10/10/2014

The feeding frenzy driving a flurry of new stock listings in the UAE could scupper the market’s nascent revival if companies float too soon and expose the fragility of overstretched investors.

After five years without an initial public offering (IPO) of notable size, Emaar Malls Group - a spin off from the developer of the world’s tallest tower - grabbed global attention when it attracted orders worth more than $47bn for its $1.58bn Dubai listing last month.

The level of interest mirrors widespread investor confidence in the markets of the UAE, with Dubai’s index more than tripling in value since the start of 2013 and Abu Dhabi’s index up 95% over the same period.

However, bankers and investors both say a significant amount of investment has been made using borrowed money and that upcoming listings may fuel further excess.

At the same time, bankers warn that some companies without proven track records are going public, eager to cash in. Should one of these offerings go badly, they say it could floor the listings market before it gets off the ground.

Authorities fear a repeat of the events of six years ago when UAE equity markets plummeted - with Dubai dropping more than 70% from its July 2008 level in six months - as shareholders who had taken on excessive leverage during the boom times were forced to dump their portfolios.

“The concern is from retail investors extending themselves in terms of leverage, which could trigger a setback,” said Tarek Sakka, at asset management firm Ajeej Capital.

New rules and stiffer penalties were introduced by the UAE stock market regulator in January to discourage leveraged trading, but authorities are now worried the euphoria around new listings is leading to guidelines being ignored.

The new central bank governor, Mubarak al-Mansouri, warned chief executives of the country’s banks in his first meeting with them on September 24 about repeating the mistakes of the past on lending to investors in IPOs, according to two people who attended the meeting, who spoke on condition of anonymity.

However banks wield significant influence in the country. Whether lenders, trying to gain business in a highly-competitive market, will comply remains to be seen as little action has been taken to enforce existing laws during the recent stock market rally.

A survey of fund managers this year about the enforcement of rules in the five main Middle East markets found the UAE was ranked ahead of only Kuwait.

Mubasher, a brokerage, said a number of UAE banks provided credit for investors to buy into the EMG offering.

This follows a pattern of banks watering down attempts by the central bank to introduce limits on other lending, including mortgages and loans to state-linked companies.

It is not just investors buying the shares who are causing jitters though, but also the type of companies coming to market.

While flotations to raise initial capital are common in the Western world, such “cash shells” are new to the Gulf and three could be listed in Dubai alone before the end of 2014.

Such firms have no assets nor track record which investors can base their investment decisions on, and many bankers are worried whether retail investors truly understand the risks involved, given the first of these - Marka - had its 275mn dirham ($75mn) IPO covered 36 times over.

“It is important we bring to market companies who are well prepared and with solid backgrounds to maintain positive momentum,” said Patrick Delivanis, Morgan Stanley’s head of investment banking for the Middle East and North Africa.

Marka and EMG were listed a week apart around the turn of last month and were the first listings in the UAE, barring a couple of small floats, since 2009.

EMG’s listing, on October 2, was the day after Amanat Holdings, a start-up planning to invest in healthcare and education assets, announced its 1.375bn dirham IPO.

As well as Amanat, there may be another IPO in Dubai before the end of the year, the bourse’s chairman said last week. Days earlier, the chief executive of Abu Dhabi Securities Exchange (ADX), Rashed al-Baloushi, had said there could be two listings on its bourse by December 31.

Private equity firm Gulf Capital is expected to be one Abu Dhabi float. It is said to be planning a $1bn-plus IPO.

Other potential near-term share sales could come from Al Habtoor Group, a family-owned conglomerate which hopes to raise up to $2.5bn, and a facilities management-focused cash shell targeting a 750mn dirhams IPO, local media reports.

Emaar Properties, having spun off the malls unit, wants to sell a stake in its hospitality business, its chairman said on October 2, while Able Logistics may list before year-end, its private equity backer said.

Some of the planned IPOs are in sectors which are key to the UAE economy, such as travel and tourism, so there will be solid, pent-up demand for good businesses from these under-represented sectors, said Bassel Khatoun, co-head of Mena equity at Franklin Templeton. More than 70% of firms on UAE exchanges are in real estate and financial services.

The response to Marka and EMG’s listings and higher trading volumes following the UAE’s upgrade by MSCI to emerging market status - year-on-year turnover on Dubai’s market in the first eight months of 2014 more than tripled to 290bn dirhams - would indicate the cash is there to back all these offerings.

However, trading volumes in September on Dubai’s market were half those recorded in July as investors withdrew money from the market to buy into the EMG IPO, undermining the idea there is enough “real” money in the system without taking on new loans.

“I can’t invest heavily in every IPO. If we see a few more IPOs at the same time, it will be a shock for the market in terms of liquidity,” said Ameed Kanan, a retail trader who manages a private portfolio in the UAE.

And retail investor sentiment is key, as while involvement by foreign institutions is growing - 790 firms had traded on the ADX in the year-to-September 22, Baloushi said, up from 361 in the whole of 2013 - retail traders’ actions move the market.

Therefore, bankers are urging market players to be cautious so that one bad listing does not undermines the whole system.

“We expect the market and investors to be selective, particularly on smaller companies. Solid companies with sustainable business models will prevail,” said Wadih Boueiz, co-head of corporate and investment banking for Mena at Bank of America-Merrill Lynch.

Reuters