Friday, January 15, 2010

NIGERIAN INSURANCE CORPORATION IPO IN UGANDA


9:15 am Entebbe, the aftermath of the Annular Eclipse of the sun, will NIC replicate this brighteness on Uganda's only Stock Market?

Offer Essentials
Company: National Insurance Corporation (NIC)
Country: Uganda
Sector: Insurance
Management Company: Corporate Holdings Limited
Ownership Structure: IGI through Corporate Holdings Ltd 60%
(Includes 9% owned by Local Investors)
Government of Uganda 40%
(All on offer for IPO)

Market share: 11% (Number 4 market player as of 2007)

Shares Offered: 161,552,000
Breakdown of Offer:
Employees: 16,155,200
General Public: 145,396,800
IPO price: 45 Ushs
IPO value: 7,269,840,000 Ushs


Earning Per Share: 5.3 Ushs (2008), 7.5 Ushs (as at 30/09/2009)
Price Earning Ratio: 8.5 (2008), 6 (as at 30/09/2009)

Opening of Offer: 31st December 2009
Closing of Offer: 5th February 2010
Allocation Results: 9th March 2010
Refund date and Certificate Issue: 18th March 2010
Trading date: 25th March 2010

The long awaited NIC IPO has finally come, along with it some controversy; below Star Traders’ analyses the; Prospectus, raging controversy, suspicion, financials and some likely outcomes


Makerere University Retirement Scheme
The Teaching staff at Uganda’s premier tertiary Institution in 1996 contracted NIC to manage their retirement funds under the, now famous, Deposit Administration Plan (DAP). There is no coincidence that when IGI Plc through Corporate Holdings Ltd took over 60% ownership from the then fully state owned Insurance Corporation in 2005 that Makerere ceased to meet its deposit obligations as regards this retirement scheme.
There is an instrument binding this transaction called the GMP and the Trust Deed and Rules which provides that a valuation could be taken by an Actuary.
NIC is in the business of covering risk, it would be therefore foolish to think they have not covered themselves adequately against any adverse scenario like is the case with Makerere’s planned abrupt withdrawal of their Retirement Scheme Funds. For now they are taking punches without retaliation from the Professors in a typical ‘don’t roll with the pig in the mud- you get dirty while it enjoys’ style but I could bet that the Ivory Tower is either not disclosing all or is ignorant about the workings of this DAP scheme, eloquence alone is not enough.
Certainly NIC will be hurt by the subsequent liquidation of assets held in order to meet this abrupt DAP obligation.
Star Traders’ believes this is a Lose-Lose situation for both NIC and Makerere,
They say silence is gold and NIC has benefited from this to mitigate on its perception loss.

Nigeria
It is interesting to note that as one of the risks related to market perception of NIC in the prospectus reads “NIC faces risk associated with IGI’s shareholding in NIC being a Nigerian Company”
East Africans (target retail investors) love Nigerian movies and what is captured under that risk does not add up in the minds of retail investors, It instead highlights the deep seated suspicion and fear associated with general dealings with Nigeria and Nigerians.
Indeed Makerere’s claims to the DAP is riding highly on this perception.

Cost of IPO
This IPO is going to cost Government of Uganda 2,531,500,000 Ushs out of the envisaged 7,269,840,000 Ushs a massive 34.8%; Oh La La!

Allocation
IPO value of 7,269,840,000 Ushs makes this a small IPO just 10% of its predecessor Stanbic and frankly pro rata will not in any way achieve government’s stated objective of broadening direct share ownership.
Why pro rata cannot achieve this; assuming word in the corridors of Pilkington Street (akin to renown Wall Street) is that one foreign investor has lined up Euro 2 million for this IPO, that would be equivalent to approx 5,600,000,000 Ushs out of the 6,542,856,000 Ushs reserved for the general public hence direct pro rata would mirror a Safaricom kind of allocation with inconsequential allocations.
GoU’s objective can be achieved if the allotment is done on a basis of say, Every East African Investor is guaranteed shares worth 1,000,000 Ushs then after a percentage of the balance; of course this can only be determine after analyzing the application results, We trust MBEA the sponsoring brokers will take keen note of this.

