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Investors ponder Umeme IPO

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Experts positive about utility firm’s IPO but concerns about company’s future persist

Three long years have passed since the Uganda Securities Exchange (USE) listed the National Insurance Corporation (NIC), as its most recent IPO. It is therefore not surprising that the Umeme IPO has roused the capital markets industry from an apparent stupor.

The new IPO has been on the waiting list for more than a year as the utility company, regulators and African Alliance – the sponsoring broker – took time to iron out sticking points on the country’s first IPO in the energy sector.

Umeme Ltd, the sole distributor of electricity in Uganda, now appears to be on course to become Uganda’s first completely private company to list shares on the USE. All previous listings have been government shares in companies that were divested to the public.

CMA approved the Umeme IPO on October 11, opening the way for the company to launch it on Oct.15.

The company has offered 38.6% of its shares to the public, which will first go to Ugandans before it rolls out to other East Africans and then to offshore investors in the rest of the world. Company officials say the IPO has been well received, and is on course to be over-scribed come Nov.7 when the subscriptions will close and shares start trading on Nov.30.

Apparently, those who have bought shares say the company – which enjoys a monopoly – could be a good investment and more so with the coming on board of the 250MW Bujagali Dam, despite a worry that only 13 years are left on its concession. But shareholders will pick courage from the fact that the company has already invested heavily – almost $150 million, which together with the new cash injection from the IPO, would force the government to renew the concession for at least two more decades.

Analysts say Umeme stands in a good position to have enough power to sell to the public and generate more revenue in the next few years.

But there is a concern that the Shs 275 price per share, which some analysts say could turn away many local low income retail shareholders.  The most recent local IPOs in Uganda were; Stanbic Bank (Shs 70) and NIC (Shs 75), which led to their being oversubscribed. Buta top Umeme official said the share price is subsidized because for every 10 shares bought there is one extra share added. That means if one buys 1, 000 shares, one would own 1,100 shares.

Charles Chapman, the Umeme managing director, defended the price as “fair.” He expected to have “zero shares for sale by Nov.7” -the official closure of the offer.

A mini survey by The Independent showed that stock agents have been busy receiving applications for shares from prospective investors across the city.

“The turn up is good so far,” said an official at the Dyer & Blair Uganda Ltd table. “We expect the numbers to multiply.”

The company is offering 622, 378, 000 shares. The IPO targets East African retail customers with 20% of the offer shares, qualified institutional investors in EAC with 25%, and international investors with 46%. Umeme employees and directors have been allocated 9% of the total offer shares. The shares constitute 38.3% of the Company’s issued share capital.

Chapman said: “We are pleased with the approval received from the CMA, which helps Umeme achieve its goal of diversifying its ownership, while providing the Ugandan and wider East African Community and international investors an opportunity to own a stake in Umeme.”

Chapman said part of the funds raised from the IPO will be used to reduce the company’s interest-bearing debt and enable Umeme to secure better financing options over the next few years. The other funds shall finance its capital investment programme countrywide to increase efficiency and effective operations of the company.   Chapman added that Umeme would become more accountable, transparent and efficient in its operations once power users become part of the owners.

Experts view

Most analysts said that Umeme is “a good buy” because of its improved financial performance, the new innovations/products the company is implementing, the increased amounts of power generated in the country and the expected increase in demand for electricity among others. These, according to experts, put the firm in a good position to earn a good return for investors. They however advise the buyers to carefully read the prospectus and get proper guidance before they buy.

Jared Osoro, the chief economist at the East African Development Bank, said the supply and demand for power keeps rising, which directly means growth for Umeme as a monopoly distributor.

“People will always consume energy,” Osoro said, adding that the issue of the concession is not a big issue “it can be renewed since the company’s efficiency is improving.”

Osoro said appeared to chide Ugandans for not having interest in investing in shares, which gave foreign investors and institutions an opportunity to dominate the stock market.

Another positive from the Umeme IPO, he said, was that it would boost the trading at the USE by increasing the volume of transactions handled at the market.

However, he doubted whether the listing would have an immediate impact on the energy sector.

However, Samuel Sejjaaka, an associate professor of accounting and finance at Makerere University Business School, said listing would enable Umeme to acquire more capital to improve on its network and connect more customers on the grid.

He added that even if the company were to lose its concession in 13 years time, the company would remain solid and in a good position to bid for other contracts.

Sejjaaka disagreed with those who say the share price of Shs 275 was high. He said any interested investor would still buy because whether the share price is high or low “the value remains the same.”

Patrick Bitature, the Umeme board chairman, also defended their price, saying it was a product of professional advice from local and international advisors, who recommended that it was “reasonable.”

Sejjaaka added that most IPOs cause a lot of excitement because many people end up buying shares, which they sell to potential long-term investors especially institutions in the secondary market at a good profit.

Concession worries

Chapman dismissed fears over the expiry of the 20-year concession in 2025, saying they have the opportunity to apply and have the contract renewed. He said that his company has invested in the network and are becoming more effective by introducing new products like prepaid meters, employing more staff at district level and has reduced power losses among others.

“Those innovations put us in a better position to bid and win the contract,” he said.

Speaking at the launch of the IPO on Oct.15, Patrick Mweheire, the Stanbic Bank executive for investment banking in East Africa, said the 46% stake allocated to the international investors in the IPO had been snapped up –  an indication of the popularity of the listing at the international level.

