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Investors in
Dangote Cement have lost over 10.9 percent value of their investment
since the stock was listed by introduction on the daily official list
of the Nigerian Stock Exchange on October 26.

The reasons for the
drop in the share price are seen partially in the observations raised
in the report of the quotations and listings committee of the Nigerian
Stock Exchange (NSE).

In its appraisal
report on the scheme of merger between Dangote Cement Plc and Benue
Cement Plc, dated September 3, it raised the flag on the entire
valuation, merger, and listing process of the resultant entity. In the
report, which was submitted to the NSE council, it faulted the
valuation process that arrived at the price of N135 at which the stock
was introduced.

“On the face
value, the valuation of Dangote Cement is unreasonable. Dangote Cement
has an installed capacity of 5 million metric tonnes per annum, with a
debt overhang of N64 billion and it is valued at N2.025 trillion while
debt free BCC (Benue Cement Company), with an installed capacity of 2.8
million metric tonnes, is valued at N246 billion,” the report added.

The report also
pointed out the incidence of conflict of interest as both merging
entities had Afrinvest West Africa Limited as sponsoring stockbroker
while also acting as co financial adviser for Dangote Cement.

“The response of
the advisers is that the role of a stockbroker does not give rise to a
conflict of interest and that the scheme document has already been
printed and in the process of distribution,” the report stated.

Lower than potential value

Ike Chioke, the
managing director of Afrinvest West Africa, the merger advisers,
however, defended the fact that it acted as sponsoring stockbroker for
both merger entities and acting as co financial adviser for Dangote
Cement.

“By virtue of the
fact that we were broker to the merger, we then continued to prosecute
the special sale. The special sale is effectively a secondary
transaction,” Mr. Chioke said.

He said the stock
was even valued lower than its potential value, given the investment in
the company that was not captured in the valuation process. He said the
current valuation did not take cognizance the future growth of the
company and the fact that its production capacity would double by July
next year. He said that a company like Dangote Cement that trades about
N5 billion a day, a debt of N64 billion simply translates to working
capital.

“I will like you
not to quote what is rubbish because clearly that report was written by
somebody who works at the Stock Exchange and we do have issues with
people who work at the Stock Exchange who don’t understand their job,”
Mr. Chioke said.

He explained that a
company can be valued using different methods. “It can be valued based
on its earnings, that is, price earnings ratio. There is what is called
firm value, which is the value of the equity plus the cash and the debt
on the books.”

He said because of the size of the company, it was about 25 percent of the total capitalisation of the Nigerian stock market.

Wole Tokede, the
NSE spokesperson, said the business of valuation and listing price of
equities is that of the issuer and the issuing house.

“It must be
approved by the Securities and Exchange Commission before it can be
listed. If a stock is over valued at the point of listing, the market
will put it in its proper position,” Mr. Tokede said.

Indeed, the market is placing the stock in its position, as it has lost N14.75 as at last Thursday, closing at N120.25.

World class company

Tony Chiejine,
spokesperson for Dangote Group, said the company is building a world
class entity that would be a pride to the country.

“If you take a look
at the gross African asset and the plan of the company going forward,
you would agree that the valuation was done with this in focus. Look at
the tax we pay to government annually. There is no need throwing
stones. Instead, we should encourage local entrepreneurs,” Mr. Chiejine
said.

A source at Vetiva
Capital Management Limited, lead financial adviser to Dangote Cement,
said while it may be correct to say the company is overvalued at
current assessment, the company’s real value is in its future growth.
He said despite the debt free Benue Cement Company, its valuation was
done based on the efficiency of the technology that both companies
operate.

“BCC is an
inefficient and old factory. Power accounts for about 40 percent of the
cement plant. It uses low pour fuel oil (LPFO) while Dangote Cement
uses gas,” the source said.

The NSE report also pointed out the breach of a key listing rule of the Stock Exchange:

“The requirement
for 25 percent of the issued shares to be held by the public as only 4
percent of the issued share will be held by the public at the point of
listing.”

Mr. Chioke said this aspect had to be waived by the NSE due to the inability of the market to absorb 25 percent.

“No one can sell
N450 billion worth of share in Nigeria today. We wanted to sell only
100 million units but we ended up selling 196.1 million,” he said.

Afrinvest said the
regulators gave the company 24 months to sell down an additional 20
percent at the listing price of N135, in order to comply with the
listing requirements.

However, while
investors count their losses, the promoter, Aliko Dangote, Dangote
Cement chairman, is smiling to the bank. By virtue of the shares listed
on offer for sale, proceeds of the sale do not necessarily go to the
company but to the promoters of the company.

So in real terms,
funds realised from the transaction, about N26.5 billion, may not
necessarily translate to value to the company but definitely adds value
to Mr. Dangote.

“How else will he
recoup the money he has invested in the business over the years?
Dangote has invested his money. He may have borrowed money or he may
have invested his personal funds. He cannot steal the company’s profit,
or under declare profit.

“So, the only way is for him to sell off part of his holding. That is the standard worldwide,” the Vetiva source said.