Global Investment House – Initial Public Offerings - The spurt in IPOs so far in 2005, with the arithmetic average of post-listing stock price performance (both IPOs and newly listed companies) for the 87 new companies reaching more than 100%, sums up the optimism prevalent in the GCC investor sentiments. This trend is likely to continue for the coming year, with the likely IPOs of Ithmaar Bank (Bahrain), Dubai Financial Market (UAE), Gulf Cement Company (Qatar), Kayan Petrochemicals (Saudi Arabia), Showtime Arabia (UAE) planned in the next couple of months.
Improved capital market conditions in the region have resulted in a growing investor’s interest in the regional equity markets. In addition, with liquidity in the markets improving substantially in the past few years, the capital markets are also witnessing increased depths, in terms of the number of new listings, as well as a growth in overall market capitalization. Regional governments, led by Saudi Arabia and UAE, have taken the initiative of placing some of their prized jewels on the primary market through IPOs. Example include Al Qurain Petrochemical Industries in Kuwait, Qatar Gas Transport Co., Omantel in Oman, Dana Gas and Abu Dhabi National Energy Company in UAE.
Complementing this has been an increased appetite for private sector companies to float their shares on the regional bourses. Regional corporations seem to be exceedingly eying listing opportunities in the regional equity markets, as a number of factors have motivated managements to list on major regional exchanges. UAE has led the region in terms of listings (36) followed by Kuwait (33).
Hopes of windfall returns have seen significant oversubscriptions to many of the new listings in the last few months. Out of all GCC markets, the UAE bourses witnessed the most oversubscriptions, led by Aabar Petroleum which was oversubscribed by a massive 800 times. Aldar Properties was also oversubscribed by 448 times and generated US$103bn in terms of funds committed. Among others, Arab International Logistics was oversubscribed by 80 times and Finance House witnessed a 75x oversubscription. This high level of oversubscriptions explains the elevated initial opening price and the subsequent performance of many of the newly listed stocks. But performances varied substantially, ranging from double-digit gains to double-digit losses.
In addition to the public participation in their equities, many regional firms are also opting the route of private placement of their equities with the help of regional investment firms. In Kuwait, Global Investment House has been instrumental in several private placements over the last few months. This trend was very much visible across all regional investment markets where large sums of capital were raised through private placements.
Companies with regional aspirations are also going on the path of cross-border listings, which have also been gaining momentum over the past few years. Some examples include, Global Investment House which listed its shares in Dubai Financial Market in 2005 after listing itself on the Bahrain Stock Exchange in the previous year. Also, SudanTel, ARIG, IFA got themselves listed in UAE and CIB (Egypt) got listed in Kuwait and UAE (ADSM). We believe that the number of cross-listings will continue to expand in the coming years as companies continue to restructure their operations and aspire to more regional/international roles.
With the current economic environment and resilience of the regional equity markets, we believe the situation is ripe for additional listings in the coming year. We are looking to see family businesses jump on the listing bandwagon, especially in the face of changes brought about by globalization. A number of family businesses are already in the process of going public and we expect to see that number expand rapidly once success is struck by some.
Middle East and North Africa IPO activity indicated a strong boost in 2005. Nearly US$7.4bn were raised through 35 IPOs in 2005, compared to US$3.5bn in 2004, more than a 100% increase. Improved capital market conditions in the region have resulted in a growing investor’s interest in the regional equity markets. In addition, with liquidity in the markets improving substantially in the past few years, the capital markets are also witnessing increased depths, in terms of the number of new listings, as well as a growth in overall market capitalization. In addition to the public participation in their equities, many regional firms are also opting the route of private placement of their equities with the help of regional investment firms. Companies with regional aspirations are also going on the path of cross-border listings, which have also been gaining momentum over the past few years. Some of the salient features of the IPO market in the region is discussed as below.
Handing over the public sector companies into private hands will enable the government to generate capital, to improve government finances and will also pass through the task of re-investment in these enterprises to the private sector and help create an “efficient capital” system where only the best and viable projects get the financing thus ensuring maximum utilization.
Important contributors to the GDP in the GCC region are not still represented in the capital markets such as oil-related companies and family businesses. As the ownership and control of these family enterprises moves into the future generations, the need to capitalize the group’s assets becomes important as some of these successors want to pursue independent interests and few others want to cash-out. Thus, there is a critical need to generate liquidity out of the fixed asset base and hence many of the group-owned enterprises wish to “corporatize” their businesses and a create a formal capital structure.
Although the regulatory framework relating to primary market is improving in the GCC region, still challenges remain such as compliance with international accounting standards, simplification of listing rules and procedures. We believe that it is high time that book building should be introduced to correctly price IPOs in the region.
Opportunity areas include Utilities/ Infrastructure with many privatization efforts being initiated in GCC (e.g. projects for power generation, gas distribution, water purification etc) to increase private sector participation. Real Estate sector looks promising with relaxation in ownership allowed by many countries. Health Care sector is likely to witnessed increased private participation in hospitals, pharmacy chains and specialty care projects. Keeping in mind the demography of the region, education sector with private sector participation in tertiary education in Kuwait offer exciting investment opportunities.
In the MENA region, the IPO market in Turkey looks promising in 2006 on the back of increasing investor interest by international investors especially in privatization projects. Accelerating privatization and IPO initiatives in the Egypt market are expected to boost economic activity. The fact that Jordan's IPO market consisted entirely of green-field companies did not deter investors from rushing to subscribe to the shares on offer as evident by the respectable oversubscription figures. GCC region seems to be a hot destination for primary market activity with oversubscription reaching record levels.
