DSE Price Updates

                              TOL 330.00     TBL 1,800.00     TTP 510.00     TCC 1,640.00     SIMBA 1,780.00     SWISSPORT 650.00     TWIGA 1,340.00 -20.00     NICOL 305.00     DCB 360.00     KA 1,500.00     EABL 2,000.00     JHL 5,860.00    
LAST UPDATE: 24/9/2008 - 5:58PM EAT

Wednesday, July 30, 2008

How to Price Shares

An esteemed member of our forum who goes by the alias Mdau #1 recently inquired about the IPO on 21% of NMB shares held by the Government and the availability of NMB's Financial Statements.

This got me thinking, it would be nice to have a discussion on how shares are priced. This knowledge would help prospective Tanzanian investors to make informed decision about whether the stock of a companying they have been eyeing is overpriced, underpriced or fairly priced.

There are a few concepts involved in share pricing. Such as the book value of a company (total assets - total liabilities) -- this is the "true" value of what the company is currently worth; the intrinsic value (the NPV of the company's expected future earnings) -- this is the perceived market value of the company; etc.
A fundamental theory of in all of these concepts is the "Theory of No Arbitrage"; one of the most basic theory in Financial Economics (and indeed all of Economics). In layman terms, this theory asserts that there is no free lunch, i.e., an investor should not be guaranteed expected net profit with 0 initial investment. Ofcourse, this all relies on the assumption that investors are rational beings and they always seek to make profit.

I hereby call on forum members to share their knowledge on how valuers come up with a decision on how much should the price of a share of a particular company be sold for during IPO. And how can investor tell if this is a reasonable price.


Anonymous said...

I think this is a good topic. There is different valuation models out there that different financial institutions use in daily basis. However, the valuation of the security goes beyond what is inside the financial statements.

There is couple of ways investor can use to check if the face value make sanse or not. Peter suggest investor to check Book Value, that is part of technical analysis. But there is fundamental analysis too.

Investor have to combine technical and fundamental analysis togather in order to value an asset. However, in Tanzania we don't have enough resource to run models like CAPM or DVM or many other models because we don't have enough resources to support this technical analysis.

Sometime later, i will introduce different models ambazo zinaweza kusaidia watu wa hapo home sababu i believe less info ndio tatizo.

Kwa kuanzia kwanza, make sure you know the company financial standing for couple of years. Probably 3 to 4 years. Know exactly what kind of business in the company involving ( NMB Banking), then you have to have idea how economy affect this business. Also, you have to have industrial avarage financial statements. This is always a benchmark on how the company is doing compare to the industry?

Ugumu mkubwa kwa Tanzania, is data. You can't buy stock for the sake of buying. You need to do your homework. I will spend sometime later to explain one fundamental after another.

Peter i will email you later, personal question concern Tanzani Job Market. One more thing, Peter did you went St.Anthony High? Class of 2002?
Mdau # 1

Nalitolela, P. S. said...

thank you Mdau #1. Yeap I went to St. Anthony's, but I was in the (O' level) class of 98, not 2002. Thereafter, I went to Mzumbe for y A' levels - Class of 01.
I will be waiting for your email!!

Anonymous said...

Well,during the IPO the stock has not been traded yet to know how it behaves in the market. There are many ways to price a stock. Why just target IPOs? In your model this can be very tricky depending on how you look at the factors affecting the future cash flows. You have to consider that there is information asymmetry between managers and investors. You have o estimate the beta of the stock and that of the market where the IPO is taking place. ALSO USE STOCHASTIC PROCESS AND COMMON SENSE. Discount the expected cash flows at the discount rate appropriate for the stock market. Since it is the first financial sector IPO and levels of noise is high use monte carlo/Gaussian simulation in your model.

Anonymous said...

Given the situation in Tanzania,I think I will use earnings multiples method. I will look at other stocks trading at DSE in the past 7 years, I can get that information easily if I'm in Dar. Then from historical data I can determine the correlation of earnings between other sectors and domestic financial. I will look at dividends history and compare NMB with CRDB which has given its investors dividends. Past is not indicative of the future but from past you can extract useful data for your analysis of the future.

