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| 04 October, 2018

Marka: The 'greenfield' IPO that failed to bear crops

Issam Kassabieh is a senior financial analyst and spokesperson at Menacorp Financial Services. He has worked on establishing the setup of Menacorp’s research department alongside the company’s CEO and CFO, and manages the research team, overseeing all coverage and trading ideas. Issam holds a post-graduate degree in Business Strategy, Leadership & Change from Heriot Watt University in addition to a BBA in Accounting and Finance from Canadian University Dubai.

Website: http://menacorpfinance.com/

A proposed capital raise could stabilise the company's balance sheet, but operational risk remains high

Marka’s IPO in 2014 was unusual for stockmarkets in the United Arab Emirates, as the retailer had few peers, other than retail real estate operator Emaar Malls, but it faced multiple obstacles in its first year of operations, starting with a crash in oil markets which dampened consumer purchasing power.

In the first quarter of 2018, the company reported a 38.8 percent drop in revenues quarter-on-quarter, and an operating loss of 2.55 million UAE dirhams (pre-financing costs). While the operating loss came in 91.7 percent lower than the  30.65m dirham loss of Q1 2017, it achieved this through cost reductions in general and administrative (70 percent) and selling & distribution (52 percent) expenses, is not sustainable and is not expected to produce the desired bottom line results.

With an accumulated loss of 458m dirhams as of March 30th 2018, which is 91.6 percent of the company’s share capital, the company has been required to set up a board meeting, followed by a general assembly to decide on its fate.

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As the results of its board meeting surfaced on October 3, Dubai-based Marka’s board of directors has decided to recommend a capital restructure program to its shareholders during the General Assembly scheduled for November 4. The plan is no different than that of other peers in the market such as Drake and Scull and Arabtec, involving a capital reduction of 450m dirhams to extinguish accumulated losses, followed by a capital increase of 250m dirhams (with an option to offer 150m dirhams to a strategic investor and the other 100m dirhams to existing shareholders for subscription) to bring the company back to life.

Of course, this proposal is subject to the approval of the Securities and Commodities Authority. However, it is still worth mentioning the risks associated with granting the proposal the seal of approval. A ‘greenfield’ IPO (ie. the flotation of a start-up company) is granted access to a financial market based on its business plans and financial forecasts. However, the risk is known to be high as the company filing for the IPO does not have any track record, which is crucial. While Marka’s plans seemed solid initially, despite its expansion plan looking very ambitious (to expand franchises around most of the Gulf), it was indeed met with an unfavorable financial environment pressured by a crash in oil prices, rising interest rates and a real estate bubble bursting in its “home town”.

Following the series of unfavorable events, Marka’s management failed to adapt to the rapidly changing environment and that is what became the weighing factor on the stock. The company burnt into its cash rapidly and changed its strategy by putting up its retail business for sale to focus on its F&B assets, particularly, Reem Al Bawadi – a strategy that shareholders did not benefit from as the company kept spiraling out of control.

Its new announcement to seek further cash from shareholders does not hold any merit, as the company now has a devastating track record and no announced plan that clarifies how it intends to move forward. Marka’s operational profit of 2.8m dirhams for Q2 2018 is not sufficient to paint a bright future, especially when investors can see that finance costs are diluting operational profits - as was seen in Q1 2018. Investors must keep in mind that even though a capital injection can stabilise the balance sheet, perhaps for around two years, the operational risk is still quite high and is portrayed within the firm’s income statement and strategy.

Any opinions expressed here are the author’s own.


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