investors in our market. The major issues, we had last year was to restore the confidence of local investors who will help to sustain the stability of the market as it was before the coming of foreign investors. We hope the confidence would be sustained until we get to the political period. We cannot really say what will happen until after election proper. However, election can bring uncertainty which the market may react to. It depends on how the politicians handle the matter. The return of the year is going to be positive but not as much as 2017.
Which sector on the NSE do you expect to come first in terms of performance indicators this year?
The banking sector is likely to do better than other sectors. I see the banks performing well in the full year than the previous year. This is because of the retaining of the monetary policy rate by CBN which ensures high return for most of the banks as well as the intervention of CBN in the 9Mobile crises which saved many banks from huge provisions for bad debt. The Industrial sectors as well as Agricultural sector are expected to do better as the availability of US dollar make easy access to raw materials and better production.
Can you comment on dematerialisation of the stock market?
The issue of dematerialization is very successful as almost all our stocks have been dematerialized into the Central Securities Clearing System, CSCS.
Certificates in physical format
As you know dematerialization offers flexibility along with security and convenience. Holding share certificates in physical format carried risks like certificate forgeries, loss of important share certificates, and consequent delays in certificate transfers.
Dematerialization eliminates these hassles by allowing investors to convert their physical certificates into electronic format. Shares in the electronic format are held in a Demat account with the CSCS.
What is your projection for the Nigerian stock market this year?
Our projection for the year 2018 is that our market will remain brighter as most of the quoted companies are likely to declare better dividend because of the expected good performance of 2017. Our stocks are still trading below Earning Per Share, EPS of 5 which means they are still below the average EPS of 8 to 10 as obtained in the Frontier market making our stocks to trade below the fair value. As long the price of Crude oil sustain or surpass the price of $65 per barrel it will boost our Foreign Reserves which attracts more foreign investors to participate in our market.