27, 2021, 7:00 AM / by Bukunmi Adejobi, Proshare Research / Header Image
Credit: NGX Group
The freshly demutualized Nigerian Exchange Group Plc (NGX) released its Q3 results for 2021 with a slight glimmer of future solid earnings as post-tax profits rose from N1.37bn in Q3 2020 to N1.51bn in Q3 2021, a rise of +10.55%. Analysts note that the surge was not earth stumping, but it gave a sense of the underlying earnings potential of the group.
In 2021, the Nigerian Stock Exchange (NSE) became fully demutualised, changing from a member-owned not-for-profit entity into a shareholder-owned, profit-making entity. The new structure, which included the Nigerian Exchange Group Plc (NGX Group), has as its subsidiaries: the Nigerian Exchange Limited (NGX Exchange), NGX Regulation Limited (NGX REGCO), and NGX Real Estate Limited (NGX RELCO).
The NASD, NGX Parley
The over-the-counter (OTC) equities market, NASD Plc, saw the demutualised NGX listed on its platform on April 14, 2021. Following its listing on the NASD, the stock traded at early market price of N25 per share while trading activities were carried out by NASD's 152 licensed and registered dealers. The listing represented the first cross-listing for any securities exchange in the country. However, this was not without some apprehension; analysts raised questions about the listing price and share ownership distribution of the NGXGROUP.
The equities trading platform saw a considerable spike in market capitalization as the volume of shares traded and deals completed rose notably between Q1 and Q2 2021. The NASD's NSI Index gained +1.04%, from 747.01 points in Q1 2021 to 754.88 points in Q2 2021, and the NGX Group traded at a high of N30.26. According to market analysts, the number of deals done rose by +933.33% to 31 from 3 recorded in Q1 2021 (using the last trading day of each quarter as a benchmark). The NGX listing added N33.43bn in added OTC market cap, raised investor interest in the market.
While investors beamed over the rise in NGX Group's stocks, analysts still questioned the extent of market disclosure on the NASD.
Chart 1: M-o-M Movement of The NASD Index & Nigeria Exchange Group's Share Price as of October 08, 2021
Source: NGX, Proshare Markets
NGX Group, Walking Back Home
After the Close of its register and the decision to with from the NASD, the NGXGROUP was admitted on the Nigerian Exchange Limited by introduction following the successful listing of 1,964,115,918 ordinary shares valued at N16.15 per share on its Main Board of NGX on Friday, October 15, 2021. The stock traded at N17.75 per share on the first day of new trading. The transaction added N34.9 billion to the total market capitalization of the NGX, which closed at a total market value of N21.6 trillion.
After completing the demutualization and restructuring of the Nigerian Stock Exchange and its related operations, the listing set the Exchange at par with other demutualized exchanges worldwide. The NGX is now similar to other African continental exchanges such as the Johannesburg Stock Exchange (JSE) and Nairobi Stock Exchange (NSE), which are listed and publicly traded shares.
Chart 2: W-o-W Movement of The NGXASI & Nigeria Exchange Group's Share Price as of November 24, 2021
The overall income of the exchange group showed that it grew revenue by +15.93% from N3.78bn in Q3 2020 to N4.38bn in Q3 2021 review (see table 1 below). The revenue included:
a. Listing fees and entrance levies included annual listing fees for listed companies, listed bonds, and delisting fees. Entrance fees include application processing and brokerage house application fees. The total revenue from fees grew by +10.72% to N529.49m Q3 2021 from N478.21m in Q3 2020.
b. Transaction fees included Equity transaction fees, Exchange Traded Fund, and Income from Bond trading. It grew by +3.17% to N1.79bn Q3 2021 from N1.73bn in Q3 2020.
c. Revenue from data, technology, and indices includes market data income from market data feed and other market data subscription services. It grew by +3.17% to N1.79bn Q3 2021 from N1.73bn in Q3 2020.
d. Other sources of revenue include treasury investments from bonds, treasury bills, fixed income deposits, dividend income from associates and subsidiaries.
Table 1: Nigeria Exchange Group's Revenue Q3 2021 and Q3 2020 (N'm)
Profit Before Tax
The Group's profit before tax rose by +26.50% from N1.36bn in Q3 2020 to N1.23bn in Q3 2021 review (see table 2 below).
Table 2: Nigeria Exchange Group's PBT Q3 2021 and Q3 2020 (N'm)
Assessing the group's ability to profit from its operations and capital efficiency showed that its return on capital employed (ROCE) in Q3 2021 was higher with a ratio of 0.02 compared to 0.01 recorded in Q3 2020. The demutualization project costs affected operating profit, which has affected group performance (see table 3 below).
Table 3: Nigeria Exchange Group's ROCE Q3 2021 and Q3 2020 (N'm)
Comparing the ROCE of its counterpart - NASD OTC, the NGX Group appears to be more efficient in generating profit from its assets. The NASD OTC recorded a negative return on capital employed with a ratio of -0.02 (see table 4 below).
Table 4: Nigeria Exchange Group ROCE Q3 2021 Vs NASD OTC ROCE Q3 2020 (N'm)
The asset turnover ratio of the NGXGROUP was slightly higher in Q3 2021 at 0.12 compared to 0.11 recorded in Q3 2020. The ratio was less than one (1), suggesting that the low efficiency ratio could not generate adequate revenue. However, this reflected company's sector, the financial services sector (see table 5 below).
Table 5: Nigeria Exchange Group Asset Turnover Ratio Q3 2021 and Q3 2020 (N'm)
Comparing the asset turnover ratio of the NGXGROUP with the NASD OTC showed that the OTC market generated revenue with its assets at a faster pace than the Nigeria Exchange Group. NASD recorded 0.43 in asset turnover while NGXGROUP posted 0.12, which may indicate the group not using its available assets efficiently; for example, fixed assets such as property or equipment could be sitting idle or not being used to generate revenue at their full capacity (see table 6 below).
Table 6: Nigeria Exchange Group Asset Turnover Ratio Q3 2021 Vs NASD OTC Asset Turnover Ratio Q3 2020 (N'm)
The NGXGROUP posted strong earnings in Q3 2021; however, the steady decline in share price appears to signal a paring down of investor confidence in the stock.