After the sudden cancellation of the $100 million (Dh367m) Nanodynamics initial public offering on the Dubai International Financial Exchange in February, analysts will be keenly watching the progress of the $500m Depa and $400m Future Pipes IPOs on the DIFX this month as an indication the fledgling bourse is capable of launching firms into public ownership.
Confidence in IPOs on the DIFX has also been hit by the poor performance of DP World shares since its multi-billion dollar IPO last autumn.
DP World shares are presently trading at around a 30 per cent discount to the IPO price, having suffered from the recent downturn in emerging market stock markets and a high initial valuation.
Local investors accustomed to heady profits from IPOs have been disappointed by this performance. But they behaved as though DP World was an old-fashioned IPO on the Dubai Financial Market, which it was not.
Under the DFM rule book IPOs are routinely under-priced to ensure a big oversubscription, and priced in dirhams. On the DIFX the rules are very different.
The IPO issue price on the DIFX is reached by a long process of internationally accepted “book building” and this means the price is much closer to fair market value at the time of the IPO. Also, and importantly in these days of US dollar devaluation, the currency unit of the DIFX is the greenback.
Now investors in the UAE are not inclined to hold US dollar assets unless they absolutely have to because the federal Cabinet has a committee considering the possible revaluation of the dirham to offset imported inflation. And nobody would want to be left holding dollar-denominated assets when the dirham might be revalued upwards.
Considered in isolation from the DIFX, both UAE-based interiors contractor Depa and manufacturer Future Pipes have a strong investment case to make to investors. This is a play on the booming Emirates construction sector where activity looks to be on a rising curve for years to come.
At a time when many asset classes and geographical locations are proving hazardous for investors, this is a safe haven with huge spending by government entities providing great depth and liquidity to this market.
Of course, nothing is ever guaranteed in life but an investment literally underpinned by UAE construction spending does not look risky at the macro level.
It is then a matter of micro analysis and both Depa and Future Pipes hail from very well-established local families that will retain large interests in the companies post flotation.
The firms are also launching IPOs at price-to-earnings ratios that are less ambitious than DP World, which pitched its share price at the top of the global range for similar groups and has since suffered from the slump in emerging market stocks.
However, investors will still have to ask whether they really want to be buying UAE equities at this time.
Is there not a good chance local stocks will follow global stocks lower again, if not this year then as soon as a new US president is elected?
It is by no means clear whether the takeover of US investment bank Bear Stearns by JPMorgan marks the end of the sub-prime crisis. Legendary investor George Soros said last week he thought this was just another bottom on the way to the final market bottom, which might be next spring.
Just like the tighter rules for IPO pricing, you cannot get away from the fact that the DIFX was created to be an international bourse based in Dubai. Therefore, if global financial markets fall then so will the DIFX as investors in DP World have so recently found out.
On the other hand, the creation of an international stock market in the heart of the GCC remains vital for the development of local capital markets and for Dubai as an international financial centre.
Already the DIFX has introduced new market practices and regulations to the region, and stimulated investment in Dubai by international banks.
But the region’s newest bourse has not had an easy ride. Its birth coincided with the GCC stock market crashes of 2006, and this made achieving a critical mass of listings much more difficult to achieve. Last autumn the local markets rallied strongly but the sub-prime crisis has dealt a blow to global equities.
Potential IPO buyers this month have a lot more to consider than in the old days of IPOs on the DFM before the 2006 stock market crash; then you just borrowed as much as possible and bought and sold and made a profit.
Now stock market investments face a potentially hazardous global economic backdrop, and an IPO on the DIFX is just not the same as the DFM.
Public offerings on the DIFX to be keenly watched