Tucked away in Lusaka South Multi-Facility Economic Zone is an entity that is poised to set the Lusaka Stock Exchange alight. When President E. Lungu made the statement to parliament on the significance of the IDC and its mandate to take companies to Initial Public Offering (IPO) or listing, TFHZPC got really excited about the prospects of analyzing future premier companies on LUSE. But the question is, “How do we get these State Owned Enterprises (SOEs)” to IPO. We will not speculate on the timeline of such an endeavor but we will provide some pointers on some of the signals future investors need to look out for if they intend to further diversify their portfolios. The Turn Around Before any company can consider going to IPO it must look at the health status of its books. The numbers on the present and previous years have to be assessed whether or not the company has had good earnings. If the earnings have been negative, a turnaround will have to be put in place. This can come in many forms (some unpopular) but the most common include a review of the management team, staff levels, leverage, customer relations, supply chain management, working capital management and cost management. Strengths and weakness in the aforementioned give the turnaround team an idea what it will take to make the company profitable again. More often than not, it’s always expected that a time frame to profitability will be put in place and the aim is to get an income statement that has positive earnings three years in row. Valuation With steady cash flows, an unquoted SOE can easily be valued using net present value or discounted cash flow. What these methods basically do is they look at the revenue potential of the prospective company over a specified period of time and allow for the determination (calculation) of the company’s theoretical value. Comes in handy for stock brokers to determine what share price the company will list at. Underwriting The process of taking an SOE to IPO is an expensive and meticulous one. The banks with investment divisions will be keen to land the contracts to help with the process of taking these companies to IPO. The banks will be responsible to handling the intricacies of the process with regulatory departments such as the Securities and Exchange Commission (SEC) and also engaging with possible investors. Eventually, a document known as the final prospectus is produced which is the go to document for all that want to know about the company and why it’s listing. In addition, details of the share price would have also be determined by the underwriter. What Value is there in Listing? Once the SOEs are listed on the stock exchange, this will offer government an opportunity to either exit or retain a minimal stake whilst at the same time allowing Zambians to now participate in the ownership of these newly promoted premier companies through their ownership of shares. Although the share certificates may not be enough for the owner to have a seat on the board, there is eligibility to dividends as well as value growth as these companies become more profitable. We envisage pension funds and high net worth individuals will take this opportunity to invest in the newly promoted premier companies. These will certainly open up new avenues of value creation that many investors will be longing for.
