New listings and investment vehicles set to drive growth in Côte d'Ivoire

 

In September 2018 the Bourse Régionale des Valeurs Mobilières (BRVM) will celebrate its first 20 years in operation. The bourse is headquartered in Abidjan, and dominated by Ivorian listed firms and market participants. Having stagnated somewhat during Côte d’Ivoire’s period of political instability in the first decade of the century, it has been making up for lost time in the intervening years.

The past decade has seen a significant increase in the volume of listings, liquidity, valuations and the number of market participants. The region’s capital markets have become increasingly sophisticated, while the variety of securities available across equity and bond markets has improved. A notable example of such innovation was the listing of five sharia-compliant bonds (sukuk) in 2016.

The long-awaited third compartment of the equity market was launched in the final month of 2017, while the BRVM plans to extend the breadth and depth of the market over the medium-term.

Bonds

Capitalisation of the bond market has taken off in the last two years, having more than doubled from CFA1.139trn (€1.7bn) at the end of 2014 to CFA2.509trn (€3.8bn) by the end of 2016, before advancing to CFA2.543trn (€3.8bn) by July 2017.

As in most developing and emerging markets, the BRVM’s bond market is dominated by sovereign issues, with corporate bonds until now playing a relatively minor role. In 2016, 11 bonds were issued, all of which were sovereign, totalling some CFA1.362trn (€2.04bn). The maturities of these new issues ranged from 2018 to 2028, with coupons between the rates of 5.75% and 6.5%. By the end of 2016 there were 41 listed bonds, including five sukuk, as well as 20 further unlisted bonds.

“As the market develops, we are seeing the terms and tenor of new issues becoming stretched, as well as appetite for new products such as sukuk and eurobonds,” Patrice N’Zi, general director of Phoenix Capital, told OBG. “The market started to rebalance in 2017, with issuers becoming less aggressive. For their part, the sovereign authorities are getting better at coordinating their fundraising, by sharing their issuance calendars.” Even with regard to Ivorian sovereign bonds, the most common in the market, there is still not a full yield curve.

The big challenge in the bond market is the continued lack of liquidity on the secondary market. The major buyers of bond issues still tend to be local institutional investors pursuing buy-and-hold strategies. The banks and, increasingly, local insurance companies are the key players.

François Adjitin, director of research at Phoenix Capital, sees this as a significant opportunity for future growth, given the right support. “For the secondary market to really take off, we need to see the same sort of information and education campaigns that have been such a success in generating interest and activity by retail investors in the equity market,” he told OBG. “There is also a need for more post-trade transaction-price transparency.”

Twin-Track Approach

“There needs to be a twin-track approach to boost secondary-market liquidity,” said N’zi. “First, mobilising internally by packaging bonds for pension funds and insurance firms – as well as for undertakings for collective investment in transferable securities and investment companies with variable capital on the retail market. And second, attracting more international funds by launching new, structured products.”

At the beginning of 2017 the Central Bank of West African States (Banque Centrale des Etats de l’ Afrique de l’Ouest, BCEAO) adopted measures to better organise refinancing through its windows. “This followed the decision in December 2016 to limit banks to borrowing a maximum of two times their common equity through its marginal lending facility,” Herman Boua, director of research at Hudson & Cie, told OBG. “This had a knock-on effect of creating a spike in rates on the bond market, but things had calmed down by the middle of the year.”

Bank Listings

The recent trend of banks seeking primary listings or secondary increases in capital through the stock market looks set to continue, as the changes in banking regulations from 2018 onwards make their business more capital intensive.

“In the short term, new regulations for banks will affect their ability to finance the real economy, particularly small and medium-sized enterprises [SMEs]. This could support the growth of capital markets, as raising bank financing becomes more difficult,” Ismael Cissé, CEO of Sirius Capital, told OBG.

Listing on the BRVM has been the government’s venue of choice for conducting privatisations, with the dual aims of developing the capital markets and raising funds. The government has signalled already, however, that it is not looking to privatise either Caisse Nationale des Caisses d’Epargne or Banque de l’Habitat de Côte d’Ivoire (see Banking chapter). On the other hand, the possible sale of the government’s 49% stake in Côte d’Ivoire Telecom (51% owned by Orange Telecom) by way of an initial public offering (IPO) is eagerly anticipated by the market, pending the completion of restructuring efforts.

