After a seven-year dry spell, the region’s stock market listings drought is set to end in spectacular fashion this year with the biggest number of Gulf companies since 2007 poised to launch stock market listings.

More than 20 GCC companies are expected to launch initial public offerings (IPOs) and up to three are looking to raise at least $1bn each.

The region’s bourses will receive a further boost in May, when the UAE and Qatar exchanges are upgraded to emerging market status from frontier status by index compiler MSCI. The ratings upgrade is forecast to attract about $1bn of investment from international funds.

The new listings and status upgrades are important steps in addressing the lack of large-scale institutions invested on the region’s bourses, and the relatively small number of stocks available to invest in.

Limited liquidity

With the exception of Saudi Arabia and Kuwait, liquidity is limited in the region’s exchanges and regulatory restrictions are seen as a major hindrance to listing domestically. As a result, some UAE companies are choosing to launch their IPOs on markets outside the region.

Therefore, the key challenge for the region’s stock markets is to use 2014 as a catalyst to drive further broadening and deepening of the markets in the years ahead.

The UAE is leading the region’s boom in market listings with at least 10 IPOs planned for 2014, including Dubai government-owned marine services contractor Stanford Marine Group, Abu Dhabi-based restaurant chain Just Falafel, and Abu Dhabi-based industrial investment company General Holding Corporation (Senaat).

The planned domestic listings reflect growing investor appetite for UAE stocks, with Abu Dhabi and Dubai’s price-to-earnings ratios reaching record highs at the beginning of 2014.

“The rebound of the UAE economy and uptick in demand is likely to lead to better valuations, which would result in increased IPO activity,” says Anil Menon, Middle East and North Africa  mergers and acquisitions and IPO leader at EY (formerly Ernst & Young). “We expect an increased level of IPO activity in the UAE and Saudi Arabia, in particular.”

With the top five stocks in Abu Dhabi and Dubai accounting for more than half of all trading activity in those markets, it is a priority to significantly increase the availability of major companies appearing on the local markets. 

The listing of large government-backed entities such as Senaat is, therefore, vital to support the deepening and diversification of local exchanges, which are dominated by construction and finance-related listings.

The structure and pricing of the IPOs must be carefully examined, however, to encourage trading. Shares in Dubai-based ports operator DP World, for example, which listed on the Nasdaq Dubai market in 2007, are not being actively traded in Dubai. Its dual listing in London exacerbated the situation by draining liquidity from the Dubai-listed stock.

“The most important factor for a large listing will be the free float. If it’s only 5 per cent then I’m sure it’s doomed – a lot of companies in drilling, aviation and dredging might be large but if they don’t trade, what’s the point?” says Fahmi Alghussein, partner at HK Advisory Services, a Dubai-based investment advisory and management company.

Other markets

The drivers of IPO activity vary across the region, however.

Listings activity is projected to pick up in Saudi Arabia, Qatar and Oman, as governments seek to increase private-sector involvement in the traditional state-run sectors, or as a means to stimulate wealth distribution through wider shareholding in government companies.

Flotations activity in Saudi Arabia, typically the region’s IPO front-runner, is expected to increase significantly after a quiet 2013. At least five companies are currently looking to list on the Saudi Stock Exchange (Tadawul), including Saudi Arabian Airlines’ unit Saudi Cargo Airlines Company.

The rebound of the UAE economy and uptick in demand is likely to lead to better valuations

Anil Menon, EY

“We’ve seen only five [IPO’s by Saudi companies] in 2013, which is [a] very small [amount] compared with previous years,” says Khalid Nasser al-Muammar, CEO of investment banking firm Saudi Hollandi Capital. “There were some changes at the regulator that also pushed some transactions away, but there will definitely be more this year.”

In Qatar, boosting listings is an important element of a government drive to improve national wealth distribution through the stock market. The initiative is set to lead to several, strategically timed offerings.

In January, Qatar Petroleum (QP) closed the first of several planned offerings that will be worth a combined QR50bn ($13.73bn). The IPO of Mesaieed Petrochemical Holding Company raised a total of QR3.23bn and was open to subscription by Qatari nationals, as well as several local institutions. Another QP subsidiary is set to sell shares later this year.

Two other companies are also looking to list on the Qatar Exchange. Barwa Bank is in the process of obtaining regulatory approval for an IPO, while Qatar First Bank is exploring the option to list existing shares, two Doha-based sources confirm.

Because of the predominance of small-scale retail investors in the region’s stock markets, finding the correct pricing model is an essential consideration when planning an IPO. While the price-to-earnings ratios might be similar among several stocks, retail investors tend to go for those with the lowest share prices.

Another challenge for regional regulators is finding the right balance between regulation that ensures adequate transparency for investors, but which is not so onerous that it deters local companies from listing.

In Saudi Arabia, it can take up to two years to receive Capital Markets Authority (CMA) approval for an IPO, which requires companies to provide financial statements every six months. The CMA also demands that any significant changes in a company’s financial set up requires the company to resubmit its IPO application.

Proposals to upgrade the listing rules are understood to be under review, but will take time to be processed.

Meanwhile, in the UAE, several large-scale IPOs that had been anticipated to be launched over the past two years have failed to materialise. This is partly because the companies were not ready to introduce the level of financial reporting required by the market regulators. In the UAE, for example, at least two years of financial records are required to be reported before a firm can list.

To help local exchanges attract more business, regulators across the region are introducing legislative changes to remove some of the barriers to IPOs. In the UAE, where moves are being made to lover the limit on the minimum level of share capital that must be offered. 

A new Commercial Companies Law in the UAE, which is due to come into effect in the second half of the year, lowers the minimum share capital required to be sold upon listing on the Abu Dhabi Securities Exchange or Dubai Financial Market from 55 per cent to 30 per cent.

“The new Commercial Companies Law could give comfort to companies that they are not losing control,” says Ahmed Ibrahim, head of equity capital markets at local law firm Al-Tamimi & Company. “If the amount of free float is set at a minimum of 30 per cent instead of 55 per cent, that could lead to a new wave of IPOs.”

The new law also allows for a market-based valuation of a company – book building – to replace the current company valuation process, which is determined by regulators. The change is aimed at providing a valuation more reflective of market sentiment.

Regulatory changes

It is vital for the development of the region’s bourses that there is a constant flow of new, large-scale listings on the local exchanges that increases the number of investable stocks available. And regulation is key.

Until regulatory changes are made, some private companies will continue to go overseas to hubs such as London to tap a larger pool of liquidity or raise their profile globally.

At the same time as easing the path towards IPOs, regulators must introduce effective regulation – and enforcement is vital – to encourage large-scale, long-term investors to the region, in order to increase liquidity in the local markets.

There is much work to be done, but the pick up in IPOs planned, combined with the status upgrades in the UAE and Qatar, are important milestones along the way.

Investor appetite: At least 10 listings are planned for 2014 on the UAE’s bourses