Sunday, May 26, 2019 / 12:45PM / By Teslim Shitta-Bey, Managing Editor/ Header Image Credit: EcoGraphics
As the NSE All Shares Index (ASI) responded to six consecutive days of MTN share price increases, upon listing by way of introduction, Proshares Nigeria was compelled by the balance of evidence to write a 57 Page Memo to the Market to provide clarity above the noise of adversarial comments in the public space. The findings of Proshare investigation into the implications of the MTN listing by LBI unveiled fundamental weaknesses in the rules guiding LBI listings on the floor of the Nigerian Stock Exchange (NSE) and provides further reasons for the Exchange and the apex regulator The Securities and Exchange Commission (SEC) to review extant practices and rules to ensure a more transparent process of pricing newly listed securities.
A review of the MTN listing process and subsequent events that followed a week of trading frenzy in the stock clearly indicates that a problem exists with the mechanism by which large cap stocks are listed on the Exchange.
This speaks to the urgent need for the Exchange and the apex market regulator to provide direction and authenticity to the process by which new issues are offered to new investors. The process by which large companies get listed on the exchange by introduction without creating float to drive price discovery is flawed. The recent vociferous protests by market entities concerning the lack of liquidity in MTN shares on the market and the sudden rise in the stocks equity value because of an alleged absence of tradable quantities on the bourse, reflects this challenge that needs to be addressed forthrightly by the regulatory authorities.
The conflicting interest between old and prospective investors needed to be resolved by a market architecture that ensures that pricing of new offers and their liquidity on listing dates are assured in order to guarantee a market governance frame work that is consistent with best global practices and does not leave market regulators open to suggestions of bias.
In the contemporary case of the MTN LBI several lessons appear to have been learnt and are captured in Proshare’s recent market memo.
Six Days of Sizzling Movement
For six consecutive days the price of MTN shares soared in an upward trajectory seeing the stock value rise by 20% in just two days of trading and by a further 60% on the fourth day of market activities; however the fever broke on Thursday as existing shareholders began to release additional quantities of the stock for trading on the floor of the Exchange. The Telcos share price dropped from N149 on Thursday May 23, 2019 to N140 per share on Friday May 24, 2019, representing an expected -6.04% price reversal as traders began to bid and offer for the security on the floor of the bourse.
A major reason for the reversal was the action taken by existing shareholders to place more of the company’s shares on the floor for trading. This was after six days of a straight price rally that saw the company’s equity price rise from a listing value of N90 per share on May 16, 2019 to N149 per share on May 23, 2019, representing a week on week (W-o-W) rise of +65.6%. The market price bubble burst on Friday on rising tradable stock and reduced investor pressure.
Chart 1 Selected Index and MTN Price Movements 2019
Source: NSE/Proshare TheAnalyst
Proshare’s market deep dive revealed that the early price surge of the Telco’s equity in the first six days of trading was inspired by an act of omission by the advisers to the listing and managers of the Exchange. Unlike, the usual practice where companies coming to the Exchange for public offer either by way of Introduction or Initial Public Offering (IPO) and sell limited quantities to new investors as a gesture of goodwill, the MTN listing appeared to have breached this market convention leading to an expectation gap between prospective buyers and existing shareholders of the company (creating the Nash equilibrium dilemma referred to in the report).
Market Rides MTN Tailwind
In a whirlwind week of major price movement, demand pressure for previously unavailable MTN stock reversed the negative year-to-date (YTD) performance of the All Shares Index (ASI) with the Index rising to a positive market yield of +0.5% on the Telcos first trading day. Indeed, the market Index rose by 6% within five days of trading activities on the stock as buyers struggled in apparent vain to lay hands on desired quantities of the Telcos shares.
Table 1 MTN Share Price and Volume Traded From May 16 -23, 2019
Source: NSE, Proshare research
The major challenge with the MTN listing was the gap in the rule that allowed companies list on the premium board as long as they offer a minimum of 20% of their outstanding shares or N40 billion in capitalisation. This rule has since been undermined by the relative sizes of new mega listings on the market floor and has created a situation where new firms listed on the Exchange can get away with offering little or no float for trading thereby leading to the artificial inflation of their share value as analysts and traders insist was the case with the three day 60% increase in the market value of MTN.
Chart 2 MTN Price Movement May 16-24, 2019
Source: NSE/Proshare research
The rise in the value of MTN over the last 6 days has placed it in a position where the company has one of the highest price-to-earnings multiple for any listed company on the Exchanges premium board with its P/E of 20.8.
Chart 3 P/E Ratio for Selected NSE Premium Board Companies
Source: Audited Annual Accounts FY 2018/Proshare research
Dangote the Exchanges largest capitalized stock still dominates the premium board’s earnings. This is understandable as it trades at a price to earnings ratio that creates hidden value opportunities for investors. DANGCEM presently trades at a P/E ratio that is half and a half times that of MTN which commands a recent P/E of 22 on a trailing twelve month (TTM) earnings per share for FY 2018.
Chart 4 EPS Ratio for Selected NSE Premium Board Companies
Source: Audited Annual Accounts FY 2018/Proshare research
At the close of market activities for the week, MTN saw its share price drop as volumes also tumbled on sellers and buyers working out a fair market value for the Telco at available market quantities of freely traded equities on the floor.
Proshare Nigeria will, to the best of its ability, continue to monitor developments in MTN’s post listing activities in a manner that supports best market governance practices and provides market information that may serve as guidance for investment entities seeking clarity.
