String of IPOs on JSE defy the gloom permeating economy

THE GLOOM gripping South Africa’s economy isn’t showing in equities. Companies have this year brought the most initial public offerings (IPOs) to the JSE since 2007, with the value of deals rising to the highest since 2010, according to data. The sales have been helped by a resurgent October following a third quarter in which there were no IPOs at all, emulating other emerging markets after a rout in global equities and commodities.

More local offerings are in the works, with the country’s benchmark equity gauge within 5 percent of the record it reached in April, when shares were trading at record high valuations. Stocks have reported gains as domestic companies expand elsewhere in Africa or Europe to tap revenue streams outside of South Africa, where a power shortage, a slump in raw material prices and labour strikes contributed to an economic contraction in the second quarter.

Attractive valuations

“The market is at a very high level, and our valuation multiples are very extended, which means that you can list your company at quite an attractive valuation,” Patrice Rassou at Sanlam’s investment management unit said. With borrowing costs set to rise if the US and South Africa increase interest rates, companies also want to “reduce their dependence on fixed income or other forms of financing”, he said.

Local companies have raised a record amount of capital this year, boosted by mergers and acquisitions and rights offers, according to data provided by the JSE, which operates Africa’s largest stock market. Companies issued shares worth R175 billion in the nine months through September, compared with R125bn a year ago, JSE data show.

As part of those capital raisings, there have been 13 South African offerings announced this year worth a combined R9.93bn, the highest value since the 2010 peak, and compared with four in 2014 valued at R4.96bn. Six are earmarked for October.

Across emerging markets, the value of announced IPOs dropped 96 percent to $49.8bn (R667.7bn) this year, even as the number of deals increased to 913 from 745 for all of 2014. Sales in the third quarter tumbled to $9.7bn from 229 transactions, compared with $28bn from 452 deals in the previous three months.

The all share index jumped to a record on April 24, pushing the South African benchmark to trade at 17 times estimated earnings, the highest ever. The gauge is up more than 6 percent this year, even after tumbling to an eight-month low in August during the global sell-off spurred by concern that China’s economy is slowing.

A brave move

“It’s a brave move to still go ahead in the current environment,” Grant Cullens, the chief executive of African Alliance Asset Management, said. “They could be proved to be very fortuitous and get away with it. Equally, they may find that they’ll end up trading at a huge discount or a discount for some time to come.”

Business confidence in the economy slumped to its lowest in 22 years in September, while manufacturing has contracted for six out of the eight months measured this year. The International Monetary Fund last week cut its forecast for South Africa’s growth this year to 1.4 percent from a previous estimate of 2 percent.

Still, all six of the IPOs that started trading this year have made gains, with NVest Financial, a consultancy and private-wealth management company, more than doubling in value since it listed at the end of May.

“We have a good pipeline of potential listings,” Donna Oosthuyse, the director of capital markets at the JSE, said. “Market sentiment and the company’s ability to raise capital will ultimately have an influence on their listing date.”

Waco International, which rents out products from scaffolding to portable sanitation, plans to raise as much as R3.5bn in the JSE’s biggest share sale this year to facilitate the partial exit of private equity investors. Sygnia, a Cape Town-based money manager with R140bn in assets, jumped as much as 71 percent when it debuted yesterday following a sale of shares to selected investors that was almost 20 times oversubscribed.

Patrick Mathidi, a money manager at Momentum Asset Management, said: “If a company has got a good story to tell, good prospects for growth, then there’s always a market for it.” – Bloomberg