Is umeme worth 300 billions?

As investment experts gear up to sell UMEME, questions arise whether the power distribution company will provide a good return for investors A couple of weeks ago a message arrived in the email accounts of clients of Baroda Capital Markets, urging them to start getting their finances in order for the sale of shares by the power company UMEME. If you are interested in this BIG IPO [Initial Public Offer], start planning your financials in advance, said the message sent out on August 15, signed by the Senior Manager and In-charge officer at Baroda Capital Markets, Suraj K. Srivastava. For domestic investors, the offer opens on 01.10.2012 and closes on 19.10.2012, Srivastavas message stated, adding that listing and trading would begin on November 15. For potential investors this means it is time to stash away savings, liquidate assets, or collect debts. Traders are priming their clients for the sale of shares in Ugandas sole power distribution concessionaire. When the companys shares are listed in October on both the Uganda Securities Exchange (USE) and Nairobi Stock Exchange, it will be the first cross-listed non-Kenyan company in East Africa. Announcement of UMEMEs listing has excited investors and analysts who have not seen a local company listing in Uganda almost three years, not since National Insurance Corporation in 2008. Apart from Barodas comment that it is big, details about the UMEME listing remain scanty, with key information like how many shares to be listed, at what price, still unknown, though the law requires a minimum of 20% of the companys volume to be uploaded. Japheth Katto, chief executive officer of the Capital Markets Authority, told The Independent they were reviewing UMEMEs application and conducting discussions with the various advisors working on the IPO, notably Stanbic Bank (transaction advisor and receiving bank) and African Alliance (sponsoring broker). Of course it would not be professionally or legally correct at this stage to discuss any details of the draft prospectus, Katto said, confirming that the review process was in advanced stages. There are 10 stages to the listing process including announcement of intent, selecting an underwriter, issuing a prospectus, a road show where company management present its performance to brokerage industry players to persuade them that the new stock is a good investment opportunity, among others. With only a month left and the prospectus still in draft, a lot still needs to be done to prepare UMEME for investors.

UMEMEs listing will bring to 8 the number of locally listed companies on the USE, and the total number of companies traded to 15, including the seven cross-listed from the Nairobi Stock Exchange. Katto said UMEME will expose investors to the energy sector, and expand the USEs portfolio of investment opportunities, now dominated by the financial sector and manufacturing. It will provide good opportunities for portfolio diversification, he said. Katto said the UMEMEs eagerness to list showed that the future of capital markets in Uganda was promising, especially as inflation and interest rates showed a downward trend. He pointed out that especially coming soon after the recent listing of the African Development Banks Shs 12.5 billion bond (part of a Shs 125 billion continent-wide program), it would fuel growth in the market. UMEME Managing Director Charles Chapman says listing on the USE will make Umeme stronger, more transparent and accountable to its customers, employees and shareholders. With the recently agreed regulatory targets and the increased availability of power, we believe the timing is right and that customers and employees should have the opportunity to share in the profits of the business, he said on August 22, as the company opened its books to the public in an investor briefing at Kampala Sheraton Hotel. Chapman said the money raised from the IPO would be invested in performanceenhancing innovations like pre-paid metering, bank payment interface to deliver real time account crediting, mobile money payment platforms, e-billing, SMS information solutions, among others. The Electricity Regulatory Authority recently announced a new pricing measure, pegging power tariffs to economic indicators like inflation and exchange rates effective October, which is expected to improve UMEMEs revenue. Our customers and stakeholders can be assured of our pledge to distribute electricity efficiently and to play a central role in the development of Ugandas economy, he said. Is UMEME a good buy? However, some analysts have questioned the companys suitability for the stock exchange, not only because of its poor public image, associated with long years of inefficient power supply, but also its record of losses, which they said flout USE rules, as well as the limited tenure of its concession in Uganda. Participants at the investor briefing last week, where UMEMEs 2011 annual report was presented, questioned whether its spotty record passed the bar of the stock exchange.

But Katto said this was not a problem for CMA, as it only requires that the prospectus submitted be accompanied by audited financial statements of the issuer and its subsidiaries for the preceding five financial years, but made no requirements on profit. It is the USE listing rules that deal with profit requirements and I have no doubt that the USE will satisfactorily handle the issue of profits when it considers UMEMEs application to list, he said. The Uganda Securities Exchange Listing Rules of 2003 Cap 6.7, require that the issuer should have declared positive profits after tax attributable to shareholders in at least three of the last five completed accounting periods immediately prior to the date of the offer. However, UMEME has only made public its financial results for two years: 2010 and 2011, of which 2010 saw a Shs 2 billion loss, according to the Annual Report of 2011. If the rule was applied, the company may not qualify for the IPO in October. When this was raised at a debate of the companys financial performance, UMEMEs Chief Finance Officer Selestino Babungi said the companys improved position negated those losses. Of course our Shs 84 billion retained earnings put us in a better position, he said. But I am not going to discuss the details due to the strict regulations surrounding IPOs. According to the companys 2011 annual report, UMEME had turned its losses in 2010 into a net profit of Shs 23billion at the end of December 2011, partly thanks to increased revenues, which should score some points with the USE. Chapman said the good performance was due to success in curbing power theft, which has been a big challenge over the years. He said the company had connected more new customers and increased revenue collections. He said the completion of Bujagali hydro power dam had stabilised distribution and consumption and ended regular loadshedding, which is good for business. Trend of UMEME's investments, 2005-2011

The concession The limited tenure of UMEMEs power distribution concession, now with 13 years left on its 2025 expiry date, has also been cause for concern. At the height of loadshedding late last year and early this year, Parliament even considered terminating the concession as the company was accused of inefficiency and breach of the terms of its contract. However, Chapman said he was confident the contract would be renewed in 2025 as performance improvements and innovation in projects like pre-paid metering had made the company more attractive. I think government will renew our contract, he told The Independent. He argued that if government did not, it would have to reimburse UMEME up to US$ 134million invested in power distribution. USE Chief Executive Officer Joseph Kitamirike was not available to comment, but in a recent interview he said the time limit of the concession would not deter UMEMEs listing since the remaining 13 years were enough for the new investors to earn a return on their investment. You are buying into a company in performance for the next 13 years. A person buying shares today may not have them in 13 years, Kitamirike said. What does the expiry of the concession mean? It means the life of the company is ending. You liquidate and divide assets. But it should not prevent it from being listed. That also assumes that the government will not renew the concession, Kitamirike added. Jared Osolo, an economist with the East African Development Bank, said UMEME had another ace up its sleeve in its monopoly position in power distribution, which stood it in good stead to perform better financially, especially as power generation improves. That alone gives confidence to shareholders that they will earn a return on their investment, he said.

Like Kato and Chapman, Osolo believes the IPO will incite some much-needed activity on the USE. That will help because today economic activity is slow at the USE, Osolo said. Owned by UK-based Actis Capital, an emerging markets investment giant, with an asset base of over US$ 4 billion, UMEME won the 20-year concession to distribute Ugandas power in 2005, taking over the task from Uganda Electricity Distribution Company Limited as part of the sectors liberalizatio