More companies will have to take the plunge and float if markets are to be put back on an even keel.
You've got to have more IPOs." That's investment guru Mark Mobius' simple answer to what local markets should do to pull themselves out of the doldrums.
Speaking in Dubai last month at the 2006 Funds Summit, Mobius, one of the world's best-known emerging markets fund managers, acknowledged that there have been several stock market listings this year in the Middle East, but said there simply aren't enough initial public offerings (IPOs) coming in to keep prices realistic. "There was too much money chasing too few stocks. Even with the corrections that stock markets have suffered this year, share prices in the region remain high," said Mobius, who is the managing director of Franklin Templeton Asset Management in Singapore.
Mobius was putting his weight behind the idea of more IPOs in the Gulf region despite the bearish regional stock markets. The fall in regional equity markets hasn't prevented IPOs from doing well. IPOs were expected to raise more than $8 billion in 2006 - and had already raised $6.2 billion in the first nine months of the year, up 45 percent on the same period in 2005. According to private equity firm Gulf Capital, IPOs in the region were oversubscribed an average of 98 times in the first nine months of 2006. Those that had listed by end-September had appreciated an average of 123 percent.
The crisis of confidence during most of 2006 dragged four of the seven bourses in the GCC to near two-year lows. The markets tumbled after a liquidity-driven rally stretched valuations and sparked a savage sell-off. Dubai was down 65 percent, Abu Dhabi by 41 percent and Saudi Arabia, the biggest in the region, slid 48 percent. Kuwait's market also slid as investors, shaken by a disclosure probe, pulled the index down. All this happened against a background of robust economic performance and mostly healthy third quarter corporate results.
Demand for shares in IPOs in the region exceeded supply by 47 times on average during the first nine months of 2006, compared with a 2005 average of 73. The schedule continues to be heavy and most IPOs continue to be oversubscribed because market participants see quicker profit-making opportunities in the primary market. Emaar Economic City's IPO was oversubscribed by 2.8 times, as 10 million Saudis subscribed for 7.18 billion Saudi riyals ($1.95 billion) in shares. It was clear that the appetite for IPOs was there and it was expected that new issues would be oversubscribed, with a resultant pressure on the secondary market.
Ashish Dave, the head of private equity of KPMG Middle East and South Asia, said the firm's survey across Oman and UAE had revealed that there is a changing perception toward IPOs. "We found that four of every five companies would change their approach to the IPO process if they had to go through an IPO again. An IPO is time consuming for key executives, with 12 percent of CEOs and 24 percent of CFOs saying that they had to spend over half of their time focusing on the IPO," Dave said. The KPMG study also found that getting into shape for an IPO and meeting regulatory requirements often demanded that a company adopt new financial, legal, governance and business processes. "More than a third of companies took longer than anticipated to complete the IPO. However, a considerable number of companies saw an IPO bringing benefits in terms of improved efficiency and additional startup capital," he said.
Imad Ghandour, the head of research and strategy of Gulf Capital, said depressed regional share markets might not affect the number of companies floating IPOs in the future. "If the market remains at the current level, what you will probably see is a downward revision in IPO valuations. But there is a large number of companies standing in the queue [to float IPOs] and there will be a sufficient number willing to come to the market," he said. Gulf Capital estimates that about 134 companies in the region will float IPOs over the next three years, of which 57 have already appointed issue managers.
But the volatile regional equity markets ensured that some IPOs were cancelled and the announcement of others were delayed. Oger Telecom which is controlled by Lebanon's Hariri family cancelled its $1.25 billion IPO hours before its opening after announcing plans earlier to list on the Dubai International Financial Exchange and London. Earlier this year, a number of Saudi IPOs were pulled out midway through the process or were delayed. Several leading investment bankers said they expected the fall in regional share markets to slow the launch of new IPOs unless issuers were prepared to accept highly reduced valuations.
Banks in the GCC have profited from the strong oil prices of the last few years and resultant liquidity. The top 50 GCC banks' profits increased by 64 percent in 2005, according to the National Bank of Kuwait September economic research report. "GCC banks beefed up their capital resources by 41 percent in 2005 while they saw a rapid expansion in credit on the back of abundant liquidity and the inflows were reflected in growing central bank foreign assets," the report said. Bank performance also benefited from faster credit growth, rising margins, higher fees including brokerage, underwriting and advisory services.
The report says credit growth has risen faster than the economy with the GCC average loan/GDP ratio rising from 31 percent in 2000 to 41 percent in 2005, fueling asset pricing inflation. Personal facilities were the fastest growing, with average growth across the GCC hitting 49 percent and their share of total loans rising from 26 percent in 2000 to 42 percent in 2005. "Qatar, the UAE and Saudi Arabia saw the fastest growth as did their equity markets," the report said.
For Saudi markets, 2006 has been the single worst year in terms of market performance. Losses last year wiped out all the gains achieved by the market in 2005. The behavior of the market by virtue of being the biggest in the GCC and accounting for more than a third of its market capitalization affected markets across the region.
Still, Saudi Arabia remains the most active IPO market, raising more than $2.3 billion in the first nine months of 2006. The UAE and Qatar markets raised $1.4 billion and $1.3 billion respectively, while the Bahraini IPO market was uncharacteristically active, with $1 billion raised compared with only $6 million in 2005
But the bearishness in the markets that set in in October accelerated through November, taking all six GCC markets markedly lower. With losses of 4 percent and 5 percent respectively, the Bahraini and Omani bourses held up relatively well, while the Saudi, the UAE and Qatar markets suffered huge losses. The performance of the North African stock markets was much better, with Morocco gaining about 3 percent, Tunisia was slightly higher and Egypt was only 1 percent lower over November. The Jordanian market seemed to be affected by the negative sentiment in the GCC and ended the month close to 9 percent lower.By Ehtesham Shahid
© Arabies Trends 2007
