7 and-a-half reasons why WestProp listing went south
KURA CHIHOTA
‘Fortune favours the brave’ and ‘until someone brings chocolate, the market will always only have vanilla’ come to mind when looking at the play by West Property Holdings to seize the investors’ imagination and offer shares in an IPO.
Harvard-educated dealmaker Ken Sharpe brought a bold offering to the Zimbabwe capital markets looking to raise US$27,000,000 in new outside capital to fund their inspirational “1 billion bricks by 2050 campaign”.
The planned listing on the Victoria Falls Stock Exchange on 29 April 2023 was postponed ‘in agreement with the Exchange’, a company statement said.
As a reformed stock broker and 9-year director of 2 REITs listed on the Johannesburg Stock Exchange, I hold 7 (and a half) reasons that saw the underwhelming response from the market with a 0.14% subscription of the ordinary shares and 0.92% of the convertible preference shares.
1.Size
Raising US$ 30m cash in Zimbabwe from individuals and institutions rationing scarce dollars was a tall order.
Smaller bite sizes of perhaps $5-$10m, done over time, might have been more easily digested for example.
Caledonia mining, with a solid business case and lengthy road show raised US$ 5.8m in a book build, is a useful benchmark.
2.Structure
The listing on the Victoria Falls Stock Exchange (VFEX) was novel.
The property companies the investing public is used to buying usually offer equity in established, dividend paying counters.
The WestProp capital raise was predominantly reliant on using convertible redeemable preference shares which to me looked like, felt like and tasted like debentures and either the market didn’t “get it” or agree with the pricing.
The tasty ‘guaranteed’ 7.5% pa coupon was diluted by the redemption of the preference share being at the option of the issuer at the preset price of US$5.00.
The choice of going direct to VFEX with all its dollar benefits was a mismatch for local investors holding rapidly depreciating Zimbabwe dollars.
The VFEX in Q2 2022 only turned over roughly US$ 35 000 a day and doesn’t offer the liquidity fund managers like in counters with this scale of investment
3.Sales
The WestProp sales machine is pervasive and persuasive on all forms of social media and a juggernaut, winning awards and always pushing sales, be it on their development sites or at Zimbabwe International Trade Fair or talking to the diaspora in Dubai Expo or London.
The business model of a developer is that future cash flows (and thus profits) rely on the sales machine keeping up a sales pace of 500 units a year in year 1, increasing to 1300 units by year 5.
The model driving profits relies on containing US Dollar costs to only 10% annual inflation and delivering at least 35% gross profit margin without slippage. All 12 projects were mooted to run concurrently placing much delivery pressure on the team.
- Speed
The company announced it planned to list with the prospectus published on 28th March 2023 and had a comparatively short period, less than 1-month subscription window for investors to find the coins to invest.
The offer closed on 21 April 2023. This short window meant that many investor board investment committees did not have time to digest and deliberate on taking up a significant investment stake.
- Speculation
Legal action always has 2 possible outcomes. The treatment of the pending litigation against the company was flagged by the Securities Exchange Commission as requiring more detail to allow investors to understand and make their own judgements and potential impact of as yet unheard cases. Stock markets are supposed to best work on maximum disclosure in order to adequately price risk.
I feel the company didn’t do enough to take investors into confidence and with doubts; the investors hesitated and didn’t invest.
- Support
It was a question bubbling under at the Financial Analyst briefing held at the Royal Harare Golf Club. “Who is backing you? Where is the underwriter?”
Investors like to be in like-minded companies and want to see ‘the balance sheet’ behind a deal.
The absence of a substantial underwriter appeared to the market to be at best super confident by the company or unsupported to the naysayers.
7.5 Status
The much-cherished Prescribed Assets was reportedly bestowed on the company stock on April 24, 2023 by the Hon Min Mthuli Ncube, 3 days too late to tip the scales in favour of the investors looking to preserve value.
The statement issued on April 29, 2023 by board chairman Dr Michael Louis states “our developments continue to be completed as per set timelines” and “all the people and institutions that have invested with us are reassured of the security of their investments”.
The market, for now, seems to prefer real brick and mortar investment in the stands, town houses, apartments and freestanding houses for sale by the company to the stock issuance.
The northern suburbs of Harare hold a real investment cachet and quality stock is finding buyers.
Kura Chihota is regional property consultant with global brokerage eXp Realty
