Bourse growing again in Morocco

The Casablanca Stock Exchange (CSE) has faced both a slim listings pipeline and low levels of secondary trading in recent years. However, market authorities are working on the launch of a range of reforms and new products that they hope will reinvigorate activity on the exchange, at a time when liquidity is also returning to the wider economy and at least two initial public offerings (IPOs) look set to go ahead in 2015. In 2014 growth returned to the market for the first time in several years and corporate bond issues recovered.

Listed Firms

As of early March 2015 there were 74 companies listed on the equity market of the CSE, with total market capitalisation standing at Dh526.2bn (€57.3bn). This was up from Dh484.4bn (€52.7bn) at the end of 2014, itself up from Dh451.1bn (€49bn) a year earlier; the annual rise marked a reversal of several years of steady decline. Market capitalisation amounted to approximately 52% of GDP in 2013, down from a peak of 100% in 2007.

The largest listed firm on the exchange was telecoms operator Maroc Telecom (MT), with a capitalisation of Dh116.2bn (€12.6bn), followed by Attijarawafa Bank of Dh76.9bn (€8.4bn) and BMCE Bank of Dh41.6bn (€4.5bn). Following MT, the 10 largest firms by capitalisation comprise three banks: Attijarawafa, Banque Marocaine du Commerce Extérieur (BMCE) and Banque Centrale Populaire; three building materials firms: Lafarge Ciment, Ciments du Maroc and Holcim; an insurance company, Wafa Assurance; a property developer, Compagnie Générale Immobilière (CGI); and an electricity provider, Taqa Morocco.

Market Performance 

The benchmark Moroccan All Shares Index (MASI) rose by 5.55% in 2014, its first year in positive territory since 2010, following drops of around 12% in 2011, 15% in 2012 and 3% in 2013. Factors underpinning the negative performance in these years included a shortage of liquidity in the banking system and wider economy due to factors such as a high current account deficit (see Banking chapter), reduced export demand growth due to the eurozone crisis, a relative economic slowdown in 2012 and declines in the value of stocks in the construction, real estate, industrial and tourism sectors, in particular. The market’s rise in 2014 was helped by a 48.3% increase in the transport sector index, the best-performing industry index for the year, as well as good performances in the engineering and industrial equipment and forestry and paper indexes, which rose by 43.6% and 42.8% respectively. Real estate shares were a drag on the market’s performance, with the value of listed shares of property developers Alliance and Addoha falling 43.3% and 32.7%, respectively, extending previous declines due to factors like Addoha’s heavy debt pile, falling turnover at both companies, poor results at Alliance’s construction arm and difficulties financing real estate projects – though those of the largest listed developer by capitalisation, CGI, performed better, with a fall of 7.9%.

As of early March 2015 the MASI had risen to 10,469, up 8.8% on the start of the year, amid general optimism about the state of the economy and the effects of falling current account and fiscal deficits. Speaking in February, Karim Gharbi, director of research for capital markets at Moroccan investment bank Casablanca Finance Group, said he was optimistic about the market’s performance in 2015 as a whole, noting that factors like falling interest rates should help to drive growth. “There should be earnings growth in all sectors on the bourse, with cement and agribusiness set to do particularly well,” he told OBG. “Cement firms will see bottom line growth thanks to lower energy prices, while agribusiness firms should see improvement in both sales and profits and appear to be notably undervalued.”

IPO Activity

In 2014 there was just one IPO, that of Dar Saada, a property developer specialising in social and mid-range housing. The firm sold 52.25m shares at a value of Dh215 (€23.39) each in early December and began trading on the exchange from the middle of the month. According to traders’ estimates published by Reuters, investors from the Gulf accounted for around 25% of subscribers to the IPO, followed by institutional investors from Morocco on approximately 20%. The developer intends to use the capital raised to step up its activities in sub-Saharan Africa, having already launched operations in Côte d’Ivoire.

The single listing was in keeping with previous years. 2013 also saw just one IPO – that of Jorf Lasfar Energy Company in December 2013, in which 2.23m shares were sold for Dh447.5 (€48.68) each, worth a total of Dh6.69bn (€727.8m). There was also only one listing in 2012, that of the flexible abrasive papers manufacturer Afric Industries. The company's IPO raised a total of Dh152.2m (€16.6m). By comparison, there were three IPOs in 2011 and two in 2010.

