Market Development December 2018 Strictly Private and confidential - - PowerPoint PPT Presentation

Strictly Private and confidential

SME Finance & Market Development

December 2018

Introduction

Introduction 3

An initiative developed by BiG Moçambique and FSDMoç to:

• Enhance the Mozambican capital markets;
• Promote alternative sources of finance

and investment to companies and individuals.

• Mozambican companies currently rely on

limited financing alternatives to fund the development of their businesses;

• Investors have few savings and investment
• ptions, resorting to traditional financial

products;

• Companies and investors, on a generalized

level, lack information on investment and financing alternatives.  Improve awareness and knowledge about capital markets  Attract more Companies to issue securities in the stock exchange  Improve liquidity, by increasing the participation of individual retail investors in the market What is it? Why? SME Finance & Market Development

Introduction 4

Companies need financing alternatives Private debt Private equity Capital markets

• Bonds; commercial paper; shares

Why is this particularly important in Mozambique? Market Context Stock Exchange Economy in the last 3 years affected by:

• Adverse weather conditions
• FX volatility
• High inflation rates
• High interest rates
• Difficulties in accessing credit

Characteristics of the Moz. Stock Exchange:

• Small in size, as a % of GDP
• Market cap dominated by government debt

securities

• Low liquidity
• Only 1 “real” IPO in the past 10 years

Methodology

Methodology 6

1) Initial Market Overview 2) Gap Analysis 3) Investor Attractiveness  > 300 companies identified  140 companies contacted  110 companies interviewed  58 companies interviewed  45 subject to gap analysis study  20 companies interviewed  10 teasers prepared and presented to investors  6 companies received positive feedback How was it implemented?

Initial Market Overview

Initial Market Overview 8

1% 1% 2% 2% 2% 5% 6% 10% 10% 15% 16% 29% Utilities Extractives Fishing Education Telecoms Financial Services Construction Agrobusiness Transports and Logistics Manufacturing Retail Services

Sector Geographic dispersion – head offices

Description of the sample

Initial Market Overview 9

24% 76% Net profit Net loss 3% 4% 3% 12% 18% 17% 41% 2% MZN 600k to 3M MZN 3M to 12M MZN 12M to 30M MZN 30M to 120M MZN 120M to 300M MZN 300M to 600M More than MZN 600M n.a

Profit/Loss Turnover

63% 35% 2% Private Limited Liability Company Public Limited Company Sole Proprietorship

Legal form

3% 3% 6% 10% 22% 56% 1 to 5 6 to 10 11 to 25 26 to 50 51 to 100 More than 100

Nº of employees

76% of the companies had revenues between MZN 120 – 600 M

Initial Market Overview 10

4% 14% 61% 21% Up to MZN 4M MZN 4M to 16M More than MZN 16M n.a 63% 27% 10% Family Owned Businnes Other n.a

Book value of equity Ownership

3% 5% 3% 37% 41% 67% Other None Capital Markets Shareholder loans Shareholder equity Bank Credit

Sources of funding Auditing

80% 20% Audited Accounts Unaudited Accounts

67% used bank credit as their main source of funding

Initial Market Overview 11

65% 37% Considers listing Doesn´t consider listing 37% 63% Know the requirements Don´t know the requirements 26% 74% Has considered listing Has not considered listing 95% 5% Aware Not aware

Willing to consider listing (after the survey) Has considered listing (before the survey) Awareness on requirements to list Awareness of capital markets and BVM

After the survey, 65% would consider a listing in capital markets

Gap Analysis

Gap Analysis 13 Namibia (NSX) South Africa (JSE) Mauritius (SEM) Nigeria (NSE) Malaysia (MIX) Audited financial statements 3 years 3 years 3 years 3 years 3 years Market cap ~ USD 70k ~ USD 35M ~ USD 580k ~ USD 11M ~ USD 119 M Free float 20% 20% 25% 20% 25% Governance Namibian Code for Corporate Governance South Africa King Report Corporate Governance Code for Mauritius SEC’s Code for

