MTN Listing: Price Momentum Breaks on Rise In Traded Stocks; Proshare Writes Memo to Market

Sunday, May 26, 2019 / 12:45PM / By Teslim Shitta-Bey, Managing Editor/ Header Image Credit: EcoGraphics

As the NSE All Shares Index (ASI) responded to six consecutive days of MTN share price increases, upon listing by way of introduction, Proshares Nigeria was compelled by the balance of evidence to write a 57 Page Memo to the Market to provide clarity above the noise of adversarial comments in the public space. The findings of Proshare investigation into the implications of the MTN listing by LBI unveiled fundamental weaknesses in the rules guiding LBI listings on the floor of the Nigerian Stock Exchange (NSE) and provides further reasons for the Exchange and the apex regulator The Securities and Exchange Commission (SEC) to review extant practices and rules to ensure a more transparent process of pricing newly listed securities.

A review of the MTN listing process and subsequent events that followed a week of trading frenzy in the stock clearly indicates that a problem exists with the mechanism by which large cap stocks are listed on the Exchange.

This speaks to the urgent need for the Exchange and the apex market regulator to provide direction and authenticity to the process by which new issues are offered to new investors. The process by which large companies get listed on the exchange by introduction without creating float to drive price discovery is flawed. The recent vociferous protests by market entities concerning the lack of liquidity in MTN shares on the market and the sudden rise in the stocks equity value because of an alleged absence of tradable quantities on the bourse, reflects this challenge that needs to be addressed forthrightly by the regulatory authorities.

The conflicting interest between old and prospective investors needed to be resolved by a market architecture that ensures that pricing of new offers and their liquidity on listing dates are assured in order to guarantee a market governance frame work that is consistent with best global practices and does not leave market regulators open to suggestions of bias.

In the contemporary case of the MTN LBI several lessons appear to have been learnt and are captured in Proshare’s recent market memo.

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Six Days of Sizzling Movement

For six consecutive days the price of MTN shares soared in an upward trajectory seeing the stock value rise by 20% in just two days of trading and by a further 60% on the fourth day of market activities; however the fever broke on Thursday as existing shareholders began to release additional quantities of the stock for trading on the floor of the Exchange. The Telcos share price dropped from N149 on Thursday May 23^,2019 to N140 per share on Friday May 24, 2019, representing an expected -6.04% price reversal as traders began to bid and offer for the security on the floor of the bourse.

A major reason for the reversal was the action taken by existing shareholders to place more of the company’s shares on the floor for trading. This was after six days of a straight price rally that saw the company’s equity price rise from a listing value of N90 per share on May 16, 2019 to N149 per share on May 23, 2019, representing a week on week (W-o-W) rise of +65.6%. The market price bubble burst on Friday on rising tradable stock and reduced investor pressure.

Chart 1 Selected Index and MTN Price Movements 2019

Proshare Nigeria Pvt. Ltd.

Source: NSE/Proshare TheAnalyst

Proshare’s market deep dive revealed that the early price surge of the Telco’s equity in the first six days of trading was inspired by an act of omission by the advisers to the listing and managers of the Exchange. Unlike, the usual practice where companies coming to the Exchange for public offer either by way of Introduction or Initial Public Offering (IPO) and sell limited quantities to new investors as a gesture of goodwill, the MTN listing appeared to have breached this market convention leading to an expectation gap between prospective buyers and existing shareholders of the company (creating the Nash equilibrium dilemma referred to in the report).

Market Rides MTN Tailwind

In a whirlwind week of major price movement, demand pressure for previously unavailable MTN stock reversed the negative year-to-date (YTD) performance of the All Shares Index (ASI) with the Index rising to a positive market yield of +0.5% on the Telcos first trading day. Indeed, the market Index rose by 6% within five days of trading activities on the stock as buyers struggled in apparent vain to lay hands on desired quantities of the Telcos shares.

Table 1 MTN Share Price and Volume Traded From May 16-23, 2019

Source: NSE, Proshare research

The major challenge with the MTN listing was the gap in the rule that allowed companies list on the premium board as long as they offer a minimum of 20% of their outstanding shares or N40 billion in capitalisation. This rule has since been undermined by the relative sizes of new mega listings on the market floor and has created a situation where new firms listed on the Exchange can get away with offering little or no float for trading thereby leading to the artificial inflation of their share value as analysts and traders insist was the case with the three day 60% increase in the market value of MTN.

Chart 2 MTN Price Movement May 16-24, 2019

Proshare Nigeria Pvt. Ltd.

Source: NSE/Proshare research

The rise in the value of MTN over the last 6 days has placed it in a position where the company has one of the highest price-to-earnings multiple for any listed company on the Exchanges premium board with its P/E of 20.8.

Chart 3 P/E Ratio for Selected NSE Premium Board Companies

Proshare Nigeria Pvt. Ltd.

Source: Audited Annual Accounts FY 2018/Proshare research

Dangote the Exchanges largest capitalized stock still dominates the premium board’s earnings. This is understandable as it trades at a price to earnings ratio that creates hidden value opportunities for investors. DANGCEM presently trades at a P/E ratio that is half and a half times that of MTN which commands a recent P/E of 22 on a trailing twelve month (TTM) earnings per share for FY 2018.

Chart 4 EPS Ratio for Selected NSE Premium Board Companies

Proshare Nigeria Pvt. Ltd.

Source: Audited Annual Accounts FY 2018/Proshare research

At the close of market activities for the week, MTN saw its share price drop as volumes also tumbled on sellers and buyers working out a fair market value for the Telco at available market quantities of freely traded equities on the floor.

Proshare Nigeria will, to the best of its ability, continue to monitor developments in MTN’s post listing activities in a manner that supports best market governance practices and provides market information that may serve as guidance for investment entities seeking clarity.

Download PDF Report Here