Islamic Finance

One of the most important innovations in 2016 was the listing of sukuk on the BRVM for the first time. Three countries – Côte d’Ivoire, Senegal and Togo – issued a total of five sukuk amounting to $1.3bn.

These listings were heralded at the Second Forum on Islamic Finance in Africa held in Abidjan in October 2016. Sponsored by the private arm of the Islamic Development Bank, these listings together constituted one of the largest such operations.

Awa Nadia Hamza, head of capital markets at Banque Nationale d’Investissements (BNI), told OBG that “the launch of the two Ivorian sukuk in which BNI was involved was a big success. At the moment we don’t have plans to issue further sukuk, but rather to continue raising funds through the issue of about four standard long-term bonds per year.”

Equities

With technological innovation, liquidity and new listings picking up pace in recent years, the BRVM has become increasingly dynamic, featuring more prominently on the radar of global investors. Its visibility was enhanced further in 2016 when it became the sixth African market to be included in the MSCI Frontier Markets Index.

The BRVM is the sixth-largest exchange on the continent, its market capitalisation amounting to 14% of GDP. On this measure the BRVM ranks ahead of Nigeria (10.7% of GDP) and slightly behind Egypt (17.7%). The Moroccan and Kenyan exchanges are equivalent to 41.6% and 30% of GDP, respectively, while all lag far behind the continent’s leading light, South Africa, which boasts the largest exchange, equivalent to 238.6% of its GDP.

Composition

The addition of NSIA Banque and Ecobank CI in 2017 brought the total number of listed stocks on the BRVM to 45. The flotation of the former took place in July 2017, with all 4m shares sold on the first day of trading. The IPO raised CFA34.6bn (€51.9m), of which 21% went to the state and 79% represented an increase in NSIA Banque’s capital.

The second IPO of 2017 saw Ecobank’s Ivorian subsidiary aiming to finance its expansion plan and reinforce its balance sheet. Opened on September 27, the IPO was completed in one day due to the strength of demand, having been originally scheduled to run until October 11, 2017. Almost CFA100bn (€150m) was raised, well in excess of the CFA45bn (€67.5m) planned by the bank.

Of the 45 firms listed on the exchange, 14 are in the financial sector, 12 in industry, seven in distribution, five in agriculture, four in public utilities, two in transportation and one, Société d’Etudes et de Travaux pour l’Afrique de l’Ouest, is a construction and civil engineering firm. Between the end of 2015 and late 2017, six businesses joined the exchange, comprising five financial sector companies and one agriculture firm, Sucrivoire (see analysis).

Seven of the eight UEMOA member countries are represented on the BRVM, with Guinea-Bissau being the only exception. The exchange is dominated by Ivorian companies, with the listings of NSIA Banque and Ecobank CI bringing their number to 35, or 78% of the total. The BRVM-10 Index tracks the 10 most actively traded stocks on the exchange, its composition being updated on a quarterly basis.

Listing Requirements

Until the recent introduction of a third, the BRVM equity market was divided into two compartments, the second having less-stringent listing requirements than the first.

To list in the first compartment a firm needs to have been active for at least five years, with five years’ worth of historical accounts, a net margin of 3% of sales for each of the past three years and CFA500m (€750,000) market capitalisation – of which at least 20% should be freely floating.

To list in the second compartment, however, a firm needs only have been active for two years, with two years of historical accounts and CFA200m (€300,000) market capitalisation. There is more flexibility regarding when it achieves a 20% free float and there is no net margin requirement to list.

Boua highlighted some compliance challenges, however. “Too many listed firms still don’t play by the rules. For example, only a few publish quarterly accounts, even though it is obligatory. The requirement for a minimum 20% floating capital is not respected, but there are no sanctions.”

Performance

After four years of strong gains, the BRVM-Composite Index had more than doubled by the end of 2015, while the BRVM-10 had advanced by more than 80% over the same period.

By that stage, price-to-earnings (P/E) ratios had become quite rich, inducing a period of consolidation and profit-taking in 2016 and 2017. Some holdings were also liquidated to raise funds with which to partake in the spate of IPOs (see analysis). The BRVM-Composite shed 3.9% in 2016, while the BRVM-10 slipped 9.8%. The average P/E ratio at the end of the year was 24.2, on a par with the 23.5 average at the close of 2015, but down from the 27.1 seen at end-2014. The first half of 2017 saw a continuation of these trends, the composite index falling a further 10.3% in the six months to end-June and the leading 10 shares down by 11.5%. The P/E ratio thus slipped further, to 21.7 by the end of June.

