Nigeria’s forex challenges seen driving the spate of insider dealings

On June 16th, 2020, Nigeria Breweries Plc, the country’s largest beer maker made an announcement. Its Chairman, Chief Kolawole Babalola Jamodu purchased 10,000 shares of the company at N43.27.

The deal occurred a couple of weeks earlier but recent provisions by the Nigerian Stock Exchange require that these disclosures are reported to the public of the company.

This announcement will be the first of many, Heineken will go on to announce it had purchased 347, 000 units of the company’s shares since August. It is also not restricted to Nigeria Breweries as quoted companies with significant foreign majority ownerships, FMOs, appear to be following a similar route. The company belongs to a club that includes the likes of Guinness, Unilever, Cadbury, Nestle, PZ Cussons.

Why exactly are they purchasing shares in their company? Is it because they are cheap or is there a surreptitious instigator, we are not aware of? Unfortunately, notification for share dealing by insiders does not reveal their motive behind the purchases leaving investors to make wild guesses.

One of such guesses is the need to bolster shareholdings ahead of a potential rights issue or a public offer. Nigeria Breweries for example has about N139 billion in debts making up about 87% of Net Assets as of June 2020. It will have to repay most of these loans sooner rather than later either by refinancing the loans or paying via equity. But for some other FMOs, the motivation to buy could be different.

The Forex Angle

One very plausible reason for the spate of sale is the exchange rate debacle currently being faced by companies in Nigeria. Since the Covid-19 pandemic took hold in late March, sourcing forex to pay for overdue obligations and more importantly repatriating dividend payments has been herculean.

For investors in FMOs like Nigeria Breweries, Guinness, Unilever, Cadbury, Nestle, PZ Cussons, MTN Nigeria, Airtel repatriating dividends has been as tough as the proverbial passing a camel through the eye of a needle. It has been nearly impossible except they opt for the black market and see their return on and of investments whittle away.

As a trader informed Nairametrics, “rather than keep the money idle, they are reinvesting in their money at a cheaper valuation”. This sounds reasonable when you consider the current valuation of FMO stocks. Most of them are significantly down year to date as they groan in intense competition and waning consumer demand. Some in high double digits negative returns.

Foreign Majority Owned Stocks – FMOs
Source: Nairalytics Research

As the chart above depicts, these create unique buying opportunities for owners of these stocks who are left with the frustrating choice of settling for sub 3% return on risk-free fixed income securities or purchase short term commercial papers that yield way below the inflation rate.  However, buying these stocks with their money means they benefit from dollar-cost averaging while still increasing their stake in the company they majorly own. After all, they don’t have plans to exit Nigeria just yet.

Unique Opportunities? Retail investors have also seized on the opportunity to position on purchasing these stocks. A recent Nairametrics article clearly outlines how this is being exploited in a positive manner. You can either remain on the sidelines or join the bandwagon of opportunists. Some of these dealings have a positive impact on share prices and a case in point is Unilever Plc. Unilever is up 11% Week on Week (WOW),  while International Breweries is up 26.3% WoW. Nigeria Breweries did not record significant gains, it was one of the most traded stocks last week. There could be more to follow in the coming days and weeks.

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