By Massoud A. Derhally
Gulf stock markets have seen a dearth of IPOs since the global downturn began. But one bumper listing — in the unlikely destination of Iraq — has the potential to perk up the market
Equity markets are still far from regaining the momentum that prevailed prior to the collapse of Lehman Brothers and the onset of the global financial crisis. In the Arab world, however, and in the Gulf in particular, there is some sanguinity that the inertia that has characterised markets for the past four years may be wearing off from an increase in initial public offerings in the region.
Globally the value of 795 IPOs reached $123.5bn last year, 27 percent lower than 2011 and the lowest since 2009, according to Dealogic. Facebook’s $16bn deal was 2012’s largest IPO and accounted for thirteen percent of volume. In the Middle East, IPOs raised about $2bn in 2012, more than double that of 2011 where listings recorded $843.9m, according to a survey by Ernst & Young. In the fourth quarter of last year, three listings raised $339.8m, compared with $226.1m in the same period in 2011.
“Drawing comparisons over the last two years we have noticed a steady climb in the amount of funds being raised by IPOs possibly hinting that markets are inching towards better results,” says Phil Gandier, Ernst & Young’s MENA Head of Transaction Advisory Services.
Saudi Arabia, which has the largest economy in the Middle East, led the country standings in 2012, raising $1.4bn from seven offerings, followed by the UAE with $277m, and Oman with $264.4m. In North Africa, Morocco and Tunisia were the only countries that also had listings.
Globally during the fourth quarter, US markets raised $7.3bn (29 IPOs), narrowing the lead on the Asian markets, which raised $8.8bn (59 IPOs). European exchanges also saw something of a return to form, with deal value reaching $7bn (20 IPOs). But overall the number of deals fell 46 percent from 255 deals in the final quarter of 2011 to 136 deals.
“The outlook for 2013 will be to a great extent influenced by investor sentiments, against the backdrop of regional developments. We are confident that Saudi Arabia and the UAE will continue to be the regional hubs of IPO activity for investors in 2013,” Gandier says.
It’s too early to gauge how the markets in Saudi and the UAE will pan out this year or foretell the quantity of share listings and receptiveness of investors. In December, Al Habtoor Group, controlled by billionaire Khalaf Al Habtoor, a scion of one of Dubai’s largest merchant family-run businesses unexpectedly postponed a planned share sale scheduled for this year. That would have been the largest deal to hit the market in Dubai, which hasn’t seen any listings since mid-2008 when Drake & Scull went public.
Another family-run firm, Daman Investments, also pulled the plug on recent plans to list. Daman, established in 1998, was initially planning to hold its IPO before the end of 2012. That will not happen anytime soon — the Dubai Financial Market is down more than 70 percent from its peak in 2008.
“I don’t think the market environment is conducive, liquidity is not there, the appetite is not there and investor sentiment is not there generally,” Daman CEO Shehab Gargash told Arabian Business last year. “We are on track and are about to begin phase two of our capital raise which will be at a premium over phase one,” he said.
Instead, Gargash says that Daman is more likely to list around 2015. Still that’s unlikely to stop other companies in the UAE from going public.
This month, however, Asiacell Communications PJSC, Iraq’s second largest mobile operator, in which Qatar Telecom (QTel) has a 54 percent stake, aims to raise about $1.3bn from an initial public offering on the Iraq Stock Exchange. The listing on the Baghdad bourse is one of three required listings by mobile companies in the country. Asiacell competes with Zain Iraq and Korek.
“We’re trailblazing here; we’re opening the wild wild west here for all the other operators and other companies,” says Shwan Ibrahim Taha of Baghdad-based Rabee Securities, the distributor and selling agent. “When this listing is successful I think everybody else would want to list. We’re not doing this because we’re looking at the other two operators, we’re doing this to prove to all the other businesses in Iraq, the large businesses that are private, that the stock market is a good way to gather capital.”
