Investors Weigh in on UMEME the Uganda Electricity Distributor IPO

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.

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.


'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.

The Independent Newspaper
29-Oct-2012