Estimating NMB future cash flows is not that easy for starters. Estimating NMB stock beta with high level of precision is not that easy. Estimating the discount rate is not that easy. CAPM does not work, people who got noble prize for it were just lucky at that time and there was no one to challenge them effectively.
An important question is what is the likely hood that NMB has been or would be overvalued/undervalued? There is a probability that this stock will go down twice before going up three times. Therefore, most likely there is a motivation to overvalue depending on who is being paid to do the evaluation and structure the deal. Is it Morgan Stanley Analyst or Deutche Bank analyst? Probably Not.Tanzanians themselves have better information in valuing their assets than the rest of the world. You can't use CAPM even if you had all the data you needed. Use common sense and stochastic process.

Anonymous said...

Hey guys, i am back. As i mention sometime this morning, there are different aspects of value a security. Analyst in Wall Street like to call it "chicken-egg situation".

There is no specific way which can promise you high yield or negative return. However, there are common theories that majority of analyst use in order to price asset with less risk.
First, you need to buy something with high expected return than that of T-bills offered by BoT. The reason behind is T-bills is free risk security, so you have to add opportunity cost on what you're buying.

There is Macroanalysis and Microanalysis, other analyst used different terminology. What this means is:
First you need to look the relation between the business and the economy? The reason behind is you want to know how does the business reacts when the economy is up or down? For instance, if you wanna buy TCC shares, you need to know the current fiscal policy in Tanzania. That means, if there is a new a tax on cigaratte, then expect number of smokers will be decrease and hence your expectation will fall short.

Remember buying a share means ownership of the company, so you need to know what you're owning. This will includes analyzing the business stage, is it in maturity or in growth? This will give you a snap shot of the return.

Then, analyze the industry as a whole, for instance, i am planning to buy NMB, then i need to look the Bank industry as whole and see its performance. Also, compare other banks vs NMB. Now to this point I can get a little picture on what i am getting into.

Last, you need to analyze the company that your buying. Analyst use different methods on this, from EPS to Price/book value ratio. There is no specific recommended methods to use. Some analyst use DDM, some use present value cash flow. However, there is no specific methods. What you need to know is to analyze company Income statement, Balance Sheet and Source and uses of fund statements. Then take your time to run certain ratios which can give you a smooth picture on what pattern is the company following? For instance check the company ROI or ROE, then you need to check if the company is borrowing the money then what is Debt/Equity ratio? Again, there is many different ratios that different analyst use in daily basis. My favorate is Market Price/book Value, this can give me an idea, or P/E ratio.

Again, if you want to buy security in the future i will recommend you to find someone with the knowledge of this things. To buy stock is not like buying car, you need to know what you're buying.

The above info is less than even a snop short. There is a lot of things that you need to look at, before you said I wanna own NMB.
Mdau # 1

Anonymous said...

Anonymous Thu Jul 31, 07:34:00 AM EAT, you said all. However, there is analyst out there who still use CAPM. The problem on this is to predict expected return, but for those who use this model they can defend it.

To find the stock beta is not something that individual can do without a strong financial background. I don't know how IPO things work back home, but with my knowledge few stocks brake the roof atter IPO, majority end up down in few days. So, hold you breath and watch the move. Don't act like noise investor.

Anonymous said...

A noise investor! there is always noise in a stock market if you know what stochastic process means.
I know how to analyze IPOs markets not only locally but also globally. That is not rocket science, as an investor you need to do some research. A simple one is who is the issuer, what is the offer price, who is leading underwriter, who are the lawyers involved,etc. people are not stupid in TZ. This is a syndicate, so while you look at the market and the company and management look at how the deal is structured and the parties involved in the deal.

What determines a successful IPO? Is it strategic Underpricing? Is it an attractive stock? Why should you believe that NMB is an attractive stock that is not technically underpriced? Will NMB be able raise the optimal capital in the IPO? Will investors meet their goals? Who are the investors that NMB want?

Anonymous said...

Why CAPM should be disregarded regardless of how many analysts still use it. Those who still use it should know it is time that they need to polish their skills and go back to school again. We are told by experts that old models in today's world are irrelevant due o how things work. Even the way balance sheets are prepared and analyzed is outdated! True value of the company and true cash flows are tricky things to analyze. Just be careful when reading your old notes and use them in the forum. Think critically that is the most important skill you will ever learn in life and in business world. We are trying to discuss a problem and how to solve it and other people like anon 8:11 are not thinking at all! I believe you are an expert of something too but think about the NMB IPO and what are you trying to answer instead of giving boring notes. More interest is in what you think than what is in the books, no book has written about NMB IPO, this is a situation in real life. You can use your books and the internet but be careful. Noisemaker!

