Transcorp, UACN, ETI, Old Mutual, Bamburi & Attijariwafa Bank: Tread carefully!

Dear Africa interested individuals:

       

            I had a flash about something I have noticed on multiple African exchanges for awhile and felt it was best to finally put my thoughts in written form.  I did not know what to expect from my findings but, felt I would uncover something insightful.  

Over the years, I have noticed parent companies listing wholly or majority owned subsidiaries on African stock exchanges at higher prices per share than the listed parent on the SAME exchange. When you mention this, the other side tells you to focus on the market value.  They tell you the market value of the parent is larger than that of the subsidiary and that is what is more important.  The market value is more important to the owner(s) of the company; the price per share of the stock is (or at least should be) more important to the investor.       

The more I thought about this readily more prevalent scenario, the more unsettled I became.  "It just does not feel right."  This is a bad signal in my opinion to investors in the parent company.  I decided to traverse across African markets and see if I could spot a defined, directional response to both companies' share prices involved in this peculiar listing dynamic.  The stock markets represented for this analysis are: Nigeria, South Africa, Ghana, Kenya, Morocco and Namibia.  

Let us kick off with Nigeria that has two pairs of companies representing.

1. Transcorp and Transcorp Hotel

Transcorp Hotel (subsidiary of Transcorp) was listed on the Nigerian Stock Exchange on January 15, 2015 at N10.00 (Ten naira) per share.  Transcorp closed on the same day at N3.06 (Three naira and six kobo) per share.  Transcorp Hotel was listed at a price per share 3.3X higher than its parent company.  

Transcorp closed on June 6, 2016 at N1.40 and Transcorp Hotel closed at N5.29.  The year-to-date performance of Transcorp (the parent) is -7.9% and that of Transcorp Hotel is -0.75%.   Since the listing of Transcorp Hotel, its price has declined 47% while that of Transcorp has declined 54%. While both stock prices have declined, the parent company (with the lower share price) has clearly declined more than its listed subsidiary in both scenarios.    

Transcorp (the parent) is 122% larger than Transcorp Hotel in assets but only 42% larger in market value.  

2. UACN and Chemical &Allied Paints (CAP)

Chemical & Allied Paints (subsidiary of UAC Nigeria) closed on June 6, 2016 at N38.00 and UACN closed at N19.00.  The year-to-date performance of UACN (the parent) is -8.4% and that of CAP is +1.06%.  Once again, the parent company (with the lower share price) has clearly performed worse than its listed subsidiary.  The subsidiary in this case actually has a positive price performance while the parent company has a negative price performance.  

UACN (the parent) is 3,670% larger than CAP in assets but only 51% larger in market value.  

3. Kenya: Bamburi Cement & EA Portland Cement 

Bamburi Cement (parent company (through a combination of shareholding) of EA Portland Cement) closed on June 6, 2016 at KES195.00 and EA Portland Cement closed at KES35.00.  This is the scenario I deem proper.  Let us find out how the market responded.  

The year-to-date performance of Bamburi Cement (the parent) is +11.4% and that of EA Portland Cement is -25.1%.  In this instance, where the parent company has a higher price per share than the subsidiary, the parent company (Bamburi) has performed much better than its listed subsidiary.  The parent company in this case actually has a double-digit positive performance while the listed subsidiary has a double-digit negative performance.  The market value of Bamburi Cement is 22X larger than that of EA Portland Cement.  

4. Morocco: Attijariwafa Bank & WAFA Assurance

WAFA Assurance (subsidiary of Attijariwafa Bank) closed on June 6, 2016 at MAD3,633.00 and Attijariwafa Bank closed at MAD354.00.  The year-to-date performance of Attijariwafa Bank (the parent) is +4.8% and that of WAFA Assurance is +11.1%.  Once again, the parent company (with the lower share price) has performed worse than its listed subsidiary in terms of price performance.  Attijariwafa Bank has a 79% stake in WAFA Assurance.  Both are listed on the main market of the Casablanca Stock Exchange.  

5. South Africa: Old Mutual & Nedbank

Old Mutual is the parent company of Nedbank with a 51.87% stake.  Old Mutual's share price closed on June 6, 2016 at ZAR40.21 and Nedbank closed at ZAR187.32.  The year-to-date performance of Old Mutual is -3% and that of Nedbank is -0.68%.  Once again, the parent company (with the lower share price) has performed worse than its listed subsidiary in terms of price performance. The market value of Old Mutual is 113% larger than that of Nedbank as at June 6, 2016. 