“We see the same trends carried over to 2017, undermining share prices in the first half of the year, particularly profit-taking from a small number of big investors as well as divestment by retail investors to the benefit of the agri-business sector,” Adjitin told OBG. “We expect things pick up again in 2018. Banking stocks – Société Générale de Banques en Côte d’Ivoire and Bank of Africa in particular – are likely to be favoured as they are performing well and consistently pay big dividends.” In 2016 CFA93bn (€140m) in dividends were paid out by firms listed on the exchange, for an average yield of 6.23%. The slide in share prices wiped out these gains, with average total returns negative for the year at -3.25%.

Market Capitalisation

Despite share prices having fallen back from their 2015 highs, growth in the market capitalisation of listed shares has continued to rise. Having touched CFA2.808trn (€4.2bn) at the end of 2009, market capitalisation has more than doubled, reaching CFA7.706trn (€11.6bn) by the end of 2016, before retrenching 14.8% to hit CFA6.566trn (€9.9bn) by mid-2017.

At the end of June 2017 Senegal’s Sonatel remained the largest company by far listed on the exchange, its CFA2.4trn (€3.6bn) accounting for more than one-third of the market. It was nearly five times the size of the next-largest firm, Société Générale de Banques en Côte d’Ivoire. Having suffered large losses in heavy trading in 2016, Ecobank is the third-largest, with capitalisation of CFA324.6bn (€487m) at the end of 2016. These were followed by Onatel, with capitalisation of CFA319.4bn (€479m), and Coris Bank International Burkina Faso with CFA312.5bn (€469m).

Equity Liquidity

Although liquidity in the equity market remains shallow by the standards of many more advanced emerging markets, it has progressed significantly in recent years, helped along the way by share splits, new listings, strong returns and increased popularity among retail investors.

“We have seen a substantial improvement in liquidity on the equity market, which has doubled over the past half decade to reach approximately $2m per day in 2017, compared to $1m per day previously,” Boua told OBG. “We expect further growth in the years ahead as competition between brokers drives down transaction fees, encouraging higher turnover in investors’ portfolios, as well as more investors entering the market.”

Having been as low as CFA82bn (€123m) in 2011, the total value of stocks traded on the BRVM progressed steadily to reach CFA393bn (€590m) in 2016, up 16.8% on 2015. Sonatel alone accounted for nearly one-fifth of the total value traded at CFA83m (€125,000), followed by Onatel with CFA29m (€43,500) and Société Générale de Banques en Côte d’Ivoire with CFA14.2m (€21,300).

Aided by a number of share splits in recent years, the total number of shares traded increased by 70.1% in 2016 alone, from 114m to 195m. However, 174.4m of these trades were accounted for by Ecobank alone, followed by Sonatel with 3.5m. The headline numbers are therefore not necessarily indicative of a particularly deep market. Notable share splits in recent years include UNIWAX (5-1) and Total CI (20-1) in 2015, and Servair Abidjan CI (20-1) and Vivo Energy CI (20-1) in 2016.

Data for the first half of 2017 suggests trading volumes fell back somewhat, having reached only CFA130bn (€195m) up to end-June 2017, albeit with two IPOs following in the second half of the year.

Innovation

The BRVM was awarded the title “Most Innovative Exchange in Africa” at the Ninth Investment Forum held in New York in September 2016. Among the innovations cited as reasons for the award were its new website, mobile application, TV show Flash Bourse and the SMS Bourse service, as well as the listing of five sukuk.

The exchange is not resting on its laurels, however. The BRVM aims to continue attracting new companies to list, with a target of 16 over the 2017-20 period. In the short term the bourse has launched a third compartment for equities dedicated to SMEs, and, on the bond market, project bonds as well as diaspora bonds for every state in the UEMOA region.

The launch of an exchange-traded fund for the BRVM is also expected in 2018, as well as the introduction of facilities to lend and borrow securities for the first time. The bourse also hopes to acquire new trading and central securities depository platforms, and to upgrade from affiliate to full membership of the World Federation of Exchanges. Medium-to-long term development plans include the launch of a fourth compartment – for equities in the oil, gas and mining sector – and a venture capital market.

