IPOs may be in favour again by Q4 as local economy reboots

With the UAE economy expected to improve by the end of this year, initial public offerings (IPOs) could stage a comeback, according to financial experts.

Economists, bankers, stock market analysts and finance managers that Emirates Business spoke to said an expected economic recovery could speed up the return of IPOs into the market and the last quarter of 2009 could witness several companies listing.

Dr Nasser Al Saidi, Chief Economist of the Dubai International Financial Centre Authority (DIFC), said this is the most favourable time to launch an IPO, as the country's stock exchanges have witnessed corrections over the past few months due to the improvement of liquidity with banks, which themselves have started disbursing loans again.

He added that the majority of the UAE's banks are no longer in need of the facilities provided by the UAE Central Bank or the Ministry of Finance. Going by the banks' current conditions, they no longer face any liquidity problem and have sufficient money to finance new IPOs.

"The banks can again enter into the IPO market to finance new ones as they were doing before the global financial crisis started," Al Saidi said.

"There is still a need in the UAE to set up many public joint stock companies in various sectors to support economic growth. The IPO market is considered the real investment market through which new companies can go public and obtain necessary finance from all categories of investors.

"I know several family firms and private companies that are getting ready to convert into public joint stock companies to be able to issue bonds, sukuks and shares, and enter into the securities market. I think there will soon be no reason left to delay the launch of IPOs and a large number of companies will launch IPOs after Ramadan," Al Saidi said.

He added there were strong hints from investment banks and funds that they would issue more bonds and sukuks in the immediate future, especially Islamic sukuks.

"The current climate is encouraging for the launch of bonds and Islamic sukuks. Investors now have a desire to enter into new IPOs in the bonds and Islamic sukuk market rather than the stock market, where risk is still high. In addition, the stability of local stock markets requires stability in global markets. Through my experience and relations with investors, I can confirm there is a very promising market for bonds and sukuks, especially those bonds that can be converted into shares," Al Saidi said.

Agreeing with him was Hamoud Abdulla Al Yasi, General Manager of Emirates International Brokerage, who said the UAE economy is still in urgent need for new public shareholding companies.

"We currently have many economic sectors which do not have public companies, though these companies are very important for the UAE economy in general. For example, there are no big public companies in healthcare, tourism, industry or food sectors. Also, despite the UAE being globally renowned for aluminium production, it does not have a listed aluminium company," Al Yasi said.

"The absence of such companies is harmful for the UAE's economy in the long-term. Unfortunately, a number of listed companies were in the real estate sector and were impacted by the global financial crisis, but this should not be a deterrent for launching IPOs.

"Some people say it is necessary to delay the launch of IPOs at this time because they will withdraw liquidity from the main market, which is the capital market, to stock exchanges, which are the secondary market. They are mistaken," Al Yasi said.

"It is claimed that all UAE nationals and expatriates in the country are investing in the stock market. But our experience shows there are many people who do not invest in stocks but still have liquidity. It is possible to attract them to the IPOs after they feel confident and safe," he added.

Al Yasi said liquidity shortage had ended as banks have resumed lending, albeit with conditions that may be stricter than before to safeguard their rights. Banks have also posted good profits in the first quarter of the current year and all these positives point to a return of IPOs.

"The market could see surprises within a few days, as new IPOs could be announced. I think if IPOs were launched at reasonable prices, they would see demand from a lot of individuals and investors."

Majdi Al Maaitah, Director of the Securities Services Department at the National Bank of Abu Dhabi (NBAD), said the UAE economy is in continuous need of IPOs. The IPO market is considered the real investment market, which supports the stock market and the national economy.

He added that the UAE's banks have recovered the ability to finance IPOs like they used to. The problem, however, was with investors who did not have confidence in this kind of investment.

"The launch of new IPOs is not a burden on the banking sector, especially after the introduction of suitable legislations to regulate the IPO process. Liquidity in banks has improved and it will not affect the new IPOs," Al Maaitah said.

