Future Pipe IPO critical test for DIFX


The announcement of Future Pipe’s $1.5 billion (Dh5.5bn) IPO is the most significant development on UAE stock markets since the merger of Nasdaq, Borse Dubai and the OMX last year. It is in fact more of a critical test for the Dubai International Financial Exchange than the DP World float last November simply because more questions are being asked of the fledgling exchange since the ports operator’s debut.

Its shares have fallen from their IPO price of $1.31 a share to around 85 cents since then. The short-term nature of many stock market investors and the generally poor level of market commentary from the media in this region have combined to create a web of misinformation about the DIFX’s potential. They are all wrong. The DIFX is one of the safest bets around. It will not fail to become one of the world’s leading exchanges within the next 10 years.

Today this might seem hard to believe, judging from recent evidence. And it is likely that in the weeks to come as Future Pipe and its lead managers shuttle between Dubai, Jeddah, Riyadh, London and New York on their IPO roadshow that they will come up against a wave of questions about the DP World flotation and the consequences of it for any new listings on the exchange.

However, the DIFX should not pay the price for the less-than-stellar performance of DP World’s shares since their debut on the exchange last year. They are not one and the same.

First and foremost, however, it is worth stating that DP World has been hugely successful for the DIFX in one major respect – liquidity. As the first company to list only on the DIFX, DP World has brought millions of dollars worth of trading volume to the bourse on a daily basis.

The exchange would be quiet without DP World’s listing. And its market makers now have a track record to build upon.  

Secondly, DP World’s listing cannot be used as a litmus test for the DIFX. As a government-related entity DP World felt it had an obligation to be as inclusive as possible.

Rather than float at a share price in the double-digits or the high single figures, it chose to list at around the dollar-mark to give retail investors used to the DFM’s and ADSM’s one dirham IPO system psychological accessibility to the flotation.

This well-intentioned but ultimately futile decision undermined the entire exercise in listing on the DIFX and the advantages to be gained from it.

The DIFX is committed to international best practice and its system of book-building for IPOs rather than simply offering nominal value for shares. This is something different for typical UAE and GCC-based shareholders but it is also the best-judged route towards mature stock markets comparable to London, Tokyo and New York.

And the shareholders to be gained from listing on the DIFX should be of the mature, international and long-term thinking variety. Instead we saw a hybrid experience where the UAE’s short-termist, over-emotional and herd-like retail investors were encouraged to participate in a process they did not understand nor really want. What they want from their IPOs are the traditional double-digit gains in a

single session.

This was compounded by the availability of easy credit that obscured the perceived demand for the stock. Many investors were able to leverage their equity and so over-ordered thinking that they would never get their full application anyway.

This is harmless when a company lists at Dh1 a share – the only way is up after all.

But it will skew the pricing process in the case of a book-building pricing mechanism that relies on such information being accurate, and as a result DP World put its shares at the top of the range after seeing what it thought was sustained demand.

And ironically, DP World’s shares suffered from the psychological effects of being priced at such a low number. The DIFX is a US dollar market with price movements quoted in whole cents. A fall of one cent meant almost a one per cent drop in DP World stock, a fall of two cents or three cents seemed huge, compounding sentiment against the shares.

Had it been priced at $5 a share or more instead of $1.31, it is arguable that it may not have seen so many sellers so early on. Investors can’t help but follow the herd, especially when it comes to heavy selling. 

In contrast, Future Pipe – a smaller, family-owned firm dominant in its sector and riding high on the massive boom in the region – will be seen as the DIFX’s textbook IPO in years to come.

The manufacturer of large diameter fibreglass pipe will likely price its shares at a very reasonable low double-digit multiple of earnings and more than likely that shares will be priced well above $1 each.
Future Pipe says it is looking for an international investor base, one of the main reasons behind its decision to list on the DIFX.

Sources close to the deal also say that the move to list only there was taken after preliminary meetings with investors. If it was the DIFX rather than the DFM, they told the company, then let it be only the DIFX.

Potential shareholders did not want to see a listing of its size spread over a second market such as London or New York. Had investors been negative against the DIFX it is unlikely that Future Pipe would gamble its future by going against their advice.

And as a source close to the deal said yesterday: “If the big investors and the Nasdaq believe in the DIFX who are we to argue?”

The Future Pipe IPO will also bring greater liquidity and prestige to the exchange. As a family-owned business, its example will be keenly watched by the many other family businesses in the region that are weighing up a flotation.

The DIFX offers such companies the unique opportunity to go to the market without relinquishing control – one the main drivers behind Future Pipe’s decision.

(Mustafa Alrawi is the Managing Editor of Emirates Business.)