Anonymous said...

Wall street analysts don't mean anything when it comes to NMB IPO, they are not all knowing kind of people. Just be careful know who to trust,yourself!

Anonymous said...

Are you aspiring to be WS analysts? a CFA and MBA will do it just go for them.

Anonymous said...

CFA/MBA/PhD does not make you an all knowing person. It is nice to have them. Use Commonsense as well. Many people fail due to lack of commonsense. Many investors fail due to lack of commonsense.

Anonymous said...

Anonymous Thu Jul 31, 08:36:00 AM EAT, IPO is the risky Investment.For the individual investor, it is tough to predict what the stock will do on its initial day of trading and in the near future since there is often little historical data with which to analyze the company. Also, most IPOs are of companies going through a transitory growth period, and they are therefore subject to additional uncertainty regarding their future value.

You talked about underwritter, they're just middle man who can make things better for investor or they can make it worse. Because underwritter are the one purchasing all the company shares and then sell it to the public. You talk about syndicate, this is just risk sharing between two investment banker, and I as investor i have nothing to do with which investment bankers are sharing risk.

The road to an IPO is very long and complicated one. small investors aren't the target market. They don't have the cash and, therefore, hold little interest for the underwriters.Most of the IPO in international Market are purchased by big investor with deep porket.

It's important to understand that underwriters are salesmen. The whole underwriting process is intentionally hyped up to get as much attention as possible. Since IPOs only happen once for each company, they are often presented as "once in a lifetime" opportunities. Of course, some IPOs soar high and keep soaring. But many end up selling below their offering prices within the year. Don't buy a stock only because it's an IPO - do it because it's a good investment.

In conclusion, few things you need to know, does a stock has a Lock-up period, be careful and Don't get sucked in by the hype.
Noise investor is common word for people who invest because such and such invest in stock A.

Mdau # 1

Anonymous said...

Investors can tell if the IPO offer price is reasonable or not by using different kinds of research methods. The goal of the NMB is to raise money and the goal of the issuer and underwriter is to make the IPO as successful as it can be but there is no guarantee for any IPO to succeed. Look at Blackstone Group IPO and many others. Valuers are picked for their talent and experience. Conflicts of interests may occur but remember NMB needs to raise Capital and Investors want capital appreciation or high return from their risk taking behavior. All said and done this is a good opportunity for investors seeking ownership in NMB. If I was the investor wanting to invest in TZ with more than $ 1 billion cash I would not hesitate to pay a high premium for NMB. I would use at least $100m to get ownership of this company and eventually become major shareholder. After that I would influence the management to be more efficient,productive, and strategic. It is a great buy no matter what you guys have to say. Time is of the essence. If I don't have money I would waste time analyzing too much and perhaps would not take risk at all. What if it was CITIBANK (T) or Barclays (T) are guys biased with foreign banks because you believe that they are better managed? That could end up being self deception. Just be careful, it is very tricky.

Anonymous said...

Don't want to confuse the distinction between random noise in market and the so called noise investors. I think I have contributed a lot today and will wait for others to add up or criticize. I am a believer in stochastic models and think that any IPO can be a failure or a success depending on the parties involved and investor behavior. For an advice study more about behavioral finance. It is not only numbers that make investment decisions. Psyche plays a big part too so don't ignore noise investors. I have asked this question. Who is NMB targeting? Institutional investors or people with deep pockets. Few Deep pockets would buy NMB since they have not acquired their wealth through the stock market. These people would rather invest in US stocks than NMB but you never know a risk taker is a risk taker. I f I had cash I would throw at least $100m no doubt, If I was working for somebody as a portfolio manager I would add NMB in my portfolio and spend at least $100m. That is me.Let me hear what you have to say.

Nalitolela, P. S. said...

first of all, I wanna say thank you to all members who have contribute thus far!! Not just in this topic, but even in the few before this.
Second I truly love the difference in opinion; that is the best way to learn. Always be ready to question everything; do not accept anything at face value. I however have to kindy ask all forum members to respect other's views and opinions and not to use language which may come across as offensive, condescending or pedantic. Be firm and confident but yet respectful.

