Will Depa float kick-start the DIFX?


YES, says Frank Kane

I think we could be witnessing a defining moment in the history of the Dubai International Financial Exchange. The start of trading this Wednesday of shares in Depa will be a key indicator of how well the DIFX can cope with the flood of IPOs expected to hit the market in coming months.

So far, the run-up to the Depa IPO has been a rare example of a
well-managed flotation. The general problem with new issues in the UAE has been that corporates and their advisers have been too anxious to attract massive over-subscription as a supposed yardstick of investor demand, regardless of traditional valuation techniques like price-earnings ratios.

But in fact massive oversubscription only proves that the stock has been mispriced; highly leveraged retail investors will sell as quickly as possible after trading begins; the aftermarket is certain to be chaotic and volatile. None of that makes for long-term market stability or shareholder value.

So far, the Depa IPO has avoided these pitfalls. Managed by Morgan Stanley, it has ticked all the right boxes – for adherence to international best practice, for balancing the needs of institutional as well as retail investors, and for ensuring a sensible split between UAE, regional and global investors.

For the first time in a UAE float, applications have been satisfied on a “first come, first served” basis, which means subscribers know how many shares they will be allotted and the cost of financing the purchase. As a result, oversubscription has been kept to a manageable, indeed healthy level – just three times. The price was fixed towards the low end of the indicated range, at $1.55 per share, demonstrating that the existing shareholders – none of whom are selling in the IPO – are not being greedy. They too would rather have a well-ordered aftermarket than a big first day profit. The advisers are keeping open an option to release a further parcel of shares – some 10 per cent of the new issue – to satisfy higher demand.

The IPO has also won the approval of the international investing community. The global roadshows have ensured a balanced split on applications, with roughly equal interest from London (where the shares will be traded in GDR from), the USA, the rest of the world, the Gulf region and the UAE. That makes for a broad-based and responsible share-register.

According to financiers close to the float, roughly one-third of the applications have come via the GDR route, with the rest going via DIFX. Even allowing for local market rules that limit how much stock can be held outside the region, that shows the international financial community is confident the DIFX can handle the float.

Depa is the company that has fitted out some of the best-known and iconic locations in Dubai, and is ready to roll out that expertise to the world. Barring major convulsions in global markets – something potential investors will have to take into account – it deserves a successful market debut, and a happy aftermarket.

And DIFX at last deserves some luck.

NO, says Mustafa Alrawi

I’m not going to be popular within interior design circles but Wednesday’s debut by Depa is likely to be a disappointment to those expecting its IPO to spark the Dubai International Financial Exchange (DIFX) into life.

I count myself among the soon to be frustrated. A big fan of the fledgling bourse, I wrote recently that upcoming issues including Depa would signal the beginning of the DIFX’s rise to international prominence. But I may have been premature. Why? At the heart of the answer is the ongoing conflict of priorities that exists at this crucial early stage of the DIFX’s development.

That conflict is that the issuing company wants to return as much value to original shareholders as possible when it floats while the exchange wants to give new shareholders the maximum possible return to keep them coming back. Until a compromise can be agreed we will continue to see a stifling of interest in the DIFX. It seems that Depa’s float will not see such a deal.

The feedback from within investment banking circles has been of the cautiously optimistic variety and news of the issue being three times over-subscribed should be a good sign ahead of trading. But there is evidence to also suggest the shares won’t perform spectacularly. While no one is suggesting a repeat of the DP World experience, Depa’s listing is likely to be a “solid” performer at best. Unfortunately, the DIFX needs something spectacular to get it past the ghost of DP World. It needs a star of a stock to get the big money flowing in.

In Depa’s case, the interiors contractor has chosen to list at a valuation level that could mean there is little value left on the table for new shareholders. It will offer 278.9 million shares, or about 43 per cent of its equity, at $1.55 per share and $7.75 per global depositary receipt (each representing five shares). Although this is near the bottom of the publicised offer range of $1.50 to $1.85 apiece, it means that the company will still be trading at 11.9 times 2008 earnings estimates.

While that may seem moderate, Depa has a perception problem that complicates things. A lot of investors compare it to Arabtec – Depa has close commercial and shareholder links with the UAE contractor. Admittedly this is simplistic thinking. They are very different companies but investors see them both as a play on the construction boom in the UAE. Until very recently, Arabtec had been trading at a discount to Depa’s offering. On Sunday, Arabtec was at 16.5 times 2008 earnings but only after a 12-week rally. 

As a result, one source close to the deal said Depa’s issue did not see the very large single orders around the $100 million range. And the investors who make up the book were at best “mediocre”. Sources said investment bank EFG Hermes was not in on the IPO at all. Fund manager Algebra Capital, according to another source, “are not in aggressively”. Many of the bigger players in the local financial scene have appeared to be lukewarm towards the deal, based on their orders. Sources close to the deal say Depa’s two dozen or so shareholders insisted upon ignoring advice to price shares between $1.30 to $1.40 each – a recommendation based upon initial feedback from top investors. While Depa’s responsibility is first and foremost to its shareholders and not to the exchange it is listing on, if Wednesday fails to give the DIFX a much-needed boost, long-term everyone involved could end up losing out.