• Corp. Gov. for

Public Companies in Nigeria Malaysian Code

• f Corporate

Governance Accounting Standards IFRS IFRS IFRS IFRS IFRS Financial performance Profitable trading record for 3 years and current year EBIT

• f at least ~USD

35k EBT of at least ~ USD 1 million in the previous year n.a. EBT of at least ~ USD 825k over the last 3 years Uninterrupted profit after tax in the last 3 years

• f ~ USD 4.8

million

Brief benchmark of the requirements of other international exchanges

Gap Analysis 14

Financial Accounting and reporting Transaction and Governance

• EBITDA Margin
• Net Income Margin
• Financial Autonomy
• Net debt / EBITDA
• Operational Track Record
• International Accounting

Standards

• Audit frequency
• Qualified audit opinion
• Willingness to publish

accounts

• Business Plan
• Dividend distribution policy
• Existence (or willingness to

have) independent directors

• % willing to float
• Purpose of finance

Additional information collected from the companies:

Gap Analysis 15 Net income margin

EBITDA margin

2% 14% 39% 18% 20% 7% n.a <0% 0%-10% 10%-20% 20%-30% >30% 5% 23% 41% 16% 16% n.a <0% 0%-5% 5%-10% >10%

Financial autonomy Net debt to EBITDA

2% 18% 14% 11% 14% 41% n.a <10% 10%-20% 20%-30% 30%-40% >40% 2% 18% 11% 68% n.a >6x 2x-4x <2x

Most companies had positive operating results and low gearing levels

Gap Analysis 16

Audit company Audit frequency

64% 36%

Big 4 Other

64% 9% 5% 22%

Yes (last 3 years) Yes (last 2 years) Yes (last year) No

94% 6%

Yes

Willingness to publish accounts Operational track record

14% 27% 59% <5y 5y-10y >10y

Almost 2/3 of the companies audited their accounts in the last 3 years

Gap Analysis 17

Dividend distribution policy Existence of business plan Willingness to have independent directors Existence of independent directors

38% 62% Yes No 65% 33% 2% Yes No n.a 55% 45%

Have Doesn't have

72% 28%

Yes No

72% of the SMEs had a business plan

Gap Analysis

Purpose of financing Modality of financing % willing to float (equity)

47% 47% 7% Equity Debt Both 84% 12% 2% 2% Expansion To finance current activity To refinance debt Shareholder exit 9% 65% 26% More than 25% From 10 to 25% Up to 10%

84% of the companies wished to raise capital to finance expansion plans

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Gap Analysis

1 Poor 2 3 Weak 4 5 OK 6 7 Satisfactory 8 9 Good 10

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Example Score-card Each answer scored 1-10, to achieve a final overall score Overall Score

Gap Analysis

Company Sector Score Financial Profile Accounting and Reporting Transaction and Governance Overall 1 Company 1 Services 9.4 9.0 10.0 9.5 2 Company 2 Transports and Logistics 7.8 10.0 9.0 8.7 3 Company 3 Services 9.4 10.0 5.4 8.6 4 Company 4 Manufacturing 7.8 10.0 9.0 8.6 5 Company 5 Financial Services 7.8 10.0 8.0 8.4 6 Company 6 Construction 9.4 7.0 7.7 8.4 7 Company 7 Services 8.2 8.6 8.2 8.3 8 Company 8 Manufacturing 7.8 10.0 7.8 8.3 9 Company 9 Retail 9.7 9.0 4.4 8.2 10 Company 10 Manufacturing 7.8 10.0 7.0 8.2 11 Company 11 Retail 7.9 8.2 7.7 7.9 12 Company 12 Telecoms 7.5 10.0 6.7 7.9 13 Company 13 Construction 7.5 10.0 6.3 7.8 14 Company 14 Services 8.4 10.0 4.0 7.7 15 Company 15 Agrobusiness 6.6 10.0 6.7 7.5 16 Company 16 Transports and Logistics 6.5 9.0 7.7 7.4 17 Company 17 Retail 5.4 10.0 8.6 7.4 18 Company 18 Services 5.7 9.6 8.2 7.3 19 Company 19 Education 5.9 9.0 8.5 7.3 20 Company 20 Services 6.9 9.0 5.8 7.2 21 Company 21 Manufacturing 7.8 8.6 4.4 7.1 22 Company 22 Transports and Logistics 5.3 10.0 7.7 7.1 23 Company 23 Transports and Logistics 7.1 9.0 5.0 7.0 24 Company 24 Manufacturing 6.9 7.0 7.0 7.0 25 Company 25 Retail 6.6 7.0 7.3 7.0

