Introduction
The development of the capital markets in Kenya has a long history as the NSE is in its 60th year of existence.
The NSE is currently a public limited liability company incorporated as a private company on 29th November 1990. The NSE then converted into a public company on 25th April 2014.NSE has been operating the exchange and it is the only approved securities exchange in Kenya, by the Capital Markets Authority.
The NSE is undergoing a phase of significant change. Demutualization was completed this year. The NSE has expanded its core mandate to include creation of wealth for its shareholders as a limited liability company.
The NSE expects to raise a total of KES 627 mn by issuing 66.0m new shares at a price of KES 9.50 per share. Of the total of 66.0m shares on offer, 2.5m will be reserved for employees of the NSE and the remaining 63.5m shares will be available to the public.
Current Shareholding
Since NSE was formed by Stock Brokers, after demutualization all the 22 Stock Brokers and Investment Banks own equal holding of 4.1% while the Government of Kenya (through the Treasury) and Investor Compensation Fund Board own 5.1% each.
| Name | No of Shares | % |
|---|---|---|
| ABC Capital | 5,250,000 | 4.1% |
| African Alliance Kenya Investment Bank Ltd | 5,250,000 | 4.1% |
| AIB Capital Ltd | 5,250,000 | 4.1% |
| Apex Africa Capital Ltd | 5,250,000 | 4.1% |
| SBG Securities Ltd | 5,250,000 | 4.1% |
| Discount Securities Ltd (statutory management) | 5,250,000 | 4.1% |
| Dyer & Blair Investment Bank Ltd | 5,250,000 | 4.1% |
| Faida Investment Bank Ltd | 5,250,000 | 4.1% |
| Francis Drummond & Company Ltd | 5,250,000 | 4.1% |
| Genghis Capital Ltd | 5,250,000 | 4.1% |
| Kestrel Capital (East Africa) Ltd | 5,250,000 | 4.1% |
| Kingdom Securities Ltd | 5,250,000 | 4.1% |
| NIC Securities Ltd | 5,250,000 | 4.1% |
| Ngenye Kariuki & Company Ltd | 5,250,000 | 4.1% |
| Nyaga Stockbrokers Ltd (statutory management) | 5,250,000 | 4.1% |
| Old Mutual Securities Ltd | 5,250,000 | 4.1% |
| Renaissance Capital (Kenya) Ltd | 5,250,000 | 4.1% |
| Shah Munge & Partners Ltd | 5,250,000 | 4.1% |
| Standard Investment Bank Ltd | 5,250,000 | 4.1% |
| Sterling Capital Ltd | 5,250,000 | 4.1% |
| Suntra Investments Ltd | 5,250,000 | 4.1% |
| Francis Thuo & Partners Ltd | 5,250,000 | 4.1% |
| Cabinet Secretary, Treasury of Kenya | 6,562,500 | 5.1% |
| Investors Compensation Fund | 6,562,500 | 5.1% |
| Totals | 128,625,000 | 100.0% |
| Source:NSE Prospectus Company |
NSE Sources of Income.
The major sources of operating income for NSE are as follows with transaction fees contributing over 83% of the total:
2013 FY
| Source of Operating Income | KES '000 | % |
|---|---|---|
| Transaction Fees | 405,777 | 83.0% |
| Annual Listing | 73,715 | 15.1% |
| initial Listing Fees | 8,651 | 1.8% |
| Application and additional listing fees | 623 | 0.1% |
| Total | 488,766 | 100.0% |
NSE generates other income from the following sources
2013 FY
| Source of Other Income | KES '000 | % |
|---|---|---|
| Market Access Fees | 40,000 | 35.5% |
| Rental income | 25,755 | 22.9% |
| Broker back office subscription | 21,240 | 18.9% |
| Data vending | 15,843 | 14.1% |
| Others | 9,689 | 8.6% |
| Total | 112,527 | 100.0% |
NSE IPO Offer Key Data
| Offer Shares | 66,000,000 |
| Offer Price | KES 9.5 |
| No of Issued and fully paid up shares post IPO | 194,625,000 |
| Offer Close | 12-Aug-14 |
| Public announcement of the results | 03-Sep-14 |
| Commencement if trading | 09-Sep-14 |
Use of Funds
The NSE plans to use net proceeds from the IPO as follows:
- Invest in new infrastructure to support the various expansion initiatives
- Reduce mortgage debt (The mortgage loan with KCB )
- Provide seed capital towards the Settlement Guarantee Fund for Futures.
Financial Performance Highlights
NSE has reported impressive increase in income and earning for the last 5 years. PAT has improved from a loss of KES 35 mn in 2009 to a profit of KES 262 mn in 2013.
Total income for the last 5 yrs has grown more than 3 times to KES 622 mn in 2013. The balance sheet has also grown more than 3 time to KES 1,149 mn in 2013.
| NSE Income Statement (KES '000) | 2013 | 2012 | Change |
|---|---|---|---|
| Operating Income | 488,766 | 329,961 | 48% |
| Interest Income | 21,420 | 21,184 | 1% |
| Other Income | 112,527 | 33,184 | 239% |
| 622,713 | 384,329 | 62% | |
| Admn Expenses | (333,838) | (258,800) | 29% |
| Finance Costs | (39,360) | (1,521) | 2488% |
| Share of Profit | 14,252 | 3,479 | 310% |
| Recovery/( Provisions) | 115,574 | (100) | |
| Profit Before Tax | 379,341 | 127,387 | 198% |
| Tax | (117,077) | (42,606) | 175% |
| PAT | 262,264 | 84,781 | 209% |
| NSE Balance Sheet (KES '000) | 2013 | 2012 |
|---|---|---|
| Non Current Assets | 864,180 | 739,349 |
| Current Assets | 284,956 | 143,341 |
| 1,149,136 | 882,690 | |
| Shareholders’ Funds | 730,810 | 492,518 |
| Non Current Liabilities | 136,280 | 285,982 |
| Current Liabilities | 282,046 | 104,190 |
| 1,149,136 | 882,690 |
NSE reported 62% rise in total income while administration cost went up by 29% in 2013 comparing with the previous year. There was a jump in recovery of doubtful debt of KES 115 mn in 2013 which may not be repeated in the coming years. PAT was up 209% to KES 262 mn in 2013 from KES 81 mn in 2012.
Key Investment Consideration
Attractive Valuation
At an offer price of KES 9.50, the offer post IPO and adjusted to one off recoveries is at a price to book ratio of 2.5 and a PE ratio of 10 which is a heavy discount to its only peer in Africa JSE which is at P/B of 3.8 and PE of 15.30. The global average P/B and P/E of listed exchanges is 5 and 23 respectively and hence NSE offer price at KES 9.5 is heavily discounted.
NSE only Exchange in Kenya
Being the only exchange approved by Capital Market Authority in Kenya, NSE will continue to benefit from capital markets development in Kenya being the biggest and most vibrant exchange in East Africa. Improved investors confidence especially after self listing will attract increased transactions resulting to more income from transactions fees.
New Products
The NSE is expanding its business lines by introducing new products in the market including REITs derivatives, and ETFs. The exchange will also introduce short selling, securities lending, margin trading, Islamic products (Sukuk), municipal and county products. All these new products will boost NSE earnings.
Relatively Small Offer
The NSE offer of 66 mn shares is relatively small for the Kenya market and hence allocation is expected to be minimal. Without allowance to use bank guarantee on application instead of paying for application upfront, there will be opportunity cost loss due to expected oversubscriptions resulting to refunds.
We recommend a BUY for the IPO and we expect the price to appreciate in the short term after listing.