He said share markets have failed to give sufficient positive indicators to date since the end of 2008 and early this year.

On an optimistic note, he added: "We believe the situation will gradually improve during the second half of the year and NBAD now has files for three new companies that will go in for IPOs during the last quarter of this year. They are not real estate companies, as the investment concept has changed. Rather they are from the healthcare and industrial sectors."

The Securities and Commodities Authority (SCA) has been informed about those companies and their shareholders have preferred to postpone the offering until the last quarter, said Al Maaitah, adding that there are many files of prospective IPOs pending with the SCA. "There seems to be a strong tendency to offer them during the last quarter, and I believe the market will be active after Ramadan," Al Maaitah said.

He said there are fears that any new issues will not be able to obtain the finance needed. And if they do obtain the finance, their listing will not be encouraging. Also, profits of several public joint stock companies currently listed on the stock markets are not big and their nominal values were low, which was another discouraging factor, he said.

Dr Humam Al Shamma, economic adviser to Al Fajr Securities, pointed out some of the highs and lows in the history of IPOs in the UAE so far. He cited the Green Crescent Company as one whose shares started trading in the market at a higher price than that of its subscription. Another example was Drake & Scull, whose share opened at a price lower than its subscription price and now stands at 98 fils. Therefore, investors who want to subscribe have to consider the market situation and whether they can recover the amount they subscribed when selling the share in the market.

Al Shamma told Emirates Business it is not the proper time for companies or markets to launch IPO. Next year might be more appropriate, he added.

Al Shamma said liquidity has improved in banks and markets, but the psychological impact of the lack of liquidity still exists at a behavioural level in banks. It has a strong effect on individuals and investors who do not want to give up the liquidity available at the moment.

Also, IPOs are not useful given the current market situation since the offerings will withdraw the liquidity currently available in the stock markets, which might lead to their retreat at a crucial time when several indicators show them moving up, Al Shamma said.

He said it might take several months for liquidity to return to pre-crisis levels, and he expects IPOs to resume only with the recovery of the world economy by the end of the year.

Ridha Muslim, Director of Truth Economic Consultants and former Ministry of Finance adviser, said everybody knows there are problems facing existing public joint stock companies, and the new companies will find it hard.

However, the main problem currently facing the market is of a loss of confidence, said Muslim, and a return of confidence is the utmost necessity at present. This confidence will not return quickly even if liquidity was available, he added, as the crisis was a psychological one in the first place.

Liquidity is available with individuals and investors, but the problem is to find confidence, said Muslim.


Regulator sees gradual recovery

The UAE stock markets are gradually recovering from the global financial turbulence and this was reflected in an improvement in their performance in the second quarter, according to the market regulator.

The Securities and Commodities Authority (SCA), which oversees the UAE stock exchanges, the largest in the Middle East after Saudi Arabia's Tadawul, said a series of steps it had taken to support the government's anti-crisis measures have helped mitigate the impact of the crisis.

"The global crisis has presented a strong test to the SCA's policies and strategies in playing its part in supervising and regulating the stock market… the SCA has not hesitated in taking a series of important measures to offset the effects of the crisis and deal more positively and effectively with it," SCA Executive President Abdullah Al Turaifi wrote in the Authority's latest quarterly bulletin.

"Despite the global crisis and its effects on world and local markets, our bourses demonstrated their capability of facing its repercussions in the second quarter of this year… they have recorded an improvement during this period… although the increase was limited, I think it has noticeable implications."

Figures by the Abu Dhabi-based Arab Monetary Fund, which tracks regional equity markets, showed the bourses of Dubai and Abu Dhabi swelled from around $123 billion (Dh451bn) at the end of March to $126bn (Dh462bn) at the end of April and about $130bn (Dh477bn) on May 18. Both bourses, which had 133 listed companies on May 18, recorded steady improvement and dealers attributed this to good performance by key firms. Turaifi said steps taken by the SCA since the aggravation of the global economic distress in mid-September were in tandem with the government's counter measures.

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