The representation of key economic sectors such as consumer goods manufacturing sector is already woefully thin at local bourses. The thriving cellular phone service providers are completely absent from the countrys stock markets. Even though a large number of textile companies are listed at local bourses, the best performing companies among these are mostly held closely by a small number of investors.
The issue of low breadth and depth of stock exchanges is a common topic at various economic forums but nothing substantial has done to resolve it. At this juncture, the proposed delisting of Unilevers operations in Pakistan (the seventh most weighted company on the Karachi Stock Exchange) adds to the ado.
The manager of a foreign fund that has significant holding in Unilever Pakistans free float, expressed resentment over the proposed price for the share buyback recently announced by Unilever, in a conversation with BR Research. This fund is among a number of minority shareholders that are loathe to the idea of giving up their stake in the Company.
However unfortunately, the law in Pakistan does not give adequate weight to the words of minority shareholders. 75 percent of Unilever Pakistan is owned by its principal shareholder and that is the number required to pass a resolution for delisting.
In other markets, more stringent rules apply. For example, in India the threshold for approval is 90 percent of all votes. Further, the privatisation must be approved by two thirds of the minority shareholders at a price agreed through a process of reverse book building.
On the other hand, the price offered by controlling shareholders is much lower than perceived valuations. Taking price to earnings ratio as a bench mark, comparable consumer goods companies are trading at an average multiple of 40 at KSE, while the buyback offered to shareholders of Unilever Pakistan is set at a mere 26.5 times the current earnings.
Similar businesses in other countries like India, Indonesia and Nigeria are even trading at higher multiples than those in Pakistan.
The consumer business in Pakistan is largely untapped as the middle-class base of 30 million consumers is a small fraction of the total population of over 180 million. That is why profits for Unilever Pakistan are only a tenth of the Companys business in Indonesia - a country of similar population and demographics.
This anomaly is better explained in terms of per capita income which in Pakistan is half that of Indonesia. The impact of marginal increase in per capita income is humungous at home. Hence, the valuation here should be at a higher multiple, especially for long-term investors.
This argument is augmented by the fact that, unlike India, the youth bulge in Pakistan has not peaked yet.
Those at the helm at the KSE and the Security and Exchange Commission of Pakistan (SECP) should take this case as an example to mend regulations. Either they should not allow the delisting of any company without the consent of majority of free float shareholders or deploy some independent institution (investment bank) to revisit the valuation.
However, if the delisting goes as proposed by the principal investor, the sentiments of foreign investors would further hamper and local stock exchanges would lose an ace from their deck.
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