People’s IPO Pays Dividends in Times of Economic Uncertainty

By Pavel Pribylovsky

stock market resizedIn the face of global economic uncertainty, crisis and falling oil prices, Kazakhstan continues to take measured steps to build an enduring, diversified economy. Among those moves was the now successful effort to involve the Kazakh public in ownership of some of the country’s most stable and successful companies.

In the fall of 2011, the Kazakh government adopted a program known as the People’s Initial Public Offering (IPO). Kazakh President Nursultan Nazarbayev emphasized the importance of providing opportunity to as many ordinary Kazakh citizens as possible when he commissioned the government to launch the People’s IPO Program in 2011. Nazarbayev stated that the population should be able to participate in the country’s economic growth through stock ownership and instructed the government to ensure that IPO program procedures were fully transparent for the general public. Additionally, the program was expected to add liquidity to the country’s fledgling stock market, boost its stock exchange, and educate the general public on investing in financial instruments.

The inaugural IPO came two years ago almost to the day when KazTransOil raised approximately $180 million through a highly successful domestic placement that was oversubscribed by two times. On Dec. 25, 2012, the company floated over 38 million common shares. Thirty-four thousand Kazakh citizens and 10 pension funds became shareholders in the company as a result of that offering.

air astana logoKazTransGas, Samruk Energy, national carrier Air Astana, Kazmortransflot, KazMunayGas national oil and gas company, Kazakhstan Temir Zholy national railway company and its subsidiary Kaztemirtrans, as well as Kazatomprom national atomic company, were named among the program participants, and are all expected to float some of their shares on the domestic stock exchange.

In the meantime, on Dec. 19, Kazakhstan Electricity Grid Operating Company (KEGOC) joinedkazmunaygas logo KazTransOil when secondary trading in the stock commenced on the Kazakhstan Stock Exchange. The company’s only shareholder, the Samruk Kazyna Sovereign Wealth Fund, floated 26 million minus one common shares (10 percent of equity) at $3 per share, valuing the deal at $72.5 million.

Eighteen Kazakhstan Stock Exchange (KASE) members participated in the offering, which was oversubscribed by nearly 30 percent. According to globalcapital.com, which quotes a source close to the transaction, the IPO had garnered limited support in the initial stages. Halyk Finance, the book runner for KEGOC’s IPO, had taken order for only a third of the book by Dec. 2, the day before the initial deadline. Consequently, the subscription period was extended to ensure the desired outcome. The total volume of bids was $91.5 million, exceeding the offer volume by 27.2 percent. This was in no small part due to the participation of the Unified National Pension Fund (UNPF).

Individuals bought 72.2 percent of the shares offered for a total of $52 million while the rest were acquired by the UNPF, net of a 1.5 percent allocation to Halyk Finance, according to Visor Capital, an Almaty-based investment bank. The total trading volume on the first day reached $1.9 millon, with the price remaining in a range close to the offering price, reported Visor Capital.

KEGOC operates as a natural monopoly and acts as the System Operator for the Unified Power System (UPS) of the Republic of Kazakhstan. The company’s primary activities include power transmission, technical dispatching and balanced production of electricity. It has 24,500 km of 35-1150 kV electricity transmission lines and 76 electrical substations with 35.9 GVA of installed transformer capacity. KEGOC employs more than four thousand people and was voted the Best National Corporate Employer in 2014.

KEGOC enjoys respectable ratings from international rating institutions: a Baa3/stable designation from Moody’s Investors Service (08/21/13) and a BB+/positive from Standard & Poor’s(11/07/14).

Kazakhstan Stock exchange logoVisor Capital analysts remain bullish on KEGOC, maintaining a BUY recommendation with a target price of $3.51 per share, representing a 27 percent upside from the current price. They expect KEGOC to increase its dividend payout to $.27-$.54 per share in the second half of 2015 on the back of rising operating income. That would represent a 50 percent dividend payout ratio versus the current 40 percent. The anticipated changes in tariff regulation will allow the company to triple its revenues in the next five years, according to a Visor Capital KEGOC company note. However, analysts warn of the company’s exposure to devaluation pressure on the tenge in light of the plummeting oil price and the precipitous slide of the Russian ruble.

According to the Halyk IPO website, KEGOC IPO attracted more individual investors than the People’s IPO inaugural KazTransOil listing two years ago. The Central Depositary received just short of 42,000 individual applications within the subscription period. That’s almost 8,000 more than in the case of KazTransOil. Certainly, this is a vote of confidence from retail investors in the face of economic uncertainty. Next company on the upcoming IPO list is Samruk Energy. It remains to be seen if this trend will continue in 2015.

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