Slump in rights issue mirrors struggling Nigerian economy

Slump in rights issue mirrors struggling Nigerian economy

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Slow-down in rights issuance of listed companies on the Nigerian Stock Exchange (NSE) market in the first quarter of 2019 is a mere reflection, amongst other factors, the struggling state of the Nigerian economy and current trend in the Nigerian equity market.

So far into 2019, the NSE approved two rights issues by Fidson Healthcare Plc and Sovereign Trust Insurance with total issues valued at N5.08 billion in January respectively.

This is low compared to N90.6 billion worth of right issues recorded in the first quarter of 2018 when the economic grew 1.95 percent and all share market index picked up 8.52 percent before factors surrounding political uncertainty began setting in.

Analysts believe that slow-down in economic activities in Nigeria could see companies not motivated to raise more funds for expansion purposes except for the reason to clear up debt obligations, especially with companies having high leverage ratios.

Evident in the Nigerian GDP report released by the National Bureau of Statistics (NBS), since the country exited recession in the second quarter of 2017, GDP growth has barely struggled to hit a 2 percent growth.

While investors on the Nigerian stock exchange (NSE) market may have watched values for their investments erode due to the persistent bearish trend in the equity market space, listed companies are also faced with the challenge of persuading shareholders to subscribe cash for new issues due to lower share price levels.

Current bearish trend in the market may see companies apply brake on the move to raise more cash either to settle debt obligations or for expansion through rights issue this year as against the year 2018.

The year 2018 recorded rights issues which amounted to N237.6 billion initiated by 6 companies listed on the exchange as stated on the X-compliance report published on by the NSE in 2018.

These companies included Flour mills with a rights issue worth of N39.9 billion, Morrison Industries (N502 million), Lafarge Africa plc (N131.7 billion), UAC of Nigeria Plc (N15.4 billion), Consolidated Hallmark Insurance (N500 million) and Union Bank plc (N49.7 billion).

The NSE approved rights issue of 750,000,000 ordinary shares of N0.50 each at N4.00 per share of Fidson amounting to N3 billion in worth, while rights issue of 4,170,411,648 ordinary shares of N0.50 each at N0.50 per share, amounting to N2.08 billion for Sovereign trust.

However, the    Nigerian equity market has not witnessed any rights issue after the conclusion of the 2019 general elections, which agreed with analysts’ stance on the fact that there will only be more rights issues on a change of government.

Explaining the idea behind right issues, “the reason why most companies have not gone ahead with right issues is because of the pricing of stocks. Stock prices are currently down and market is currently down. Companies would prefer to issue rights when prices are favourable” Paul Uzum, a Lagos based stockbroker told BusinessDay.

 

 

Since the conclusion of the 2019 general elections, negative sentiments of the market have driven the all share index performance down by 13.05 percent to 28,430.37 points as at the close of market on Tuesday, 4.95 percentage points lower than FY 2018 bearish market performance of 18 percent.

Meanwhile year to date analysis have also shown that performance of the NSE is down 9.34 percent grossly underperforming other markets in sub-Saharan Africa and emerging markets.

“When market picks up we will see a lot of right issues, however, the current administration doesn’t look like a stimulating factor for market uptick. A change in administration after the 2019 elections would have seen a market boost in which companies would take advantage of in right issues” Uzum added.

While investors awaits a clear policy direction which should boost market sentiments positively hence, translate into better prices which listed companies can take advantage, current market conditions aren’t suitable for right issues.

Listed companies are therefore faced with the challenge of persuading shareholders to subscribe cash for new issues.

 

David Ibidapo



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