NSE Investors appear to be Ignoring Valuations with the Recent Rally

NSE Investors appear to be Ignoring Valuations with the Recent Rally

November 17, 2010, 0910

The Nigerian Stock Exchange is experiencing a dramatic change in investors’ sentiments as

evidenced by the significant surge in trading volume and the break above all pertinent
cumulative moving averages; thereby reversing the bearish trend.

For the week ended November 12, 2010, the average daily trading volume was 530 million
shares. The last time this type of average daily trading volume was experienced was
in the week of May 3, 2010 as highlighted in the graph below:

NSEAll ShareIndexVs. DailyTradingVolume

1,200,000,000 29,000.00

28,000.00
1,000,000,000
27,000.00

26,000.00
800,000,000
25,000.00

600,000,000 24,000.00
Volume
23,000.00
Index
400,000,000
22,000.00

21,000.00
200,000,000
20,000.00

- 19,000.00

Improvement in Moving Averages

At the close of trading on November 12, 2010, the NSE all share index at 25,367.83 is
above its 20 day, 50 day, and 200 day moving averages of 25,056.93, 24164, and 24962
respectively. The NSE all share index broke above its 20 day moving average on October 4,
2010, and broke above its 50 days moving average on October 12, 2010. The index broke
above its 200 day moving average on October 15, 2010 confirming a bullish trend, but on
November 2, 2010, the all share index slipped back below the 200 day moving average
indicating a trend reversal. However, on November 9, 2010, the index broke above the 200
day moving average again on very heavy volume.

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 NSE Investors appear to be Ignoring Valuations with the Recent Rally

TheNSEAll Share IndexVersusthe 20 Day and 50 DayCSMA

10000

8000

6000

4000

2000

0 Below 20 DSMA

-2000 Below 50 DSMA

-4000

-6000

-8000

-10000

-12000

Chart ReflectingtheNSEAllShareIndex versus the 200 DayMovingAveragefrom

January 2009 throughNovember 2010
20000

15000

10000

5000

Below 200
-5000
#
REF!
-10000

-15000

-20000

-25000

-30000

Motivation of Current Volume Surge:

I attribute the surge in prices and volume to the AMCON chief executive Mustafa Chike-Obi’s
pronouncement on November 9, 2010 stating that AMCON will take over the loans given by
the central bank to the nine bailed out banks by converting them into some form of equity

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 NSE Investors appear to be Ignoring Valuations with the Recent Rally

( Common or preferred). It was also noted that the assets acquired from these bailed out
banks will be held for at least two (2) years. The effects of Mr. Chike Obi’s comments
amazingly resulted in the ignition of some enthusiasm into the market. This enthusiasm
appears to have increased money flow into the banking sector especially on some of the
bailed out banks that have reflected increases in price and volume as shown in the graphs:

A friban k 6 w eeks Price & Vo lu m e Tren d Intercontinental Bank 6 w eeks Price & Volum e Trend

2 5 ,0 0 0 ,0 0 0 3 .5 20,0 00,000 3.5

18,0 00,000
3 3
2 0 ,0 0 0 ,0 0 0 16,0 00,000
2 .5 14,0 00,000 2.5
1 5 ,0 0 0 ,0 0 0 2 12,0 00,000 2
10,0 00,000
1 0 ,0 0 0 ,0 0 0 1 .5 1.5
V o lu m e 8,000 ,000 Volume
1 6,000 ,000 1
5 ,0 0 0 ,0 0 0 P r ic e P rice
0 .5 4,000 ,000
0.5
2,000 ,000
- 0
- 0

O ceanic Bank 6 w eeks Price & Volum e Trend U n io n B an k's 6 w eeks Price & V o lu m e Tren d
80 ,0 00,00 0 4
7 0 ,0 0 0 ,0 0 0 6
70 ,0 00,00 0 3 .5
6 0 ,0 0 0 ,0 0 0 5
60 ,0 00,00 0 3
5 0 ,0 0 0 ,0 0 0
50 ,0 00,00 0 2 .5
4
4 0 ,0 0 0 ,0 0 0
40 ,0 00,00 0 2 3
3 0 ,0 0 0 ,0 0 0
A
xisTtle

30 ,0 00,00 0 1 .5 Vo lume
2 Vo lu m e
2 0 ,0 0 0 ,0 0 0
P r ice
20 ,0 00,00 0 1 P r ic e
1 0 ,0 0 0 ,0 0 0 1
10 ,0 00,00 0 0 .5
- 0
- 0

However, it appears that these investors who are rushing to buy the shares of these bailed
out banks have not analyzed the implications of Mr. Chike Obi’s comments and the effects
of the potential conversion of the CBN funds into equity ( i.e., common or preferred).

