Share listings and new financial products to jump start Algerian capital markets

 

As bank borrowing becomes increasingly expensive, capital markets are emerging as a financing alternative for a range of domestic firms. This is true of the government as well, as large fiscal deficits mean financing needs are likely to remain significant. Before hydrocarbons prices fell in 2014 – and the resulting economic headwinds occurred – banks benefitted from plentiful liquidity, which allowed them to lend to the public and private sectors at competitive rates (see Banking overview). This abundance of financing is one reason capital markets in Algeria have remained at an early stage of development. Other factors include the population’s strong and persistent preference for cash, and a general distrust of formal financial products and institutions.

Formation 

The Société de Gestion de la Bourse des Valeurs (SGBV) was created in 1997 to operate Algeria’s capital markets, with the six state-run banks participating as shareholders. Overall, market capitalisation on the Bourse d’Alger, which was launched in 1999, remains dominated by sovereign bonds, and no new corporate bonds have been listed since the most recent one matured in early 2016. Eriad Sétif, a state-owned agri-food business, was the first firm to publicly list in 1999, joined later that year by SAIDAL, a publicly owned pharmaceutical company. In 2000 Entreprise de Gestion Hôtelière El Aurassi (EGH El Aurassi), the state-run hotelier, followed suit. There were no further initial public offerings (IPOs) for more than a decade after this, and Eriad Sétif withdrew from the market in 2006.

Three private sector listings since 2011 changed the dynamics of the equity market, but it still remains in an early stage of development with limited secondary market liquidity. Total market capitalisation, including both equity and bonds, stood at AD437bn (€3.6bn) at the end of June 2017, having been in gentle decline since 2015, when bond issuance peaked. The most notable development in 2017 is the expected inaugural listing on the dedicated equity market for small and medium-sized enterprises (SMEs) by AOM Invest, which was preparing to go public in the second half of the year.

Regulation & Development 

Since its establishment in 1993 the Commission for the Organisation and Oversight of the Stock Market (Commission d’Organisation et de Surveillance des Opérations de Bourse, COSOB) has been the independent regulator of Algeria’s capital markets, and has overseen the 11 active market intermediaries. Physical trading takes place on Monday and Friday mornings, with price movements restricted to within 5% to limit intra-session volatility. COSOB has put together a strategic development plan for the 2016-20 period, founded on three pillars: increasing the number of listed equities from five to 30, developing both existing and future market participants, and improving communication efforts to boost the market’s image.

Bond Market 

As in many emerging economies, Algeria’s fixed-income market dominates. The value of outstanding bonds was AD391.8bn (€3.2bn) at the end of June 2017, having fallen from a high of AD440bn (€3.6bn) at the end of 2015. Together with the IPO by Biopharm that tripled market capitalisation on the equity index in 2016, the recent decline in the value of the bond market has narrowed the size gap between these markets. At the end of 2015 the bond market was 28.5 times the size of the equity market, but by mid-2017 it was only 8.5 times larger.

Since the last corporate bond issue matured in early 2016, public listings have exclusively been government-issued sovereign bonds. Dahli SPA, a commercial, hotel and leisure properties builder, issued a seven-year AD8.3bn (€68.8m) bond in 2009, with coupon rates increasing from 4% in the first year to 6.75% in 2016, at which point it was fully paid off. “In addition to the publicly listed bond market, there are several large corporates with debt issues that are traded over the counter (OTC) among financial institutions,” Kamel Taleb, director of market oversight and development at COSOB, told OBG. “These include Air Algérie, Algérie Télécom (Mobilis) and Sonatrach.” Some publicly traded bonds are also traded OTC, which leads to less liquidity in the official market.

However, in terms of value, bond market liquidity continues to dwarf that of the equity market. The AD7.5bn (€62.2m) in bonds traded in the first half of 2017 was more than 67 times the transaction value on the equity market. First issues dominate activity, with much weaker activity on the secondary market. This, combined with the recent absence of corporate issues, means transaction levels are largely determined by the sovereign issuance schedule of the state. This has caused transactions to be somewhat volatile in recent years: from the abnormally low level of AD52m (€431,000) in 2013, transactions surged to AD8.4bn (€69.7m) in 2014 and doubled again to AD17bn (€141m) in 2015. Although transactions fell to AD11.6bn (€96.2m) in 2016, they reached AD7.5bn (€62.2m) in the first half of 2017, foreshadowing another strong year. One reason for the drop-off in 2016 was the introduction of the guichet direct (direct window), through which smaller-denomination sovereign bonds could be issued directly to retail investors – including those in the informal sector – as an alternative to traditional savings products.