Further development will create challenges as well. “The process of integration within UEMOA will necessarily involve stock markets across the bloc. However, it might not be easy, given concerns over local regulations and sovereignty,” Georgine Codo Adja, CEO of BNI Finance, told OBG.

Third Compartment

The long-awaited third compartment of the equity market was launched in December 2017, following discussions between the BRVM and 30 SMEs in the run up to the launch.

The listing requirements for the third compartment are even less stringent than for the second one, particularly with regard to the minimum float. Companies still need to have been active for at least two years to list, while the minimum float requirement has been reduced to 10%. Firms must also have a three-year business plan and a sponsor, neither of which are required for listing in the first or second compartments. “SMEs are increasingly seeking advice on fundraising, restructuring and financial disclosure requirements, to become more attractive to outside financing,” Cissé told OBG.

Speaking to OBG, Boua sounded a note of caution. “There are many arguments in favour of another compartment for smaller firms, but a number of structural factors mean making it a success will be a challenge,” he said. “At the moment most quoted firms are the subsidiaries of big groups, or came about as a result of privatisations.”

Market Players

In addition to welcoming new stock and bond listings to the market in 2016, the BRVM also saw an increase in the number of brokerage firms and custodian banks. The number of custodians rose by one to seven, of which five operate in Côte d’Ivoire and two in Senegal. The number of brokerages also grew, by three to 24, with the addition of a new broker in Benin and two in Senegal. This brought to five the number of brokerages operating in Benin, the country with the second-largest group, but this is still half the total (10) in Côte d’Ivoire. The BRVM continues to be covered by two ratings agencies, the West African Rating Agency and Bloomfield Investment Corporation.

Private Equity

As with most of the region’s capital markets, private equity has grown exponentially in recent years, albeit from a relatively low base. There were 15 funds in operation by mid-2017, up from only two in 2008. Most of these are active in generalist development capital space, since appetite for early-stage and specialised funds is still limited.

Speaking to OBG, Mamadou Kouyaté, director of investment at Cauris Management, shed further light on the market dynamic. “Private equity is very active in finance, services and agro-industry. Regulatory reform and increased capital requirements are generating many investment opportunities in banking and insurance, in particular,” he said. “We saw a lot of new funds raising money in 2016 and 2017, but this is not linked to the regulatory changes in banking and insurance as most of them are generalist. It could be explained by the attractiveness of Africa and especially francophone West Africa”.

Whereas multilateral finance organisations have traditionally been the cornerstone investors in private equity funds in the region, local private sector actors have been coming to the fore in recent years. Having secured several successful exits of late – including Bridge Bank and Banque Atlantique in 2016 – some of the earliest funds, raised during the 2008-09 period, have generated impressive internal rates of return in the region of 15%, which has whetted the appetite of investors during the most recent rounds of fund-raising.

Kouyaté identified the tax system as the biggest challenge facing the private equity sector. “We still don’t have a dedicated legal and tax regime for private equity,” he told OBG. “This creates legal and tax insecurity for both investors and fund managers, and makes it complicated to structure investments.”

Commodities & Currencies

As yet, there are no publicly quoted markets for either commodities or currencies in Côte d’Ivoire, despite its reliance on cocoa exports to drive the economy, for example. Foreign-exchange transactions continue to be carried out with or between the banks, while the main market for cacao is in London.

There have been proposals to establish a cacao exchange in Abidjan, but this would likely be independent of the BRVM if it were to happen.

Outlook

The equity compartments of the BRVM are likely to see continued interest in primary and secondary listings in the face of strong economic growth (see analysis). The launch of the third compartment for SMEs is likely to be an acid test for the BRVM and, if successful, should contribute to economic growth by expanding the financing options available to SMEs wishing to scale up.

Market observers expect that the corporate bond market will wake from its relative slumber in the coming years, as bank lending to large corporates becomes more scarce and more expensive (see Banking chapter), while the banks themselves look to the bond market as a longer-term source of financing alternative to the BCEAO and the inter-bank market. “Despite the growth of the stock exchange, the use of tradable investment tools has not yet become embedded in the culture – although we are seeing a change in mentality among the business community,” Codo Adja told OBG. These developments should together support continued strong growth in market capitalisation of both equity and bond markets as a proportion of GDP going forward.

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The Report: Côte d'Ivoire 2018

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