Analysis of Ipo Prospectus of Utfsl and Ecobank Ltd free essay sample

Investing in the stock market should not be a heart and gut affair based on hunches, guesswork, hot tips, rumours or speculation. This is true for investments in securities of companies already listed on the stock exchange; it is also true for investments in securities of companies seeking listing for the first time. Seeking listing on a stock exchange is also called going public or flotation. The purpose of seeking listing is generally to raise funds for the companys business expansion or growth. The company seeking listing will therefore offer part of its securities to be subscribed by the public, as part of the listing exercise. This offer is called an Initial Public Offering (IPO). Currently, any company wishing to undertake an IPO would have to get the approval from the Securities and Exchange Commission before the IPO can be carried out. The Securities and Exchange Commission, in considering an IPO proposal, would take into account the overall suitability of the company undertaking the IPO. Once approved, the company is required to issue a prospectus that tells about the company, what it does, how it has fared and how it expects to perform in the future. The purchase of securities offered by the IPO Company constitutes, in effect, a contract between the company the investor. As with any contract, it is important that one fully understand his rights and the terms and conditions as set out in the prospectus. A prospectus must contain all relevant information about the company making the IPO, and must be filed with the relevant authorities. Therefore the information that is disclosed in the prospectus relates to the terms on which the invitation or offer is made. It is important for an investor to read and understand these terms in the prospectus in order to be able to assess for himself/ herself the risks or merits in investing in a specific the company. ECOBANK TRANSNATIONAL INCORPORATED (ETI) Reasons for the Offer The Company’s code 1963 (Act 179) makes it mandatory for any company which decides to offer shares for subscription to outline what it intends to use the funds to be raised for. ETI’s deport on the use of proceeds from the offer was fairly good. Emphasis was laid on good past records which served as a panacea for future achievement. Most prospective investors would be very much interested in knowing what exactly the funds being ranged would be used for as well as its past financial and perhaps only read this portion of the prospectus. It is however a step in the right direction that the band gave some highlights of its achievements. The four major purposes for the offer highlighted were very crucial for any band that aimed at expanding: Firstly ETI typically requires it’s subsidiaries to among the top three in the markets in which they operate. This aim cannot be met if priority is not given to the capitalization of its existing subsidiaries. It’s thus very good that 56% of the proceeds from the offer would be used to strengthening the capital base of its subsidiaries. Secondly, the company plans to invest substantially in acquisitions and expand into new markets. About 36% of the proceeds from the offer would be used for this purpose. Mention was also made of some markets in African countries that ETI is planning to venture into. This move would in a small way help in the rapid growth of the company. Technology plays an important role in the Banking sector. In recent times, there is a rapid growth in the advancement in technology. One can make mention of the automated Teller machines, Ezwich and the inter bank networking systems that are fast growing in the banking industry. It is therefore welcoming and appropriate that 3. 04% of the proceeds from the offer would go into Technology and process upgrade. This would help that company with other competing banks as well as improve upon its customer’s satisfaction. Despite the fact that the above points were well made, it would have been appreciated if the reasons for the offer were detailed which would have in turn helped in making a good assessment. Firstly, the approximate amount allocated for each purpose was not detailed enough. It would have been better understood if the sub items under each purpose with their respective approximate costs were made known. Secondly, a more detailed highlight of the various purposes would have been appreciated. INDUSTRY ANALYSIS EcoBank Transnational Incorporated (ETI) is Africa’s leading independent pan African banking group. ETI operates a cross 4 Regional Blocs in Africa, with it dominance in Ecowas. The Ecowas subsidiaries account for 94% of the Group PAT in 2007 and Ghana and Nigeria Contributing 61%. COUNTRY OVERVIEW Politically, most of the countries were ETI’s subsidiaries operate were stable and democracy and good governance being deepened. The highlights on the macroeconomic variables such real GDP and inflation is crucial for the assessment of the subsidiaries performance. In Ghana the real GDP show a positive growth of 5% to 6% from 2003 to 2006 than dip to 5. 5% in 2007. Inflation was high between 10. 5% and 12. 7% from 2006 to 2007, but PAT rose by 36. 6% making Ghana the second highest contributed to PAT. STRUCTURE The Bank’s structure has been clearly provided with †¢ ETI, the parent company with †¢ 32 subsidiaries and affiliates operating in 25 countries in West Central, Eastern and Southern Africa. This geographic spread helps diversities and protects the Group earnings stream against specific adverse events. The core operation i. e. providing banking and financial services has been specified. The structure of operation is a centralized one with ETI providing the: †¢ Management †¢ Training and development of new business to all subsidiaries. †¢ Technical and operational support in technology. This controlling interest in each subsidiary enhances the Group’s ability to operate as â€Å"one Bank†, manage costs and implement stronger corporate governance and financial controls. ETI Subsidiaries have a commanding market share in the industry’s total assets; normally ranging among the best four top banks in the operating countries. In Benin EcoBank Benin is the second largest bank and accounts for 20. 