Investor sentiment in Iraq is still not on a par with other regional markets and the country’s financial system doesn’t have the depth or maturity of neighbouring countries. The country is moving from a small base after having gone through an era of sanctions, the war in 2003 and unrest since the fall of Saddam Hussein’s regime. And though the economy is set to grow 14.7 percent this year from about 10.2 percent in 2012, according to International Monetary Fund estimates, the Iraq Stock Exchange has about 85 listed companies largely weighted by banks. All mobile operators in the country in fact missed an August 2011 deadline to list, saying the bourse was not prepared at the time for their listing.
“In Iraq today we don’t have an equity culture,” says Taha. “It’s not like Saudi Arabia or the UAE, so we have to build it. So far we haven’t seen a real company coming on the market. It’s basically dominated by banks which a normal investor doesn’t have an affiliation with. Mobile operations is quite different, it’s something they hold in their hand, something that they pay for every day.”
Asiacell’s subscription period for 67.503 billion shares, representing 25 percent of the operator’s share capital, started 3 January and runs through 2 February with shares being offered at a price of a least IQD22 (1.8 US cents) per share. The share listing will be the country’s first major IPO since the fall of Saddam Hussein’s regime in 2003 after the US-led invasion of the country and the region’s largest since 2008 when trading commences 3 February.
“It’s a good thing, it’s an IPO that will raise enough interest but there’s still the geopolitical risk of Iraq,” Haissam Arabi, the chief executive at Gulfmena Investments in Dubai. “It’s not like an IPO of a MENA-based or GCC-based entity. It will have interest but it's not going to translate into all types of investors. It won’t be muted, it will generate interest but not a whole lot.”
“I think there is always demand for profitable growing companies with strong balance sheets. Telecom stocks are usually good yield stocks,” says Jawad Abbassi, founder and general manager of Arab Advisers Group. “Given a suitable valuation, there will be good demand by local and regional investors.”
Asiacell, which holds a fifteen-year operating licence issued by the Communications and Media Commission of Iraq in 2007, and which became the first mobile provider in Iraq to achieve nationwide coverage, serving all eighteen of Iraq’s governorates, says it has 9.9 million subscribers and is confident Iraq’s mobile industry has much more room to expand.
The potential could be great for a country which had a non-existent mobile market in 2003 and in 2011 had a penetration rate of about 77 percent and an estimate of more than 80 percent last year according to Abbassi.
Iraq had over 27.36 million lines by the end of the third quarter of 2012. Asiacell had a 36 percent market share, according to Arab Advisors. The company has an EBITDA (earnings before interest, taxes, depreciation, and amortisation) margin of 45 percent with revenues in the first twelve months of 2012 amounting to $1.3bn.
“The market is strong, profitable with healthy operators,” says Abbassi. “The main issue for cellular operators is to face the eventual stalling of growth in voice subscribers and the pressure on classical voice and SMS and roaming revenues stemming from competition as well as increasing adoption of VoIP and apps on smartphones by end users. Operators should certainly allocate major focus on broadband internet and also their strategy vis-a-vis content, ecommerce and similar value added ventures.”
So far Abu Dhabi financial services company Invest AD has said Asiacell will be the biggest holding in its portfolio. Some emerging market funds that were not able to invest in Iraq before because companies were not big enough are now considering Asiacell, says Taha.
“We are still facing a lot of difficulty because it’s Iraq but it’s also one of the most exciting growth stories economically in the world,” says Taha. “The interest is building up quite actively. We are being called on a daily basis by institutions in the Gulf to invest in this.”
Unfortunately while prospects for a better 2013 are there, investors are still coming out of 2012 and the risk may still be denting people’s appetite and confidence.
“People were still driven by yields and chasing after yields that’s why fixed income remains the ideal asset class to date in the region,” says Arabi.
“We still have issues, you have mostly the geopolitical risk, the Arab Spring, a lot of things will continue to play on investors' minds,” he adds.
“The IPO market and primary market should pick up especially that the overall mood towards equity markets is going to improve in 2013. It will be selective basically in places like Saudi and more stable economies.”