How The Smarts Reap On Slumbering Exchange
Between January 31, 2022, and February 17, 2023 series of significant share transactions happened in the shares of MTN Nigeria (MTNN) Plc involving an insider. They were not disclosed until May 10, 2023, when the company filed to NGX, a notification of share dealings by an insider named Damilola Toriola.
That corporate communication was filed after Toriola acquired 21,655 additional units of MTNN at N226.70 per share on May 3, 2023, bringing the aggregate volume of the insider’s shares acquisitions to a total of 54,740 ordinary shares.
The notification of insider dealings signed by the Company Secretary, Uto Ukpanah, indicated that the transactions which occurred on January 31, 2022; September 6, 2022; February 17, 2023; and May 3, 2023, were executed at the average price of N197.23 per share.
The time lag between the date of transactions, and disclosure is in obvious violation of the Rule 17.13 of the NGX Issuers’ Rules, 2015, titled “Disclosure of Changes in Beneficial Ownership of Shares.”
Rule 17.13 of NGX’s Issuers’ Rules, 2015 requires every Issuer to notify NGX immediately about any transaction that takes the beneficial ownership of its shares to five per cent or more not later than ten (10) business days after such transaction.
However, MTNN said that it has in place a Securities Trading Policy which guides the Board and employees when effecting transactions in the Company’s shares. “The policy provides for periods for dealing in shares and other securities, established communication protocols on periods when transactions are not permitted to be effected on the Company’s shares as well as disclosure requirements when effecting such transactions,” Nigeria’s telecom firm said.
In a note on its securities trading policy contained in its unaudited first quarter (Q1) 2023 financial statement, the South Africa-based mobile telephony company added that “Insiders covered in this policy have not notified the Company of any dealing in the Company’s securities within this period and the Company is not aware of any breach of this policy within the period.”
Owing to the regulatory laxity at the NGX, the MTNN equity dealing escaped notice, probably because it had no material impact on the share price movement.
The Transcorp Raid
The multi-billion Naira raid on Transnational Corporation of Nigeria (Transcorp) Plc by Femi Otedola created a series of profit-taking opportunities that underscored the market distortions caused by off-market trading activities.
Before the raid, the conglomerate’s share price was fluctuating between N1.30 and N1.50 until April 12, 2023 when the raider acquired 5.52 per cent shares of the hospitality and power company with a distorted market valuation for obvious reasons bothering personal interest.
Keen on wrestling the control of Transcorp from Elumelu, and with eyes set on its lucrative power assets, the chairman of Geregu Power Billionaire Otedola) acquired additional shares of Transcorp days later, increasing his stake to 6.3 per cent. The company confirmed the acquisition eight days after the transaction pushing the share price above N2 per share.
Six days later the corporate giant held its annual general meeting (AGM) which saw its price edge up a few notches but by April 28, the Geregu Power boss sold off the acquired Transcorp shares after a buy-off deal that cost Transcorp Chairman, Tony Elumelu, a princely sum.
InsideBusinessNG learned that Otedola poured the sum of over N250 billion into Transcorp to acquire the 6.3 per cent stockholding but Elumelu coughed out about N32.5 billion extra cost to buy out Otedola. After the exit of the hostile raider, the conglomerate’s share price balked at its rising trend. But the billionaire equities investor escaped with a fabulous market payout.
There was nothing illegal about Otedola’s investment actions except that gaps in market communication smacks of regulatory slumber as with the case of MTNN insider dealings that weren’t disclosed several months later.
When NGX rose from a deep slumber to issue a Circular on May 15, 2023, admonishing investors to respect the trading regulations of the market before embarking on off-market equity deals, the market distortion had already left an avoidable impact.
The Circular by the Divisional Head Capital Markets, Jude Chiemeka, urged all investors to comply with the rules and regulations regarding the disclosure of substantial interests in listed companies. He noted that refusing to comply with the guidelines “creates information asymmetry, distorts public information and market data, and undermines the confidence of investors in our market and that the Exchange will continue to take necessary actions to ensure compliance and promote a level playing field for all market participants”.