42% of the industry’s total assets of the 11 operating banks. The number of branches and the work force of each subsidiary across the bloc have been given. This highlights countries with more branches. For instance Ghana and Nigeria have 36 and 215 branches spread across these countries. This amounts to 50. 2% of the distribution. Similarly, Ghana and Nigeria have 544 and 2,548 of the workforce respectively. The historical financial performance has been well summarized for easy understanding. All the listed items showed upward trend which is an evidence of strong performance. The date of commencement of operations of each subsidiary was presented. This is significant in comparing Group PAT contribution, as most of the new subsidiaries had a zero or negative contribution to Group PAT However in the industry analysis, the following would have been considered. Under the caption Ecobank subsidiaries, the 100% equity held by ETI in Guinea Bissan, Gambia and Sierra Leone appeared to be owned out right by the parent company but this contradict the heading. Also in countries with equity less than 100%, it was not clear as to whether the remaining equities belong to the parent company or associate companies. Thus the right classification would have been spelt out. In each economy, the industry’s total workforce would have been given in relation to ETI subsidiaries. The essence is to provide the proportion of the ETI’s subsidiaries workforce in the industry for each country. The country to country population size was given but the subsidiaries customer base was not given and the proportion of people who have access to the traditional banking services in each country. This statistics could have been provided. In the abridged prospect the number of countr ies for ETI subsidiaries was given as either 25 of 27 which is inconsistent. The ETI’s vision, mission statement and core values could have been given separately from the objectives. However, no vision, mission statement and core values were stated. CRITIQUE OF THE ASSUMPTIONS UNDERLYING FORECAST AND PROJECTIONS The prospectus published by ETI does not contain any financial forecast and projections. All what is there concern their past performance. The listing regulations as well as the elements of a prospectus publish by GSE and SEC (in the Security and Exchange Commission act) stipulate that every prospectus should contain information about the financial status of the issuer as well as the financial projections about their future cash flows. Discussion of the Risk Factors We believe that it was possible to list the risk factors in terms of degree of impact. This is because each company is unique and some risk factors are more crucial for ETI than others. It would have been good for ETI to have told prospective investors, what from its perspective the critical risk factors were. Sovereign Risks They failed to admit that most of the countries in which they operate have a far from stable political condition which could change. A further discussion of how more stable countries could neutralize the effect of any unexpected political occurrences would have been helpful to prospective investors. Market Risks The assessment by ETI of the possible market risk states general possible market risks, instead of the ones that may be most important for their unique operation. There is mention of liquidity risk, exchange rate fluctuations, interest rate and commodity price volatilities, without an indication of which is more likely to cause an adverse effect on operations. Credit Risks Here the company fails to discuss why there may be exposed to credit risk, as credit risk is an internal risk that the bank has control over. Operational Risk The discussion of operational risk in our views gives adequate information to prospective investors. There is specific reference on where they for see their exposure to operational risk and steps take to mitigate the risk. Compliance Risk ETI talks of highly fragmented, poorly capitalized and weak banking regulations of the banking sectors of most countries in which it operates. It is difficult to see how this translates to compliance risk for the operations. Disclosure Risk We believe that ETI could not be exposed to disclosure risk as it up to ETI to release any information concerning its operations, if it regards to requirements for financial reporting, then, we think it will more appropriately fall under compliance risk. In conclusion, we think that it would have been more helpful to prospective investors in the degree of impact of these risk factors were discussed. Projected income statement The mini as well as the full prospectus of ETI, contrary to the regulations contained in the listing regulations published by GSE, was not provided with the financial forecast. Only data for their past operation was given and none concerning their future in terms of cash flows and assets and liabilities. UT Financial Services Limited. (UTFSL) Reasons for the Offer The Company’s code 1963 (Act 179) makes it mandatory for any company which decides to offer shares for subscription to outline what it intends to use the funds to be raised for. The two major purpose of the offer by UTFSL is captured in the introductory paragraph of the purpose of the offer section of the prospectus. The offer, was mainly to enable the general public own part of the company and share in its fortunes. Secondly, the offer granted the two existing share holders the opportunity to sell part of the shares to the public. It was also noted that the proceeds amounting to GH? 3,000,000 was going to be used for the following; †¢ Branch Expansion †¢ Motor Vehicles purchases †¢ The purchase of office equipment †¢ The purchase of furniture fittings. About 80% of the proceeds realized from the offer were allocated for branch expansion. This is a step in the right direction since this would help in increasing the capitalization of the company. Though the above purposes were well noted, the reasons for the offer were not detailed enough for the prospective investor to give a good assessment of the purpose of the offer. Secondly, the presentation of the breakdown of the proposed utilization of the proceeds from the offer would have been more appreciated if the percentages on the various items of expenditure breakdown were