The Lusaka Securities and Exchange Commission’s six-year wait for another Initial Public Offering (IPO) has finally ended with the publication of the Zambia Forestry and Forest Industries Corporation Limited prospectus in which the company has indicated that it seeks to list 40% of the forestry company.
“This is an offering of up to 40% of the shareholding of ZAFFICO, totaling to 160 million Ordinary Shares of the share capital in ZAFFICO to the Public, employees of ZAFFICO and selected institutional investors“, read a statement in the Prospectus that was made public recently and published on 6th December 2019.
The LuSE’s last IPO was the Madison Financial Services IPO of mid-2014 in which the company raised K62 million from investors who paid K3.10 per share for the financial services company’s security. ZAFFICO in comparison seeks to raise K329.6 million when trading debuts on 7th February 2020 (anticipated date) with a share offer price of K2.06. The offer opens on 11th December 2019 and closes 21st of January in the new year.
The first signal of this IPO came during the 2019 Zambian National Budget speech when the then Minister of Finance Margaret Mwanakatwe indicated that the Government would be seeking divestiture through IPO of two state-owned enterprises: a forestry company and an insurance company.
The road to the IPO has been fraught with numerous challenges. Some of them include the “Mukula tree” debacle, to trade unions’ lack of knowledge in the purpose of IPOs, to the IDC’s ownership of ZAFFICO. The prospectus addresses these to offer comfort to investors. ZAFFICO’s role in the Mukula tree debacle and where the proceeds to the sale of the trees is exposed (proceeds currently sit under the jurisdiction of the Secretary to the Treasury). Financial Insight has published numerous articles on the importance of capital raising adventures such as IPOs. The assertion that questioned IDC’s ownership of the ZAFFICO asset was taken out of context, according to a media statement Acting Managing Director, Manuel Mutale.
According to ZAFFICO (in the prospectus), the objectives of the offer and listing include
- to afford the Zambian Public, Zambian Institutional Investors, employees of ZAFFICO and other qualifying investors the opportunity to participate in the potential growth of ZAFFICO.
- to fund ZAFFICO’s future expansion programs
- to create a public market for the Ordinary Shares
- to provide the Selling Shareholder (IDC) with an opportunity to reduce its shareholding in the company
- and to support the development of the Zambian capital market
However, investors will be keen to understand the value proposition of the company especially in an era that is seeing global finance shifting to sustainable investment opportunities especially those that impact the environment.
Furthermore, although the desire is to get more Zambian’s participating in securities trading, the role of FDI cannot be understated. Financial Insight argues that the marketing of this IPO must extend to foreign investment. Why? Over the last 3 years, ZAFFICO’s EBITDA margins have been above 50%. Operating Margin has been above 50%. Net income margin above 40%. The company exists in an industry that has both domestic and export market attraction. This is even before they expand their operations to include value-added services which can only be achieved through capital investment.
However, investors will also be looking at the growth in liabilities. The company has almost doubled its appetite for debt over the last 3 years. There has also been a surge in trade payables over the same period. Fortunately, the company is highly liquid with cash that is more than double its trade payables despite ballooning inventory.
They have chosen the road less traveled. An IPO opens them up to scrutiny and shareholder critic. They have chosen not to go the way of a begging bowl but to give equity to astute investors.
–Article updated to reflect Secretary to Treasury and not Cabinet