Public offerings: How strong is the regional outlook really for new listings?

by  — 4 January 2015

Throughout 2014, equity research analysts pointed out that, compared with 2013, as an asset and investment class, equity (both primary listings and secondary trading) had picked up, both in terms of volume and numbers in the Middle East and North Africa (MENA) region. As per the latest data issued by Thomson Reuters, equity-related issuance during [...]

Throughout 2014, equity research analysts pointed out that, compared with 2013, as an asset and investment class, equity (both primary listings and secondary trading) had picked up, both in terms of volume and numbers in the Middle East and North Africa (MENA) region. As per the latest data issued by Thomson Reuters, equity-related issuance during the first nine months of 2014 totalled USD5.1 billion (QAR18.6 billion), a 43 percent increase in activity from the same period in 2013 amounting to USD3.6 billion (QAR13.1 billion). Experts tell The Edge that a comparable momentum can be expected for the first quarter of 2015, though volumes cannot be predicted at this stage. 

In July 2014, EY had said in their MENA IPO Update: Q2 2014 that Middle East and North Africa (MENA) initial public offering (IPO) proceeds had seen a jump of 129 percent in the second quarter of 2014. In Q2 2014, there were 11 IPOs raising USD1.1 billion (QAR4 billion), a rise of 22 percent compared to the same period in 2013 by deal numbers.

According to EY, there were a total of 16 deals raising USD2.4 billion (QAR8.74 billion) in the first six months of the year, an increase of 14 percent for both volume and proceeds compared with the same period in 2013 and the highest amount of capital raised in the first half since 2008.

Gulf Cooperation Council (GCC) IPOs represented 90 percent of all MENA IPOs in the first half of the year, with 10 GCC IPOs raising USD2.26 billion (QAR8.23 billion). Saudi Arabia led the GCC activity in the first half of the year with four IPOs, followed by the United Arab Emirates (UAE) with three, Oman with two and Qatar with one.

In late October, Thomson Reuters, in their quarterly investment banking analysis for the Middle East region, reported that Middle Eastern equity and equity-related issuance during the first nine months of 2014 totalled USD5.1 billion (QAR18.6 billion), a 43 percent increase in activity from the same period in 2013 amounting to USD3.6 billion (QAR13.1 billion).

Equity capital markets underwriting fees totalled USD134.5 million (QAR489.6 billion), up 183 percent from the same period last year, which reached USD47.5 million (QAR172.9 billion).

Given these trends in the regional capital markets, The Edge spoke to experts on the IPO climate for H2 2014. Until mid-October 2014, USD3.7 billion (QAR13.47 billion) was raised by GCC-based companies, across a number of sectors such as real estate, petrochemical, marine services, e-commerce, cement, travel services and power, among others.

Commenting on the prospects of IPOs in the GCC in H2 2014, Sanjay Bhatia, managing director of Alpen Capital Investment Bank (Qatar) LLC, says that the GCC region dominates the MENA IPO market. Bhatia continues, “The largest IPO so far in 2014 was Emaar Malls, which listed on the Dubai Financial Market and raised USD1.57 billion (QAR5.71 billion). The IPO was oversubscribed 30 times. Another large listing was Mesaieed Petrochemical Holding Company (MPHC) on the Qatar Stock Exchange (QSE), which raised USD887 million (QAR3.23 billion) and was oversubscribed five times.”

In terms of number of IPOs, the UAE and Saudi Arabia each had four listings, with USD2.1 billion (QAR7.6 billion) and USD500 million (QAR1.8 billion) raised, respectively, says Bhatia. “Stock markets which are expected to experience high activity levels in the last quarter of 2014 are Saudi Arabia and the UAE,” according to Bhatia, a sentiment Steven Drake, PwC’s Capital Markets partner, agrees with. Drake mentions that the signs are that the Saudi Arabia market will continue to be strong, though it was relatively quiet in H1 of 2014, mostly because a number of companies that were in the listing process had still not received regulatory clearance. “The UAE market is also strong with a number of prospective IPOs slated for H2, though most likely many of these will spill over to Q1 of 2015,” says Drake.

In the opinion of Abdulaziz Al Emadi, director of the listing department at QSE, regional capital raising is still coming off a low base and therefore a small number of large deals can distort the picture. “However,” Al Emadi adds, “the GCC has clearly seen an increase in activity which may continue and is likely to account for a significant portion of overall MENA activity.”

“The UAE currently look the most promising for IPO activity in the GCC during the remainder of 2014, with Qatar and Saudi Arabia following closely behind. All three, however, are driven by different dynamics,” says Michael Katounas, deputy CEO and head of investment banking at QInvest.

“The UAE,” according to Katounas, “banks on Dubai, which benefits from significant local and regional demand as well as international liquidity. This drives companies with bigger market capitalisations to seek a public listing in the UAE.”

In Saudi, the fundamentals are very attractive. It is a bigger economy, with encouraging growth prospects. However, the demand will be predominantly from local investors rather than international, where there will only be marginal interest, says Katounas.

Commenting on Qatar, Katounas says, “We see a healthy supply of companies looking to list and there is significant investor demand to support these listings. While historically the procedural hurdles have made a listing in Qatar more difficult, there are a number of initiatives currently underway which we believe, once fully introduced, will accelerate the Qatari IPO process.”

H2 prognosis

Q2 of 2014 has seen more successful IPOs in the GCC, compared to Q1. What does it portend for H2 IPOs, in terms of volume?

Bhatia of Alpen Capital Investment Bank (Qatar) LLC feels that successful listings during the first nine months of 2014 have encouraged other companies to refresh previous IPO plans, and other companies are considering this fund raising route as well. He continues, “As a result, many IPOs are now being planned during the remaining months of 2014. The bigger ones expected by the end of this year include National Commercial Bank (Saudi Arabia), Saudi Airlines Cargo (Saudi Arabia), Gulf Capital (UAE) and Amanat Holdings (UAE).”

