Now that the IPO is closed, the speculation has already started on how the Emaar Malls Group (EMG) shares will open next Thursday. Barring an unforeseen catastrophe in global financial markets, EMG ought to enjoy a strong pop on day one. Retail investors have not had an IPO like this for many years and the institutional allocation was sold out on the first day. The real question for investors is what happens after that. Is EMG going to be more than a one-day wonder?
Will there be a rush to exit the stock? It’s true that IPO buyers are often a fickle lot looking for a quick profit and nothing more. They may also be even more nervous than usual given the less than entirely propitious outlook for global stocks this autumn. Better out with a quick profit than risk making none at all.
It was ever thus. I’ve been writing about Dubai stocks for so long I can remember the original Emaar Properties IPO back in 1997. Investors doubled their money from Dh1 to Dh2 in a week on that IPO. But those who held on saw the share price rocket to Dh16 before the bust of 1999.
EMG is different at several levels. First, it’s a spinoff from the leading listed company Emaar Properties that is retaining a not inconsiderable 84.6 per cent stake after the IPO. Secondly, the valuation of the original Emaar Properties IPO in 1997 – and admittedly this was a start-up and not a well-established concern like EMG – was a lot more favourable to investors.
EMG is looking overpriced at approaching 30 times earnings at what may be the peak of its business cycle. It could face a Facebook-style flop shortly after trading starts with a rush to the exit door. But those who bought Facebook when the shares fell back have since done extremely well. EMG is the UAE’s largest IPO since October 2007 and has raised around US$1.6 billion for Emaar shareholders, of whom the Dubai Government is by far the largest.
Dubai has a reputation for not giving assets away and indeed selling at the right time, at least as far as the seller is concerned. Remember the previous larger local IPO, the $5bn Dubai Ports World issue in October 2007? Then Dubai managed to cash out just at the right time before the global financial crisis. DP shareholders from that IPO have been nursing large losses ever since.
You have to wonder if it might be the same story for EMG. There is the possibility of another financial storm this autumn. Then again EMG has cleverly timed its IPO to coincide with the $22bn Alibaba IPO on the New York Stock Exchange and that should help to smooth its debut. But such large IPOs often are held at the very top of markets. It’s the time when they are easiest to sell and get the highest price and therefore not a good time to buy.
What if history is repeated again and global stock markets take a nasty tumble? Then EMG shares would quickly fall to a much lower earnings multiple and selling price. That of course would be the ideal moment to buy them.
Take a lesson from the local investment group Abraaj, which bought DP World shares with great skill as the Dubai bourse crashed in 2009-10 at a fraction of the IPO issue price. DP World, with assets like the Jebel Ali Free Zone, was only ever going to be temporarily depressed in value, with the benefit of hindsight. Might the same not be true for EMG in a big sell-off? Assets like its Dubai Mall are not going to disappear and any temporary fall in the value of this real estate is a buying opportunity. And now that EMG is a public company anybody would be able to play this trade in a stock market correction.
Still, shareholders of Emaar Properties are going to get most of the $1.6bn raised in the IPO back as an extraordinary dividend, and look to be the biggest winners from this IPO after the excitement of day one. Longer term there may be a good opportunity to pick up the stock more cheaply in the secondary market after a correction. On the other hand, global stocks could get yet another boost from the money printers of the central banks and that has indeed kept shares rising in the UAE for the past three years as well as in the rest of the world.
Peter Cooper is the editor of arabianmoney.net
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