Tucked away in
Lusaka South Multi-Facility Economic Zone is an entity that is poised to set
the Lusaka Stock Exchange alight. When President E. Lungu made the statement to
parliament on the significance of the IDC and its mandate to take companies to
Initial Public Offering (IPO) or listing, TFHZPC got really excited about the
prospects of analyzing future premier companies on LUSE.
But the question
is, “How do we get these State Owned Enterprises (SOEs)” to IPO. We will not
speculate on the timeline of such an endeavor but we will provide some pointers
on some of the signals future investors need to look out for if they intend to
further diversify their portfolios.
The Turn Around
Before any
company can consider going to IPO it must look at the health status of its
books. The numbers on the present and previous years have to be assessed
whether or not the company has had good earnings. If the earnings have been
negative, a turnaround will have to be put in place. This can come in many
forms (some unpopular) but the most common include a review of the management
team, staff levels, leverage, customer relations, supply chain management,
working capital management and cost management.
Strengths and weakness in the aforementioned give the turnaround team an
idea what it will take to make the company profitable again. More often than
not, it’s always expected that a time frame to profitability will be put in
place and the aim is to get an income statement that has positive earnings
three years in row.
Valuation
With steady cash
flows, an unquoted SOE can easily be valued using net present value or
discounted cash flow. What these methods basically do is they look at the
revenue potential of the prospective company over a specified period of time
and allow for the determination (calculation) of the company’s theoretical
value. Comes in handy for stock brokers to determine what share price the
company will list at.
Underwriting
The process of
taking an SOE to IPO is an expensive and meticulous one. The banks with
investment divisions will be keen to land the contracts to help with the
process of taking these companies to IPO. The banks will be responsible to
handling the intricacies of the process with regulatory departments such as the
Securities and Exchange Commission (SEC) and also engaging with possible
investors. Eventually, a document known as the final prospectus is produced
which is the go to document for all that want to know about the company and why
it’s listing. In addition, details of the share price would have also be
determined by the underwriter.
What Value is there in Listing?
Once the SOEs are listed on the stock exchange, this will offer government an opportunity to either exit or retain a minimal stake whilst at the same time allowing Zambians to now participate in the ownership of these newly promoted premier companies through their ownership of shares. Although the share certificates may not be enough for the owner to have a seat on the board, there is eligibility to dividends as well as value growth as these companies become more profitable. We envisage pension funds and high net worth individuals will take this opportunity to invest in the newly promoted premier companies. These will certainly open up new avenues of value creation that many investors will be longing for.
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