Tunisia's capital markets expected to rebound along with wider growth

Tunisia has an active stock market that has seen a large number of equity listings in recent years and that witnesses regular government and corporate bond issues, though the secondary share market is relatively shallow and bond trading activity is minimal. Both markets, and particularly the corporate bond market, are dominated by the financial sector.

Following strong growth in 2014, the country’s all-share index, Tunindex, had a good first half of 2015 but lost all of the period’s gains following a terrorist attack in June that dented economic confidence. However, the market has got off to another strong start in early 2016, sparking hopes that it can return to its previous course of growth.

Sector Players

Established in 1969, the local stock market is the Tunis Stock Exchange (Bourse des Valeurs Mobilières de Tunis, BVMT). Originally set up as a public entity, since 1994 the exchange has been jointly owned by the country’s stock brokerages, each of which holds an equal share in it.

There are currently 23 brokerages, though many are subsidiaries of banks and are not heavily active. This has left much activity concentrated in the hands of two independent brokerage houses, MAC SA and Tunisie Valeurs, which had respective transactional market shares of 22.4% and 20.9% in 2014 (all other brokers had market shares of less than 10%, and 17 had shares of less than 5%). The stock market and brokerage operations are regulated by the Financial Market Council (Conseil du Marché Financier, CMF), an independent public body established in 1994.

Capitalisation & Contribution

Total stock market capitalisation stood at TD17.83bn (€8.2bn) at the end of 2015, up from TD17.32bn (€7.9bn) a year earlier. The outstanding value of listed corporate bonds amounted to TD1.95bn (€894m). The market is moderately sized by regional standards; market capitalisation was equivalent to 19.2% of GDP in 2014, according to World Bank figures, less than half of the level in Morocco (47.9%) but well above that of neighbouring Algeria, where market capitalisation is equivalent to a fraction of 1% of GDP. Comparable data from the World Bank for neighbouring country Libya is not available, but its market capitalisation appears to have stood in the vicinity of 4.5% of GDP as of 2013.

Money raised via the capital market accounted for 9.2% of total financing of private investment in 2014, according to data from the CMF, more or less split equally between corporate bond issues and capital increases. The market’s contribution to financing the broader economy has risen in recent years, with the proportion up from 6.6% in 2012 to 8.6% in 2013. The BVMT is aiming to raise the figure to an eventual rate of around 20%.

Equity Market 

The BVMT’s equity market has witnessed strong initial public offering (IPO) activity over the course of recent years, with the number of listed equities growing from 56 in 2010 to 78 at the end of 2015, an increase of 39%. Market capitalisation is top heavy, with the largest firm by capitalisation – drinks manufacturer Société de Fabrication des Boissons Tunisie (SFBT) – accounting for approximately 12% of total equity market capitalisation at the end of 2015, and the largest 10 firms accounting for around 56.5% of the total.

As a consequence, price moves in some of the top companies can have large impacts on overall market performance. “A lot of the market gain in the first half of 2015 was due to an increase in SFBT’s share price following an increase in the cap on foreign participation in the share,” Bassem Neifer, an analyst at equity research firm AlphaMena, told OBG, referring to a decision in January to allow foreign investors to own more than 50% of the firm’s equity.

Alternative Options

In addition to the main equity market, the BVMT also operates an alternative market that was launched in 2007. A total of 12 companies are listed on the market, with a focus on small and medium enterprises (SMEs) and high-growth firms as well as companies that are in difficulty or in need of restructuring.

However, Lilia Kamoun, a senior analyst at the brokerage Tunisie Valeurs, told OBG that, overall, it had not functioned well since its launch. “The alternative market involves high-risk companies and should have been limited to institutional investors,” she told OBG. “However, it was opened to retail investors as well, whose shorter term investment horizons are not well suited to the nature of the companies listed, which require a longer timeframe.”

As a result of this, the alternative market has not seen many listings since its initial launch, although one of the two IPOs that took place in 2015 did so via the alternative market.