The circular equally quoted the Rulebook’s section on free float requirements, Rule 2.2 which notes that “Each Issuer shall incorporate in its half-year financial statement filed with NGX, its shareholding pattern, and also indicate whether or not its free float complies with NGX’s free float requirements for the Board on which it is listed.
“Investors and all stakeholders are reminded to be guided by the provisions of the above NGX rules and circular,” the statement added.
Gross Distortion of Transcorp Valuation Exposed
Elumelu paid Otedola a 400-per cent premium on Transcorp’s closing price to acquire his bloc of shares, implying that Otedola was paid about N12.5 ($0.027) per share, and walked away with a N32.5 billion ($70 million) payout. This development spurred interest in Transcorp’s shares, resulting in a 128-percent boost in its stock price within two weeks.
One of the many distortions of Transcorp lies in the gross undervaluation of its lucrative power assets and the equity price at NGX. While Otedola’s publicly-traded Geregu Power has one power plant in Kogi State with an installed capacity of 435 MW – and boasts a market capitalization of more than $1.6 billion, Transcorp has two power plants in Delta and Rivers states with a combined capacity of over 2,000 MW.
However, Transcorp’s market capitalization has been significantly but deliberately undervalued at less than $300 million. A dealing member of the Nigerian Exchange close to Otedola, Garba Kurfi, confirmed that Transcorp was grossly undervalued until Otedola whom he described as Nigeria’s Warren Buffet swooped on it to bring out its underlying real value.
“Tony has been milking Transcorp alone. At the end of the year, he would pay nothing or at best one kobo dividend per share. But this year, when he saw Femi move in, what did he do? He paid five kobo. Somebody who has been paying one kobo moved to five kobo. Femi paid N250 billion for the shares of Transcorp. If you divide N250 billion by 40 billion ordinary shares of Transcorp, it will give you over N6 per share,” said the Chief Executive of Lagos-based APT Securities and Funds Limited.
Between Overhyped Geregu Power and Undervalued Transcorp
Otedola purchased Geregu Power, an under-performing State-owned power asset in 2013, with an effective capacity of fewer than 100 megawatts (MW), and increased its capacity to 435 MW, with 70-80 per cent of the power generated being supplied into the grid.
Geregu Power, whose shares have doubled in just six months, recently paid out N20 billion ($43.5 million) in dividends to its shareholders for the 2022 fiscal year. Despite paying an impressive dividend, some stockbrokers believe that Geregu is running ahead of its fundamentals. Whereas the earnings per share (EPS) stood at N4, its dividend payout indicated double its EPS implying that the power company had possibly drawn from its reserve to make up the N8 per share dividend to shareholders.
“Geregu Power is trading at multiples of its intrinsic value. It appears to be grossly over-valued by the market ahead of its fundamentals. The issue now is: how did Geregu Power, within such a short period of listing on NGX, become so over-valued? And then Femi is now cashing out at the top of extrinsic market value,” David Adonri, Chief Executive of Highcap Securities Limited pointed out.
Geregu Power was listed on the NGX less than seven months ago at the price of N100 per unit. Barely six months after, the stock price jumped and is currently trading over N300 per share. The question on the lips of most market observers is: what significant improvement in the fundamentals of the company within six months could have triggered over a 200 per cent rise in share price?
An analysis by InsideBusinessNG revealed that rather than improvement, there is a significant deterioration in the fortunes of the equity considering the full-year audited result and the result that was published when the company was listed about six months ago. The result the company disclosed when it was listed was much stronger than the full-year 2022 result.
Our finding indicated that the dividend Geregu paid for the full year 2022 was partly taken out of the reserve. While the Earnings Per Share (EPS) for the period ended December 31, 2022, stood at N4, the company paid a dividend of N8 per share, indicating therefore that an additional N4 was taken out of the reserve to pay the humongous dividend.
