Stocks on the Uganda Securities Exchange (USE) are going at bargain prices but there are few takers as illiquidity and a lack of awareness among other factors conspire to dampen activity, analysts say.
According to unofficial figures all companies except the Kenyan based East African Breweries Ltd (EABL) have Price-Earnings (PE) ratios of less than 10.
The PE ratio, the ratio between the share price and the net profit of a company per share, is an indicator of whether a company is overvalued or not. Assuming solid company performance low PE ratios suggest the company price can still rise higher.
Dividend yields are higher than 2.0% for all shares except BAT Uganda, which distributed no dividends in 2004, and Kenya Airways Ltd, which is retaining most of its profit to finance a turn around project.
Dividend yield, which measure the dividend as a percentage of the share price, a higher dividend yield assuming sound business fundamentals means there is potential for share price increases.
“It’s a wide spectrum of things that range from low disposable incomes, low savings, low awareness, a lack of variety in the instruments on offer, market makers and financing options,” USE’s Research & Market Development manager Harriet Kiwanuka said.
“In addition there is a scarcity of investment advisors in this market who would disseminate current information and analysis … educating the public on the exchange as an alternative investment vehicle.”
In 2005 the value of shares trading in the USE was sh5.6b but in the second week of January alone the turnover on the 50year-old Nairobi Stock Exchange (NSE) was about sh42b.
Kiwanuka said however interest in the USE was growing from year to year.
“Let us not forget where we came from, one listed company for almost two years to seven listed companies in the last three years … turnover will increase with every new company that comes to the bourse,” she said.
The size of the bourse with a total market capitalization – the value of total shares on the exchange, of sh3,360b at the end of last year about a quarter the size of the Nairobi bourse whose market capitalization stood at sh12,100b in the second week of January.
Market players agree that a lot of stocks on the exchange are undervalued but a lack of activity means they may not reach full valuation soon.
“There are absolute bargains in this market, we are not pushing up prices because there are a few brokers … but that is a function of the market size,” said MBEA broker Davis Gathara.
The regulatory Capitral Markets Authority (CMA) acknowledges the situation and are working towards alleviating it.
“This year we expect UTL, Kinyara Sugar works and Stanbic Bank to list,” CMA CEO Japheth Kato.
“What this will do especially with Stanbic and UTL is bring in more individual subscribers into the market and push up trading activity.”
On the policy side Kato said his organisation will continue to lobby for pension reform.
“What we are lacking is the more professional investors – pension funds, insurance companies and collective investment schemes and for these to become actively involved in our market pension sector reform is crucial.”
Currently National Social Security Fund (NSSF) dominates the social security sector and pension reform would open up the industry to other players. A paper has been prepared and presented to the finanace minster and Kato is optimistic we shall movement in 2006.
“We use Kenya as example the liberalizing of the pension sector has reinvigorated the market in the last few years,” he said.
Kenya’s Nairobi Stock Exchange has also benefited from the introduction of the Central Depository System (CDS), a system by which trades are cleared electronically without the use of paper , which speed up transaction times and boost activity.
Kato said a separate law allowing for the introduction of the CDS is also being considered by government.
There is an estimated 10,000 individual shareholders with the USE compared to about 600,000 in Kenya and 50,000 in Tanzania.
Some shareholders despite the risk that share prices could go up or down, are already reaping the benefits of their investment and any new improvements will be icing on the cake.
“I have a small portfolio but last year the return on my investment including capital appreciation and dividends was 33% and I intend to invest more in the market this year,” one shareholders said.