I really like the challenges I see here and the difference in opinions; it makes me happy to see there are some Tanzanians out there who know a thing or tow about how things work. Personally, as a trained Financial Engineer, I am happy to see some of the principles most of us (Fin Engs) live by, such as CAPM being challenged over here; and I as one of the groundbreaking mathematicians working in the industry back home, am so excited to see people debate about the fundamental/empirical i.e. theoretical analysis VS the technical/mathematical i.e. quantitative analysis. That's how we learn. Thank you all once again; please keep the discussion going (respectfully). I have a few more topics to bring here related to this.. mainly on security pricing. But let us learn how to price the UNDERLYING first!!

Please remember folks, like it's been mentioned before. This is not rocket science. There is no given formula or algorithm that works universally. Even the guys who won the Nobel prizes like Black, Scholes and Samuelson; they did not do it by sticking to conformal ideas. They all thought outside the box. So thank you guys; challenge the norm; let us invent new things and learn from each other.

Anonymous said...

Anonymous Thu Jul 31, 09:36:00 AM EAT, I do respect your decision. I wanna add NMB in my nasty egg basket. That is why i asked Peter to find financial statements for this good company.

I do have trust with the bank, I know Imani, is a good and a tycoon guy. However, that doesn't make me buy his bank. NMB i believe there target is to rise fund, and the same time to maintain their corparate structure. I don't know if they have specific investor who they're targeting. However, they want to rise cash for the sake either expanding or developing new projects.

There is a big difference between real investments and what is in the text book written by Harvard Proffesor.

Someone suggest what if was CITIBANK, no one on this earth want even to touch CITI now. They're in deep nightmare. It's not about management, it is about the company. Again, buying stock is not like buying a normal products. There is something beyond desire of buying.

As soon as i have NMB financial statements, i will make my final decision. At this moment, i can't buy it. Peter ukipata vitabu vya NMB please tuwekee hapa.

Mdau #1

Nalitolela, P. S. said...

kuhusu vitabu; I am yet to get them bros and sis's. For those people back home, I call on you once again to help us with this. I specifically asked for the Mar 31st quarter before but everyone would appreciate whatever accounts you have; even as far back as since NMB was privatized!!

Mdau #1, and the other Member above; I appreciate the challenge between the two of you, and I agree, textbook education does not always transcend into day-to-day office doings. Infact, 90% of the material can not be directly applied. However, it does have it's part in making us who we are today; a very big part, if I may say so. Anyways, mjadala uendelee. Tupo pamoja!!! I have a few challenges I can't wait to throw your way guys. Some technical ones; and some... well... you'll see!!!

Anonymous said...

NMB can generate up to 30 Billions Tshs. or $27M net profit annually. Deposits under management is close to $450m or 500 billions Tshs.Figures were extracted from not very reliable webiste but they are close and for purpose of discussion they can be taken as valid until some one comes up with actual numbers.
Since this is a bank and is subject to scrutiny, I would se VaR models to assess its loans portfolios and decide how risky the portfolios are. Many borrowers may default in the future. Many things could change due to bank failures and credit crunch in America and Europe. Tz is not an exception. The notion that effects of credit crunch have no impacts in African countries is not accurate. The crunch and has contagion effects in Asia and Africa.
This one will spread slowly but surely it will affect small banks in small countries that were thought as
wearing crunch proofs.
VaR is Value at Risk, the banking business is affected by defaults and by consumer confidence. Once there is a panic the effects will be seen just in one night. Given that possibility, I would put my money in NMB and then get out before it is too late. All I am saying is this is a timing issues. One mistake one goal.
It is good to know that we have financial engineers who are not jobless in TZ. Hey is it the right thing to use IPO to raise money if they need capital why can't they issue convertible bond as well? Why the IPO would be the appropriate strategy for now and why now? How many branches do they have? What type of banking do they do? What is the profit per branch? How many employees do they have. What is the profit per week and per month? How do they make money? fees and interest income. Do they have unique products? Do they depend on deposits?
Who is the major shareholder and what % of total capital. Why is the Govt involved? NMB came from NBC. ABS and IFC are among the shareholders. Well this is risk sharing rather than profit sharing. Bank supervision and regulations will change dramatically.

Anonymous said...

