Market conditions floor IPOs

A flood of IPOs was expected this year, but with continued global turmoil and regulatory uncertainty, companies have stayed away from the market.

Below target: only eight companies have listed on the Abu Dhabi and Dubai exchanges this year, exceeding the total for 2007 but disappointing those who were expecting as many as 50 public offerings.

At the start of the year, hopes were high for initial public offerings (IPOs) in the UAE. After a roaring stock market year-end some 50 companies planned to launch stock listings, according to Fahd Iqbal, vice president of equity research at EFG Hermes. Eight months later, a mere eight companies have newly listed on the Abu Dhabi and Dubai exchanges. Though the number exceeded the total for last year, it is a disappointment for those who thought this would be the year the Emirati IPO market would come of age, according to financial news site zawya.com.

Last year the total value of new listings was Dh24bn (US$6.5bn) - this year it is a mere Dh4.7bn. Even though last year there were only three new listings in total, one on the Dubai International Financial Exchange, and two on the Dubai Financial Market (DFM), their value was much higher than this year's figure. Some companies were caught by the turmoil in the global markets. Future Pipe Industries Group, manufacturers of fibreglass, plastic, and cement pipes and fittings, cancelled its planned IPO in May, citing "conditions in the equity capital market and recent events in the financial markets". But others were held up by local concerns.

For example, the Abu Dhabi-based Al Qudra Holding postponed its Dh3.7bn offering in March because it wanted to wait for corporate regulations to change - including the restrictions on foreign share ownership. Such rules prevent foreign investors from taking major stakes, so restricting the amount of capital that can be raised. But by the time it became clear that the limit on foreign ownership was not going to be revised this year, the UAE stock markets were falling, making new listings more difficult.

There is still no indication as to when the new company laws will be drafted and passed. Given the preponderance of family-owned conglomerates in the UAE, the success or failure of a domestic IPO market depends on their willingness to come to market. The law has changed in the past few months to allow family firms to list just 30 per cent of their shares, compared to the previous 55 per cent, which put many off since it would mean surrendering control. There will be a time lag before such companies start taking advantage of the rule change.

The next year will be crucial in seeing whether the new legislation has had any effect. Imran Ahmed, managing director of asset management at Mashreq Capital, thinks that the regulations will play a role in edging families towards listings, especially those with regional ambitions. "We are seeing the market move in a certain direction over the last few years," he said. "From being a local UAE company, corporate managements will start to think about regional and global ambitions and so their demand for capital will increase. Some of the benefits of listing come from a financial perspective - if you're a well-run, well-managed business, by going public with a percentage of your stock you will raise the overall value of your business by allowing the market to value your company."

Neven Hendricks, regional managing partner at Deloitte Middle East's financial advisory services, stated that sentiment has been the key factor driving down IPO attempts, and that economic indicators are positive. "The fall in IPOs is because of the uncertain market conditions, no matter which territory you are in," he said. "I believe the cause is market sentiment rather than the fundamentals, because look at the fundamentals of the region - it's awash with liquidity and prices of assets in the region are not unusually inflated, indeed are usually underpriced."

Mr Hendricks added that regional banks would continue to support IPOs because they were not showing the same Western signs of stress over mortgage-backed securities. While other exchanges in the GCC have suffered in attracting new listings, the Saudi Tadawul exchange is the exception. The Tadawul has already hosted more IPOs this year than the DFM has over the whole of the last four years, and has more than 50 more planned over the next two years.

The reason for the Tadawul's success has been primarily because the government has used it as a wealth distribution tool, privatising state-owned companies to allow the general populace to buy profitable stakes. In addition the Tadawul is the biggest market in the region, which means it tends to attract large numbers of investors. It will be further boosted by last week's announcement that foreign investors will now be able to play the market via equity swaps.

Some analysts think it is only a matter of time before the UAE markets show a similar revival. Despite worries, the UAE has nearly 50 IPOs in the pipeline for the next two years, meaning it is "very full", according to Mr Iqbal. The perception remains that IPOs in the UAE are mainly limited to financial services and real estate firms, but the list shows a more diverse offering. They range from Jumbo Electronics to Emirates airline to financial companies such as Gulf Capital and developers including the Dubai Properties Group.

In addition, it still appears possible for a popular IPO to be deluged with demand - the IPO of Drake & Scull, the engineering and construction company, which closed on July 17, was 101 times oversubscribed. Such diamonds in the rough give hope to the rest of the jittery UAE market, anxious to profit from a public listing. [e-mail]