Africa’s second largest copper producer, Zambia, is said to list state owned entities beginning 2019 in a quest to improve operational efficiency. According to the 2019 budget presentation, The MinFin advised that the Southern African nation would have an insurance and forestry SOEs make debuts on the local bourse. For decades SOE’s have been cost drivers of state limited resources. The state has frequently had to capitalize in vain with low to negative ROIs and zero dividends paid out.
The government came to realization, especially in economic hardship times, that it makes no business sense to be shareholder in loss making vehicles. Much as the state is not specialized at running business and will need to complement the private sector to avert market failure, we still believe the state in a modern world should still be involved in business if they are to achieve sustainability.
Basic listing prerequisites
Listing on any exchange has pre-requisites key of which are 3 year consecutive profitability and adherence to corporate governance tenets. Without reasonable doubt, it is easy to prove adherence to corporate governance but having a set of audited financial statements seems a mirage in most state owned entities. It is very vague as to how outright loss making entities or SOEs with incomplete sets of financial statements will make it past the securities exchange commission (SEC) to list on the Lusaka Securities Exchange scoreboard. The SEC should clarify as to how this will happen.
Possible options would be for SOEs to make it to the quoted tier and after improved performance of meeting the 3 year profitability benchmark then graduate to a full listing. The market can only speculate.
Previous SOE listings
Other entities such as the nation’s mining and investment vehicle that are listed on the LuSE delay publishing of financial statements which is not a secret. The listed entity produces financials with a year or two lags which in essence is unacceptable by international standards. In liquid markets, that understand the value of perfect information, share prices would tumble on failure to disclose financial information. How would shareholders know about performance if information is not available timely?
We decided to use the listed SOE as a proxy for other SOEs to come. The SEC should clarify how listing will be possible even in the advent of losses or lack of 3 years of consecutive profitability.
Other blips to look out for
The last time an SOE was listed on the LuSE, the initial purchase offer (IPO) was opened for 4 months and was adversely impacted by risk factors such as currency volatility which did not make risk management an economic sense. The SEC, brokers and Investment advisors have this experience to learn from to handle the 2019 IPOs cautiously.
Company valuations need to be carefully executed to ensure the share prices are reflective of the SOEs balance sheets at offer stage. These issues will reflect on the effectiveness of the Industrial Development Corporation – IDC.
ZAFFICO and ZSIC are set to make it on the LuSE scoreboard in 2019.