News Column

Stock Market Upbeat

July 28, 2014

Julius Businge

Brokers at the USE. Trading has been dominated by Umeme for most parts of the year. NET PHOTOInvestment opportunities in utilities, financial services drive demand for shares

The Umeme counter has been the busiest in terms of turnover and shares traded on the Uganda Securities Exchange (USE) for the greater part of this year.

By July 18, Umeme, Uganda's sole power distributor, had its share price appreciate by 47% up from Shs 275 recorded during its Initial Public Offer (IPO) in November 2012 to Shs405.

Although other companies such as Stanbic (SBU) experienced similar price movements a few weeks after their IPO in 2007 (from Shs 70 to Shs 240), some market observers say they were surprised that Umeme's political problems with some MPs regarding its concession did nothing to diminish the popularity of its shares.

Even on July 18 trading session, its counter recorded over 3 million shares as bids (representing demand), but not even one share was on offer. The company dominated trading with over 4 million shares worth over Shs 1.8 billion with its share price rising to Shs 405.

"Yes, those factors should have negatively impacted on the price but it has not been the case," said one official at the USE who requested not to be mentioned because he does not speak for the USE.

"But you also know it very well that the company is profitable and has no competitor in its business." He added that it is rare to see foreign institutional investors like Investec sink their money in a company whose future they are not sure of.

Analysts told The Independent that the appreciation of the company's share price is largely attributed to the demand coming from institutional investors especially foreign ones.

In May, Actis Capital LLP sold 45.1% of its 60.08% stake in Umeme to Ugandan and foreign investors - a transaction that was described by analysts as exceptional.

The deal, which was worth $86 million (about Shs 215 billion) has since seen the Umeme counter transact almost every day with most investors interested in buying into the company.

The company's major shareholders include Investec Asset Management (18.47%), Umeme Holdings (14.30%), NSSF (14.27%), Farallon Capital (7.82%), Coronation Funds (3.68%) and Allan Gray Africa Funds (3.25%). The other investors are; IFC (2.78%), Utilico Emerging Markets Ltd (2.48%), Everest Capital (1.47%), T. Rowe Price (0.99%) and other retail investors who hold 30.48%. These investors hold a total of 1.6 billion shares as at June 16.

Arthur Nsiko, a research analyst and William Nyakatura, the corporate advisor at African Alliance, suggested that Umeme's profitability and monopoly in the power distribution business in Uganda are the major drivers of the popularity of its stock.

"Foreign investors know what is on the ground," Nsiko told The Independent, "they have studied Umeme and the energy sector in the country and are assured of a good return on their investment."

Nsiko added that the company's current payout ratio (the proportion of the company's earnings paid out as dividends to shareholders) remains competitive at about 40% compared to the other old listed companies in the market like Baroda at 20%, Stanbic at about 45% and DFCU at 40%.

He added that the company has met most of its concession targets, which is why investors are confidently investing in it.

For example, the company has managed to reduce losses from 35% in 2009 to the current 24% and targets 14% by 2018. This reduction, ideally translates into more profits and dividends to shareholders as it makes more power available for sale.

The company, under the concession signed in May 2004 with the government of Uganda, was supposed to invest $65 million in the first seven years; but instead doubled it to $130 million. It was supposed to make 60,000 new connections in the first seven years; it tripled it to 220,000 connections. It was supposed to increase collection of revenue from 75% to 95%; it is currently collecting 98% of total electricity sold as per 2013.

The company's financial statement for the period up to December 2013 indicates profit after tax for the year ended December 2013 increased to Shs 84 billion up from Shs 57 billion a year before.

The increase, according to company officials, was attributed to improved performance in operating profits and lower financing costs for the year. The company has paid out a total of Shs 23 billion as dividends for the year 2013 with each share going for Shs 24.8.

Another positive factor is only about 15% of approx. 35 million Ugandans are connected on the national electricity grid; meaning there is still a wide market for Umeme in the future, according to Nsiko.

Joseph Kibuuka, the acting chief executive officer at Crested Stocks, says Umeme's current performance at the USE could be attributed to the confidence other investors have in the new shareholder; Investec.

Investors look at who is investing what and in which company before taking part, Kibuuka suggested, adding that any future proceedings in Parliament on the company will do no harm on the share price. It is the performance and the outlook of the company that matters most, he said.

"No one will put their money in a dying stock, and after all, Umeme is entitled to a massive compensation in case its contract is terminated."

Nsiko said shareholders eying long term investment opportunities in the market should opt for the financial services industry given the fact that the economy is recovering from the past two tough years that saw annual inflationary pressures spike to 30% from single digit and interest rates to around 27% up from around 17-18% leading to a jump in non-performing loans and reduced profitability.

"We expect the recovery in GDP growth (currently at 5.7% in 2013/14) growth to feed into the entire banking industry, which has always made profits," Nsiko said.

However, Kibuuka, said although economic factors like inflation, the exchange rate and interest rates could change anytime and affect performance of any company, a favorable economic environment is good for any stock on the USE.

He said, however, electricity is more of an indispensable necessity for businesses and for most Ugandans. "Demand for electricity will continue growing," he said, which is good for shareholders in Umeme.

"While making an investment decision, investors should look at utilities such as Umeme first, that is where we see a good return at the moment."

Nsiko said the entire market has not picked up yet because most investors prefer to buy into companies they think will post good profits and make money in a short period.

When asked to comment on the other counters, Nsiko said their evaluation of NVL is 'a hold,' which means that shareholders can hold their stock and wait for some time.

He said NVL is a good stock despite the fact that the company recently incurred huge costs on other group media houses and equipment among other costs. On BATU, the price remains high and stable but there are genuine investors for the company.

Uganda Clays has a popular brand according to Kibuuka in producing construction products but has minimal trading because of management issues that have negatively affected its performance. "They (UCL) need to clean their house to attract more new shareholders and boost trading on its counter," he said. Kibuuka agreed with Nsiko on BATU. He suggested that the majority of the shareholders are holding their stock because they have gained from it in past years. "They don't want to let it go," he said. On Baroda, Kibuuka said recent corporate activities such as issuing of bonus shares have limited trading on its counter.

On the market generally, Kibuuka said young as it is compared to the Nairobi Securities Exchange (founded in 1954), the USE stands in a better position to grow because Uganda's economy is expected to post positive economic indicators in the long term.

According to the Capital Markets AuthorityJune 2014 report, total market capitalization and the USE All-Share Index went up, while the share volume and equity turnover were in negative territory.

The report indicates total market capitalization closed the month of June at Shs 23.16 trillion up from Shs 19.33 trillion a year ago. The increase was driven by a rise in the market capitalization of all counters with the exception of KA, DFCU, NIC, SBU, UCHM and UCL that dropped.

Total shares traded dropped to 98.19 million in June 2014 from 138 million shares. The ALSI went up to 1, 696 points from 1, 481.

In June 2014, Umeme was the highest-traded counter, moving more than 56.78 million shares - or 56.78% of the total volume transacted during the month.

Like Kibuuka, Nsiko is optimistic that the 15-year old USE will gain momentum when more companies list on the market and as more new investors join the fray.

At the end of June 2014, 24,207 Securities Central Depository (SCD) accounts had been opened compared to 21,433 accounts at the end of June 2013. This was an increase of 13% year-on-year. Local individual investors held 16,181 SCD accounts at the end of June 2014, representing 67% of all the SCD accounts.

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Source: AllAfrica

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