Madison Financial Services IPO: What you need to know

In a year when lending rates have been as high as 28 percent, Madison Financial services (MFS) has positioned itself to start tapping cheaper capital by listing on the Lusaka Stock Exchange. MFS will become the 23rd listed entity on the Lusaka Stock Exchange (LuSE) after they closed their Initial Public Offering last Friday. They also become the 3rd LuSE-listed domestic company with a presence outside of Zambia. The LuSE is up over 15 percent year-to-date despite an economically shaky first half of the year, making it a relatively attractive time to launch an IPO.

IPO process in Zambia

Madison Financial Services Plc

MFS is a diversified financial services entity owned by parent company Lawrence Sikutwa and Associates (LSA) which makes its money from 4 subsidiaries plying their respective trades in the following sectors:

1.       General Insurance (Madison General Insurance – Zambia & Tanzania)

2.       Life Insurance (Madison Life Insurance)

3.       Micro Lending (Madison Finance)

4.       Asset Management and Stock Broker services (Madison Asset Management)

Insurance is by far the strongest segment and currently contributes around 70 percent to group revenues.

Key players in MFS IPO

Apart from MFS management and executive team, the key players in this IPO are:

•                    Stock Brokers Zambia: the joint lead advisors as well as the sponsoring broker

•                    Imara Africa:  the joint lead advisors

•                    African Life: the underwriters of the IPO

•                    Stanbic Bank: the bankers

•                    Chibesakunda & Co.: the legal team

•                    Deloitte Zambia: the independent auditor

•                    Corpserve: the transfer agent

The IPO will cost MFS a total of K7m with 73.5 percent of the cost being for financial advisory, brokerage and other professional services - meaning Stock Brokers Zambia, Imara and African Life will do very well for themselves. In countries with more developed capital markets, investment banks usually play the roles that are being played by African Life, Imara and Stock Brokers Zambia at one go. Listing on the LuSE itself will cost K150,000, 2.1 percent of the total cost.

IFC Exit

20m shares which represent 40 percent of MFS will be listed on the LuSE at K3.10 per share meaning that the IPO will raise at least K62m. The transaction will give MFS a market capitalization of K155m – 56.6 percent above its net asset value. The company will trade under ticker ‘MFIN’ on the LuSE later this month. Below is a chart illustrating shareholding before and after the IPO:

Source: MFS prospectus

The IPO will see the International Finance Corporation (IFC) exiting from their investment in MFS and walking away with a cool K30.3m. The IFC initially invested $7m into MFS in 2007 consisting of $2m in equity and $5m in debt. In terms of equity, their investment will have returned almost 300 percent after the IPO – the kind of returns that Private Equity firms fantasize about.  Rhoydie Chisanga, Lawrence Sikutwa (Executive Chairman of LSA) and the William Fyfe Estate will make K19.2m, K10.2m and K2.1m, respectively from sales of part of their shares in MFS.

Selected Financials

MFS’s prospectus gave us a look at the previously private financials of MFS which have been very robust over the last 3 years:

Source: MFS prospectus

Profit after tax and Gross premium income have grown by an average of 75 percent and 10 percent over the last 2 years, respectively. Profitability metrics Return on Assets (ROA) and Return on Equity (ROE) are also trending upward – a sign that management is deploying capital more efficiently as well as generating progressively higher returns for shareholders.
Prospects

MFS has a very strong brand name which bodes well for future expansion because of the low penetration rate of insurance products in the Zambian market. They are likely to have a good amount of success picking up new clients with a strong brand name behind them. Their microfinance segment could benefit very well from the continued growth of the Zambian economy which will sprout out more businesses - especially when the country develops a larger manufacturing base, meaning more companies with large workforces which they could sign up and lend to the employees. Asset management and broker services are still at the beginning of their growth cycle - a strong, trusted brand name will be very influential as this sector continues to grow. 

Challenges

MFS's cost of capital is quite high (above 20 percent with some facilities) and with the government (MFS lending is highly exposed to civil sector workers) looking to reduce the rate at which civil sector employees borrow, the margins of their micro-finance segment could be cut down significantly moving forward. Competition is very high within insurance and micro-lending sectors with each having at least 30 other players which could also dampen margins. New entrants in the insurance sector are already using lower prices in the short run to gain market share. Within the micro-finance sector Bayport, Banc ABC and Izwe Loans are some of the notable names which MFS is up against in this segment (commercial banks have also dabbled in this space but have yet to figure it out properly). It might also become tricky in the future to declare  at least 30 percent of net income as dividends year after year as MFS has proclaimed (a ploy to guarantee the IPOs success? They didn’t really need it!)

Verdict

MFS could be looked at as the perhaps “the Zambeef” of the financial services sector - they are well diversified in terms of business segments (and to some extent regionally) with Insurance, micro-lending, asset management and broker services which gives them a strong edge of their competitors. This quality also makes them resilient in times of economic adversity. The prospect of them obtaining a deposit taking license, in addition to being listed on the LuSE, is very attractive because it will significantly cut down their cost of capital leading to higher margins. MFS's strong brand name coupled with the qualities highlighted above should provide them with enough ammunition to outlast competitors who are currently taking advantage of low barriers to entry in the insurance sector - which is their bread and butter.