The Nigerian Exchange Group (NGX) is the leading market for trading securities in Africa, with a total market capitalization of over N25 trillion as of October 2021 and over 200 listed companies across various sectors. However, despite its size and potential, many of the entities listed on the NGX face an undervaluation challenge. This means that their share prices do not reflect their true worth, based on their earnings, assets, growth prospects, and competitive advantages.
Undervaluation occurs when the market price of a company’s shares is lower than its intrinsic value, which is the present value of its future cash flows. This means that investors are not willing to pay a fair price for the company’s earnings potential, growth prospects, and competitive advantages.
There are several factors that contribute to the undervaluation of NGX-listed companies, such as:
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Low liquidity: The NGX has a relatively low trading volume compared to other emerging markets, which means that there are fewer buyers and sellers for the shares. This reduces the price discovery process and creates wide bid-ask spreads, making it harder for investors to buy or sell at their desired prices.
High risk perception: The NGX operates in a volatile and uncertain environment, with frequent political, economic, and social challenges. These factors increase the risk premium that investors demand for investing in NGX-listed companies, which lowers their valuation multiples.
Limited research coverage: The NGX suffers from a lack of adequate and reliable information on its listed companies, especially the smaller and mid-sized ones. There are few analysts and brokers who provide regular and in-depth research reports on these companies, which limits the awareness and understanding of their performance and potential among investors.
Regulatory constraints: The NGX has to comply with various rules and regulations that affect its operations and competitiveness, such as capital requirements, listing fees, taxation, foreign exchange controls, and corporate governance standards. Some of these regulations may be outdated, inconsistent, or restrictive, which may discourage new listings, limit foreign participation, and increase compliance costs.
These factors create a vicious cycle of undervaluation for NGX-listed companies, as they reduce their access to capital, limit their growth opportunities, and lower their shareholder returns. This in turn affects their ability to attract and retain talent, innovate, and compete in the global market.
To address this challenge, the NGX needs to implement a comprehensive and coordinated strategy that involves various stakeholders, such as:
The government: The government should create a conducive and stable environment for the NGX to operate and grow, by providing macroeconomic stability, improving infrastructure, enhancing security, reforming regulations, and promoting transparency and accountability.
The regulators: The regulators should ensure that the NGX adheres to the best practices and standards of corporate governance, disclosure, and investor protection, while also allowing it to be flexible and responsive to the changing market conditions and customer needs.
The issuers: The issuers should improve their corporate performance and communication, by adopting sound business strategies, optimizing their capital structure, diversifying their revenue streams, increasing their profitability and efficiency, and engaging with their shareholders and potential investors.
The intermediaries: The intermediaries should increase their research coverage and market making activities for NGX-listed companies, by investing in technology, data, and human resources, developing new products and services, expanding their distribution channels, and enhancing their reputation and credibility.
The investors: The investors should recognize the value proposition and opportunities of NGX-listed companies, by conducting thorough due diligence, diversifying their portfolio allocation, taking a long-term perspective, and participating actively in the market.
By working together towards a common goal of enhancing the valuation of NGX-listed companies, these stakeholders can create a virtuous cycle of value creation for themselves and the economy at large. This will enable the NGX to fulfill its vision of being Africa’s preferred exchange hub.