According to international media, the government plans to issue its first sukuk (Islamic bond) in 2018, along with introducing Islamic financial services at state banks. In the past, consideration was given to the issuance of sukuk to finance the government, but none made it to the exchange in 2017. Souhil Meddah, director-general at RMG Consulting, told OBG, “Algeria still has a very cash-oriented culture, so while the introduction of Islamic financial products could absorb a small amount of the country’s savings, a big change in attitude would be necessary for these products to go mainstream.”

Equity Market 

While the significant discrepancy between the market capitalisation of the equity and bond markets denotes their respective relevance, the narrowing of this gap suggests change could be imminent. For private businesses, the absence of corporate bonds – coupled with both Biopharm’s IPO in 2016 and the first listing on the SME equity market anticipated in late 2017 or early 2018 – suggests that the equity market could become a more viable financing alternative in the near future.

Having been dominated by two public sector companies – SAIDAL and EGH El Aurassi – since the late 1990s, the exchange could benefit from the recent listings of private sector entities: Alliance Assurances in 2011, NCA Rouiba in 2013 and Biopharm in 2016. With these additions, three of the five publicly listed firms are now private sector players, and these newcomers dominate market capitalisation.

Performance & Valuation 

Despite economic turmoil, the stock index has been relatively flat throughout 2016 and 2017. Having been 1288.5 at the end of 2015, it increased to 1293.3 by the end of 2016 and 1294.8 by June 2017. Following Biopharm’s listing, however, market capitalisation of publicly listed equities experienced a three-fold increase, from AD15.4bn (€127.7m) at end-2015 to AD45.8bn (€379.9m) at end-2016. Since then, the market has been stagnant, with market capitalisation of AD45.7bn (€379.1m) as of the end of June 2017.

Accounting for more than two-thirds (67.1%) of total market capitalisation, Biopharm has dominated since its IPO, with its valuation reaching AD30.6bn (€253.8m) at the end of June 2017. SAIDAL is the second-largest stock, valued at AD6.7bn (€55.6m) in mid-2017 and accounting for 14.6% of the market. The other three listed equities are fairly close in terms of market capitalisation: EGH El Aurassi was valued at AD3.3bn (€27.4m) at the end of June 2017, accounting for 7.2% of the market, followed by NCA Rouiba with AD2.8bn (€23.2m) and 6%, and Alliance Assurances with AD2.3bn (€19.1m) and 5.1%.

Liquidity 

Dynamics in the primary market have been the principal driver of liquidity, as the secondary market remains both underdeveloped and underutilised. Before 2015 the equity market was declining, with an average of 86,754 transactions during the 2012-14 period for an average annual value traded of AD42m (€348,000). The IPO of NCA Rouiba bolstered these averages in 2013, and anticipation of the Bio-pharm IPO in early 2016 similarly boosted trading to 2.2m shares for a total value of AD1.25bn (€10.4m) in 2015. In 2016 there were 788,860 transactions, for a total value of AD806m (€6.7m).

With no IPO activity in the first half of 2017, transaction levels fell from the highs of 2015-16, with 184,750 shares traded for a total value of AD111m (€921,000). In the first half of 2017 there was a clear step change in liquidity – even on the secondary market – from the pre-2015 period. The SGBV and COSOB are hoping to improve liquidity, attract more IPOs and increase activity on the secondary market.

Public Listings

As of 2017 there were five publicly listed companies on the Bourse d’Alger. First entering the market in 1999, SAIDAL, the state-run pharmaceutical firm, is the longest-standing listing. Its free float was 20% as of December 2016. Despite mixed performance in recent years, the firm enjoyed a strong start to 2017, increasing its share price from AD600 (€4.98) to AD665 (€5.52) over the first half of the year. At 5.25, its price-to-earnings ratio (P/E ratio) was the lowest of the five in 2016, though its dividend yield was second highest at 6.67%.