calculated to make it easier for the prospective investor to know which expenditure item was being accorded the greatest priority and which one was being accorded the least. An expenditure item which was conspicuously missing from the breakdown of the proposed utilization of the recapitalisation amount was the amount allocation to offer expenses. It would have been appropriate if this cost was charged to the proceeds from the offer. Again, it would have been worth it, if part of the proceeds was invested in technology and process upgrade. This is as a result of the rapid growth in technology and advancement in the financial services industry. This would have in turn helped in the growth of the company. INDUSTRY ANALYSIS UT The unique Trust Financial Service (UTFSL) has been identified as non-deposit taking group. The company was incorporated to perform the following: †¢ General financing services, †¢ Forfeiting and factor financing, †¢ Export financing and †¢ Borrowing from the market. The date of commencement of business and the names of the founders were stated. UTFSL corporate vision, mission, objectives and core values were highlighted. UTFSL’s operating activities has been stated as follow: †¢ Emergency loan †¢ Special purpose loan †¢ Working capital financial loan †¢ A stop gap loan †¢ E-plan †¢ Unique car loan †¢ Future leaders education The financial performance in terms of interest income and Net profit from 2003 to 2007 has been captured showing impressive performance. The regional break down of the branches was also emphasized, with the concentration in the southern part of Ghana. From 2003 to 2008 UTFSL achievement was outlined. As well as the future plan. The following should have been noted: The historical financial performance of each of the regional branch should have been stated for comparative analysis to identify the best and least performing branches. The macroeconomic variables which are key as they imp act positive or negatively on the financial institution was not given. The total number of UTFSL’s workforce and the regional breakdown of the workforce were not also highlighted. CRITIQUE OF THE ASSUMPTIONS UNDERLYING FORECAST AND PROJECTIONS The listing regulations as well as the elements of a prospectus publish by GSE and SEC (in the Security and Exchange Commission act) stipulate that every prospectus should contain information about the financial status of the issuer as well as the financial projections about their future cash flows. In the prospectus issue by UTFSL some points can be noticed: They assume the real GDP growth to increase at almost 0. 1% every year. Despite the fact we think it is realistic enough, a look at the past evolution of the real GDP growth doesn’t follow that trend. Again, they didn’t do mention of the other indicators UTFSL assume the loans and advances yield a stable increase of 25%. Knowing that this issue was done just before an election and that inflation usually rises after every election, we think 25 %( this is GH? 78,939,000) is not enough. Customers will need more money to face the general price increase on the market. Again the past performance for the company for the previous 5 years have never been neither stable nor at 25%. 90% of loans and advances for borrowings is realistic enough, the company is keeping a percentage (10%) for unforeseen events. The company anticipates operating expenses ranging at almost 29% of interest income this a bit less than the las t year before the issue and it may be good for investors to see that of the income is spent for operating the firm. The firm didn’t state any increase in the portfolio in the purpose of the offer as well as they didn’t mention any introduction of new services, however, they are using this reason to explain an increase in fee and commission income. The expected provision for bad debts is less than the one of 2007. t’s a good signal that the company will work harder to decrease the default rate.. No precisions were given as for the basis of the calculation of the various depreciation rates. Discussion of the Risk Factors Credit Risk The statement of credit risk is rather brief and does not give adequate information for investors. For instance, on what basis does the company able to recover its owed debt? This information will give a good indication on the mitigation of the risk Interest Rate Risk The discussion of the interest rate risk seems to suggest that there is no risk at all. Since the company has a policy to ensure that it matches the rate of borrowing and the rate of lending. Political Risk According to UT the current political stability in Ghana will continue. We are of the opinion that a discussion of political risk should take into account the possibility of a sudden change in the political condition especially as pertains to government rules and regulations. Economic Risk In our view the discussion of economic risk dwelt on the past, no mention was made on the anticipated future economic risk outcome. projected income statement PROJECTION Critical look at the projected profit and loss clearly show many mistakes in the account. For instance the transfer from profit and loss account for 2008 was supposed to be 5795 instead of 5964. Again operating income for 2009 was also 30903 instead of 3903 which has been recorded in the account. Such common mistake in a public document like this is not acceptable. The balance sheet also has it own problem. The balance sheet figures were manipulated. This is because there was no way the balance sheet would have balanced using the figure in the statement. All the total figures at the liabilities were wrong. In conclusion, the management of UT should be more diligent in their duties whenever they are coming out with a public document like this. The auditors should also be responsible for these mistakes. Again the company promised in the prospectus (P5) to pay a minimum dividend of 20% each year out of the distributable earnings. However, an analysis of the financial projections procured reveal that the dividend paid out hardly reached 10%. In fact it is planned to be 9. 56% for the first year, 7. 69% for 2009 and will keep on decreasing till 5. 58% in 2012 Corrected income projection |PROJECTED PROFIT AND LOSS ACCOUNT | |   |2008 |2009 |2010 |2011 |2012 |