Aliko Dangote, President of the Dangote Group. The company is building a world class entity that would be a pride to the country.
Investors in Dangote Cement have lost over 10.9 percent value of their investment since the stock was listed by introduction on the daily official list of the Nigerian Stock Exchange on October 26.
The reasons for the drop in the share price are seen partially in the observations raised in the report of the quotations and listings committee of the Nigerian Stock Exchange (NSE).
In its appraisal report on the scheme of merger between Dangote Cement Plc and Benue Cement Plc, dated September 3, it raised the flag on the entire valuation, merger, and listing process of the resultant entity. In the report, which was submitted to the NSE council, it faulted the valuation process that arrived at the price of N135 at which the stock was introduced.
"On the face value, the valuation of Dangote Cement is unreasonable. Dangote Cement has an installed capacity of 5 million metric tonnes per annum, with a debt overhang of N64 billion and it is valued at N2.025 trillion while debt free BCC (Benue Cement Company), with an installed capacity of 2.8 million metric tonnes, is valued at N246 billion," the report added.
The report also pointed out the incidence of conflict of interest as both merging entities had Afrinvest West Africa Limited as sponsoring stockbroker while also acting as co financial adviser for Dangote Cement.
"The response of the advisers is that the role of a stockbroker does not give rise to a conflict of interest and that the scheme document has already been printed and in the process of distribution," the report stated.
Lower than potential value
Ike Chioke, the managing director of Afrinvest West Africa, the merger advisers, however, defended the fact that it acted as sponsoring stockbroker for both merger entities and acting as co financial adviser for Dangote Cement.
"By virtue of the fact that we were broker to the merger, we then continued to prosecute the special sale. The special sale is effectively a secondary transaction," Mr. Chioke said.
He said the stock was even valued lower than its potential value, given the investment in the company that was not captured in the valuation process. He said the current valuation did not take cognizance the future growth of the company and the fact that its production capacity would double by July next year. He said that a company like Dangote Cement that trades about N5 billion a day, a debt of N64 billion simply translates to working capital.
"I will like you not to quote what is rubbish because clearly that report was written by somebody who works at the Stock Exchange and we do have issues with people who work at the Stock Exchange who don't understand their job," Mr. Chioke said.
He explained that a company can be valued using different methods. "It can be valued based on its earnings, that is, price earnings ratio. There is what is called firm value, which is the value of the equity plus the cash and the debt on the books."
He said because of the size of the company, it was about 25 percent of the total capitalisation of the Nigerian stock market.
Wole Tokede, the NSE spokesperson, said the business of valuation and listing price of equities is that of the issuer and the issuing house.
"It must be approved by the Securities and Exchange Commission before it can be listed. If a stock is over valued at the point of listing, the market will put it in its proper position," Mr. Tokede said.
Indeed, the market is placing the stock in its position, as it has lost N14.75 as at last Thursday, closing at N120.25.
World class company
Tony Chiejine, spokesperson for Dangote Group, said the company is building a world class entity that would be a pride to the country.
"If you take a look at the gross African asset and the plan of the company going forward, you would agree that the valuation was done with this in focus. Look at the tax we pay to government annually. There is no need throwing stones. Instead, we should encourage local entrepreneurs," Mr. Chiejine said.
A source at Vetiva Capital Management Limited, lead financial adviser to Dangote Cement, said while it may be correct to say the company is overvalued at current assessment, the company's real value is in its future growth. He said despite the debt free Benue Cement Company, its valuation was done based on the efficiency of the technology that both companies operate.
"BCC is an inefficient and old factory. Power accounts for about 40 percent of the cement plant. It uses low pour fuel oil (LPFO) while Dangote Cement uses gas," the source said.
The NSE report also pointed out the breach of a key listing rule of the Stock Exchange:
"The requirement for 25 percent of the issued shares to be held by the public as only 4 percent of the issued share will be held by the public at the point of listing."
Mr. Chioke said this aspect had to be waived by the NSE due to the inability of the market to absorb 25 percent.
"No one can sell N450 billion worth of share in Nigeria today. We wanted to sell only 100 million units but we ended up selling 196.1 million," he said.
Afrinvest said the regulators gave the company 24 months to sell down an additional 20 percent at the listing price of N135, in order to comply with the listing requirements.
However, while investors count their losses, the promoter, Aliko Dangote, Dangote Cement chairman, is smiling to the bank. By virtue of the shares listed on offer for sale, proceeds of the sale do not necessarily go to the company but to the promoters of the company.
So in real terms, funds realised from the transaction, about N26.5 billion, may not necessarily translate to value to the company but definitely adds value to Mr. Dangote.
"How else will he recoup the money he has invested in the business over the years? Dangote has invested his money. He may have borrowed money or he may have invested his personal funds. He cannot steal the company's profit, or under declare profit.
"So, the only way is for him to sell off part of his holding. That is the standard worldwide," the Vetiva source said.
Source:http://234next.com/
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