Whatever happened to the “wave” of initial public offerings (IPOs) we were told at the beginning of the year was going to wash over UAE markets?
Sure, there has been a healthy pick-up in capital markets activity over the past six months, with IPOs successfully completed by Emirates Reit and by Marka.
The latter was heavily oversubscribed, indicating a shored-up demand for well-backed and well-conceived IPO projects, even with no trading record and no profits in prospect for some years. Its shares will begin trading soon, perhaps next week according to people involved in the transaction, so we will see how all that demand translates into the after market.
There was also the successful debut of Gulf Marine Services on the London Stock Exchange back in March, and a solid share price performance since, showing that the lure of rival exchanges outside the UAE can never be underestimated.
But apart from those, the UAE has not experienced the rush to market many were anticipating. Just Falafel, the booming fast-food business, was tipped to go any day, every day, for months, but still has not materialised; Emaar's malls business, originally slated in for an IPO before the holy month of Ramadan, is still at the drawing board phase, and will probably not get listed until the final quarter of the year, insiders say.
There are particular reasons in both those cases, and with regard to Emaar, there are special reasons why this IPO – the biggest and most important for seven years – should not be rushed to market.
But overall, it has been a disappointing six months on the capital markets, despite rising stock indexes. Much of the focus of UAE professionals seems to have shifted to Saudi Arabia, where billions of dollars worth of market flotations are in the pipeline.
Here, in no particular order of significance, are the reasons given by financial professionals for the hiatus in UAE capital market activity.
Uncertainty over valuations. Since the beginning of the year, UAE markets have maintained their growth, albeit at less than the vertiginous rates of last year. But this has given rise to concerns by some global investors that such rises were unsustainable.
Getting top price in an IPO is usually among the most important factors in the strategic planning, so it isn’t surprising this has made advisers think again.
The water has been further muddied by the inclusion of nine UAE stocks in the MSCI Emerging Markets Index. The move had been clearly flagged for months ahead, but there was little consensus as to the short-term effects on valuations. Markets have not experienced the soaraway growth post-MSCI that optimists expected.
There has also been uncertainty over the regulatory environment in which IPOs take place. New commercial law is being prepared in the UAE which will make existing listing regulation more flexible, allowing shareholders to sell smaller proportions than the current minimum of 55 per cent and allowing them also to sell down capital via a book-building process.
These new laws appear to be at the final stages, and will do a lot to encourage the IPO process. Emaar was given exemption from the old regulations, allowing it to go for a listing on the Dubai Financial Market rather than London and Nasdaq Dubai (as had first suggested). It is likely that any significant new share issue seeking a similar waiver from the regulatory authorities would also get the Emaar treatment.
Finally, there is another vital consideration affecting the timing of IPOs. Companies seeking to go to market have to show at least two years of commercial trading records, and many are waiting for the end of the current year to do so.
The reasoning is that 2012, when many corporates were still in post-crisis recovery mode, was not a very good year for business, but last year was much better, and the current year better still. Bringing a company to market with solid 2013 and 2104 trading figures will boost valuations.
For all these reasons, many companies have decided to postpone their market plans, but not for long. There are at least two big flotations – apart from the ones mentioned above – out there at advanced stages of preparation, the professionals say.
The final quarter of 2014 promises to be exciting; next year, even more so.
fkane@thenational.ae
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