Dubai IPOs Signal Recovery But Market Wants Bigger Listings

A slew of IPO plans in Dubai shows the stock market is finally regaining its role as a fund-raising source for companies. But big new listings – the kind that could stimulate turnover and attract fresh foreign money – are still some distance away.

Over the past several weeks, at least three relatively small companies have been laying plans for initial public offers of shares on Nasdaq Dubai, which could start as soon as this month.

That is a sign that the wounds of the global financial crisis, and Dubai’s real estate crash of 2009-2010, have largely healed. The most recent listing on either of Dubai’s two stock markets occurred in early 2009, when construction firm Drake & Scull listed.

With real estate prices now recovering strongly and the main Dubai stock index up 74 per cent year-to-date – though still 55 per cent below its 2008 peak – the emirate can once again absorb supplies of new equity.

Listings of large companies, however – including some of Dubai’s state-linked giants – would be needed to deepen and diversify the market substantially. For this to happen, authorities may have to revise regulations and make a political decision to cut the state’s stake in some of its prize assets.

“We’re seeing a number of SME (small and medium-sized) companies seeking a listing in the UAE given the improvement in investor sentiment in the region in general, and the UAE in particular,” said Tamer Bazzari, chief executive at Genero Capital, a United Arab Emirates-based investment advisory firm.

“Bringing these companies to the local markets, which have been in a lull for the last four years, will encourage other companies to tap into the IPO market as a source of financing and create an exit platform for family groups and private equity firms.”

But he added, “Trading in SME companies might be limited given their size – hence the need for larger companies to go public and boost the liquidity.”

NASDAQ DUBAI

Bank of London and The Middle East (BLME), Britain’s largest stand-alone Islamic bank, said last month that it planned to seek a listing on Nasdaq Dubai, offering shares worth $503 million.

Just Falafel, a United Arab Emirates-based franchise restaurant offering the traditional Arab food, has hired an adviser to help arrange an IPO on Nasdaq Dubai as soon as October, sources said.

And Emirates REIT, the UAE’s first real estate investment trust, plans to sell shares in an IPO on Nasdaq Dubai before the end of this year, people aware of the plan said.

BLME plans its listing as Dubai makes a push to develop as an Islamic financial centre, while Emirates REIT is involved in Dubai’s booming property market. But in some ways Just Falafel may be the most exciting listing for investors, because it is a play on the region’s consumer boom.

“The IPOs that will help the market the most will not be from real estate and banking – because most people are already invested in those and are looking at other exposure like domestic consumption and companies which leverage on Dubai’s tourism boost,” said Amer Khan, Dubai-based fund manager at Shuaa Asset Management.

With the combined capitalisation of Nasdaq Dubai and the bigger Dubai Financial Market (DFM) at about $80 billion, and Dubai’s trading turnover back up to 2010 levels, there is no doubt that the market can absorb the fresh equity comfortably.

“There are many reasons contributing to the increased interest in IPOs,” said Yasser Geissah, head of equity capital markets at National Bank of Abu Dhabi.

He cited catalysts such as increased liquidity on UAE and regional exchanges, higher profits and dividends at UAE corporations, and the decision of index compiler MSCI to upgrade the UAE to emerging market status next June, which is expected to attract more foreign funds.

LISTINGS

All of the listings planned so far are of relatively small companies, however; bigger companies are still steering clear of the UAE.

Dubai’s DAMAC Properties, one of the region’s largest private property developers, has hired two international investment banks to help it arrange an IPO in London.

Abu Dhabi-based firms have recently chosen to float abroad rather than in their domestic market. Al Noor Hospitals listed in London in June with a valuation of $1 billion; its rival NMC Healthcare listed in London last year and its share price has risen 55 per cent since then.

“UAE markets missed two great health care companies which would have given the market great diversity,” said Fadi Al Said, head of investments at ING Investment Management.

One deterrent to the listings of big companies on DFM is the regulatory framework, fund managers say.

The rules require all IPOs on DFM to be priced at a par value of Dhs1 per share, limiting owners’ options in structuring the offers. Also, DFM requires IPOs to offer at least 55 per cent of a company.

Nasdaq Dubai in some ways has more flexible IPO rules and sets a minimum offer requirement of 25 per cent, but its trading turnover is smaller than DFM’s.

“It’s about time IPO regulations change in the UAE, before this expected wave,” said ING’s Al Said.

The UAE regulator, the Securities and Commodities Authority, referred questions about its IPO policy to its website, which says the SCA is working “to improve the efficiency of UAE capital markets through the development of the necessary legislations, the enhancement of supervisory regulations and the development of investment and legal awareness.”

Another issue for the market is that many of Dubai’s blue chips are controlled by the government, which owns large stakes in them. Investors would love to see IPOs of firms such as the fast-growing Emirates airline and Dubai Electricity and Water Authority, but that would depend on a political decision.

Such a decision may be nearing. Mohammed al-Shaibani, chief executive of the state’s Investment Corp of Dubai, told Reuters that Dubai expected to offer at least one flagship asset to the public as early as next year, to stimulate investment and shore up its role as a global trade hub.

Investors have also been encouraged by news that Abu Dhabi and Dubai have hired banks to advise on a possible merger of DFM and the Abu Dhabi Securities Exchange.

By creating a single, larger market, a merger could improve liquidity and smooth the eventual launch of big IPOs in state-linked companies.