In July 2015 the BVMT signed an agreement with the French financial market representative body Paris Europlace, which, among other initiatives, will see it work together with the European stock exchange Euronext in order to examine different ways to facilitate SME financing via the bourse.

Listings

Just two new equity listings appeared on the BVMT in 2015, down from six in 2014 and 12 the previous year, though seven companies already listed on the market also raised additional capital on the bourse during the year. “Morale is low following recent terrorist attacks, and most companies are in observation mode. Furthermore, few wanted to list in the second half of 2015, when market values were falling,” Salma Zammit Hichri, senior analyst at MAC SA, told OBG. The new listings in question were of car dealer Universal Auto Distributors Holding (UADH), which placed a one-third stake on the main equity market in June, raising TD40m (€18.3m) in capital; and office and school supplies manufacturer Office Plast, which floated 36% of its equity on the alternative market in October, raising TD5m (€2.3m). Both operations were oversubscribed, by four times in the case of UADH and 30 times for OfficePlast, which points to substantial demand for new listings on the part of investors.

The next equity listing to take place is likely to be that of local pharmaceuticals manufacturer Unimed, which regional media in December 2015 reported could take place in the first quarter of 2016. The Tunindex’s strong start to the year and tight banking sector liquidity both augur well for more IPOs during the course of 2016, and Hichri said that she thought the year would see more listings than in 2015. However, Kamoun also said that she expected that the recovery of the IPO market in 2016 would be limited, at around four or five new listings. “Despite the recent tightening of banking sector liquidity and lending, firms do not appear very interested in the market at the moment, likely due to the wider economic situation,” she told OBG.

Indeed, uncertainty regarding the performance of the market beyond the short term appears to be deterring firms from listing. “What stops companies from going public are not regulatory or administrative issues, but the lack of mid-term visibility and the lack of opportunities in which to invest capital. As a result, the incentive for a company to make an IPO is fairly small.” Mourad Ben Chaabane, director-general of MAC SA, told OBG.

Incentives

Listed companies benefit from several incentives, including a reduced rate of corporate tax of 20% for five years after listing. However, Hichri argued that to support the IPO pipeline over the long term, the government needed to offer further inducements to companies to list, though she said the chances of this currently appear low. “The development of the market is not one of the government’s major concerns at the moment, and the situation regarding incentives is getting worse rather than better,” she said, referring to a recent reduction in the general corporate tax rate to 25% without a concomitant reduction in the 20% rate, which applies for five years, offered to listed companies. “The difference between the two rates is no longer large enough to encourage companies to list given, for example, the costs and increased transparency requirements involved,” she told OBG.

Listed Sectors

The financial sector in Tunisia accounted for 51.5% of market capitalisation in 2015, while consumer goods companies accounted for 27.5%, consumer services 9.7% and industry 6.3%. Financial institutions, and banks in particular, accounted for still larger proportions of capital raised on the market in recent years, at 82.9% and 73.4%, respectively, of the total in 2014, up from 55.9% and 38.3% the previous year.

By contrast, the equity exchange lacks representation by large firms from some major local sectors, such as the telecoms and phosphate industries, though it could soon see the introduction of a major telecoms operator: in April 2014 the state-controlled Al Karama Holding, which was tasked with acquiring assets confiscated from the former president, Zine El Abidine Ben Ali, and his family and associates, said that it intended to sell its stake in Zitouna Telecom. The operator holds a 15% stake in the country’s largest mobile operator by subscriptions, Ooredoo. The transaction was set to take place via the stock market in September 2014. However, it has yet to occur, and there have been no recent updates on the plans, although industry figures are hopeful it may take place in 2016.

Family Companies 

Another potential source of further major listings for the bourse comes from the domain of large family-owned conglomerates in Tunisia, which are major players in the economy. However, according to Kamoun, previous efforts to persuade them to float has had only limited success. “In 2007 new tax incentives designed to encourage local conglomerates, which are mostly family firms, to restructure themselves into holding companies and list on the bourse were put in place, but only around five or six did so, which was less than had been expected,” she told OBG, attributing the reluctance of large family firms to list, in large part, to an aversion to the increased transparency requirements for listed companies.

