NSE’s new classification for quoted companies: Where does your company stand?
At the inception of November 2011, The Nigerian Stock Exchange revised its market segmentation and issued new classifications for listed companies.
In the new order, The Exchange now has 12 market sectors, down from 33, and quoted companies will henceforth be further classified on the basis of market capitalisation, dividend payment, and liquidity. According to The Exchange, the changes would enable the market “better reflect global standards and standard international industrial classifications.”
At Alexander-Davids Limited, we view this development from an Investor Relations (IR) perspective, which in the evolving market situation should be of increasing interest to the management of public companies.
In the wake of the new company classifications at The Exchange, it would no longer be enough for a company to be on the Main Board of the Daily Official List to be considered as being in the big league; it will now be further classified as “Large”, “Medium”, or “Small”, depending on its market capitalization, as outlined in the table below.
|Medium||>$150 million but < $1 billion|
This distinction has not always been there – at least not in an active sense. Before now a company was either on the Main Board or the Alternative Securities Market (ASeM), or what was called the Emerging Market or Second-Tier Securities Market (SSM), and this made all the difference in public perception of its size. (Even though it must be noted that part of the idea behind the ASeM was that companies in that sector would not be defined exclusively by market capitalization as was the case under the SSM, all the companies currently in the ASeM sector remain the original SMEs .) Thus, in the past if a company was on the Main Board, it was considered “large”, and if the company was on the SSM, it was a “small” company, relatively.
We observe that in the reclassification of quoted companies by market capitalization, issuers will in addition contend with the vagaries of exchange rate fluctuation as they manage their place on the ladder, gaining and losing in market capitalization, depending on the performance of the naira against the US dollar. Reason: The classification is US dollar-denominated.
Further In the new dispensation, a stock will now be actively judged as a “Growth” or “Income” stock on the basis of its dividend payment track record. This classification has implications for the dividend policy of a company and corporate financing. How would management like the market to identify the company’s stock – a Growth Stock, or an Income Stock? What would inform management’s preference for one over the other?
The table below explains the basis of the classification.
|Income||Avg. dividend payment for 5 years ≥ 30% of Earnings|
|Growth||Avg. dividend payment for 5 years < 30% of Earnings|
Finally, there is the liquidity issue. Companies will be adjudged “Liquid”, “Less Liquid”, or “Illiquid” on the basis of The Exchange’s new liquidity classification, as outlined in the table below.
|Liquid||>70% of Tradable Days
Volume traded/No. of shares in issue > 5%
Avg. value traded per day ≥N5 million
|Less Liquid||30% - 70% of Tradable Days
Volume traded/No. of shares in issue 4.99% - 1%
Avg. value per day = N1 million – N4.99 million
|Illiquid|| <30% of Tradable Days
Volume traded/No. of shares in issue < 1%
Avg. value traded per day < N1 million
In addition to the questions on the issue of choosing between being known as a Growth Stock and Income Stock, questions also arise as to how to ensure that a company gets positive ratings in the other two classifications. Valuation is important in managing a company’s market capitalization rating, and we ask: How does a company achieve fair valuation and protect its market capitalisation from undue erosion? Active dealing in the shares of the company is also an important element in the equation, which elicits the question: How does a company generate activity in its shares and attract the liquidity necessary for a positive classification on the liquidity table?
The issues that have been raised are not mutually exclusive; in fact they also depend on one another in some ways. For one, a healthy activity in the shares of a company is a necessary condition for a sustainable fair valuation. Investors also look at the utilization of earnings, among others, in deciding whether to invest or not, and at what price – all of which impact on liquidity. The issues are multifarious and intertwined. However, it suffices to say that it is this interplay of concepts and their impact on the reality of the company that has made IR a strategic management responsibility.