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One year after de-mutualization and listing, NGX Group faces liquidity crunch



NGX Group, owners of the Nigerian Exchange, which recently underwent demutualization and listing, has released its financial results for the first full year of operation.

While the company saw an increase in revenue from N5.7 billion in 2021 to N6.1 billion in 2022, it also reported an operating loss of N1.3 billion, up from N281.8 million in the previous year.

The company’s profit after tax decreased from N2.2 billion to N698.4 million, though this included a share of profit of equity accounted investees of N2.1 billion. This investee that provided the N2.1 billion that helped turned the exchange into profit was none other than its cash cow, CSCS.

NGX has for years (preceding its demutualization) relied on the CSCS for the majority of its profitability. CSCS makes most of its money by carrying out depository, clearing, and settlement of all transactions in the Nigerian Capital Market. The Nigerian Exchange Group owns a 31.14% ownership interest in CSCS. Whilst one can postulate that so long as the CSCS keeps making money, the NGX will be profitable, the same cannot be said of the company’s impending liquidity crunch.

NGX is in bad need of cash and its either it starts making this money by running the exchange profitably or it does so by raising fresh capital, albeit without the controversy that besieged the botched attempt of 2022. Our prognosis that NGX needs to start generating cash as soon as possible, emanates from its latest results which suggest that NGX Exchange may be facing liquidity challenges that could pose significant risks to its long-term financial stability.

One key area of concern is the company’s negative working capital of about N12.6 billion, which is driven largely by a new N14 billion term borrowing.  During the year it borrowed N25 billion in external loans using part of it to invest in one of its subsidiaries. It managed to pay back N11 billion. The company has cash on hand of N4.7 billion, which is a positive sign, but the negative working capital means that the company may have difficulty meeting its short-term obligations.

Furthermore, the company’s net cash from investment was negative at N11.4 billion, primarily due to the significant investment in associates (stated above), which suggests that the company may not be generating enough cash flow to address its debt obligations. In addition, NGX Exchange owes its suppliers N5.2 billion, which could further exacerbate the company’s liquidity challenges.

The recent cancellation of a capital raise due to a shareholder dispute also highlights potential governance and management issues at the company. While the matter appears to have been resolved last year, we understand that not all shareholders are still happy with the company’s current direction, which could impact its ability to raise fresh capital.

The company also needs to reign in on its high operating cost which mostly takes up whatever revenue it earns. During the year, its operating expenses (net interest payments) were N6.7 billion consuming the entire N6.1 billion in revenue reported. Critics of the company’s management have often suggested that its directors make more money than shareholders, citing its high executive compensation as a percentage of revenue.

For example, the executive directors just three of them take a combined emolument of N324 million last year. Sitting allowances alone gulped N85.3 million while other directors’ fees printed N138.7 million. In total, the company spent N584.1 million on its directors compared to N499.4 million.

The directors are yet to confirm if dividends will be paid this year( it did not pay any dividends in 2021). We also do not expect the NGX to declare dividends this year due to its cash flow challenges. Should it decide to pay dividends out of its reserves (which are robust) it will have to borrow from banks to do so.

Despite these challenges, NGX Exchange still has a total equity of N36.8 billion, with retained earnings of N31.7 billion. The company just needs to focus on growing its topline revenues by focusing on its core mandate of being the destination for investors seeking to raise equity or list.

The whole of 2022, Nigeria did not record a single major IPO in 2022, while it did record a few listings by introduction, the total number of listed companies on its main bourse remains around 160. Over 70% of the market capitalization of the exchange is contributed by the SWOOTs (a Nairametrics acronym for Stocks Worth Over One Trillion).

Much of the startup world does not consider the NGX as a destination for any future initial public offers, preferring to list on the NYSE or NASDAQ. Nigeria’s incessant naira depreciation has also increased the lack of interest in the younger more tech-savvy retail investors based in Nigeria. Attracting this very important demographic will be key to its future as a stock exchange. As technology improves, it’s only a matter of time before Nigerians will find better alternative platforms to equity investments.

Finally, to address its liquidity challenges, NGX Exchange may need to consider additional financing options, such as equity raises or other forms of capital injection. While raising equity may dilute existing shareholders’ stakes in the company, it may be necessary to improve NGX Exchange’s financial position and ensure its long-term viability. The company may also need to explore other options, such as cost-cutting measures or debt financing, to address its liquidity challenges.

Investors should closely monitor NGX Exchange’s financial performance, management decisions, and governance practices to assess its long-term potential. While the company faces significant challenges, it also has potential opportunities for growth and expansion. NGX Exchange’s future success will depend on its ability to navigate these challenges and capitalize on these opportunities while maintaining a stable financial position.