He said because of the strong macro trends and sector fundamentals, outstanding operating performance, conservative business model and the diversified and scalable platform, investors saw Umeme as a great opportunity.

Officials said having invested over $134 million in the distribution system, Actis, the majority shareholders of Umeme had given the company a firm foundation for any investor to buy and earn a good return.

“They will keep giving the required support to the company because they will still own the majority shares in the company,” said Bitature.

He added that the outlook for the Ugandan economy would continue to drive the demand for electricity and that they would work with the government to continue extending the penetration of electricity throughout the country to expand access.

According to the company’s prospectus, the company has increased its customer base from 250, 000 in 2005 to over 460, 000 to date. It has reduced energy losses from over 38% to 27% in the same period and increased revenue collections from 75% to over 98%. The company employs over 1, 300 people.

Joseph Kitamirike, the USE chief executive, declined to comment comment about the IPO until ‘practical’ trading at the USE starts at the end of November.

“But what I can say is we expect more trading at the USE,” he said.

Experts say all listed companies have their own risk factors, which every investor must carefully consider.  Bitature agreed saying would be investors should to ‘carefully’ review the risk factors detailed in Section 14 of the prospectus in order to better understand the risks and uncertainties associated with Umeme, its industry, Uganda and its regulatory environments so they can make informed decisions about the offer.

Officials said the company would later seek approvals from the Kenyan regulators to execute a cross listing on the Nairobi Nairobi Securities Exchange.  If it succeeds, this will mean more cash for investment and expansion hence more customers and revenue.

What remains to be seen is the impact the 15th company to list on the USE will have on trading activity which has been sluggish since Stanbic listed in January 2007.

Key USE milestones

June 1997: USE is licenced by the Capital Markets Authority to operate as an approved Stock Exchange.

January 1998: USE lists first UGX 10 billion 4 year EADB Bond.

March 1999: USE lists 5 year UGX8.3 billion PTA Bond.

January 2000: Uganda Clays Ltd becomes first equity listed on USE’s.

June 2000: BAT floats shares

March 2001: EABL becomes first ever cross border listing

March 2002: Kenya Airways also cross lists

November 2002: Official listing of Bank of Baroda Uganda Ltd (BOBU) on the USE

September 2003: first tranche of UTL Medium term Note is listed

October 2003: USE launches USE All Share Index (ALSI).

January 2004: First Government Bond is listed on the USE.

2004: DFCU becomes second bank on USE.

December 2004: New Vision offers 20% of its shares in IPO

December 2005: 8 year EADB Bond is listed

February 2006: Jubilee Holdings Limited (JHL) of Kenya becomes first insurance firm on USE.

January 2007: Stanbic Bank Uganda lists with a 200% over-subscription.

December 2009: NIC lists on USE

February 2010: USE launches electronic trading (SCD system)

February 20 11: Centum cross lists on USE

Oct.2012: Umeme becomes first energy company to launch IPO


‘Umeme IPO a good opportunity’

African Alliance is the sponsoring broker of the Umeme IPO.  Kenneth Kitariko, the CEO, talked to Peter Nyanzi about the salient issues in the process ahead of the official listing of the company early next month.

Why would a private company decide to go public by listing shares on the stock market?

Companies do this to raise funds for growth and also to provide the company with an avenue to access capital markets in the future to raise funds. Also, going public can also grow the profile and brand of the firm as a marketing tool.

Why did the Umeme IPO take too long to become reality?

The regulator, CMA, had to be satisfied that the company had disclosed all pertinent information for shareholders to make a sound decisions, also unlike other industries the power sector is more complex and requires extensive due diligence, by outside parties, including the advisors and regulators

Some people have said Shs 275 is a little too high for the ordinary person. What factors determine the price?

It sometimes doesn’t matter whether somebody gives you a full orange or a full orange sliced twice. It still makes one orange.

So, what safeguards are in place to protect the interests of investors in these listed companies?

CMA, the Uganda Securities Exchange and the issuers have put in place polices to ensure that companies meet minimum requirements including reporting requirements, corporate governance etc.

What impact is the Umeme IPO likely to have on the securities industry in Uganda?

I think it will increase Uganda’s visibility in frontier markets, and allow more portfolio investments in Uganda. It would also put Uganda in the radar screen of foreign/frontier investors. Our perennial problem is liquidity.

And what does it mean for the energy sector in the country?

This opens up the market for more investments in the energy sector, to boost power and efficiency of distribution across the country.

On previous IPOs foreigners have tended to acquire more shares than Ugandans. Why is this so?

Ugandans still lack the savings and investing culture as individuals, which fortunately they have begun to foster, but still we are not yet there and therefore it’s not good enough. The other reason is that institutional investing is still underdeveloped with the pension sector still in its early stages of development.

The stock industry in Uganda is relatively young compared to many other countries.  What should be done to build popular interest in stock trading?

There is need for more investors’ education, marketing and creating private sector precedents such as Umeme and privatize more government-held companies.

What other key challenges is the stock market in Uganda facing?

It is mainly low liquidity and the fact that only a few companies are listed on the USE.

Where do you see the stock market in Uganda in the next few years?

It’s likely to be more developed in the next few years; given the on-going deregulation of the pension sector.

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