Performance

The market has provided investors with solid returns over the long term, with the Tunindex all-share index having risen by a compound average growth rate of around 9.4% since its launch in 1997. Recent short-term performance has, however, been mixed: the index ended 2015 down 0.9% for the year, after growing by 16% in 2014. The growth in 2014 followed three consecutive years of negative returns. The market had a strong first half of the year in 2015, peaking at 5759.27 points in late June, for a year-to-date rise of 13.1%, but fell sharply in the wake of the terrorist attack that killed 38 foreign tourists in Sousse on June 26, which badly affected the tourism sector and damaged wider investor confidence. The index hit a low for the year of 4873.2 on November 12, before making a partial recovery in December. The overall market had a price-to-earnings ratio of 13.88, up slightly from 13.58 in 2014, and a dividend yield of 3.9%, unchanged on the previous year. The Tunindex20, which tracks the 20 largest stocks by capitalisation, was down 1.68% for the year, having followed a similar trajectory to the all-share index.

In terms of economic sectors, the Tunindex’s performance in 2015 was pulled down by the industrial, basic materials and consumer services segments, respectively down 30.4%, 23.1% and 8% for the year. The consumer goods and financial sector indexes, however, both ended the year in positive territory, up 10.4% and 2.4%, respectively. Local bicycle manufacturer Eurocycle was by far the best-performing stock of the year, having risen by 116.7%, more than twice its nearest rival. “Tunisia’s free trade agreement with the US gives Eurocycle access to a high-potential market with strong demand for bicycles, and the company also has large cash reserves,” Hichri told OBG, saying that she expected the stock to continue to do well in 2016. Telecoms infrastructure service firm Sotetel was the worst performer, losing 65.2% of its value, while the largest company by market cap, SFBT rose by 24.2%, following a gain of 99.1% the previous year.

Following a disappointing second half of 2015, the market got off to a good start in early 2016, having risen by 7.4% year to date to 5415.98 as of the end of January. Moreover, expectations for market performance in 2016 are generally better than in 2015, although, according to Kamoun, it could take time for the market to recover from the recent downturn, despite some encouraging valuations. “Share prices are very low at the moment and some are very attractive, but there is a lack of institutional investors to take advantage of this,” Kamoun told OBG.

Analysts’ opinions regarding the performance prospects for the financial sector – by far the largest in terms of capitalisation – also vary. Neifer predicted that bank stocks were likely to remain stable in 2016, and that leasing stocks would either remain stable or fall, due to low margins and high refinancing costs. However, Hichri argued that both segments were growing well, with little likelihood of unpleasant surprises in store. “2016 should be a year of consolidation for some key stocks in the financial industry,” she told OBG.

Trading & Ownership

Average daily trading volumes of listed stocks stood at TD8.6m (€3.9m) in 2015, up from TD7.2m (€3.3m) in 2014 – although, in practice, the amount varies widely from day to day – or a total of TD2.14bn (€981.4m), up 20.4% on 2014 figures. Block orders accounted for some 27% of transactions by value. The market is dominated by retail investors, with institutions accounting for only around a third of equity ownership, though Neifer said that this represented a large increase on the proportion three years ago. “There is a lack of large cap stocks that would be able to attract institutional investors,” he told OBG. “Furthermore, local insurance firms face regulatory ratios that prevent them from owning large amounts of any individual share. The life insurance market is not developed, meaning that there is a lack of large savings funds making long-term investments, while banks are mainly acting as intermediaries in the market,” he added. According to Kamoun, Tunisian financial institutions tend to prefer other forms of investment to equities. “Local institutions invest largely in bonds, real estate and strategic stakes in companies, rather than in portfolio stock investments, in part because of a cultural preference for lower-risk assets,” she said, adding that more tax incentives could help further attract institutions to the market.