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25 Companies achieved a scoring ≥ 7.0

1 2 3 4 5 6 7 8 9 10 1 2 3 4 5 6 7 8 9 10

Financial Profile Gap Analysis Technical Requirements 21

25 Companies achieved a scoring ≥ 7.0

Investor Attractiveness

Investor Attractiveness

Information collected on 10 companies

• Brief presentation of the company
• Type of transaction
• Amount to be raised
• Transaction goals
• Business highlights
• Key financial indicators
• Shareholder structure

1 Page Teaser

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Investor Attractiveness

Yes, why? No, why? 1. There is room to add value in the Company 2. Company displays potential for efficiency improvements 3. Company displays growth potential 4. Transaction purpose is attractive 5. Financial performance is attractive 6. Business model is attractive 7. Sector is interesting 1. Limited perception of capacity to repay (debt) 2. Limited perception of exit strategy (equity) 3. Transaction purpose not attractive 4. Financial performance not attractive 5. Business model not attractive 6. Does not invest in the specific sector of the company 7. Ticket size too small / too big 8. Does not invest in the specific instrument 10 Teasers presented to investors, to assess if they found the companies attractive

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Investor Attractiveness

Results of the approach to investors 6 out of 10 companies received positive feedback from institutional investors Feedback shared with all companies, highlighting areas of greater attractiveness and lower attractiveness Specific roadmap developed and presented to the companies with a step-by-step action plan on how to access debt or equity capital markets Ongoing work with specific companies considering listing, while

• thers considering operations /

transactions outside capital markets

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Lessons learned

Lessons Learned

Dependence of funding sources Unattractive tax framework Financial Literacy Access to information Financial planning Capital markets awareness Concentration of savings

• Difficulty to access organized information from

companies

• High dependence from traditional bank

financing and shareholder funds

• Poorly structured business plans, with

mismatches between financing and investment maturities / company valuation and amount to raise

• Most individual investors typically invest in two

asset classes: term deposits and real estate Investment ticket sizes

• Companies did not reveal an adequate

understanding of its potential as an alternative source to access finance

• Fiscal framework does not incentivize

investments in capital markets

• Unawareness by individuals of key concepts,

such as liquidity of investments, risk/return, portfolio diversification, etc.

• Investors revealed a mismatch between the

size of the investment opportunities of SMEs and their minimum investment ticket size criteria

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Recommendations

Recommendations

Financial training Regulation

• Company executives still lack adequate

knowledge of basic financial concepts

• Targeted financial literacy / training programs

aimed towards management of companies considering accessing capital markets

• Regulation to create investment funds, which

can be subscribed by institutional investors, and invest in opportunities with smaller ticket sizes

• Creating the framework to enable banks to act

as Liquidity Providers (Market Makers) of listed securities Stock exchange Tax policy

• Currently has a low participation from the

general public (the retail segment of the market), which affects liquidity

• Important to have “success stories” to fuel the

interest in capital markets and ensure a broader participation from the start

• Having an attractive tax code, particularly

relevant in the case of incipient capital markets, seeking to attract new issuers and investors

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