EGH El Aurassi has been listed on the bourse since February 2000, and the hotelier is still majority publicly owned, with a 20% free float as of December 2016. Its share price has advanced steadily since 2012, from AD340 (€2.82) at the end of that year to AD550 (€4.56) at the end of June 2017. At 8.95, its P/E ratio was second highest in the market for 2016, and its dividend yield for the year was 6.06%.

Alliance Assurances was the first private firm to join the market via its March 2011 IPO. At 31% it boasted the highest free float on the market in December 2016. Its share price, however, has lost more than half its value since 2012, falling from AD825 (€6.84) at the end of that year to AD400 (€3.32) at the end of June 2017. Despite these challenges, Alliance Assurances has the strongest dividend yield of the five listed firms, at 9.68%. Its P/E ratio of 6.4 was in the middle of the pack in 2016.

Founded in 1966, the food and beverage producer NCA Rouiba joined the bourse in 2013. Its share price has declined every calendar year since its IPO, from AD405 (€3.36) at the end of 2013 to AD325 (€2.70) as of June 2017. This is likely due to weak earnings, which caused the firm to post the highest P/E ratio in 2016, at 21.8. Its dividend yield of 4.48% was the lowest on the market that year. One-quarter of NCA Rouiba’s stock was free floating at the end of 2016.

The most recent market addition is Biopharm, which had a AD6.2bn (€51.4m) IPO in early 2016. The vertically integrated pharmaceutical firm was popular with retail investors, who reportedly took up 86% of the offered shares, with institutional investors capturing the remainder. In December 2016 Biopharm had a 20% free float, while its market capitalisation reached AD30.6bn (€253.8m) by the end of June 2017. Its P/E ratio in 2016 was 5.63, while its dividend yield was 5.39%. Biopharm recorded a 10.3% increase in sales its first listed year, to AD56.3bn (€467m) in 2016, while operational profit increased 22.6% to AD7.3bn (€60.5m). This saw net profits increase nearly 25% to AD5.5bn (€45.6m) and earnings per share grow from AD173 (€1.43) to AD216 (€1.79), while the dividend per share was AD66 (€0.55).

A Strong Effort 

Société des Ciments de Aïn El Kébira (SCAEK), a subsidiary of Groupe Industriel des Ciments d’Algérie, made an attempt to become the sixth publicly listed firm in Algeria before its IPO was cancelled in June 2016. Coming three months after the successful Biopharm flotation, the firm sought to raise AD18.95bn (€157.2m) by releasing 35% of its stock. However, only 5% of the offered shares had been taken up by the final day of the subscription period, meaning it had failed to secure sufficient investor participation to meet the minimum-required free float rate of 20%. With expected market capitalisation of AD54bn (€447.9m) in the event of a successful IPO, it would have been valued at a figure higher than the other five companies combined. Market observers cite the unsuccessful efforts of SCAEK as a main factor behind recent reluctance by large firms to seek listings on the bourse.

Future Listings 

As part of its 2016-20 development plan, COSOB is aiming to increase the number of listings from the current five to as many as 30. “In 2013 COSOB identified eight public companies that could be possible candidates for flotation. Among these, Crédit Populaire d’Algérie, Hydro Amé nagement and Mobilis appear the most likely, but these are at different stages of development, and none have yet applied for a listing,” Taleb told OBG.

Other candidates identified by authorities as potential IPO listers include Caisse Nationale d’Epargne et de Prévoyance, Banque Extérieure d’Algérie and Cosider Carrières, an infrastructure firm. “We do not expect to see further listings on the main market imminently, but it is possible that Compagnie Algérienne d’Assurance et de Ré assurance could come to the market in late 2017 or early 2018,” Meddah told OBG. “Over the longer term, the listing of Mobilis, the leading mobile phone operator in Algeria, is eagerly anticipated by the market.”

In the medium to long term, lack of liquidity and available financing is expected to encourage more corporations to consider the stock market as a viable alternative. Meanwhile, both public and private sector banks may look to IPOs as a possible – or even necessary – way to raise funds to meet more stringent capital requirements (see Banking overview).

