Missing piece to improve BTCL shares liquidity
Correspondent | Friday July 15, 2016 12:27
On the basis of that publicity, the IPO was over-subscribed by almost double the amount of the threshold with more than 90% of the offers accruing to retail investors and the remaining 10% of the offers received from institutional investors.
Looking back, the rigorous determination on the marketing and publicity of the IPO got the masses running helter-skelter in a bid to get a piece of the golden pie.
The captivating IPO slogan orchestrated by the company, ‘Ya Rona Rotlhe’, seemingly catapulted the public into a sense of belonging, the very sense that naturally necessitated shareholding in the company by virtue of being a citizen of this country buttressed by provisions of the privatisation policy and citizen economic empowerment. Yet many of these potential shareholders could not advance logical reasons for investing in the telecom giant save for the ‘public noise’. In fact, merely based on the ‘public noise’ of the anticipated listing at the time, majority of potential shareholders prematurely decided to pump their funds into the company even before the prospectus could be released. Nonetheless, the corporation released the prospectus and more rational investors scrutinised the contents of the document to weigh the possibilities of throwing some thebes at Megaleng.
Whilst there were some previous concerns on the corporation’s business model and growth strategies in the face of increased competitive and legislative environment amongst others, the major concerns of buying BTCL shares were never on the fundamentals of the corporation, but the liquidity of the shares on the secondary market cognisant of the rules on restricted trading.
Tradability of the BTCL shares was a hotly debated topic on corridors drawing from the fact that the market has always been clouded with liquidity challenges given the existing broad investor base. However, with BTCL constricted pool of investors, illiquidity was bound to be the biggest challenge. Within the realm of this realisation, rational investors drew comfort on the fact that the corporation’s directors stated in black and white that the risk of lack of liquidity in trading of shares will be mitigated by introducing a market maker, Botswana Privatisation Asset Holdings (BPAH). The purpose of BPAH was to inject or mop up liquidity as and when there are no buyers or sellers of BTCL shares, respectively. For this purpose, in its IPO results, the Board of BTCL informed the public that in order to assist BPAH to execute the role of market making, this separate entity was allocated 3,000,000 shares.
Post-listing of the shares on the Botswana Stock Exchange, BTCL shareholders are now aware that trading these shares has proven difficult, especially for those retail investors who want to exit their positions. There have been a lot of sellers from the retail space, and this oversupply of shares without the corresponding demand has put the BTCL share price under strain. Illiquid trading has increased significantly following the company’s loss and ill-timed departure of the current managing director. These two major events are suspect to the recent decline of the share price below its IPO purchase price, which registered P0.96 per share this week, in the process wiping out P42 million from the corporation’s market capitalisation.
The fact that there are too many sellers without the corresponding demand signifies a huge lack of liquidity for the shares, a phenomenon that calls for BPAH to arrest the situation by mopping up excess supply of the shares to stabilise demand and supply as indicated by BTCL directors in the prospectus. As it stands, the official rules on market making are still undergoing refinement and consultation for formalised implementation, a critical element that BTCL did not disclose in the prospectus.
It is believed that some investors bought BTCL shares knowing that BPAH would create the market for these shares if shareholders want to sell or buy. However, without exercising its mandate, BPAH has left many investors with huge liquidity risk. On the surface of this matter, BTCL is at the risk of facing lawsuits from aggrieved investors, particularly if illiquidity persists and the share price collapses further, in the process wiping away shareholder value.
Warranted lawsuits from groups of investors are common in the regional and international markets, for instance, Facebook has gone through numerous lawsuits post the IPO where investors sued for systems and processes that did not work post the IPO as well as the information they believed was concealed in the IPO prospectus. In this regard, BTCL as a body corporate does not only face the risk of lawsuits in respect of the failure by BPAH to exercise market making, but its directors are also running the risk of facing criminal charges and getting convicted for “false statements by officials of companies” contrary to section 323 of the Penal Code (Cap. 08:01) (1973 Rev.).
Of interest is the provision 323(b) of the Penal Code that clearly states:
“323. False statements by officials of companies;
Any person who, being a promoter, director, officer or auditor of a corporation or company, either existing or intended to be formed, makes, circulates or publishes, or concurs in making, circulating or publishing any written statement or account which, in any material particular, is to his knowledge false, with intent thereby to effect any of the following purposes that is to say -
(a) to deceive or to defraud any member, shareholder, or creditor of the corporation or company, whether a particular person or not;
(b) to induce any person, whether a particular person or not, to become a member of, or to entrust or advance any property to, the corporation or company, or to enter into any security for the benefit thereof, is guilty of an offence and is liable to imprisonment for a term not exceeding seven years.”
