NSE-Web-Prospectus-2014

3.3 Basis of Offer PriceThe Offer Price has been set on the following basis:3.3.1 Historical PerformanceThe compound annual growth rate (CAGR) of the NSE for variousindicators from year 2009 to year 2013 was studied:a. The CAGR of operating income was 31.34%.b. The CAGR of interest & other income was 60.59%c. The CAGR of total income was 35.59%.d. The CAGR of administrative expenses was 17.45%.e. The CAGR of profit after tax was over 300%.f. The CAGR of total assets was 39.55%.g. The CAGR of shareholder funds was 28.95%.h. The return on average equity 2013 was 42.88%.The key conclusions drawn from the above was that NSE wassuccessful in diversifying its income away from operatingincome and the growth in total assets was due to significantreinvestment of profits.3.3.2 Operating IncomeOperating income comprises the following:- annual equitylisting fees, equity transaction levy, annual fixed-income listingfees, fixed-income transaction levy and other fees. Other feescomprise initial listing equity fees, initial listing fixed-incomefees and additional listing equity fees.Annual equity listing fees and equity transaction levy aredependent upon Kenya`s GDP, ratio of equity market capitalizationto GDP, equity turnover ratio and share turnover velocity (referto Section 7 below). The interest rate environment is one of themost important factors that affects the volume of bonds traded.3.3.3 Other ItemsInterest, other income, administration expenses, profits andcash flows was studied for the year 2013 in particular:-a) Year 2013 had “Recoveries in the year” and new “Marketaccess fee” (refer to Sections 17(c) and 6 in the Notes tothe Financial Statements in the Reporting Accountants’Report in Annexure A2).3.3.5 Key Valuation MethodsThe price/earnings ratio method was one of the key methodologies.The comparable indicators in May/ June 2014 from internationallylisted exchanges included Moscow Exchange, JohannesburgStock Exchange, Warsaw Stock Exchange and BM&F Bovespa. Avaluation range was established (notwithstanding their size,liquidity, product range).Additional comparable indicators in May/June 2014 from theExchange were used and included the entire listed market,commercial banks, insurance companies and an investmentcompany. A valuation range was established.The other key method was the discounted cash flow valuation.Full year performance 2013 excluding extra-ordinary items wasa key basis for the financials. The performance for the fourmonths ended 30 April 2014 was also used. Using variousassumptions another valuation range was established.Using the three valuation ranges above a broader valuationrange was concluded. More weighting was given to the domesticcomparable indicators above.3.3.6 Offer PriceA number of factors were considered in establishing theindicative Offer Price range.These included the investment environment, possible directionof interest rates, possible competing offers in the market,projected net earnings growth of the listed companies on TheExchange for the year 2014 and material risks.The recent performance of previous new listings on TheExchange was a critical determinant and they were carefullystudied. The findings were used to guide the setting of the finalOffer Price range based on the broader valuation range above.In particular, a lower Offer Price/earnings ratio was deemed tobe more suitable in order to create more vibrant secondarytrading.The Board of Directors finally settled on Kshs 9.50 in order toencourage stronger and more broad based retail investorparticipation.b) Year 2012 and 2013 had new income in “broker back officesubscriptions” which is to continue. “data vending” incomehas grown significantly since year 2009.c) The growth in “administration expenses” was notedbetween year 2012 and 2013.3.3.4 Investment in CDSC LimitedCDSC Limited is treated as an associate of NSE and so the equitymethod of accounting is being used for the value, which as of 31December 2013, was Kshs 60.94 million (refer to Section 13 inthe Notes to the Financial Statements in the Reporting Accountants’Report in Annexure A2). The market value could be significantlydifferent.21