IPOs in the GCC: Fundamentals support pipelines 

GCC markets celebrated the Dubai government's initiative to support Dubai World and its subsidiary Nakheel. But will the momentum be enough to raise sustainable trust in the shattered stock markets? With dozens of IPOs in the pipeline in the GCC, a healthy portion of optimism could be justified.

The markets' relief has been palpable. On March 25 the Dubai government announced that it would support Dubai World and its real estate development subsidiary Nakheel with $9.5bn. The timing of the announcement was well planned and professionally undertaken. Consequently, the Dubai Financial Market jumped over four per cent on high volumes on the same day. Advances were also posted in Abu Dhabi, Riyadh and Doha.

It is now up to the financial sector to repair confidence in the capital markets. "GCC fundamentals are strong in the GCC to support Initial Public Offerings (IPOs) and Mergers and Acquisitions", Dr Nasser Saidi, Chief Economist at the DIFC Authority tells AMEinfo.com. "After a rather stagnating 2009 with regional growth of 0.7%, the six member states of the GCC are expected to grow by 5.2% (real GDP growth), according to the IMF."

Joseph Schuster, CEO of IPOX Schuster in Chicago, who develop indexes covering the performance of IPOs worldwide, agrees with Dr Saidi: "We currently have a pipeline of around 40 IPOs which may be seeking to go public in the GCC during the course of 2010 and 2011." Higher oil prices and a number of successful stock exchange debuts have raised risk appetite in the Gulf region.

During the first 11 months of 2009 there were 459 IPO deals, down from 740 during the same period in 2008. In the second half of 2009, strong performing secondary markets in the East and West, however, positively affected the primary market climate. Banco Santander Brazil SA, the largest IPO in Brazilian history, raised $7.5bn. In the US, Hyatt Hotels successfully went public. German investors hailed the debut of Kabel Deutschland in mid-March 2010. At the same time, Seoul saw the launch of Korea Life. Seventy per cent of all IPOs last year took place in Asia Pacific.

Regional brands look to list

In the GCC, firms which aim to list during the next 12 to 18months include Aluminium Bahrain, one of the world's largest aluminium smelters, Damac Holdings, the diversified conglomerate, and Unicorn Investment Bank, the Bahrain-based financial institution.

Although HH Sheikh Ahmed Bin Saeed Al-Maktoum in February denied detailed plans for an IPO of Dubai's Emirates Airline, which he chairs, he added that "one day" he might consider such a move. Qatar Airways plans to list shares "between 2012 and 2014", according to the carrier's CEO Akbar al-Baker.

A key economic deficit in the Middle East and North Africa (Mena) is the lack of financing alternatives. According to the IMF, bank assets in the Mena region have a staggering share of 85% of all asset classes compared to a third globally. Stock exchanges worldwide comprise a quarter compared to only 12% in Mena. The imbalance in the debt market is even more skewed: Only 3% of all Mena assets are debt securities, compared to 42% globally.

Attracting FDI to the GCC

According to Schuster, around $350bn has been created annually through IPO and spin-off activity over the past 10 years. A sound stock market culture which attracts more firms to go public can help in diversifying the sources of finance.

"Diversification is not only crucial in attracting foreign direct investment, but also an effective buffer against the impact of a recession", Dr Saidi explains. FDI will only flow, however, if GCC firms act in a more transparent way than they have done so far. Dr Saidi helps companies to improve their corporate governance with seminars and consultant sessions held by the DIFC-based Institute for Corporate Governance Hawkamah, which he chairs.

Listed firms need an active communication policy. This includes an informative webpage as well as regular media releases on management activity. These qualities might sound self-evident, but according to Dr Saidi: "19% of GCC companies have no website at all, while only 2% hold analyst meetings or conference calls."

Careful initial IPO strategies

Nevertheless, Schuster warns of a sort of "IPO mania". Listings can only add value in the long term if they are well planned and designed by the right banks. "We see interesting investment opportunities in GCC IPOs subject to attractive initial valuations. Judging from the experience of Saudi-based insurers which are priced at nominal values and experience huge initial gains, initially overhyped IPOs have rarely proven a successful long-run IPO investment strategy."

Schuster points at last year's listings at Riyadh's Tadawul exchange of AXA Cooperative Insurance Arabia's ACE Arabia Cooperative Insurance. Both insurers jumped 267% and 185% respectively on their first trading day. Since then, both values have been underperforming against their sector benchmark index, the Tadawul insurance Index TINSI.

But although Vodafone Qatar, which launched a $1bn IPO at the Qatar Exchange in May 2009, has been underperforming as well, the share of the Newbury's telecom subsidiary in Qatar is an example how IPOs in the GCC can raise global awareness in the finance industry. During Q1 2010 Vodafone Qatar was added to the Dow Jones Islamic Market (DJIM) GCC Index. This index measures the performance of GCC firms operating in line with Islamic Shariah Law. Since Vodafone Qatar does not earn money with pork, weapons, pornography or interest-bearing financial products, the firm is considered to be Shariah-compliant.

Fund managers use indexes as a benchmark for their portfolio performance. Globally, there are 555 managed Islamic funds worth $35bn. They offer investment opportunities for institutional and private individuals, bringing halal GCC firms "from Wall Street to Main Street".

Consolidation of exchanges can also help to increase liquidity and deepen market depth. Dubai's international exchange Nasdaq Dubai currently is currently in line to merge with the local Dubai Financial Market (DFM).

Gerard Al Fil

Source: www.ameinfo.com