Sunday June 15 2014

Why NSSF investment in Umeme is a good deal

By Eden Tusiime

Recently, National Social Security Fund (NSSF) invested Shs34b to purchase 100 million Umeme shares. With this, the Fund increased its shareholding in Umeme Ltd from 131,722,711 shares (8.1 per cent) to 231,722,771 shares (14.27 per cent, making the fund the third largest institutional investors in the power distribution company.

I think it’s a good investment, the fact that Umeme is one of the best performing companies in East Africa and the second largest company on the Uganda Securities Exchange (USE), it’s worth an investment. I have read stories in the press that the Fund made good returns on investment in Umeme’s Initial Public Offer (IPO), getting a 41 per cent total return including Shs3bn in dividends, this is a good and impressive deal.

When investing in anything, it’s common knowledge that everyone looks forward to earning mind-boggling dividends from the shares, but that is not guaranteed because sometimes you can make losses. The accrued dividends NSSF has so far earned from Umeme shares are proof that the investment is a profit-making one, despite the risks involved.
The beauty about it is that the Fund is meant to get a seat on the Board of Directors of the company.

This will enable the Fund have adequate representation to ensure shareholder interests are taken into consideration.
Added to that, in case Umeme concession is not extended by the Government of Uganda, the Fund would have recovered more than 80 per cent of its initial investments in dividends by the time the contract expires in 2025. In addition, the Fund will get a share equivalent of the product of the Fund’s stake and net assets of the company on dissolution.

The Fund could also sell its holdings on the market well before the concession expiry should the share price increase to a level where they can realise substantial capital gains.
If the concession is cancelled on advice of Parliament, The Government of Uganda would have to pay Umeme 120 per cent of the net assets of the company within 91 days from the cancellation date. The immediate cost to the GOU including incidental costs is estimated at Shs1 trillion. In addition, the negative implication of the cancellation to future prospective investors in the country would put off potential investors; a position believed the Government is unwilling to take.

Why Invest in Umeme?
I have seen people ranting about NSSF’s decision to invest in Umeme. But this is my take, after scrutinising the whole agreement between the two parties.

Umeme Investment has delivered good returns for the Fund since the company’s listing on the Uganda Securities Exchange. In addition, the attractive future prospects of the company make this a core holding in their portfolio. Umeme is one of the best performing companies in East Africa and the second largest company on the Uganda Securities Exchange. Since its IPO, the Fund has enjoyed a 41 per cent total return including Shs3 billion in dividends.

The investment also fits well within the Fund’s considered approach to deploy capital in growing areas like the energy sector. Uganda has one of the lowest electricity consumption per capita levels in the world, with only an estimated 12 per cent of the population having access to electricity.

Umeme plays a critical role in supporting economic growth of Uganda through enabling access to electricity. Going forward, increased demand for electricity to support the growing economy should translate into higher earnings growth for the company.

The investment was approved by the Fund’s Management Investment Committee, which recommended it to the Investment and Projects Monitoring Committee of the Board. The NSSF Board approved the investment in consultation with the Minister of Finance, Planning and Economic Development as provided for under Section 30 of the NSSF Act before the investment was executed.

This section states that: “All monies in the Fund, including the reserve account, which are not for the time being required to be applied for the purpose of the Fund shall be invested in such investments as may be determined by the board in consultation with the Minister of Finance, Maria Kiwanuka.”

In her May 13, 2014 letter, Kiwanuka responded raising a number of issues, which the Fund satisfactorily clarified. She recognised Umeme to be a very attractive investment but encouraged the board to look into income generating infrastructure related to power generation like Karuma and Isimba dams. She believes these will be key in driving national generation capacity and more power for Umeme to distribute for sustainable asset based growth and more revenue generation.

The increase in demand for electricity is also projected to translate into higher earnings for the company. The increased shareholding in Umeme means that more Ugandan savers under NSSF can benefit from the profits enjoyed by the company rather than these going to the foreign owners of the business.