“For such a stock whose fundamentals have deteriorated from the point of listing at N100 to now rise a few months later to over N300 is quite questionable,” Adonri, a senior stockbroker told our correspondent over the telephone.
Enter Transcorp.
The stock, on the other hand, had perpetually languished in the neighborhood of N1 ($0.003) per share for years, with lackluster dividends paid over the past few years.
Otedola had already started making demands for board seats on Transcorp’s board and was still buying shares in the company every day. But Elumelu fought back to buy him out, ostensibly to keep the intrinsic value of the power company to himself.
Within a space of days, Elumelu acquired an additional 9.7 billion shares in separate deals to ramp up his combined stake in the group to 10.5 billion shares or 25.9 per cent, cementing his position as Transcorp’s main shareholder. The wife further acquired more shares of Transcorp, increasing Elumelus’ stockholding above 30 percent.
“Otedola’s raid on Transcorp was a blessing in disguise. He does his homework, and he moves in. As long as there is value in a stock, which he can just bring up, he moves. Nobody asked him to go to First Bank Holdings (FBNH). He did his homework and he entered. Today, he remains a blessing to minority shareholders because FBN stock was trading at single digits between N3 and N6 per share before he entered. But today it is trading at N11 to N12; the value has jumped to N12 because of Femi. That gives value to other shareholders. And that is what Warren Buffet does. Femi (Otedola) can be Warren Buffet of Nigeria because that is what Warren Buffet does,” APT boss told InsideBusinessNG.
Otedola himself confirmed the distortion in the valuation of Transcorp shares when he wrote in a personal statement that “I had bought the shares of the company because I believed in the potential of the group to hit ₦2 trillion in valuation. I offered to buy Transcorp Plc for N250 billion, but unfortunately, my offer was rejected. My goal was to maximise the company’s potential as a Nigerian conglomerate with a market capitalisation of at least N2 trillion instead of the current N40 billion, but it seems some shareholders have a different vision. The scramble for the shares after my acquisition is a testament to the value that Transcorp Plc can offer, and I hope the company continues to thrive under new leadership.”
Lamenting that stakeholders in Nigerian companies were getting shortchanged by the owners and managers, Otedola added thus: “I remain committed to the growth and success of Nigerian businesses, and I will always be looking for ways to create value for all stakeholders.
Stakeholders are unfortunately always shortchanged by getting stipends while the owners and managers of the business live a jet-set lifestyle, which is detrimental to the stakeholders.”
Analysts React
Commenting, the Chief Executive of Proshare Nigeria, Femi Awoyemi, stated that “Rule 17.13 of the NGX Rule book is unclear about the timing of market communication. The Rule refers to immediately in one breadth, and not later than ten (10) days in another. The ambiguity leaves room for an investor’s discretion such that an investor could buy five per cent equity in an NGX-listed company and sell the total shares within nine days of purchase without disclosing the acquisition to the regulator and by extension the market. The Transcorp purchase and sale action occurred within 15 days but could have been done earlier.”
Continuing, he stated that “When the market needed clarity the NGX appeared to have waited too long for public communication. This may not have been the fault of the Exchange, but it certainly was a response to a Rule book that requires revisiting.”
Awoyemi believes that allowing large, crossed transactions by high net-worth individuals (whether rich corporates or individuals) to the exclusion of smaller investors smacks of market discrimination.
“A policy that quarantines crossed transactions from market pricing would allow for a ‘cooling period’. Alternatively, after a trigger quantity is crossed by two or more parties, a minority shareholder consideration should serve as a quantity available for free float price action. The rule would dampen exaggerated price hikes after large investors have completed their business,” financial markets analysts concluded.
For Evans Ashagwu, a strategic retail investor “Otedola has stirred massive acquisition of shares, not only those of Transcorp but also others shares traded on NGX if only to avoid a hostile takeover of the company. He has brought much-needed liquidity to the Exchange and has brought up value for all stakeholders. How I wish he continues his strategic equity raid on laggards,” said the excited investor.
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