When the United States opened up its markets by registering NASDAQ, a parallel alternative to the New York Stock Exchange (NYSE), many firms, some not initiated in the United States (US) saw an opportunity to rush for listing which always gave many an opportunity to benefit from the advantages of the stock market. In Africa, such efforts have been gestured by Egypt, whose Cairo and Alexandria stock Exchanges both have over 700 listed firms… and Egypt still ranks among the best performing markets in the world.  Such fruits are the efforts of the Securities and Exchanges Commission (SEC) and the Capital Markets Authority (CMA) for the US and Egypt markets respectively.

In Kenya, the Nairobi Stock Exchange (NSE) seems to have worked very hard as we are headed to witness the listing of two firms in the coming month.  Making the issue even juicier is the recent announcement by the government to relinquish control of all state owned firms; Mumias Sugar Company, one of the best performing firms in the market and National Bank of Kenya which is still holding the bulk of bad and doubtful debts in Kenya’s banking industry among them.

Investor’s attention is now geared towards the Scanad Group which is set to release its prospectus on July 17, 2006. Kenya Re and Equity Bank are also set to follow suit later with the latter having confirmed that its listing is not to seek funds (capital) but other benefits that come with listing.  The bank, whose core capital is currently at over Ksh. 1 billion made a pre-tax profit of over Ksh.0.5 billion last year meaning that it was among the best performing banks in terms of Return on Equity (ROE).

With 47 companies currently listed, the catalogue is even set to grow within the short run with more than 10 firms set to list. This clearly indicates that Kenya will soon realize the fruits of a vibrant stock market which could go a long way in attracting foreign investors.  South Africa recently started a campaign that aimed at identifying large cap companies in the continent and wooing them to list at the South African Bourse (Johannesburg Stock Exchange, JSE)

As we girdle out for the next IPO (Scanad Group), investors need to be ready for the challenges that come with many listings and a market that is more efficient than it was.    

Among the challenges is the fact that price appreciations that have been experienced in some dominant counters will not exist any more. While this is good news to the income investor, it is bad news to others.  Good news for the income investor and bad for the short seller. In addition, the fact that there are many counters to pick from means that scrutinizing books will be more sought after than was before.  This will help seep out market leaders from the laggards. Some companies will consequently  not trade for a long period of time.  Currently, only five to eight counters record nil activity and this barely lasts for days. 

The Egyptian case is a clear revelation of this scenario. With over 750 listings, only less than half of these companies actively trade in the two exchanges on a daily basis.

On the incoming IPO, investors need to realize that as irrational as the market is, it is not always guaranteed that the best return will be arrived at on the first day of trading in the secondary market.  This was witnessed during the KenGen IPO when its share price shot up by over 400% on the first day of trading.  Scanad may however not offer investors quick cash as KenGen did because KenGen was partly a government owned entity and received a lot of support in its floatation of its IPO. In addition, being a monopoly in electricity generation gave it a lee way.  In addition, its financial base is a clear evidence of a firm company with its profits previously placed at over Ksh. 2 billion.

The idea of quick cash from the Scanad IPO can also work depending on the reaction of big investors who may be interested in acquiring corporate decision making stake in the firm.  This however needs to be taken very cautiously as one may lose money easily buying a stock whose share price will take time before it appreciates.

Another way of looking at this is that unlike the typical advertising firms that will either target the print or the visual media, Scanad is stretched to both extremes and shares a very huge market share as it may attract a lot of attention.  But again, media firm’s performance is based on the contracts they get and the renewals at expiry.  I recall the case of TEQUILA, an advertising firm that went under after Safaricom, one of their major clients failed to renew their advertising contract in 2004.

The Scanad IPO marks the beginning of a very unique category in our stock market which has been dominated by Industrial and finance sectors.  This will be the first in Marketing and we still anticipate more to add variety in the sector.

If more firms list in the coming months as anticipated, we are likely to witness lesser price volatilities hence fewer opportunities for short sellers to make money, and more opportunities for long term investors to put in money and watch it for a long term.

Just before we get into the period of our stock market transformation with a dozen new listings, a word of caution to investors, don’t let emotions determine your stock picks. Very soon, listed firms will be too many to the extent that unlike currently where some firms will not record trades for an entire week, we will witness firms that do not record trades for even a whole month, but with lesser price fluctuations.