The Kenyan equity market could experience a few lows in the wake of mobile operator Safaricom's long-awaited initial public offering (IPO), says Edward Gitahi, investment manager at AIG Investments.
Telkom Kenya, a 60% shareholder of Safaricom, is set to float 25% of its shares on the Nairobi Stock Exchange (NSE) through an IPO. According to Kenyan media reports, the process will begin today.
The move is expected to create a dip in the Kenyan economy, as retail investors sell off some of their existing holdings on the NSE to fund their participation in the Safaricom IPO, explains Gitahi.
Although the IPO will inevitably bring new money to the stock market, at least 15% to 20% will be funded from existing holdings, he adds.
"This trend has been observed in the past, whereby retail investors have taken up more than 60% of the IPOs that have come to the market."
About three weeks prior to the previous IPO of power supplier Kengen, the stock prices declined by 5% to 10%, as retail investors sold some of their existing stock investments. Subsequently, the market rallied on account of the refund monies that were re-invested in the market, explains Gitahi.
Political factors
The Kengen IPO attracted an unprecedented 200 000 applications and was three times oversubscribed.
Safaricom is expected to have a greater subscription, as the company has wide public appeal, says Gitahi. Market capital and the total number of shares on the NSE have been in recession over the past few months, indicating the trend is already occurring.
The East Africa Standard quotes Michael Joseph, CEO of Safaricom, as saying the IPO might only be completed in the first quarter of 2008.
The delay of the IPO and the upcoming December general elections could spark investor uncertainty and increased recession on the NSE. Investors are now beginning to factor in a possible regime change in favour of Raila Odinga, from the Orange Democratic Movement (ODM).
If this happens, recent legal objections by the ODM could affect the IPO altogether, increasing short-term interest rates over the next few months, explains Gitahi.
The current government is relying on the proceeds from the Safaricom IPO to bridge a budget deficit in excess of $300 million, he adds.
Uncertainty around the timing of the IPO's completion might force government to cut back on its ambitious development expenditure projects planned for the country. This expenditure is critical if the country is to accelerate economic growth from the current 7% to the long-term target of 10%, he says.
Long-term growth
Gitahi believes that despite slight market weakness and political uncertainty, the IPO will strengthen the Kenyan economy and bolster the NSE in the long-term.
The size of the Safaricom IPO is estimated at approximately $522 million, which is more than a third of the 12-month market turnover for 2006 of $1.4 billion, he says.
Hype and investor interest around the IPO can be attributed to Kenya's growing economy, which has been strongly bolstered in the past seven years by strong economic reforms, says Gitahi.
Kenya's economic growth has shot up from less than 2% in 2000 to 7% today.
It is anticipated that the Safaricom IPO will attract significant participation from Kenyans abroad and foreign investors. These kinds of investors accounted for about 10% to 15% of the Kengen IPO applications.
"If this is repeated during the Safaricom IPO, we could potentially see an inflow of $100 million or more," Gitahi notes.
To put this into perspective, Kenya's official foreign exchange reserves stand at $2.7 billion, he adds. "This provides the case for the strengthening of the Kenyan shilling and ultimately the economy."
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