Implications of Conversion of funds to equity position

The conversion of the CBN funds into equity will be the worst case scenario for current
shareholders. This will basically make the shares of the current shareholders of the nine (9)
banks worthless as it will result in a significant dilution in the share position of the current
shareholders. Since I am not preview of exactly how AMCON will perform valuation for the
equity conversion. For illustrative purposes, converting the injected funds to equity position

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 NSE Investors appear to be Ignoring Valuations with the Recent Rally

based on the closing share prices and CBN capital infusion on a one to one ratio as of
November 12, 2010 for the five bailed out banks highlighted in the schedule below, shows
that the Federal Government will own an average of approximately 63% of the bailed out
banks.
CBN or Fed. Govt 
Equity position if funds  Projected  CBN 
Approx # of shares  Unit Price  @  are converted to shares  Projected Combined  % of Ownership 
Banks CBN Capital Infusion outstanding 11/22/2010 at current prices O/S  shares of each Bank
Afribank 50,000,000,000 13,506,826,511.00 2.86 17,482,517,482.52 30,989,343,993.52 56.4%
Finbank 50,000,000,000 16,721,199,795.92 0.98 51,020,408,163.27 67,741,607,959.18 75.3%
Oceanic Bank 100,000,000,000 22,221,369,708.77 3.44 29,069,767,441.86 51,291,137,150.63 56.7%
Union Bank 120,000,000,000 13,509,726,415.00 5.44 22,058,823,529.41 35,568,549,944.41 62.0%
Intercontinental 100,000,000,000 18,860,015,598.28 2.9 34,482,758,620.69 53,342,774,218.97 64.6%
Total 420,000,000,000 84,819,138,029 154,114,275,237.75 238,933,413,266.71 63.0%

Basically, if the above scenario is actualized, the shares of all current shareholders will be
almost worthless since the Federal Government will become the majority shareholder of
these banks. If the Federal Government becomes the largest shareholder, how will the issue
of the annual dividends distribution be handled? Will these banks' require authorization
from AMCON before any dividends are declared? As investors will recall, in 2009 bonus
payment that was declared by one of the bailed out banks was nullified by the CBN.

Therefore, with this scenario in mind, why are investors piling into the shares of these
rescued banks? As a technical trader, “the trend is supposed to be your friend” and as long
as the trend favors the trader, stay put and do not buck the trend. Nevertheless, at the
current prices, most of these bank stocks are over-valued and trading at “nose bleed”
levels. Therefore, investors must realize that they are buying these stocks because of the
potentials of generating short term profits, because fundamentally, the stocks of most of
these rescued banks are worthless for now.

Conversion of the Bailed out funds to Preferred Stock.

Preferred stocks are special equity security that have properties of both ‘an equity and a
debt instrument’, and are generally considered hybrid instruments. Preferred stocks take
precedence over common stocks, but are subordinate to bonds.

Preferred stocks have some other benefits that might be of concern to common stockholders
such as:
• Preferred stocks receive a fixed dividend that has been predetermined through the
agreement with the preferred shareholders. This fixed dividend is not usually binding but
has preference over the common stock.
• The common stockholders can only receive dividend after the preferred shareholders
have been paid. Also, most contracts include a provision that mandates the company to
pay any arrears to the preferred shareholders before the common shareholders' right to
dividend can be activated
• In a bankruptcy, preferred stockholders are paid off first prior to common stockholders.
• The common shareholders have a residual claim on the profits, while the preferred
shareholders have a fixed claim on profits after the interest on debt securities have been
paid.

With all these aforementioned benefits of preferred stocks which might be of concern to
common stockholders, I still believe the conversion of the CBN bail-out funds to preferred
stock will be more beneficial to the shareholders of the bailed out banks, because from the
point of view of the existing shareholders preferred stocks prevent further dilution of

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 NSE Investors appear to be Ignoring Valuations with the Recent Rally

ownership of the company, and preferred stock owners do not interfere with the operations
of the company since they do not normally have a right to vote like common stockholders.

Conclusion

There is nothing wrong with trading the stocks of these bailed out banks with obvious signs
of price resurgence for profit making purposes. However, investors buying these stocks
should understand that they are only short term trading vehicles, because as noted by the
Chief Executive Mustafa Chike-Obi “ most of these bailed banks will require further funds to
get them to minimum capital adequacy levels even after AMCON absorbs the non-
performing loans and returns shareholders' funds to zero.

Investors who are buying these stocks and believing that they are a sure avenue to future
riches may be setting themselves up for a rude awakening, since they refuse to understand
valuation or that the fair value of a stock should not be ignored.

Finally, these investors who purchased the shares of these banks post the CBN cash infusion
have a big decision ahead of them. Do they go along for the ride and cash out before these
banks are acquired, or stay in and take their chances regardless of what the post acquisition
strategy of the new management team might be (i.e., reduction of the number of share
owned to reflect purchase price, share reconstruction, etc), because upon the acquisition of
these bailed out banks, the number of shares owned by current shareholders will be
adjusted to reflect the purchase price (i.e., which might be based on cash or stock
transaction) and the holdings of the new majority owners. Let’s watch as events unfold.

Prepared by Chukwumah Biosah, President CEBAL Audit Group, USA and InvestIQ, Technical Analysts to Proshare. All opinions on
this page/site constitute our best estimate judgement as of this date and are subject to change without notice. Investors should
see the content of this page as one of the factors to consider in making their investment decision. Proshare Limited, its employees
and analysts accept no liability for any loss arising from the use of this information. All enquiries should be directed to Biosah@ca.rr
or info@proshareng.com

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