Initial Public Offerings Rating The Ghana Stock Exchange (GSE) is determined to improve transparency and disclosures by companies raising funds from the public. IPO grading is one way to improve transparency and disclosures which assist investors to make informed decisions leadin
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Beacon Ratings Equity market
Initial Public Offerings Rating The Ghana Stock Exchange (GSE) is determined to improve transparency and disclosures by companies raising funds from the public. IPO grading is one way to improve transparency and disclosures which assist investors to make informed decisions leading to healthy growth of capital markets.Beacon Ratings’ IPO grading is an assessment of the fundamentals of a corporate entity and its public issue, covering operating environment, industry growth prospects, supply chain
Initial Public Offerings Rating
The Ghana Stock Exchange (GSE) is determined to improve transparency and disclosures by companies raising funds from the public. IPO grading is one way to improve transparency and disclosures which assist investors to make informed decisions leading to healthy growth of capital markets.
Beacon Ratings’ IPO grading is an assessment of the fundamentals of a corporate entity and its public issue, covering operating environment, industry growth prospects, supply chain partners, operating and financial performance, liquidity and financial flexibility, infrastructure and technology, solvency and leverage, risk management, sustainability and competition, parent entity support, corporate governance and management quality. Effectively, the grading is an independent opinion on the fundamental strengths of the IPO.
The grading is communicated to investors through a grading report which provides information on grading rationale, key rating drivers (strengths or weaknesses), and financial indicators/highlights.
IPO rating criteria
Beacon Ratings’ IPO grading is a comprehensive analysis of factors that affect the issuer and the issue and includes interaction with senior management to understand and assess key aspects of the IPO.
Operating environment
Operating environment assessment provides a clue of the setting in which Issuer operates, determining current state and prospects for development.
Regulatory environment set out the framework for business practices, policies and incentives for products that have significant effect on operations of Issuer.
Sound and transparent regulatory framework with independent and credible regulator with best practices, promotes healthy industry environment.
Industry growth prospects
The industry growth prospect is assessed to determine performance and associated risks of the industry. Industry parameters are:
Growth prospects:Growth prospects of an industry affect earnings and returns of entity operating within it.
Industry dynamics have significant effect on Issuer’s operating position, product, market, pricing strategies and long-term core profitability.
Cyclicality:Cyclical industries are categorized into two: those that are influenced by the performance of the economy - real estate, and those influenced by the level and volatility in commodity prices - agriculture.
Competitive intensity: High level competition in an industry reduces Corporate entities’ capability to grow revenues and increase profits.
Regulatory risk:Regulatory intervention in multiple forms, including taxation, duties and subsidies, price controls, import/export restrictions, outright bans.
Operating performance
Corporate entities that have relatively strong positioning and high market share have competitive advantage. The following are assessed:
Products and services profile
Timely availability of raw materials, manpower and utilities
Bargaining power with key customers and suppliers
Value addition in the product and services
Product and service distribution networks and channels
Business contracts with customers and order quantities
Relative scale:large scale is associated with operational efficiency
Operating efficiency
Operating activity and efficiency are assessed using financial ratios such as:
Cost of production per unit compared to competitors
Stock turnover
Debtors’ collection period
Creditors’ payment period
Turnover to total assets
Current capacity utilisation
Operating expense to income
Sensitivity of key drivers, selling prices and input costs
Sustainability and competition
Competitive position: This results from solid control over distribution channels, suppliers, other business partners, and easy access to target markets.
Market sharearises from solid position per market and product, client recognition, brand name, strong niche.
Size of operation: Large entities are sustainable and competitive. Medium and small entities - in terms of asset size or gross revenue - can enjoy a significant competitive advantage when sustainable market positions are taken in niche segments.
Business franchise:Franchise may arise from brands and products to meet the range and varying needs of clients. Solid business franchise leads to strong market position, market growth, core profitability and internal capital generation.
Infrastructure and technology
Corporate entities use of modern technology infrastructure to achieve efficient production cycle, reduce wastes, sustain quality products and demonstrates willingness of management to grow the business within changing times.
Profitability
Profitability is a measure of earnings generated as against the resources deployed.
Expense ratio
Gross profit margins
Net profit margins
Return on assets
Return on equity
Solvency and leverage
Borrowed funds have obligations in the form of interest and principal repayments, irrespective of the cash flow generation. Gearing and debt coverage indicators such as:
Debt to total assets
Debt service coverage
Interest coverage
Financial flexibility
Capacity to raise funds at short notice from banks
Bank lines for working capital, revolving credit facilities
Treasury bills and other short-term notes
Cash or encumbrance-free fixed deposits in banks
Liquidity and cash flow positions
Liquiditymeasures of an entity’s capability to meet its short-term cash obligations
Current ratio
Quick ratio
Cash ratio
Cash flowsanalysis is critical in assessing creditworthiness as it provides indication of whether operations are capable of funding itself or relying on external sources.
Cash flow from operating activities
Cash flow from investing activities
Cash flow from financing activities
Free cash flows
Corporate governance
Sustainability of Issuers is heavily influenced by policies and support provided by governing board over time. Parameters considered include:
Board compositions and committees
Oversight responsibilities
Board practices and track record
Board support for management
Board composition and independence
Management quality
Management qualityis a differentiating factor in the performance of Issuers. Parameters considered include:
Senior management stability
Senior management pro-activeness
Senior management’s credibility and track record
Depth, breadth and succession plans
Capability of second layer of management
Environmental and social sustainability
Employee relations
Human rights
Stakeholder relations
Health and safety
Air pollution and water pollution
Product and service responsibility
Parent support
Issuers in most cases are affiliates of larger business groups hence any form of implicit or explicit support available from parent/sponsors serves as credit enhancement. Financial strength of the parent entity is considered:
Financial position of parent entity
Sources of operating cash flows
Commitments and allocation of funds
Strategic significance to parent entity
IPO grading scale and interpretation
Imported table
IPO grading scale is on five (5) point scale. IPO with strong fundamentals is assigned the highest score “Beacon Ratings Grade 5” and IPO with poor fundamentals is assigned lowest score “Beacon Ratings IPO grade 1”.