There were expectations in Morocco that 2015 would see an increase in listings. The listing of fuel distributor Total Maroc took place in late May, following an IPO in which it floated 15% of its capital; the IPO was nearly seven times oversubscribed. A privatisation via the bourse of the government’s minority stake in ports operator Marsa Maroc is also expected to take place in 2015, though as of June a privatisation decree for the firm had yet to be issued. The company, which operates nine terminals in Moroccan ports, is seeking to expand its operations both in the kingdom itself, where it reportedly plans to bid for the operation of two terminals in Casablanca port and the second phase of the Tanger Med port, as well as in West Africa. The government had previously sought advice on floating its stake in the firm in 2011 but did not go ahead with the plan. The consumer goods group Mutandis in May announced plans for an IPO in 2015 in order to strengthen its brand offering and support its expansion into Africa. Others could also follow suit; Gharbi said that the number of listings in 2015 would depend on the market’s performance. “If performance is strong, we could see as many as four IPOs in 2015,” he told OBG.

Delistings

Companies have been exiting the exchange at the same time as new firms have been joining it. In late 2014 property developer CGI, which floated in 2007, announced its intention to delist from the bourse. The announcement followed an investigation into the firm ordered by the authorities in the wake of the arrest of senior figures at the company on corruption charges and its failure to deliver some projects to clients as planned. In January the market regulator, Caisse Deontologique des Valeurs Mobilieres (CDVM), ordered a second valuation of the firm to take place before it could delist, following claims that the firm that conducted the first valuation suffered from a conflict of interest. Another firm, Mediaco, delisted from the exchange in February 2015, following two years of poor performances in its share price and financial results.

Trading

Trading is dominated by a small number of securities, with the 10 most traded shares in 2014 accounting for three quarters (74.5%) of all transactions on the bourse during the course of the year. The most heavily traded share on the market in 2014 was Attijarawafa Bank, with transactions worth Dh5.64bn (€613.6m), or 20.5% of all market transactions, followed by real estate developer Addoha (Dh3.1bn, €337.2m), or 11.2% of all transactions and BMCE Bank (Dh2.4bn, €261.1m), or8.85%).

Institutional investors account for more than two-thirds of transactions, due to the weak participation of retail investors who, according to Gharbi, have lost much of their appetite for involvement in trading since 2009. “Retail investors got used to very high returns and there was a lot of disappointment when they came to an end,” he told OBG, adding that individual investors’ expectations from the market could be unrealistic. “People need to get used to the idea that there is a risk and understand the long-term advantages of the market; over the long term, investments in the stock exchange still perform better than alternatives and they are much more liquid than other popular forms of investment such as real estate.”

The total value of trading on the bourse stood at Dh49.8bn (€5.4m) in 2014, down from Dh62.1bn (€6.76bn) the previous year (the 2013 figure was in turn up slightly from Dh61bn (€6.6bn) in 2012). The bulk of trading in 2014 by value – Dh30.9bn (€3.4bn), or 62% of the total – occurred on the central market, while most of the remainder (worth Dh13.8bn (€1.5bn) took the form of over-the-counter bloc market trading. The value of total equity trading for the year stood at Dh44.3bn ($4.8bn), or 89% of all transactions by value, while that of bond trading totalled Dh5.5bn ($594m).

Liquidity Shortage

Such amounts are relatively small in light of the exchange’s market capitalisation; the secondary market suffers from a relative lack of liquidity as institutional investors tend to buy and hold securities, rather than trading. “There is a lack of short-term institutional investors such as hedge funds in the market and retail activity is low,” Gharbi told OBG.

Largely as a result of such traits, a number of benchmark index providers have effectively downgraded the status of the market over the last two years. In November 2014 S&P Dow Jones reclassified the CSE’s equity exchange from emerging to frontier status, following decisions along the same lines by the FTSE Group and MSCI in September 2014 and November 2013, respectively. The FTSE Group explained its decision by the “continued decline in broad market liquidity, below the level sufficient to support sizeable global investment”.