There is a lot to ask than just financial statements. I repeat, analyzing fin statements requires understanding of how they are prepared and keeping in mind that in the new economy the old ways of measuring value are outdated. It would take time for balance sheets makers to catch up with new economy. So just think and do not depend on balance sheets analysts to do what computer programs can do.
Suppose net income is x and number of branches is Y and operating income is z. What new can you say? There is no good news from financial statements. There is no bad news either. Employ other analytical skills and estimates to come to your conclusion. What is the population of TZ? What is the GDP? How competitive is the banking business? What is the market share of NMB? CRDB? NBC? AKIBA? Other than Dar, Mwanza, Zanzibar, and Arusha where else can NMB make money? KAMPALA? NAIROBI? KIGALI?
The whole game in IPO is not just the single company, it is the whole industry and market. If you invest just because you were convinced by the numbers that were manipulated you'd be a loser.
What is the beta of the market? Is the focus on Initial public offering or to think outside the box?

Anonymous said...

I don't need tons of balance sheets figures to discuss how should valuers price NMB and how to tell if the premium is reasonable or not. This is a game. An IPO can be a total loss or a success. A company seeking financiers through an IPO should have an alternative way of raising the same money they need through a different method of financing even if it can be expensive. Another option is to abandon the future projects. If the problem is operating costs, then that is an expensive way of raising money.

Anonymous said...

I always fall in love with old methods of pricing securities. I saw many new ways in different brokers office, but most of them doesn't works all the time. I saw from new president methods to january effect, but neither of them has out beat the market in two consercative tearms.

I strong believe on old technique, you can't tell me the company made 200M in revenue or in profit. I need to see source and uses of funds, i need to know where the money come from and how was it spend. I need to know what am I buying? What if the bank is borrowing millions of money to finance naive projects? I can't find that without dinging deeper in their books.

How does NMB make millions in profit? I can't figure that out unless i have the books infront of me.
I strong agree with other methods ambazo waadau mme propose, but i strong believe on old analytical methods.
Asubuhi njema, i will catch yao jioni baada ya kazi

Mdau # 1

Anonymous said...

idiosyncratic risk, systematic risks,default risk,economic risk,managerial risk,operations risk,country risk,and competition risk are some of the risks that will slow growth of this stock if there has been any. Investors bear a high risk aand should require a high yield. i downgrade it to neutral. All depends on your investment philosophy. Migombani Investment Bank Analyst.

Anonymous said...

Journals za financial economics and econometrica zimecover sana haya mambo ya ASSET PRICING DYNAMICS lakini hamna research zozote kuhusu soko changa kama DSE.Therefore,mtu unaweza kufanya study na kuanguka na nobel prize ambayo siku hizi haina value sana kama zamani hizo.GOOD LUCK GUYS!

Anonymous said...

someni Kenneth Singleton na Stephen J Taylor. Mbona topic nzuri lakini mpo kimya kama vile sio nyie mlionzisha hii topic na hii forum au manafanya vibarua vya kubeba mabox. Poleni kwa kazi.

Anonymous said...

How can this be an IPO? May be i'm little confused..( defination of IPO is a company's first sale of stock to the public)..
Is NMB's public owned already? if that is the case, why you called this selling of common stocks an IPO?

Nalitolela, P. S. said...

Hi guys,
This post was inspired by a question Mdau #1 had asked in regards to NMB IPO, however it was not meant to be specific to NMB, but rather it's a question of how to price any generic company, however NMB can be used as an example ofcourse, when one is trying to clarify a point.

Anyways, so as to keep this discussion focused, I will open another discussion specifically on NMB

Anonymous said...

mdau Migombani Investment Analyst, u seem to raise more questions than answers. Please demonstrate for us what all those types of risk have to do with pricing?

Mbongo said...

don' mean to diss people, but I agree with mdau hapo juu. Some people r just writing their notes here, no real analysis

Nalitolela, P. S. said...

1. Anonymous poster from Thu Jul 31, 07:34:00 AM EAT asked why did my post just target IPOs. Well ideally, the "fair" price of a publicly traded stock is more or less given by the market.

2. This brings me to a point raised by Anonymous from Thu Jul 31, 07:34:00 AM EAT. Stochastic Models, and other models such as binomial tress, trinomial lattices can only be used to model the price of a stock that is already being publicly traded as they give the evolution of the price S(t) at time t>0; given the initial price S(0). The purpose of this post is to specifically discuss how to get that S(0). You can not use stochastic models without knowing the drift and volatility.