Accounts
For the record we are not a certified accountant, so judge for your-selves as well.
As long term retail investors we are perturbed by these facts as per the financial statements:
Dividend payout policy: NIC has been a darling of its short-term shareholders paying out an average 78% of profit as dividend from the years 2005 to 2008.
It is reverse impressive to note that they have been overstretching themselves to keep their shareholders smiling considering in 2006 they paid out 807,760,000 Ushs compared to a profit after tax of 497,674,000 Ushs thereby dipping in their reserves.

Deferred tax Liability
These are tax obligations postponed and they attract interest once they become Outstanding, the issue here is about the amount of 9,165,624,000 Ushs in comparison to the net profit of 3,023,367,000 Ushs as at September 2009.
It is common practice that Insurance companies operate on liabilities (premiums) but this accumulated tax liability vis a vis high percentage dividend payout does not project foresight.

Last word
IGI has done a commendable job in turning around NIC in the last four years nonetheless their commendable effort, in terms of value they are offering to investors on the Stock Market, almost equals to what is already on offer in the Secondary market as represented by: Stanbic Bank, New Vision and the DFCU counters with Price Earning ratios between 10-15 compared to NIC’s 6 yet these companies have broader and deeper upside potential in terms of expansion and consolidation.
Star Traders’ would therefore, with a pinch of salt, recommend that NIC be a Short-term buy to take advantage of the short lived IPO excitement and probably the absence of the 2% brokerage fee.
After questioning one of the brokers on the logic behind especially regarding the NIC financials, he had this to say “If you do not buy into NIC, rest assured the Nigerians will! IGI Plc is the Underwriter.”
Yeah, right and most times that’s what the Stock Markets are all about, Star Traders’ believes now you can form an independent opinion.
Good luck and all the best to you Investors in this New Year 2010.


Acronyms
IPO- Initial Public Offer (Primary Market)
EPS- Earnings per share, is amount of money each share earns, say for NIC each
share worth 45 Ushs has earned 7.5 as at 30/09/2009
IGI- Industrial and General Insurance
NIC- National Insurance Corporation
Ushs- Uganda Shillings

Key words
Actuary- one who makes calculations for Insurance companies.
GMP and the Trust Deed and Rules- instrument binding the Makerere DAP Scheme.
Underwriter- one who undertakes to purchase shares, at a fee, incase of
undersubscrition.

Exchange Rates
1 Naira = 25 Ushs
1 Kshs = 25 Ushs
1 USD = 1,920 Ushs
1 Euro = 2,750 Ushs


“Teaching investors to count is fine, but teaching investors what counts is best”
The author is a blogger based in Entebbe
Mob: +256 702 431064
eatrader@gmail.com

4 comments :

  1. Anonymous said...

    Andrew,

    What interest is on Deffered tax?!!!!

  2. Volunteer For A Cause said...

    Great analysis for us Star Trader, we can now judge for ourselves...

  3. Anonymous said...

    Andrew have you seen that nic has reserves of 11 BN now muk claims OVERR 15BN of that is that good or is it destined for high levels of debt

  4. Star Trader said...

    Anonymous 1:
    There is no interest on Deffered Tax, but once once a Company does not pay it within the stipulated time, it becomes an Outstanding Tax which attracts a penalty of 2% per month.
    Reason being that Deffered tax is temporary difference caused by the diference in the applications of the financial concepts and the tax accounting concepts. Thank you for that comment, we have rectified that in the main article.

    Volunteer for a Cause:
    Yeah:Judge,enjoy and learn- after all that what life is all about. may be you could take comfort for Warren Buffet's now famous quote as regards Investment in the Stock Market, "Be fearful when others are greedy and be greedy when others are fearful"

    Anonymous 2:
    Well Insurance Companies like Banks use other peoples' monies and they have perfected that, we agree that NIC has a Liquidation of Assets Risk as they will have to sell off some of their nera cash Assets like Shares, Bonds and Treasury Bills to meet obligations on say the MUK SCheme.
    And besides they will not pay out the "15BN" all at once- Renaissance Capital's analysis puts the payment period between 4-5 years.
    I believe payment of MUK will not destine them for higher debt levels instead it will force them to sell some near cash assets.

    Thanks to all, even for the comments sent to the inbox.
    Star Traders'