The reclassifications has had a significant impact on the market as emerging market funds pulled out their investments following the decisions, although the impact is likely to be short-lived. “There were large exits, mainly in November 2013, and they have not been compensated for by frontier funds entering the market,” Gharbi said. “However Morocco will come back on the radar, and frontier funds are in any case growing faster than emerging market funds.”

The liquidity situation also appears set to improve as a result of factors such as market reforms and a strong pipeline of new investment products (see analysis). “We hope that the liquidity problems will be resolved by the new products we are launching,” Badr Benyoussef, chief business development officer at the CSE, told OBG, adding that the institution is also trying to attract more potential investors to increase liquidity. “We are working to increase our visibility; we are also trying to educate retail investors as well so that they are better prepared for the market.”

Wider economic factors are also boosting the prospects for increased activity on the exchange. “Improvements in liquidity in the banking sector and wider economy will help to boost transaction levels in the kingdom’s capital markets,” said Mamoun TahriJoutei, head of economic intelligence at BMCE Bank.

Bond Market

As of March 2015, 48 corporate bonds were listed on the CSE debt market, with a combined value of Dh12.2bn (€1.3bn). Activity on the market has waxed and waned in recent years; 2005 to 2010 saw substantial growth in the debt market, thanks to excess liquidity in the economy and low interest rates on Moroccan treasuries, but a significant fall in liquidity levels in recent years and rising interest rates as well as the impact on investment sentiment of a pair of corporate bond defaults in 2009 and 2010 saw activity levels fall. 2013 saw just two corporate bonds issued according to CDVM data, both of which were listed on the CSE, with a combined value of Dh2.2bn (€239.3m). Both bonds were issued by local financial institutions, namely a 10-year bond with a coupon of 6.18% issued by BMCE Bank and a five year security with a 5.6% interest rate issued by Attijarawafa Bank.

However, activity picked up again substantially in 2014 with the issue of 12 corporate bonds with a combined value of Dh10.7bn (€1.1bn), four of which were listed on the CSE. The largest of these was a Dh2bn (€217.6m) issue by property developer Addoha in July, followed by a Dh1.5bn (€163.2m) bond issue by fellow developer CGI earlier in the month and another Dh1.5bn (€163.2m) debt issue by retail distributor Label Vie in November. Other bond issues during the year included a five-year, Dh350m (€38m) issue by agribusiness firm Zalagh Holding, of which Dh125m (€13.6m) was taken by the European Bank for Reconstruction and Development, making it the first local currency corporate bond issue to which an international financial institution subscribed. The firm also became the first Moroccan corporate debt issuer outside of the finance sector to seek an international credit rating.

As of early March 2015 there had been two further bond issues since the beginning of the year, namely a Dh1bn (€108.8m) 10-year bond with a 4.75% coupon by Credit Immobilier et Hotelier that is listed on the CSE in January, and another Dh1bn (€108.8m) issue by property developer Alliances Immobilier in February; the latter security, which is not quoted on the exchange, matures in five years with a coupon of 5.67%. Like with the equity exchange, transaction levels on the secondary debt market are also low, with investors preferring to buy and hold bonds. “There is a need for a greater diversity of bond listings to increase liquidity on the market; a compulsory rating system for bonds, which is not currently in place, would also help,” said Benyoussef.

Eurobond Issues 

Large Moroccan firms are also increasingly turning to international debt issues for financing. In April 2014 the country’s leading phosphate producer, OCP S.A., launched its maiden eurobond as part of efforts to finance its $17bn expansion programme. The firm sold $1.25bn of 10-year debt with a coupon of 5.75% and a further $300m of 30-year bonds at a rate of 7.375%. The issue followed the firm’s signing of agreements to build four fertiliser plants in Morocco and Gabon at a cost of $2bn, with the aim of supplying as much as 30% of the African fertiliser market. OCP S.A.’s issue followed the launch in November 2013 of a $300m five-year eurobond by Moroccan bank BMCE, in November 2013.

Similar issues are likely to be in the pipeline; TahriJoutei told OBG that as long as eurozone interest rates remain low, eurobonds would be an attractive source of financing for Moroccan institutions. “Morocco has an investment-grade rating and it can raise money in foreign currency at attractive interest rates,” he said.

