Harnessing shareholder power in Oman

Oman is leading the way when it comes to power and water companies listing on regional stock markets, and other countries are beginning to follow its model. Published in MEED, 13 November 2013

For investors seeking exposure to power and water companies in the region, Oman stands well clear of the field. The most recent company to list was Sembcorp Salalah Power & Water Company, which owns and operates the Salalah independent water and power project (IWPP) in the southwest of the country.

When trading in its shares began on the Muscat Securities Market (MSM) on 8 October it became the seventh listed power and water company in the sultanate. By contrast, other bourses in the region have, at most, one or two listed companies from the sector.

Sembcorp Salalah, co-owned by Singapore’s Sembcorp, Oman Investment Corporation and Bahrain-based Instrata, was in fact the second listing of a utility company on the MSM this year, following the debut in June of Sharqiyah Desalination Company. Sharqiyah operates a desalination plant at Sur and is a joint venture of France’s Veolia and the local National Power & Water Company. Shares in both Sembcorp Salalah and Sharqiyah rose strongly after making their entrance into the market, suggesting a healthy level of appetite among investors.

Listing strategy

All this interest in Oman is largely because of the way it has chosen to run its utilities sector. The government has issued a string of licences for IWPPs, independent power projects (IPPs) and desalination plants under build-own-operate contracts. As part of the terms of these licences, the companies are typically required to sell 35 per cent of their shares to the public.

As well as ensuring a reliable power and water supply, this policy also ensures there is a steady trickle of new utility companies coming to the stock market.

On the other side of the equation, demand is also at a healthy level because of the dividends these companies tend to pay. For example, in its prospectus Sembcorp Salalah said it expected to reward its shareholders with higher dividends than the average for companies listed on the MSM.

“Reaction to the Sembcorp Salalah IPO [initial public offering] was positive,” says one broker in Muscat. “Local pension funds and institutions were the main buyers. The power stocks usually look good in their portfolios. The dividend yield is around 9.5 per cent and that is what they are looking for.”

Oman is the only country in the region to enforce such rules for utility companies, but other governments have adopted similar regulations for other industries. In Iraq, for example, the three mobile network operators are all meant to list their shares on the Iraq Stock Exchange, although they have repeatedly missed their deadlines and, to date, only Asiacell has actually done so. Similarly, in Saudi Arabia, all insurance companies are forced by the regulator to float their shares on the Saudi Stock Exchange (Tadawul).

The reasons for such regulations are political in nature, with governments using the listings as a way to try and redistribute some of their country’s wealth to the broader population.

“A lot of governments in the region are using the equity capital markets as one route by which they can pass wealth down to the public,” says Adnan Fazli, equity capital markets leader at Deloitte & Touche Middle East. “In Oman, the IWPP operators are benefiting from offtake agreements with the government, which make them profitable. The government wants some of that benefit to flow to the general public via the corporates benefiting from such state contracts.”

As a result of Muscat’s stance, there are now almost as many power and water companies listed on the MSM as on all the other stock markets in the region put together. Within the rest of the GCC, Abu Dhabi National Energy Company (Taqa) is listed on the Abu Dhabi Securities Exchange, Saudi Electricity Company (SEC) is on the Tadawul and shares in Qatar Electricity & Water Company (QEWC) are traded on the Qatar Exchange.

Of these Gulf companies, the largest by far is SEC, which had a market capitalisation of about $14.9bn at the end of October. Its size meant it was among the 10 largest listed companies across the whole of the Middle East and North Africa (Mena) region in MEED’s 2013 ranking of the 100 largest listed companies.

The next two largest companies are closely matched in size, with Sembcorp Salalah valued at $4.8bn and QEWC at $4.4bn.

Other markets

Beyond the GCC, there are even fewer listed utility companies. These include Lydec which is quoted on the Bourse de Casablanca in Morocco and runs the water, sewerage and electricity networks around Casablanca, the country’s largest city. Further east, Amman Stock Exchange hosts two utility companies: Jordan Electric Power Company (Jepco) and Irbid District Electricity Company. Across the border from there, shares in the Palestine Electric Company are traded on the Palestine Exchange in Nablus.

