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EXPLAINER: What is listing and what to lookout for?

September 10, 2021 0
EXPLAINER: What is listing and what to lookout for?

Over the past couple of days, you might have read on the planned listing of Mobile Telecommunications Limited’s (MTC’s), through an Initial Public Offering (IPO) on the Namibian Stock Exchange (NSX) following government’s approval of the process in November 2017. Of course, this is history in the making, as MTC will become the first State Owned Enterprise to be listed. But if you find yourself with more questions than answers around what this means, here is our explainer.

What is an Initial Public Offering (IPO)?

An IPO refers to the process where a previously unlisted company offers shares to the public for the first time. The timeline to MTC’s much anticipated IPO has been prolonged by the COVID-19 pandemic and is now set to occur almost four years after government’s approval of the process.

A company is typically considered to be private prior to an IPO being characterised by a limited number of shareholders. Upon increasing its shareholder base by offering its shares to the public, it becomes a public company which in this case would be listed on the NSX. MTC is currently majority owned by the government of Namibia, through the Namibia Post and Telecommunications Holdings Limited, which implies that it will become the first public enterprise to list in the country. Also of note is the anticipated market capitalisation of the listed entity.

Why list, in the case of MTC?

Listing gives shareholders, in this case government, the opportunity to realize the value of their investment. Government is expected to raise between N$3 billion- N$3.5 billion from the planned listing of 49% of the company. It allows shareholder to transact in the company shares, sharing risks as well as benefitting from any increase in the organizational value.

The listing process also opens a company up to considerable public scrutiny and it becomes subject to the numerous disclosure requirements of the NSX, which regulates the activities of listed companies. This is in order to allow the general public to make informed decisions when considering investing in listed companies making them less risky than unlisted investments.

What is a prospectus?

The prospectus is the main document in a listing and is accompanied by any other information a potential investor requires to conduct due diligence and derive an independent valuation. This then compared to the listing price to determine whether the share offers value. There are several methods of valuation with preferred methods being based on the particular investor’s philosophy and strategy. Notwithstanding the different approaches, the basic concepts of time value of money and risk broadly apply. 

What are the benefits and risks of investing in a listed company?

Income from listed investments can be considered in terms of capital gains/losses which is the increase / decrease in the share price relative to its purchase price, these gains are unrealised until shares are traded and profits / losses booked. Dividends are annual or semi-annual distributions based on the company’s earnings per share and a pre-determined dividend policy. Smaller shareholders usually consider the dividend yield as a more accurate reflection of value since it is easily comparable with other asset classes and reflects their lack of control.

The total expected return of a share over a year would be a combination of both capital gains / losses and the dividend yield. Many people consider an IPO as a money-making opportunity and participate in a speculative manner assuming large increases in a company’s share price following the listing. However, it is necessary to understand the risk inherent in any particular IPO, particularly that equity investments deliver inconsistent returns over the longer term. This risk could be directly attributable to the company’s performance or subject to market emotions. The underpinning principal is that the market often mis-prices assets creating arbitrage opportunities which may allow investors to take trading profits, over the medium to long term however a share price tends to track growth in its earnings per share.

Allowing new investors to buy shares implies an element of old investors cashing out in addition equity capital raised may be used to expand the business or reduce debt. An IPO also comes with a lot of publicity and a certain stature amongst other corporates. This provides incentives for companies to list. It is therefore essential that the investing public conducts its own due diligence and where necessary engage their advisors before participating in any IPO. We recommend that investors at least consider the following basic check list prior to participating in an IPO:

  • Read the prospectus – also known as a pre-listing statement, it provides details about an investment offering and helps investors make more informed decisions.
  • Know the use of the listing proceeds – re-investing the capital raised into the business creates a foundation for future growth which is beneficial to shareholders.
  • Understand the Business – enables potential investors to recognising new opportunities or identify risks in the market.
  • Assess management – invest into the team which plays a key role in the company’s operations and functions are responsible for driving its growth.
  • Company’s potential - future prospects are critical in a forward looking market appreciating a company’s potential is the basis to forecast its performance.
  • Financial health and valuation – historical trends coupled with above-mentioned forecasts and business sustainability help translate potential into profits to derive an intrinsic value
  • Comparative valuation – similar investments are comparable across various valuation metrics, understanding the price dynamics of the company’s peer group provides a valuation sanity check.
  • Risk factors – look out for any lurking risks which can pose a threat to the company’s future business prospects and by extension profitability.
  • Know listing sponsoring broker – the listing process is navigated by an entire team of advisors and investors must be wary of any potential conflicts as they themselves seek advice.   

All the above should be considered with-in the framework of a potential investor’s philosophy and strategy which will determine their time horizon, risk tolerance and income preference.

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Last modified on Saturday, 11 September 2021 10:05
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