After months of inactivity, Growth Enterprise Market Segment becomes the in thing

Christmas has come early for entrepreneurs and a select few investors at the Nairobi Securities Exchange.

The Growth Enterprise Market Segment (GEMS) had been quiet for 15 months, after real estate developer Home Afrika became the first listing in July 2013. But in the last three weeks, the segment has come alive, and the momentum seems likely to continue into the festive season.

The counter is a segment of the NSE whose listing rules are less stringent — for instance, companies do not need a track record of profits and the listing fees are much lower — to enable small and medium enterprises go public.

“The process of listing on the GEMS market is faster and offers entrepreneurs a platform to raise funds. This is a regulated market, which gives companies a lot of credibility,” said Johnson Nderi, the Corporate Finance & Advisory manager at ABC Capital.

Regulatory approvals

Flame Tree Group, a manufacturing conglomerate, was the first to re-activate the GEMS counter, listing its shares by way of introduction on November 6.

Last week, Kurwitu Ventures, a Sharia-compliant investment firm, joined Flame Tree.

And over the next couple of weeks, technology firms East African Data Handlers and Empire Microsystems are expected to list.

“We plan to list Empire as a platform to do business. We expect to come to the market before the end of the year, subject to regulatory approvals,” said James Mworia, the firm’s managing director.

The question on most investors’ lips is why the sudden flurry of activity at the counter? Is it the chase of fame and fortune? Are early investors in some of these companies looking to profit from the sale of their shares once their businesses are listed and the price spikes before the market corrects it?

For instance, Home Afrika’s shares hit an all-time high of Sh25 a few months after listing, up from the Sh12 introductory price.

The early shareholders who sold when the share price doubled made a tidy profit. However, mirroring the company’s performance since it listed, the stock closed last Friday at Sh4.15.

The real estate developer saw its half-year profits to June this year drop by 72 per cent to Sh42.9 million from Sh115.5 million over a similar period last year.

Given that Home Afrika is big on real estate development, it constantly needs cash. But the drop in its share price has meant it cannot raise more money through a rights issue — selling additional shares to investors.

However, last week the firm got the green light to raise Sh900 million through a corporate bond. This, though, will add an extra financial cost on the company at a time when its profits are falling because a bond will come with the fixed cost of interest payments.

Funding expansion

A cheaper source of cash to fund expansion is also what Flame Tree Group needs.

The company manufactures and owns a high-value portfolio of mass market brands, including, Roto Tanks, Jojo Plastics and Zoe cosmetics. It has a presence in six countries; Kenya, Ethiopia, Mozambique, Rwanda, Mauritius and Dubai.

Its financial statements show the manufacturer has been growing its turnover and making consistent profits. It reported a net profit of Sh78.2 million in the six months to June 2014.

With sales of Sh778 million, it means for every Sh100 in turnover, Flame Tree earned Sh10 in net profit in the first six months of the year.

In 2012, Flame Tree Group was only making Sh3 in net profit out of every Sh100 in sales. This got better in 2013, with the manufacturer making Sh9 in net profit for every Sh100 in sales.

But profits do not paint the whole picture.

Looking at its cashflow statement, Flame Tree has been closing its financial year with a deficit in cash for the last two years. In the six months to June 2014, it had Sh26 million in cash flowing out of the business.

But to be fair to the manufacturer, it has paid out dividends consistently over the years. Flame Tree paid out Sh73.8 million in dividends this year. The biggest beneficiary of this payout was Heril Bangera, who owns close to 90 per cent of the company he founded in 1989.

BIG QUESTION

The big question is whether it would have been better for the manufacturer to retain its dividends to fund expansion. The group has been raising money through bank loans, and now, through the recent private placement at the bourse.

“The group plans to fund its working capital requirements through listing on the Nairobi Securities Exchange, following which it will be able to access cheaper sources of capital,” reads the Flame Tree Group information memorandum.

“It is likely that the group will finance a further expansion plan through a rights issue in the medium term.”

The manufacturer will be hoping the share price does not fall below the Sh8 it opened trading with on November 6 to hold a successful rights issue.

Flame Tree Group’s shares rose to Sh14 on the first day of trading, but they have since dropped, closing at Sh8.85 on Friday last week.

Rosy future

The third firm to list in GEMS is Kurwitu Ventures.

Kurwitu — a name borrowed from an ancient settlement along the Kenyan coast — has a bias towards agriculture, real estate, energy and infrastructure in its investments.

Its directors have a wealth of knowledge in the investment banking field and include Mohammed Hassan, who worked at investment bank Dyer and Blair for close to 14 years.

It introduced its shares at Sh1,250, which appears pricey given that the company has no track record of making profits.

According to its information memorandum, in 2013 Kurwitu made a loss of Sh815,416, and expects to lose Sh13 million in 2014.

But the firm is projecting a rosy future — tapping into the expertise and experience of its directors to close big deals and bring in the money. The investment firm projects net profits will rise to Sh48 million in 2017.

“Our concern now is ... [in] creating value for the company. We’re targeting the sophisticated investor who understands our business model and the risks,” said Kurwitu Executive Director Abdirahman Adillahi.

The group’s shares closed last week at Sh1,500, 20 per cent above its introductory price, but on low volumes.

So, how does the NSE benefit from all the activity in the GEMS? Being a listed company itself and existing for profitable motives, the NSE will have targets to meet, and some of the revenue will come from listing SMEs.

Although, the listing fees the NSE receives from companies in GEMS is much lower — just Sh32,000 for the recent listing of Kurwitu — compared to the millions of shillings it gets from listing larger companies, its strategy might be to target as many small and medium companies as possible.

In a way, the NSE would be creating its own “kadogo” economy.

GOING PUBLIC

The bourse launched GEMS to grow small and medium companies and enable them access the securities exchange by easing the rules for listing and making it cheaper to go public.

NSE Chairman Eddy Njoroge said the listing by SMEs is an indicator that the NSE is not a platform solely for entities that have established and profitable operations.

“It is also open to firms that have solid business ideas, experienced and talented management, and have identified a business niche in the market,” he said.

“We at the NSE will continue to reach out to owners of businesses, entrepreneurs, advisors and investors to create awareness of the advantages of listing on the GEMS market.”

The segment registered its first listing six months after it was launched in January last year.

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