In the past couple of years, the GCC IPO market has been hit significantly by dwindling oil prices, an economic downturn and a number of unexpected geopolitical shocks.
The apathy continues to linger in 2017, but with volatility relatively low compared to that of the previous year and with easing measures firmly in place, conditions are expectedly healthy for raising equity financing going forward.
However, the deteriorating IPO line-up remains the cornerstone concern for the region as GCC nations continue to focus on overhauling their economies, including cutting government spending, and privatisation of state-owned enterprises to address immediate budget deficits.
Privatisations may provide the catalyst, as regional governments are keen to resolve liquidity concerns which have impacted equity market activity, by boosting listings on their exchanges and thereby increasing investor confidence.
Accordingly, favourable equity valuations, government-sponsored maiden offers for state-owned enterprises, and initiatives undertaken by regional governments will be the key to the GCC IPO market to get back on track over the medium term.
In the last two years, the GCC IPO market was confronted by declining oil prices and heightened economic uncertainty. As a result, IPO trends witnessed in 2016 were the lowest registered in the last decade, as the total number of IPOs in the region fell to three issuances from six deals realised in 2015.
Capital issuance via IPOs also plunged by around 50 per cent from 2015 to $745 million. Corporates looking to enter the market preferred to stay on the sidelines, and were met with periodic surprises including the Brexit outcome and the US presidential election results.
However, it is important to note that all the three corporate IPOs listed in the GCC during 2016 remained oversubscribed, indicating that investor appetite exists for companies that have the right valuation and growth story and operate in defensive sectors such as healthcare and education.
Since the fourth quarter of 2016, as oil prices began to show positive signs of recovery, GCC governments have also been swift in implementing a host of measures aimed at increasing listing activity and strengthening regional capital markets. For example, the UAE circulated new draft IPO regulations for feedback from stakeholders, setting requirements increasingly in line with international exchanges.
Changes for the better
Saudi Arabia's Capital Market Authority (CMA) announced a number of major changes such as relaxing the requirements for foreign institutional investors, introducing new trading options, relaxation of reporting deadlines, and the implementation of a new settlement process, thereby working toward inclusion on the MSCI Emerging Market index.
Recently, Saudi Arabia also introduced a new parallel market called Nomu, an alternative trading platform with lighter listing requirements compared to the main market, designed to boost the role of SMEs. Similarly, Qatar has also announced plans to open a new exchange for SMEs this year.
Furthermore, regional bourses have also been urging family businesses, who are the mainstay of GCC economies and are typically reluctant to engage in the listing process.
Over the last decade, Saudi Arabia has been a prominent IPO market in the GCC, contributing 68 per cent of all the regional IPOs since 2006 and an average of five deals per year over the past five years. Moreover, all three of the region's corporate IPO deals in 2016 were listed on the Saudi exchange.
Budging on the recent momentum, Saudi regulators are also in touch with several regional companies seeking a cross listing in Riyadh by the end of this year. Reportedly, the billionaire Olayan family, Credit Suisse Group's largest shareholder with a portfolio of more than 40 companies in the Middle East, is considering selling shares in some local assets. Additionally, the market is set to witness a flurry of new IPOs, primarily from the insurance sector, following strict directives from the CMA.
Historically, UAE stock markets, which have had a relatively drier spell compared to Saudi Arabia, still need listing of new companies to attract liquidity. The combination of improved oil prices, favourable government initiatives, and strong investor appetite to generate returns is likely to facilitate more exits via the IPO route in the near term. Accordingly, many companies including Massar Solutions, Senaat, Jannah Hotels and Resorts, Gulf Capital and Tasweek Real Estate Development are studying the possibility of listing their stocks on Abu Dhabi's market, while Al Shafar General Contracting, Daman Investments, Emirates District Cooling, Al Habtoor Group, Emaar Hospitality Group, Mawarid Finance Rivoli Group and Able Logistics Group plan to launch IPOs on Dubai's exchange.
Perhaps the most important impetus for the regional IPO market will come from governments to initiate listing of well-performing state enterprises, along with larger companies mulling dual listings or listings in foreign markets, citing a mature market with higher investor activity and subscription base than the domestic markets.
For example, Saudi Aramco's IPO would likely simultaneously list on more than one exchange as the company continues to hold talks with exchanges in the US, UK and Asia for consideration. The IPO could encourage other GCC countries such as the UAE, Kuwait and Qatar to list their state-owned oil assets too.
Apart from Aramco, Kuwait too announced plans to sell shares of the state-owned Az-Zour North Independent water and power project in mid-2017. Though the listing of several planned state-owned enterprises in the GCC is expected to unleash an era of unprecedented change in local stock markets, GCC governments would need to ensure that objectives of state-enterprise stakeholders are aligned to that of the government, while profitability and attractiveness for Gulf shares amongst foreign institutions are maintained as the success of these listings will largely depend on the attractiveness of the shares.
Overall, the bearish market sentiment is expected to ease over the first part of this year, as oil prices stabilise on the back of positive agreements amongst the OPEC, which should boost regional investor sentiments. Moreover, GCC governments' plans to garner revenue from the divestment programme and the recent trend of listing family-owned businesses could lead to some mid-sized IPOs in the medium term.
To confirm the positive trends for floatation, corporates are likely to look for leadership from larger issuers in terms of activity, while adherence to preset timelines from government-sponsored entities such as Saudi Aramco should provide the much-needed confidence and impetus for others to follow suit.
While many companies have expressed interest in going public, they may want to adopt a wait-and-watch approach for better macroeconomic data points, improvements in investor sentiments and easing of liquidity.
Despite these broad market risks, the prospects for IPO activity in 2017 and beyond looks much better for the GCC region, especially in the UAE, where a sharp rebound in new listings can be expected.
By Shailesh Dash
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