“There would appear to be a regional pipeline of potential IPOs that exceeds what we have seen to date. That said, provided the equity markets continue to perform well, then the IPO window should remain open.  The head winds we are seeing in other markets and the continuing economic backdrop of slower growth from some key countries and potential interest rate rises need careful monitoring for those seeking to list,” says Declan Hayes, managing director, transaction services, Deloitte.

The GCC IPO activity is expected to continue to rise in H2 of 2014, with market valuations returning to somewhere near pre-crisis levels, according to Phil Gandier, MENA transaction advisory services leader, EY.

Gandier says that Q3 2014 had only one IPO, with the third quarter historically being the slowest of the year. “However,” he continues, “activity is expected to pick up in Q4. Many companies from the MENA region have announced plans for going public by the end of the year, with companies in the financial services and real estate sectors dominating the pipeline.”

In the opinion of Al Emadi of QSE, it is widely acknowledged that improved conditions in the underlying equity markets are beneficial for IPOs.  “Higher stock prices in general allow for more favourable pricing from owners, and greater liquidity encourages investor participation.  It is also the case that launching an IPO requires a ‘window’ which can be over a month long to take account of the subscription period and the immediate aftermarket, and so all other things being equal, the currently improved market conditions are supportive of more IPOs,” says Al Emadi.     

Stock exchange upgrades

Last June, Morgan Stanley Composite Index (MSCI) upgraded the Qatar and UAE exchanges to ‘Emerging Market’ status, which was followed by the S&P Dow Jones upgrade for QSE in September 2014. Do these mean better prospects for IPOs in these two markets?

Bhatia of Alpen Capital says that this is expected to improve market liquidity and position the exchanges for long-term investments. “In addition,” mentions Bhatia, “the Saudi stock exchange is in the process of formulating regulations for international investors to invest, which is expected to be finalised by early 2015. These measures are expected to draw fresh liquidity to the region.”

Hayes of Deloitte is of the opinion that these upgrades ensure that large international funds now have to consider investing in regional markets, adding, “This potential liquidity supply means in theory there should be a bigger pool of investors to invest in IPOs.”

“The MSCI upgrade of the UAE and Qatar to the emerging markets status will go a long way toward changing investors’ perceptions that regional markets are weakly regulated and have poor disclosure,” says Gandier of EY. He adds that passive funds which track emerging markets will now need to change their portfolio allocations to include the UAE and Qatar, which is expected improve liquidity in these markets.

Katounas of QInvest agrees saying that the upgrades make both countries’ equities increasingly relevant and attractive to international investors, and a core component of global asset allocation. He specifies that the upgrades should have a positive impact on the prospects for IPOs in both Qatar and the UAE as it will increase liquidity, which will be beneficial across both markets. 

Debt and private equity

In late October, Thomson Reuters, in their quarterly investment banking analysis for the Middle East region, mentioned that Middle Eastern debt issuance reached USD6.3 billion (QAR22.9 billion) during the third quarter of 2014, down 68 percent from the record-breaking second quarter total of USD19.7 billion (QAR71.71 billion). Boosted by the strong second quarter, bonds issued so far during 2014 increased five percent from the same period last year, to USD32.8 billion (QAR119.4 billion).

What do these figures reflect, in the experts’ views? If IPOs do well in this region, what impact will that have on debt or private equity as capital raising mechanisms?

Bhatia feels that the success of IPOs in the region will positively influence debt and private equity transactions, and will increase overall financial activity. For IPOs where the end-use of funds raised is to enhance growth, equity funds raised is likely to be paired with debt in order to optimally structure a project’s capital structure. “Further,” in Bhatia’s opinion, “IPOs provide a viable exit option for private equity investors to consider and provide the required comfort for them to realise anticipated returns.”

The impact will depend on various factors, says Gandier of EY, since not all companies are suitable for IPO, which means that they would need to look at other means to raise capital. He explains, “Companies that don’t want to dilute their shareholdings will look at debt to raise capital to maintain control. With sufficient levels of liquidity in the market to raise capital through IPO, private equity or debt, positive competitive tension could help to raise sentiment in the market.”

Both Gandier and Steven Drake PwC’s Capital Markets partner agree that  private equity firms can also consider using IPOs as an exit route for their portfolio, which has already been happening in other markets internationally. Al Emadi of QSE says, “The debt and equity capital markets in the region remain ‘young’ in relevant terms.  However, confidence plays a major part in the capital markets and that is true both for issuers and investors.  Landmark IPOs, for example MPHC in Qatar, will no doubt act as catalysts for future IPOs.” 

What to expect by end -2014

End of the year usually sees heightened activity in the regional capital markets and if plans are anything to rely on, experts agree that the month of December 2014 also represents the latest date by which corporates expect to publicly list.

Gandier of EY says that the growing number of planned IPOs indicates that investor confidence is on the rise.  He adds, “The improved economy and regulatory initiatives are expected to bring liquidity to the market. Government spending on infrastructure and diversification of oil-based economies have created more opportunities in the private sector. These continued developments will encourage more companies to raise capital from the market.”

For Al Emadi of QSE, IPO activity is always volatile given the long lead times involved and the need for consistent market conditions when IPOs are being distributed.  He says that a number of countries have talked publicly about a pipeline for the remainder of 2014 and market participants in particular will be keen to close deals before the year-end if at all possible.

As contributing factors, Al Emadi cites improved liquidity and generally strong share performances, which will help GCC issuers and bankers to be pushing to bring companies to the capital market if the necessary preparation and approvals can be secured.

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