A-Z guide of an IPO: Getting the all-clear

What is an IPO?

Ainitial public stock offering (IPO) refers to the process of offering shares of a private corporation to the public in a stock issuance for the first time. It is the largest source of funds with long or indefinite maturity for the company through the public capital market.

Currently, there are a lot of enthusiastic individual investors who are eager to participate in IPOs and they do not even seem to be concerned about the risks involved in buying these offered shares of mainly technology companies.

Despite the fact that these IPOs come with clear warnings about the potential risks involved such as uncertainties in the market or the company’s financial performance, the companies are spurring liquidity on the bourse.

Because investors are seemingly not deterred by these risk factors and are willing to invest despite them, companies are becoming more comfortable with including even more detailed risk disclosures in their IPO documents.

Is it a good call to participate in an IPO involving a telco in Uganda?

For starters, Airtel Uganda will, in October, join MTN Uganda in going public on the Uganda Securities Exchange (USE). Both telcos worry that their competitors could trigger lowered pricing to retain and win over new customers, which could derail growth of their revenues.

It must be noted that there are additional looming uncertainties with the emergence of unconventional and over-top players such as Instagram and WhatsApp, which “provide highly nuanced and multi-dimensional competition in the process.” There are additional looming uncertainties.

MTN Uganda noted in its 2021 prospectus that “these players enjoy the additional advantage of not being domiciled in Uganda, and so are able to provide alternative network services without a direct regulatory, tax and local infrastructure impact.”

In offering an answer as to whether it is a good call to cast your lots with telcos, one expert put it neatly by saying the companies are like saying, “please be cautious, possibly you might even lose your money” if you are eyeing long-term return on investment.

What yardsticks should one consider before making a decision on taking part in an IPO?

In the first quarter of 2022, Uganda Communications Commission (UCC) noted that there is stagnation of growth in domestic talk time at 16.4 billion minutes from 17.1 billion minutes in the prior quarter. This, the regulator offered, “may be indicative of behavioural or consumption changes as consumers gradually switch from traditional voice to app-based messaging solutions.”

Voice services, which are declining, account for the majority of revenue for telecoms—more than 55 percent. Airtel Uganda says the company’s total revenue is expected to continue to be dominated by this revenue in the medium term due to the increased use of the services by young people.

The increased use of the services by young people, according to Airtel Uganda, is expected to result in this revenue continuing to dominate the company’s total revenue in the medium term. The company says revenue from data and digital services is increasing concurrently, and it anticipates that this trend will continue as smartphone penetration accelerates, along with mobile network capability.

Financial analysts say they normally count the pages of risk factors whenever each prospectus comes out.

“If a [prospectus] exceeds 10 pages, there is a problem. Investors now gloss over even the direst risk factors, so 20 pages is not uncommon,” one analyst who follows IPOs, told Sunday Monitor, on condition of anonymity.

Are companies upfront in the prospectuses they put out before IPOs?

For the most part, yes. In 2018, Cipla Quality Chemicals Uganda (CiplaQCIL), a public pharmaceutical company, warned its potential shareholders prior to its listing that before making an investment decision, they should first review their risks with a lawyer, auditor, stockbroker, banker or tax advisor. Five years later, its investors have lost more than Shs680 billion.

The drug manufacturer indicated in its 12-page risk disclosure that its operating results may fluctuate due to a number of factors, many of which may be out of its control. In one blunt sentence, it said thus: “CiplaQCIL may not succeed in its strategy of expanding the number and range of its pharmaceutical products. Furthermore, it may not be able to operate its plants at the required levels to support increased product demand, hire sufficient personnel to achieve its growth strategy or manufacture new product lines.”

The company also warned that its past performance (revenue, profit margins and costs) should not be relied on as an indication of future performance or growth, especially as competition intensifies.

Regardless, the CiplaQCIL IPO was oversubscribed the subsequent year, raking up Shs167 billion, with each share priced at Shs256.5. This was after an eight-year drought of IPOs on the country’s bourse.

The following year, 2019, in its annual report, Mr Emmanuel Katongole, the chairman of CiplaQCL, noted that the company made a loss of Shs36 billion compared to the Shs7 billion profit it recorded in the year it listed (2018).

The company attributed this to a higher impairment allowance made as a result of the Zambian government’s delayed payments, a decline in gross margin, and an increase in interest rates on its overdraft.

Is CiplaQCIL an outlier?

Unfortunately, no. MTN Uganda made its debut on the USE in 2021, with 16 pages of risk factors. It for one warned that “there can be no assurance that demand for data will continue to grow…” Any increase in the revenue generated from data and digital services, it added, may not be sufficient to “offset the substantial capital expenditure required to upgrade MTN’s networks to handle increased data traffic...”.

Since 2021, MTN Uganda investors have lost more than Shs67 billion on the bourse.

What is the average number of risk-factor pages in IPO filings?

It’s not tracked. However, based on anecdotal information from the bourse’s underwriters and seasoned investors, it appears that the average has increased from what was once only a few pages to somewhere between 11 and 13 pages.

Two things are going on here. One is that the USE has mandated greater and more detailed risk disclosure.

Second, no one is concerned about including risk disclosures because investors still do not read the fine print as thoroughly as they should.

Mr Andrew Mwiima, a financial markets analyst, observes that investors have failed to try to understand complex business models and their inherent risks as the business plans of today’s technology companies have grown more difficult to understand.

“People do not read about these risks because literacy levels in the country are low. You need to look at the entire balance sheet, weigh costs and debt levels, and to do that thoroughly,” he says, adding, “You need to have a clear understanding of the company you want to invest in.”

To understand these risks and their magnitude, he recommends seeking advice from Capital Markets Authority-licensed advisers, stock brokers, lawyers, tax advisors, or accountants.

Long-term investors tend to take a closer look at new companies whose offering documents contain warnings about the improbability of profits.

“Those pages of risk factors are not made-up risk factors,” he says, adding that Airtel Uganda’s IPO will almost certainly be oversubscribed by foreign investors due to the country’s deterrent shilling, which encourages them to buy a large number of shares.

Treasury reports that in July, the shilling declined against the Euro and the British pound, with respective depreciation rates of 0.9 percent and 0.8 percent.

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