Nigerian stocks sink as investors position ahead of Dangote refinery IPO

Nigeria’s equity market has fallen to its lowest level since 8 July, wiping trillions of naira from its value, as investors brace for what could be the country’s largest share sale.

The market capitalisation of equities on the Nigerian Exchange Limited (NGX) fell to ₦154.39trn on Monday, down from ₦160.42trn on 10 August. Seasonal weakness and delayed bank earnings have also dampened activity, but analysts say portfolio rebalancing in anticipation of the refinery’s listing may be contributing to the sell-off.

“There are indications of a bit of a sell-down by investors who want to buy into the Dangote IPO,” Jimi Ogbobine, associate director and head of consulting at Agusto Consulting, tells The Africa Report.

Investors are positioning early because of the expected scale of the transaction and the lack of a comparable listed asset in Nigeria, he says.

“We have downstream and upstream companies, but this is the biggest refinery on the continent,” Ogbobine says. “In terms of a midstream operation of this size, we do not have anything similar.”

Dangote Petroleum Refinery and Petrochemicals FZE has filed its initial public offering application with the Securities and Exchange Commission, with a prospectus expected in September and the public offer targeted for October. The transaction is expected to raise about $5bn and to value the refinery at between $40bn and $50bn.

In May, NGX Group chair Umaru Kwairanga said some companies were delaying their own offers to avoid competing with the refinery for investors’ capital. “They feel that investors will prefer to buy Dangote,” he told The Africa Report.

Portfolio rebalancing

Ogbobine describes the selling pressure as portfolio rebalancing rather than an exit from Nigerian equities. Investors with limited cash are likely to sell existing holdings to participate in the refinery offer, temporarily diverting capital from listed companies.

He says the same pattern emerged during the refinery’s private placement, when demand spilled into the foreign exchange market as investors swapped naira for dollars.

“You can sell Stock X and buy Stock Y on any given day,” he says. “In this case, however, investors are selling Stock X to buy Stock Y, which is not yet on the market.”

He says it is not necessarily too early for investors to begin raising funds, given the amount of capital the IPO is expected to absorb.

Nigeria has listed upstream and downstream energy companies, but no quoted midstream business on the scale of the 650,000-barrel-per-day refinery.

The pressure on existing stocks could intensify once formal marketing for the IPO begins, Ogbobine says. Money may also move out of fixed-income and money-market instruments, and offshore investors could bring additional foreign capital into the transaction, he adds.

“Funds will flow into the position from multiple sources, not just one,” he says. “There will be flows from offshore and onshore investors – from everywhere.”

Abiodun Keripe, managing director of Afrinvest Consulting, says it is too early to conclude that the anticipated IPO is responsible for the market’s decline, although it cannot be excluded as a factor.

“Investors might be looking to exit some of their positions in the market – especially where they’ve recorded significant gains – to position themselves ahead of the offer,” Keripe says.

But Nigeria’s equity market is also experiencing its typically quiet third quarter, and delays in earnings releases from some tier-one banks have further weakened momentum, he says.

“I wouldn’t say it’s purely a matter of investors creating liquidity for the Dangote IPO,” Keripe says. “We have no clear data at the moment to determine whether that’s the reason.”

He adds that the market was similarly sluggish during the private placement, partly because investors shifted liquidity into that transaction.

Building the war chest

Last week, Dangote Refinery secured a $1bn underwriting programme for the listing, comprising a fully funded $600m tranche covering the completed private placement and a further $400m commitment for the IPO, according to the co-financial advisers, Marob Strategies of Dubai and Washington-based Lilium Capital.

On 23 July, the company announced the completion of its private equity placement, raising $2.5bn. It said subscriptions were 3.7 times the initial offer size, with investors including Africa Finance Corporation and India Infra Buildco, an investment vehicle facilitated by the African Export-Import Bank.

The National Pension Commission relaxed share-investment rules in May to allow pension fund administrators to participate, granting forbearance from requirements for a track record of taxable profits in at least three of the prior five years and for dividend or bonus share issuance in at least one.

The Africa Report reported in June that the listing had become one of the most closely watched potential IPOs on the continent, with bankers and brokers noting growing demand and expecting oversubscription.

Some investors have been keeping capital in money-market funds rather than selling it immediately before the IPO.

In May, Lagos-based investment analyst Gbemisola Adelokiki said such funds offered a way to generate returns while awaiting the offer’s opening.

“Many investors do not want their capital sitting idle in low-yield savings accounts while waiting for the IPO window,” she said. “Money-market funds offer an efficient middle ground because investors can earn attractive returns while still maintaining access to their funds when needed.”

The ability to redeem those investments quickly becomes particularly important ahead of an offer of this size, she added.

A huge market shift expected

At a valuation of about $40bn, the refinery could account for roughly one-quarter of the NGX’s enlarged market value after listing, according to London-based EBC Financial Group.

Using the Nigerian foreign-exchange rate of ₦1,365.6856 to the dollar on 7 August, that valuation would place the company’s worth at about ₦54.63trn. The proposed $5bn fundraising would be equivalent to approximately ₦6.83trn.

“If Dangote Refinery entered the Nigerian Exchange at close to a $40bn valuation, it could account for roughly one-quarter of the resulting NGX market value,” David Precious, senior market analyst at EBC, said in a 13 August note.

“If that valuation is difficult to support, few shares are available for public trading, or investors need to reduce other Nigerian holdings to participate, the effects could extend across Nigeria’s equity market,” he added.

The firm said potential participation from South Africa, Kenya, Egypt, Ghana and Rwanda could help bring additional capital into the market. Discussions have included possible Kenyan investment of as much as $500m, although no allocation has been confirmed.
(The Africa Report)