Nairobi Securities Exchange, IPO Report, August 2014

NAIROBI SECURITIES EXCHANGE
Recommendation: BUY
We initiate coverage on the NAIROBI SECURITIES EXCHANGE (NSE) with a BUY recommendation and a target price of KES 14.30, 50.3% above the IPO price of KES 9.50. The Nairobi Securities Exchange’s total income has recorded 5 year CAGR of 35.5% driven by increased market turnover. In last 5 years, the company has moved from a loss after tax of KES 31.8m to a profit after tax of KES 262.2m. For FY14, we forecast earnings per share to grow 5.9% y/y to KES 1.43. The growth in earnings in 2014 is likely to be subdued due to the fact that the company reported a one-off gain of KES 120.0m in 2013 from a recovery of a bad debt. In the longer term, we believe that investments in IT infrastructure and systems will facilitate the creation of new products and the launch of the derivatives market will drive income growth in a cost effective manner. The Nairobi Securities Exchange will be the second exchange in Africa (after the Johannesburg Stock Exchange) to be listed and therefore provides unique exposure to the growth in African Frontier Markets. At the issue price of KES 9.50, the NSE has a forward P/E of 6.7x, P/B of 1.2x and dividend yield of 4.5% compared to the JSE’s P/E of 15.3, P/B of 3.8x and dividend yield of 3.5%.

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