3. I think there was a bit of confusion when Mdau #1 mentioned looking at the market performance. I believe he meant look at the performance of the company of your interest, say company X VS industrial performance. i.e., what are the prospects of the industry as a whole, and how is the company X fairing, i.e. what is it's market share, what proportion of industry-wide earnings can be attributed to X? etc. This is not the same as comparing how the stock price is doing, as suggested by Anonymous from Thu Jul 31, 07:34:00 AM EAT

4. CAPM has come under some fierce criticism from some posters. Ofcourse CAPM, like most models, is not without shortcomings. However, knowledge is always evolving, and as human beings we learn from mistakes. Thus older models may not be as relevant today; but it is from them that new models often arise. Thus, I find the assertion that the Nobel prize for Sharpe, Markowitz and Merton was undeserved, to be unfair and an undervaluation of the contribution these pioneers made to financial engineering. But that is just my personal view.
In the end no model is perfect; and each may have it's own benefits depending on the particular scenario you are dealing with.

5. As far as the issue of underpricing/overpricing goes; it is usually the norm that during IPOs shares are sold at a lower price than what is deemed to be their fair value so as to encourage investors to buy in volumes. Moreover, it helps to reduce the drop effect once the shares start trading on the stock exchange.

The aim of this discussion is to help each other discuss the basics of how to determine that fair price. So that if valuers say that the price during IPO is say TZS1,000 per share, you can check if this is indeed fair or not

6. Anonymoys posters from Fri Aug 01, 07:23:00 PM EAT and Thu Jul 31, 11:31:00 AM EAT, NMB is semi-private; the government sold only 49% of the shares (RABO Bank 34.9%, National Investment Company Limited (NICO) 6.6%, Exim Bank Tanzania 5.8%, Tanzania Chambers of Commerce Industries and Agriculture (TCCIA) 1.7%). The government still holds 51%. Now it wants to offload 21%, that is why the government is involved.

Currently NMB is NOT a publicly traded company as you suggested; the aim of the government is to make it a PLC; now before enlisting on the DSE, they are giving Tanzanian investors (both institutional and individual) a chance to buy that 21% (with 5% reserved for NMB employees), so this is an Initial Public Offering.

It is true that NMB came from NBC but they are currently totally different entities, and ABSA, IFC have nothing to do with NMB.

Some of the info you inquired about (i.e. # of employees, branches, earnings, etc) can be found from financial statements and annual reports. More of this on the incoming post that will be specific to NMB

7. Anonymous from Thu Jul 31, 11:31:00 AM EAT, you asked why raise funds from IPO, why not Convertible bonds. Well, if we are to make that argument, then we can ask why would anyone want to sell shares to start with? The thing is when you sell shares you are giving up ownership of the company, and by buying shares you are buying part of the company. Where as selling of bonds is borrowing money; it's a liability. Ofcourse with convertible bonds, the owner has an option to exchange it for stocks, but at the heart of it, it is still a bond.
If a company wants to just raise capital without giving up ownership, then they would sell bonds; but if they do not wish to have the burden of that debt on their books, and are willing to give up ownership then they would sell shares.

Now in regards to NMB in particular, like I said above, it is the government that is selling 21% of it's shares as an initial move towards enlistment of NMB on the DSE; it was not just a move to raise funds. Thus selling convertible bonds was not an option.
(By the way, CRDB might also be going the same way in a not too distant future)

Nalitolela, P. S. said...

...going back to the main topic, how should one price shares. So far it seems the consensus has been to agree to disagree. Most people have given their views and somewhat stuck to them.

First of all, I wanna say that the aim of this discussion is not to turn a total layman into a sophisticated financial analyst overnight. However the aim is to exchange ideas between people studying or working in the financial sector; who know a thing or two and are looking to gain from what others think; as well as help other folks as well get an insight into what exactly is it that valuers do. As pointed out before this is not rocket science; and you should not buy just because your brokers says so, or as someone mentioned before, you should not be a noise investor. At least get an indicative price that would be fair to you (depending on what your criterion is; i.e. are you a growth investor or value investor; are you interested in dividends or just in getting a sit on the board; are you looking for voting rights, or eventually plan for eventually outright takeover)

Anyways, going on... I agree with Mdau #1 that availability of data is a big problem in Tanzania. Sadly even on the DSE website you can not readily get for listed companies, and the available data is not always in the most convenient form. I mean, I would like to be able to search for a given stock and be able to view the graphs for the dates I set as well as be able to download spreadsheets of stock price history. But that is currently not available.
For unlisted companies, obtaining information is even more difficult. Most companies do not put annual reports and financial statements online. Sadly for most companies in Tanzania having a website is more of a fashion thing. We do it because everybody else does; but they do not serve their full purpose which is to provide info about the company and be a communication portal with the general public.

