Where have all the IPOs gone?

Published in MEED, 4 October 2018

It has not been a good year for stock market listings in the Middle East. In the first half of 2018, there were only 13 flotations, raising a total of $1.3bn in capital, according to consultancy firm EY, and there has not been much activity since then. Most of the market debuts were by real estate investment trusts (reits), and if these are excluded, only five companies came to market, raising a total of $149m.

It was not meant to be like this. Towards the end of last year, analysts were predicting a bumper year for initial public offerings (IPOs). The latter months of 2017 saw a mini surge in listings, with nine IPOs in the final quarter raising $2.6bn; the star attractions being Emaar Development, which raised $1.3bn, and Adnoc Distribution with $851m.

It was the largest capital-raising in a quarter since 2014 and raised expectations of a boom in activity. Optimists could point to government plans to privatise more state-owned companies, not least in the oil sector. In addition, the trend of more regional bourses being promoted to emerging market status by indexing company MSCI was expected to attract international investors and incentivise local firms to list their shares to raise capital.

However, such factors have not been enough to offset other difficulties. Geopolitical trends have not helped, with conflicts in Syria and Yemen and diplomatic tensions between GCC states making investors wary. Government austerity programmes have also contributed to a soft macroeconomic environment.

There are other, market-specific trends at play, too. Steve Drake, Middle East capital markets leader at consultancy firm PwC, says one issue that has contributed to the lack of activity in Saudi Arabia has been the status of the Saudi Aramco IPO. The government initially pencilled in a listing some time in 2018, but this has been repeatedly delayed.

Other companies thinking of listing are concerned investors will not buy new shares as they wait to invest in the oil giant. They “want to know what is happening with Aramco first”, Drake explains. “There has not been a slowdown in interest or in companies preparing for a listing, but in terms of [execution].”

In the other main market in the region, other factors are at play. “In the UAE there has been a number of companies interested but who have not necessarily actioned [their IPOs] at this point,” adds Drake. This is due to “valuation expectations, coupled with a weakening in the underlying economy, particularly in Dubai”, he says.

What activity there is tends to be concentrated in niche areas. Within the GCC, the most active area has been reits. The largest are Mefic Reit, which raised $237.5m on the Saudi Stock Exchange (Tadawul) in June, and the Sedco Capital Reit, which was the largest IPO in the first quarter, raising $173m in February.

Beyond that, there have been two relatively small financial services IPOs in Egypt, with BPE Holding For Financial Investments raising $26.2m in March and CI Capital Holding raising $57.2m the following month. The only other listings in the first half were Arabia Falcon Insurance on the Muscat Securities Market and real estate firm Immorente Invest on the Casablanca bourse, both in April.

In addition, the Dubai Financial Market (DFM) attracted secondary listings for Naeem Holding for Investments, which has a main listing on the Egyptian Exchange, and Bahrain-listed Ithmar Bank in the first quarter. There have been some cross-border listings, too. Dubai-based Shelf Drilling listed on the Oslo Stock Exchange in June. Another Dubai firm, RA International Group, which offers services to firms in remote areas of Africa, made its debut on London’s junior Alternative Investment Market the same month.

There are plenty of other deals in the pipeline. At least three GCC stock market operators – are preparing to list. In addition, firms such as Emirates Global Aluminium and Dubai-based real estate developer Nakheel are also lining up, as are several Omani companies, including Oman Airports Management Company and Oman Oil Company.

An important factor for many is the need to raise more capital. A recent survey of Saudi companies by EY found a significant number are looking to equity markets to raise finance, with 73 per cent saying they are considering an IPO. “Lack of cash in the balance sheet is a significant challenge to growth, not just in Saudi Arabia, but across the world,” says Abdulrahman Moulay Albizioui, transaction advisory services leader for Saudi Arabia at EY.

However, observers admit many of these deals could end up being delayed. Mohammad al-Rasheed, a partner at law firm Baker & McKenzie Habib al-Mulla in Saudi Arabia, said: “The IPO pipeline includes a number of transactions that aim to hit the market later this year, although it is likely that some of these transactions will spill into Q1 2019.”

The uncertainty in the IPO market has not been helped by the mixed performance of the stock markets themselves. Some, including the Boursa de Tunis and the Tadawul, posted healthy gains in the first half of the year, but many others lost ground, including the Casablanca Stock Exchange and the DFM.

The downturn in regional IPO activity is mirrored in other parts of the world. Globally, the number of new listings in the first half of the year was down 19 per cent on last year, according to Baker & McKenzie. The value of listings also fell 15 per cent to $90bn.

Few expect the situation in the Middle East to change soon. While privatisations remain on the agenda – including for the Saudi and Egyptian authorities – it will take time for companies to adequately prepare themselves for the close scrutiny of equity markets. And while finance ministries in the Gulf are starting to loosen the shackles of austerity, that will take time to feed into faster economic activity and greater investor confidence.

“We see – and deal with – entities that are interested and are starting to prepare themselves, but I do not think we are going to see many actual offerings this year,” says Drake.