The statements around market making for BTCL shares is quite material in nature, hence if BPAH does not come to the party irrespective of the circumstances, these risks remain substantial particularly that BTCL Board did not disclose the circumstances prior to the IPO, an action that is tantamount to concealment of vital information in the prospectus.
While members of the investment community await BPAH to come to action in view of the oversupply of unexecuted orders and the downward spiral share price, BTCL needs to set up an Investor Relations Office (IRO) in which an investor contact point will be established and robust programmes on the BTCL strategy communicated clearly to all levels of the corporation’s investor base in order to boost their confidence. The same strength, determination and focus the corporation had with the public during the IPO should be reinvigorated by the office to cultivate demand for the shares of the telecom giant. IRO is warranted as a matter of urgency looking at the fact that more than 90% of BTCL shareholders are retail investors with diffused knowledge, skills and experiences on the stock market, hence susceptible to price sensitive information or unsubstantiated speculations.
For the corporation’s share price to stabilise and register desirable growth, markets need substantial assurances delivered by the IRO. The IRO has to be highly active in all channels of communication including but not limited to: social media, newspapers, radio and TV, public lectures, workshops, seminars, country wide roadshows and other channels where some retail investors can consume and digest the much needed information. The company needs to establish and drive branded content on television. There are capable media companies such as Black Gold Media Group, which can structure and deliver the right public relations interface. Particularly, the IRO must be proactive in drumming the following considerations to retail investors:
P371 million Loss: Following announcement of the full year financial results for the year ended March 31, 2016, the social media was awash with confusion that the Corporation is going belly up. The events leading to the loss for the year needs to be articulated very well by the IRO and should not be said in passing. Investors have been informed that the loss was as a result of once-off impairment exercise performed during 2016. Even though P522 million impairment was understated in the prospectus, it was however expected. Going forward, the profits should not be impacted by a similar exercise. Despite this loss, the company is still solvent and shall operate as a going concern.
Revenue Growth: BTCL projects to post positive set of results going forward. The corporation managed to grow its revenue base by 0.4% to P1.512 billion in comparison to the previous year, and this revenue was ahead of the budget. To continue accelerated growth of revenues, the market should be aware that the corporation has invested in mobile phones in the current financial year and the yields shall be harvested in the next financial year. Long term investors have to get comfort from the fact that the Company’s mobile and broadband (fixed and mobile) data services are expected to continue to anchor growth in the short-to-long term as revenues from mobile registered 12% growth in the past financial year.
Price Decreases: BTCL reports that Global Telco revenues continue to be pressured by efforts of regulators and governments to continuously push down prices, as a way of driving universal access to telecommunications services. Mature markets like Botswana face limited growth prospects, and entry of previously unrelated businesses into the Telco ecosystem results in intensified competition. The corporation’s fixed and wholesale revenue are expected to stabilise following the slowing down of the recent huge price decreases.
Cost Management: To sustain profitability levels, the company has embraced the need to stringently manage costs as revenue growth continues to come under pressure. If the costs are contained well, desirable profits can be generated and shareholders can get a better dividend. This has to be appreciated by all investors.
Cash Growth: BTCL remains to be cash positive. Given the full year results, cash generated from operating activities was P257 million and the cash flow used in investing activities was P224 million. Cash at the end of the year stood at P390 million, an increase of P240 million from the previous financial year. The cash growth is desirable in that it can finance operations, anticipated capital expenditures and dividend payments. The BTCL Board declared a dividend of five thebe per share probably because the corporation has sufficient cash reserves as illustrated by the figure below:
Given the P640 million cash position (includes P250 million raised from IPO), the corporation is in a position to deliver the strategy in the new financial year. As such, it is only fair if investors can hold on to their positions to allow sufficient time for the corporation to implement its strategy, get over the current hurdle of re-structuring and re-organisation phases.
Notwithstanding the foregoing, BTCL must ensure that its long-term investment case is described appropriately and consistently. Not only to institutional shareholders as it is the usual case with most listed companies, but to retail investors too since they constitute more than 90% of the investor base.
Generally, listed companies care less about communicating with retail investors since individuals cannot influence the board or decision making and have little influence over management, but BTCL is a different breed in this regard.
The corporation’s directors are indebted to shareholders and the IRO should be set up as a matter of urgency to manage and protect shareholder value whilst the function of BPAH should be highly fast-tracked to complete the missing piece of the price liquidity risk.
*Ikanyeng Segonetso is a Capital Manager at First National Bank Botswana. He writes in his personal capacity. The views expressed herein are purely for informational purposes only and should not be misconstrued as investment advice.