This lack of information makes it hard to apply one model or another. However, whatever model you decide to use, I strongly agree with Mdau #1 that reading and understanding the financial statements is vital. And not just financial statements, even annual reports as well as (future) corporate plan, i.e. what are their plans in the next 3, 5, 10 years; are they good plans; are they achievable; do they guarantee growth in size and earnings, etc.
Reading these statements and reports is not just about getting the number that you will plug into a formula and get the price. Whatever your views are, whatever model you use, you have to remember that buying a stock is buying part of the company. So you have to understand the company inside out; and not just the company, you have to understand the performance of the industry as a whole.

Now as far as what particular model to use, personally I am more a fan of using discounted cash flows; only because in my opinion, for an individual investor, which most of us are, the main point of investing is so that I can get more money back in the future. To me the company's earnings mean nothing if I don't get to enjoy it. I mean, I wanna have my cake and eat it too.
So I wanna know how much do I expect to earn; then calculate how much that is worth today. Therefore I will calculate on models like Dividend Discount (DDM); Economic Value Added (EVA), etc.

The fact that I like this particular model, does not mean I think it's perfect; I just think it reflects what most investors worry about, i.e. how much will I benefit from owning share X next year, or 2, 3 years down the road. Why should I buy this share instead of putting it in a CD or buy Treasury Bills/Bonds, etc.
The main downfall of using Cash Flow-Based Valuations especially for a country like Tanzania is that we have such volatile interest and inflation rates. If you are looking to take into consideration a longer time frame into the future, you have to have some sophisticated way to model interest and inflation rate changes (which is a whole different ball game and we can have a different topic on that). Theoretically, we expect (or at least hope) that the company will be in existence for an infinite period of time; thus we can calculate the discounted cash flow as pricing a perpetual bond.

One way to go about it, I think is to have a set time frame. Then look at the alternative of investing into a risk-free security that would mature at the end of that time period, and use it as a bench mark. Then take it's yield and give allowance of however many basis points you are willing to go below.

All in all, you need to know how the company has been performing so far; this will give you an indication of how it may do in the future. So you still have to read the balance sheets and annual reports, corporate plans, etc. You also have to do macroeconomic analysis; because to predict the interest rates trends, etc you have to know how the country's economic as a whole is doing. You also ofcourse have to know the dividend policy of the company in question (this will tell you how much you will be earning) which goes hand in hand with doing analysis of the industry performance as whole as well as the individual company's performance.
As far as knowing the dividend policy; as well as obtaining annual reports, corporate plan and financial statements, I expect that if you are seriously considering investing in a stock you will have obtained this. Contact the company, or contact your broker for more information.

Having said that, I acknowledge that there is no single answer to this question. And there are different classes of valuation methods other than cash flow based; e.g. Earnings-Based Valuations, Revenue-Based Valuations, Equity-Based Valuations, Member-Based Valuations, etc.

I would also like point out that for value investor and speculators; they may not care about dividends and earning, etc during IPOs. All they may care about is to buy the stock at a cheap price and wait when public trading starts they can take advantage of the initial spurt in prices. For them this whole analysis may not be of too much use. Often times such kinds of people are the ones who cause sudden price drops after the stock is listed.

Anonymous said...

Hello Waungwana, i was off over the weekend. I am so impress kuona watu wako so exited about this staff.

Over the weekend i had visitors from Arkansas, a well educated family. I introduce the topic of NMB IPO in the middle of conversations. This fellows explains how lucking of information caused them not to buy TBL when it was for grabbed. To make long story short, one of them is thinking to fly to Tanzania and then purchase NMB shares and then fly back to US.

Just look at TBL or TTC, over the period of five years or more their shares soared for more than 50%.

I believe there is no easy way of owning a good company than buying their shares.

Mdau #1