How businesses can leverage the stock exchange to scale
Soaring inflation and prolonged trading inactivity due to the global lockdown left businesses with huge inventories and a cashflow problem, which also disrupted funding pipelines. Currently, large, medium, and small businesses are sourcing for funds to get their businesses back on track and pursue their growth mandate as markets open gradually.
Businesses would need long-term access to finance to strengthen operating cash flow, drive product development initiatives, enhance logistics, expand product promotion coverage, penetrate new markets as well as scale operating capacity to the pre-COVID-19 levels.
The ability of these businesses to access funds readily would positively rub off on economic growth. It would revamp the employment generating capacity of the organised private sector and subsequently impact the gross domestic product level.
Many businesses default to bank loans when they are squeezed financially. But the stringent requirements by the banks and the high interest rate on such loans remain a big challenge that small and medium businesses sometimes find hard to surmount. Fluctuating currency exchange rates and inflation trends have further compounded SMEs’ ability to access cheap funding for their operations. It has therefore become apparent that businesses look beyond the commercial banks for their funding needs.
Traditionally, across the globe, capital markets offer an interesting opportunity for businesses that are looking to raise capital for medium to long term financing of their activities. The stock exchange serves as a financial intermediary between investors and businesses listed on its floor. It is regarded as a trading crucible that links businesses to a large pool of local and foreign investors who are constantly searching for interesting investment opportunities. These investors are anxious to boost their ROI and will put their monies in stocks that have favourable profit projections. The advantage for businesses on an exchange is that they can access large capital at lower cost.
Businesses listed on the country’s stock exchange, like Stanbic IBTC, MTN Nigeria, and BUA Foods, among others have an advantage in terms of access to low cost capital to expand their operations.
BUA Foods Plc’s 18 billion shares, for instance, were recently listed on the exchange at N40. The listing on the stock exchange provided a lever for the BUA Foods business to raise capital and deepen its operating capacity in the pasta, edible oil, sugar, and flour segments of the local food value chain as well as drive its export capabilities. While this move lifted the NGX Exchange (NGX’s) market capitalisation to N720 billion, it yielded a capital gain of 33 per cent for investors in the first week.
MTN Nigeria had a similar remarkable run in the first month of listing. Its shares appreciated from N99 to N129.45, yielding massive gains for investors while mopping up funds for the telecommunications giant to drive its network and mobile money expansion agenda.
Meanwhile, the finance opportunities available at the stock exchange are not restricted to large businesses. Structured small-medium enterprises need funding to navigate the teething challenges in the early growth stages.
Considering how the economy is holding up and the cautious approach of traditional lenders to small businesses, it is time for the segment to explore the capital market in a bid to access long-term finance to take advantage of emerging market opportunities. This is crucial for the survival of the segment.
In fact, there are tailored platforms that meet the capital needs of the SME segment on the floor of the stock exchange. The Growth Board on the NGX provides an alternative route for well structured small businesses with potential for growth to list on the exchange. Businesses of all sizes can list on the stock exchange to access cheap and long term tenured equity or capital from the capital market.
As businesses reopen fully for economic activities, and the Africa Continental Free Trade Agreement gathers pace, there is hardly a better time for businesses to access the opportunities available on the stock exchange to raise cheap long-term capital for their operations.
Absa, which offers investment banking and market products through various Nigerian registered subsidiaries, namely Absa Representative Office Nigeria Limited, Absa Capital Markets Nigeria Limited, and Absa Securities Nigeria Limited, advised local businesses to tap into the ample pool of retail and institutional investors on the stock exchange to drive their growth aspirations.
According to Akinkunmi Majaro, the head, Absa Securities Nigeria Limited, “Businesses consistently strive to grow. Therefore, continued access to cash flow and other investment resources are crucial for businesses aiming to build the competitive edge necessary to drive growth. Meanwhile, the global health crisis and its fallout are strong indications that access to long-term financing with fewer stringent demands is critical to staying resilient in an austere operating environment.”
He added, “The Nigeria Stock Exchange, especially, provides access to long and medium terms finance for structured businesses. Absa Capital Markets Nigeria Limited is positioned to help multinational and local businesses and a wide range of investors gain an overriding view of the capital market as well as guide investors and businesses in making wise investment and finance choices.”