There has been some speculation that more companies could be listed before long. In late September, media reports suggested Taqa was planning to list the shares of its wholly owned Moroccan subsidiary, Jorf Lasfar Energy Company, on the Casablanca market. A spokesman for Taqa declined to comment to MEED on what he described as “rumour or speculation”.

If it does go ahead, however, it will be a significant addition to the market. Jorf Lasfar is the largest coal-fired power plant in the Mena region and accounts for about 40 per cent of Morocco’s total electricity supply. It is currently undergoing a 700MW expansion, which will enable it to provide more than 2,000MW of power by April next year.

Whether or not more power and water companies do decide to list will depend as much as anything else on the cost of funding they are facing. Bonds, both conventional and Islamic (sukuk), are currently proving to be a popular option for many corporates in the region, including power and water companies.

In July, the UAE’s Ruwais Power Company, which is 54 per cent owned by Taqa, issued a $825m bond for its Shuweihat 2 power and desalination plant. Taqa’s chief financial officer Stephen Kersley described the bond at the time as having an “attractive coupon of 6 per cent”. He added that the transaction was “the first step in building an active and liquid project bond market in the region”.

Other utilities that have also been getting involved in the market include SEC,which is expected to launch a sukuk for up to SR5bn ($1.3bn) to local investors in the coming months, following a $2bn international sukuk earlier in the year. Dubai Electricity & Water Authority (Dewa) has completed a $1bn five-year sukuk this year and Saudi Arabia’s Power & Water Utility Company for Jubail & Yanbu (Marafiq) issued a SR2.5bn five-year sukuk.

Cost of capital

However, if the bond markets start to become more expensive then companies may be less willing to issue more debt and could instead turn to the equity markets to raise new funding, according to Fazli.

“In the last couple of years, there have been a number of sukuk issuances by regional corporates, mainly as this has been one of the cheapest forms of funding available,” he says. “However if quantitative easing in the US is pulled back and corporate bonds become more expensive to raise, then equity will become more attractive.

“Effectively, it comes down to the overall cost of capital. There are businesses across a number of industries, including the power and water sector, that could potentially list, but the decision will be driven by their attractiveness to investors and the relative cost of capital for such issuers.”

For the moment, the threat of higher bond prices does not seem an immediate problem. In a research note issued in late October, London-based Capital Economics said bond markets across the Mena region had rallied over the previous month. This happened in response to signals from the US Federal Reserve that it will maintain its quantitative easing programme until early next year.

On the other hand, stock market valuations are also riding high, which provides an incentive for businesses to sell their shares to raise money. But there are also some disincentives to listing. Organising a stock market flotation can take a long time in the region, partly because companies are sometimes underprepared when they announce their intention to float. In a recent Deloitte survey of people working in the regional equity capital markets, 90 per cent of respondents said that a typical IPO took more than 12 months to organise. Twenty-three per cent said it took more than two years.

Delays can also happen because some of the elements necessary for a listing are not always well developed in the region, including the book-building process used to secure the best possible price for shares.

Broader uptake

As a result of all this, there is unlikely to be a glut of new power and water listings any time soon, in most countries at least. In Oman, several other companies are still required to list on the MSM. They include Al-Batinah Power Company, which operates the 745MW Sohar 2 plant, and Al-Suwadi Power Company, which has the licence for the 745MW Barka 3 facility.

Local media in Oman have suggested the IPOs of both companies could be launched by mid-2014. In addition, Phoenix Power Company, which is currently building a 2,000MW facility in Sur, is also expected to come to the market at some point.

If power and water operators from other countries are to follow the lead of these companies in the future, it will require certain market conditions. Not least, this would include a broader uptake of the IWPP and IPP models around the region and possibly some reforms to the listing processes to make them more efficient. The evidence from Oman, however, suggests there is no substitute for governments forcing power companies to float their shares.