The dominance of retail investors gives rise to increased market volatility. Neifer told OBG, “Retail investors tend to be heavily influenced by short-term macroeconomic developments, so day-to-day events can strongly affect market performance.”

Foreign Investment

Foreign investors held 25.6% of market capitalisation at the end of 2015, which is down slightly from 26.33% a year earlier but up from a level of around 20% at the end of 2010. Large cap companies account for much of the foreign holdings in the market; for example, SFBT, the largest listed company by capitalisation, also had the second-highest proportion of foreign ownership of any listed company at the end of 2015, at 61.6%, after the Higher Commission of Investment (Commission Supèriere d’Investissement, CSI) gave its approval for foreigners to own up to 66% of the company’s equity in January 2015.

While investment from abroad has risen in recent years, it is thought that low and variable liquidity levels deter large foreign institutions from raising their holdings further. “Foreign investors can’t find enough depth in the market,” Hichri told OBG. Foreign investment levels are also limited by foreign ownership caps, which vary by sector. Until recently, all foreign acquisitions of stakes in onshore Tunisian companies that brought the foreign ownership level to 50% or higher required approval from the CSI, as did further transactions that brought the foreign ownership level above 66%, though in September 2014 a decree abolished the requirement for some industrial and services segments. Currently, no listed firm has a foreign ownership level above 66%.

There have been reports that some restrictions may be further relaxed under the new investment code, currently being worked on by the government (see Economy chapter). “There is a need to lift all barriers to foreign investment in the market,” Neifer told OBG. “In particular, in the retail sector, where foreign share ownership is prohibited entirely, to help the development of the market.”

Funds

Net assets of Tunisian mutual funds amounted to TD4.59bn (€2.1bn) in 2014, unchanged from the previous year but down from TD5.25bn (€2.4bn) in 2011. This was equivalent to 5.5% of GDP and 42.2% of national savings. Bond funds dominate the market, accounting for 89% of total mutual fund assets, compared to 11% for mixed funds, while equity fund holdings are negligible.

Marketing Strategy

The BVMT implemented a new marketing strategy in 2015 with the aim of helping to boost the development of the exchange through the creation of a local stock market investment culture. A key component of the strategy involves delivering a range of outreach events, such as seminars and conferences, with many targeted at young people and students.

The strategy also included the launch, in May 2015, of a new website, Investia Academy, which provides a variety of online educational programmes aimed at different categories of investors and market observers, including the general public, the media, entrepreneurs and young people. The BVMT also ran a third round of an online simulated trading competition, MyInvestia, which it launched in 2014.

Product Development

The bourse’s development strategy also includes upgrading its information platforms and offering new products. In May 2015 the BVMT announced that it had signed an agreement with Euronext to migrate its current trading platform to the latter’s Universal Trading Platform, which is also used by the Beirut, Muscat and Amman stock exchanges, and which will allow the bourse to offer a range of new investment products, including exchange traded funds and warrants, as well as derivatives. The platform is expected to come online in 2017, and in the interim the BVMT is making plans to launch a study to examine the possibility of offering these new products, which would require a change in the law. However, according to Kamoun, the launch of new investment products may not make a big difference to the development of the market in the near term. “Without more institutional investors there is not really a need for more sophisticated products, and existing institutional investors are also not very interested in them,” she told OBG. “For the moment, the main priority should be to attract more institutional investors and to increase market capitalisation and trading.”

Outlook

Industry figures are hopeful that the market will perform better in 2016, and the Tunindex’s strong growth prior to the Sousse attack, as well its good start to the year, suggests that such hopes may well be fulfilled, providing the security environment fully stabilises. The wider development of the bourse will depend upon how far the BVMT can attract more institutions into the equity market, as well as the success of efforts to boost trading on the bond market. Privatisations, such as the stalled plans to sell the government’s stake in Ooredoo, could also significantly raise market capitalisation and diversify its components, should they be revived in the near future, as industry figures are calling for.

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The Report: Tunisia 2016

Capital Markets chapter from The Report: Tunisia 2016

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