Analyst(s) and CMO Comments/Reports Pre-Listing
1. MTN Nigeria IPO Teaser – Listing and Precursory Information - Jun 01, 2018
3. MTN - A case study for market-supporting institutions – Temitope Oshikoya – Nov 03, 2015
Third Parties Comments Posts Listing
4. Ferdi Moolman: The CEO who painted Lagos Bourse - Businessday.ng - May 21, 2019
Analyst(s) and CMO Comments Posting Listing
8. VIDEO: Capital Market Analyst, Rotimi Fakoyejo, Speaks On Shares Manipulation Allegation Against MTN – Arise News – May 21, 2019
9. MTN Nigeria’s Listing by Introduction: What the True Picture is – Afrinvest – May 21, 2019
10. Bullish Post Listing Market Reaction on MTNN Stock –Anchoria AM Research - May 17, 2019
Related News on Nominal Price & Transfers
11. NSE Rule on Nominal Transfers Takes Effect – Jul 12, 2018
13. Click here to Download Full PDF on Par Value Rule - Nov 06, 2017
15. Click here to Download Full PDF on Interpretative Guidance - Nov 06, 2017
Related News on MTN
18. NSE Clarifies Concerns on MTN Nigeria's Premium Board Listing – May 21, 2019
19. MTN Listing Memorandum – (PDF) – May 16, 2019
20. VIDEO: Highlights of MTN Nigeria Listing At NSE – May 16, 2019
22. A Fool’s Guide to the MTN Nigeria’s 2019 Public Listing - May 16, 2019
25. MTNN Q1 2019 Analyst Presentation – May 13, 2019
27. MTN VS AGF: Court Rejects AGF Preliminary Objection – May 07, 2019
29. MTN Announces Conversion From A Private Company To A PLC - Apr 24, 2019
30. MTN to List On the NSE Before End of H1, 2019 - Mar 14, 2019
35. MTN Nigeria Sues FGN and AGF For N3billion – Nov 09, 2018
38. MTN Nigeria, Banks and CBN Action – An Update and Initial ... - Sept 01, 2018
39. MTN Ghana Successfully Completes Its Initial Public Offer – Aug 31, 2018
40. MTN Replies Nigeria's CBN – You Approved The Funds Repatriated Aug 30, 2018
42. Stanbic IBTC Notifies of Regulatory Fine in Relation to MTN – Aug 30, 2018
43. CBN Clamps Down on Four Banks; Writes MTN to Refund $8bn – Aug 29, 2018
44. MTN Nigeria – Interim Financials For H1 2018 - Aug 14, 2018
46. MTN Ghana Launches Mobile Money Based IPO - Jun 10, 2018
47. MTN sues NCC over N780 billion fine - Premium Times Nigeria - Dec 18, 2015
48. MTN Group share price drops by 10% - Proshare – Jun 17, 2005
Related News on Exchange Rules
49. NSE, SEC Streamline Listing Process to Encourage More Listings – May 23, 2019
51. NSE Notifies of SEC Approval of Rules of The Exchange - May 13, 2019
53. NSE Launches X-Bot to Enhance Market Participation – Dec 28, 2018
54. NSE Proposes Rule for Listing of Green Bonds on The Exchange – Oct 04, 2018
55. NSE Reviews Equities Market Structure to Improve Liquidity and Participation – Jun 25, 2018
56. New Rules on Suspension of Trading in Listed Securities – Matters Arising – May 22, 2018
58. NSE Proposes Rules for Price Stabilization of Securities; Calls For Comments – Mar 22, 2018
60. NSE Proposes Amendments to Dealing Members Rule(s) 7.4 and 7.5 – Nov 16, 2018
61. NSE Releases Sustainability Disclosure Guidelines – Nov 16, 2018
62. NSE Proposed Rules on Free Float, REITs and Listing on the Growth Board – Jun 01, 2019
64. NSE Calls for Comments and Drafting of Rules on the Derivatives Market – Jan 02, 2018
65. NSE Pricing Methodology - The New Par Value Rule And You – Nov 09, 2017
67. NSE Issues Notification of Effective Dates of New Rules for Dealing Members – Oct 25, 2017
69. NSE Proposes Amendments to Rules 15.31, 15.32 & 17.13 of the NSE Rulebook - Feb 19, 2016
70. NSE Introduces The Rulebook 2015 – Dec 31, 2015
72. New Rules on Demutualization of Securities Exchanges in Nigeria Proposed – Apr 12, 2015
Related News on Free Floats
74. Level of Compliance and Free Float Deficiencies on NSE – Jun 07, 2016
75. Free Float Deficiencies: CHELLARAMS Yet to Comply as due date elapse – Mar 03, 2015
76. DANGCEM, UBN and 9 Others Still Have Free Float Deficiencies – Jul 02, 2015
77. NSE Seeks to Amend Rules on Free Float, Filing of Accounts and 3 Others – Feb 26, 2015
79. NSE Grants Waivers to DANGCEM, UBN and 4 Others on Free Float Deficiencies – Sept 22, 2014
80. NSE Lists DANGCEM, UBN and WEMABANK as firms with Free Float Deficiencies – Apr 02, 2014
81. Aluminum Extrusion Industries Plc Joins List of Companies With Free ... – Oct 09, 2014
83. Listing Rules: NSE confirms list of firms with Free Float Deficiency - Oct 02, 2012