6. Namibia: First Rand Bank & FNB Namibia

First Rand Bank is the parent company of FNB Bank Namibia.  First Rand Bank is a South African bank that is also listed on the Namibian Stock Exchange.  First Rand Bank closed on June 6, 2016 at NAD45.60 and FNB Holdings closed at NAD47.51.  The year-to-date performance of First Rand Bank is +7.6% and that of FNB Holdings is +9.1%.  Once again, the parent company (with the lower share price) has performed worse than its listed subsidiary in terms of price performance.  The Namibian Dollar and the South African Rand are interchangeable and can be exchanged on a one-to-one basis.  The Rand is still considered legal tender in Namibia.  

7. Ghana: ETI & Ecobank Ghana

ETI (listed on the Ghana Stock Exchange) is the parent company of Ecobank Ghana.  ETI owns 68.93% of Ecobank Ghana.  ETI's share price closed on June 6, 2016 at GHS0.19 and Ecobank Ghana closed at GHS6.30.  The year-to-date performance of ETI is -29.6% and that of Ecobank Ghana is -10.1%.  Once again, the parent company (with the lower price per share) has performed worse than its listed subsidiary in terms of price performance.  The market value of ETI on the Ghana Stock Exchange is 13X larger than that of Ecobank Ghana. 

This scenario was not the case when ETI and Ecobank Nigeria were still listed simultaneously on the Nigerian Stock Exchange four-and-a-half years ago.   

ETI should harmonize its auditors for the parent and Ghana subsidiary.  Deloitte/Grant Thornton handles the audit of ETI while KPMG handles the audit of Ecobank Ghana.  This is not the ideal way to carry out an audit for a parent company and its subsidiary.  Transcorp and Transcorp Hotel have the same auditor: PWC.  This is the proper way to get things done and make the audit process seamless.  

I did not know what to expect when I was looking at these markets.  I did know that this is not a good signal to the market place about the parent in my opinion.  The six African stock markets I have assessed, clearly show that the markets prefer the listed parent to have a higher price per share than the listed subsidiary.  

Bamburi Cement and EA Portland Cement of Kenya have a price per share that goes in line with their ownership structure.  The listed parent company has a share price that is higher than the listed subsidiary.  This is the only listed parent among the seven pairs (across six Exchanges) that had a better year-to-date price performance than its listed subsidiary.  

Investors should be wary of parent companies that list subsidiaries at higher share prices than the parent's share price on the same stock exchange.  The listed parent will probably under-perform the listed subsidiary in terms of holding period return.  Only the pair of stocks listed on the Nairobi Stock Exchange got it right.  A wide positive (+11.4% year-to-date for Bamburi as against -25.1% for EA Portland Cement) return between both companies was achieved.  No other pair of companies had a difference this wide.    

No one knows the future when it comes to investing; we can all do something to demystify it nonetheless.  This article has hopefully set you on the right course...        

P.S.  

It is good to know that Eddy Njoroge has finally stepped down from his position as the Chairman of the board of the Nairobi Stock Exchange (NSE).  In my article prepared about eleven months ago and published by the Africa Report magazine, I stated that after the Exchange was demutualised and listed, he should have relinquished his position as Chairman of the board of the Nairobi Stock Exchange.  He went ahead to oversee the appointment of the current CEO of the Nairobi Stock Exchange who was already a non-executive director on the board of the Nairobi Stock Exchange. Eddy Njoroge doubled as the CEO of KenGen (listed company) and board member of the Nairobi Stock Exchange for five years.  He was Chairman of the Board and CEO of KenGen for a two-year period.   He has finally left the scene.  

The other African Exchange mentioned in the article with even more glaring corporate governance concerns was the Nigerian Stock Exchange.  The part owner of a listed bank (Access Bank) is the Chairman of the Board till date.  He may very well wear a double hat like Eddy Njoroge, from 2017, when he likely takes up the mantle as the Chairman of the board of Access Bank in addition to his current portfolio.  When will Nigeria ever get things right?            

                            The TRUTH will set us FREE; I will keep telling it.  

                       Tell others to tell others about this Africa Research Blog