Sme Market 

While the SME version of the main stock market has existed since 2012, it will only transition from theory to practice when the first firm – widely expected to be AOM Invest – lists on the market. The SME market was established for companies with capital of up to AD500m (€4.1m), at least 10% of which must be freely floated on the exchange. Participating firms are also required to nominate a promoteur en bourse (sponsor) for five years to guide them through the early stages of activity as a listed company. Sponsors must assist new firms in meeting market requirements for information disclosure, transparency and good governance.

With a goal of creating a pipeline of stock market-ready SMEs, in July 2016 the SGBV signed a partnership agreement with the 3000-member association of young entrepreneurs, Jil’Forum des Chefs d’Entreprise (Jil’FCE). At the time of this agreement, Mohamed Skander, president of JIL’FCE, announced there were five SMEs ready to list on the stock market. These were active in diverse sectors, such as plastics, aquaculture, services and agricultural equipment. The digital finance and e-payment segments have also been flagged as having potential for smaller firms to join the stock market. Yazid Benmouhoub, director-general of the SGBV, noted some advantages that SMEs have over larger firms in the country, including a higher capacity to raise debt and negotiate borrowing rates with banks, as well as tax advantages that have been in place since 2015.

AOM Invest is an SME based in western Algeria that specialises in research and development, as well as the operation of tourism projects. Once the agreement has been signed by COSOB, AOM Invest is expected to become the first firm to list on the dedicated SME version of the local stock market. While preparing for listing, the firm had social capital of AD112m (€929,000). In coming to the stock market, the firm hopes to raise sufficient capital to finance its countrywide development plans. The listing may also provide a positive example for other SMEs. However, while many SMEs have expressed interest in following in AOM Invest’s footsteps, no other firm had applied to the authorities by mid-2017, as players adopted a wait-and-see approach.

Upgrade Initiatives 

Supported by funding from the Ministry of Finance, the SGBV is upgrading its pricing and quoting technology over 2017-18. This €10m-11m investment will see trading move to a fully digital platform for the authorisation and clearing of trades, which should eventually allow investors to trade remotely through mobile devices and other internet platforms. By facilitating trading, this new technology is expected to improve market liquidity.

Also on the docket is collaboration agreed upon in late October 2017 between the city of London and the Bourse d’Alger. While specific details are forthcoming, a memorandum of understanding was signed to develop the bourse in terms of equipment, training and regulation. Some areas highlighted for cooperation include public-private partnerships, sovereign bonds, Islamic finance and technology.

Currency 

There are two currency markets in operation in Algeria: the official market run by the central bank and a parallel market operating outside the official institutional framework. Between December 2014 and December 2017 the official exchange rate saw the dinar depreciate by approximately 33% against the dollar. This was largely in an effort to boost revenues in local currency from sales of hydrocarbons, which experienced a price collapse from more than $100 per barrel in 2014 to less than $30 per barrel in 2016, before recovering to around $60 by late 2017 (see Economy chapter).

The official currency market is considered limited and rigid, lacking the flexibility required for actors in the real economy. Therefore, the parallel market caters to retail investors, commercial actors and players from outside the country.

However, the parallel market is more expensive, as is usually the case, because in addition to the exchange rate determined by the official market, traders must pay Customs and value-added tax.

“Following the shift of the dinar relative to the dollar, the insurance sector could benefit from updating its capital,” Mokhtar Naouri, CEO of Cash Assurances, told OBG. “Such an action, if taken by every insurer, could increase market turnover.”

Outlook 

With bank financing rates on the rise, more firms are expected to consider the stock market as a viable alternative in the years ahead. It will be important to maintain momentum when the first firm lists on the SME board, as this is expected to bring others to the market. Larger corporations are believed to be considering listing in 2018 as well.

For the capital markets to play their full role in Algeria’s economic development, there is a need for more corporate bond issuance and a more regular schedule of sovereign debt issuance at various tenors. This would establish a reliable yield curve, against which the private sector could benchmark investment and funding decisions. Allocating credit ratings to sovereign bonds could help as well, while the availability of new, publicly listed fixed-income products – such as sukuk – could further increase liquidity by bringing in more funds and investors.

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The Report: Algeria 2017

Financial Services chapter from The Report: Algeria 2017

The Report: Algeria 2017

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