Regulatory Reform

The CDVM, which regulates Moroccan capital markets, is set to undergo some important changes in the coming years. Under a law passed in 2013 the council is to be transformed into a public authority that will see the presidency of the organisation pass from the minister of economy and finance to a new figure, nominated by the cabinet, who is to be titled the Moroccan capital markets authority. “The changes will give the body more independence from the government,” Hicham Elalamy, deputy director-general of the CDVM, told OBG. For the change to come into effect, another law specifying the mode of appointment of the heads of such authorities needs to be passed; Elalamy told OBG that this was likely to take place during the four-month parliamentary session beginning in April 2015.

In addition, the new body will be charged with educating the public on the functioning of capital markets, a role no one institution was charged with before, and regulating sector professions. The changes will also see the creation of a separate sanctions committee to levy punishments against firms that break market rules. “The previous committee did not function as well as it could have; the new body will create a separation between market supervision and sanctions,” said Elalamy.

Stock Exchange Law

The CDVM and the Ministry of Finance have also been working on a new stock exchange law. “The aim of the law is to transfer certain requirements from the stock exchange law to market regulations,” Elalamy said. “The law as it currently stands specifies all the requirements for each exchange and therefore needs to be changed whenever a new exchange is established or the rules for an existing exchange need to be modified,” he said, explaining for example that the creation of exchange-traded funds (see below) required changes to both the stock exchange and the mutual funds law.

“The new law outlines principles and leaves the details to regulations, and will therefore give us more flexibility and encourage innovation,” Elelamy told OBG. “We want different exchanges to be able to have different information reporting requirements; the law as it stands imposes the same requirements on all listed firms, but companies listed on a smaller exchange should have lower requirements as the firms have less capacity and the market is acknowledged to involve a higher level of risk.” The law will also allow for the creation of a small-and medium-sized enterprises-dedicated board on the exchange (see analysis).

Speaking in February 2015, Elalamy said a draft of the law was with the secretary-general for review, after which it would be sent to the government and then parliament for approval.

Several other reforms are also being implemented. A number of amendments to the law on the securitisation of shares were passed in September 2014, and the authorities are also working on a law regulating third party asset management.

“There is already legislation in place on collective investments such as mutual funds but nothing on individual and third-party management of investments,” Elalamy told OBG. The law was due to be passed in 2013 but was put on hold; speaking in February 2015, Elalamy said that it was currently out for consultation and should be passed in 2015.

Elalamy told OBG that another change under consideration was the relaxation of restrictions capping investments by Moroccan mutual funds in foreign assets at 10% of their capital, adding that the change did not require any new legislation but would need approval from the Office des Changes. It is not yet clear exactly what form any such change would take. “It may for example be a simple increase in the overall limit, or we may for example increase the limit solely for African investments in order to help develop the kingdom as a hub for African finance,” Elalamy said.

Partnering Up

In June 2014 the CSE and the London Stock Exchange Group (LSEG) signed a strategic partnership covering a range of areas, including the supply of a new trading platform to the CSE (see below) and help with the design of a new board for small and medium enterprises (see analysis); CSE CEO Karim Hajji said that the agreement could also help large Moroccan firms list on both exchanges. In October 2014 LSEG also signed an agreement with Moroccan securities depository Macroclear to provide it with access to European securities settlement systems.

The June agreement included the acquisition by the CSE of a new trading and market monitoring platform provided by MillenniumIT, a subsidiary of the LSEG, which will allow the bourse to offer a range of new products such as exchange traded funds. Benyoussef told OBG that the system should be running by mid-2016. In February, Elalamy told OBG that the CDVM was also working with the bourse on adapting market regulations to the new system. “Work on regulations covering the new platform is well-advanced, with just one or two outstanding points left to deal with,” he said.

Outlook

Given widespread optimism surrounding the prospects for the kingdom’s economy, the Moroccan stock market is expected to perform well during 2015. Furthermore, the exchange’s stronger IPO pipeline, plans for a wide range of new products and the indications of increased interest in bond issues suggest that market activity is poised to increase. Looking to the longer term, more flexible legislation governing the bourse will make it easier for the bourse to adapt to new circumstances in local and international markets.

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The Report: Morocco 2015

Capital Markets chapter from The Report: Morocco 2015

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