State-backed UAE companies lead the pack for share price gains

November 19, 2024, 2:21 PM

Among the UAE companies that have listed since 2021, the top nine performers are majority owned by Dubai or Abu Dhabi

21 Emirati IPOs since 2021
13 in Abu Dhabi and 8 in Dubai
Dewa’s $6.1bn float was largest

The stock market performance of UAE companies that have gone public in the past few years varies greatly – but government-backed businesses have delivered the biggest gains.

There have been 21 notable initial public offerings of UAE companies since the start of 2021 – 13 on the Abu Dhabi Securities Exchange and eight on the Dubai Financial Market.

Abu Dhabi government entities are the major shareholders in 10 of the companies and Dubai state entities in five.

The Dubai Electricity and Water (Dewa) offering was the largest UAE flotation in this period, raising $6.1 billion, while the IPOs of three Adnoc subsidiaries raised a total of $4.4 billion.

The top nine performers are majority owned by Dubai or Abu Dhabi.

“Government backing is very important,” says Ahmed Kamal, portfolio manager at Azimut Middle East in Dubai. “It solidifies the investment case and gives investors confidence that the management guidance on the company’s earnings outlook is achievable.”

Yet government-run businesses tend to have relatively small free floats, ranging from 5 to 25 percent.

Often, so-called cornerstone investors – typically, other government-related or federal entities – buy a sizeable portion of the shares sold in these IPOs, so the number of shares available for trading is lower than it appears.

In May, Adnoc Drilling sold a further $935 million of shares, 5.5 percent of its stock, in an accelerated book building.

The sale, priced at AED3.90, raised the company’s free float to 16.5 percent. This led it to be accepted for inclusion in MSCI’s indexes, important benchmarks for international investors.

Adnoc Drilling’s stock ended Friday at AED5.24, taking its gains since listing to 128 percent.

Adnoc Logistics & Services, which went public in 2023, has been the top performer since its IPO – but does not offer the same access to outside investors.

“The free float increase has had a very positive impact on Adnoc Drilling’s stock performance,” says Kamal.

Adnoc Logistics & Services and Adnoc Gas are high-quality companies and deserve to be included in the MSCI and FTSE indexes, he says, but their free floats do not meet the threshold.

Not all the IPOs have fared so well. Four of the 21 companies ended trading on November 15 below their IPO price. Alef Education was down 13 percent, Al Ansari Financial Services was down 5 percent and ADNH Catering was down 1 percent.

Al Yah Satellite Communications Co (Yahsat) had fallen 24 percent when it delisted on September 30 following its acquisition by Bayanat AI, another Abu Dhabi government-run company that has since been renamed Space42.

“The post-IPO performance has been mixed and depends on many variables,” says Kamal. “The company’s individual fundamentals are key but also of huge importance is the way the bookrunners determine the IPO share allocation."

If investors receive too small an allocation, Kamal explains, there is little incentive for them to expand their holdings at a higher price after listing.

The same is true if allocations are too large – there is little reason to buy more. "In fact, you’re more likely to sell to reduce your exposure," Kamal says.

Pricing is also pivotal. Companies that went public at the start of this flurry of IPOs tended to be more generously priced for subscribers. This has helped some stocks to surge.

Recent IPOs have been priced at higher earnings multiples, however, and so many have struggled to make further gains.

“Even if a company is a high-quality business, if there’s little upside potential due to expensive IPO pricing there’s little incentive to buy the stock,” says Kamal.

Dewa and Fertiglobe are flat versus their respective IPO prices – as is Lulu Group, which made its bourse debut last week. Borouge, PureHealth and Spinneys have gained less than 5 percent since listing.

Kamal cites Lulu as a cautionary tale. The supermarket chain planned to sell 25 percent of its shares, but investor demand led the company to increase this to 30 percent.

“IPO subscribers received more shares than they expected so there hasn’t been sufficient buying demand to push the stock higher,” says Kamal. “Every asset has a price. It doesn’t mean a company is a bad asset if it struggles after listing, it’s more that its IPO wasn’t priced well.”

Further US interest rate cuts, which will reduce returns on cash savings accounts, could brighten the allure of recently listed UAE companies that offer strong, consistent dividends, says Kamal.

“Liquidity is very important,” he adds. He points to Saudi Arabia where the bourse trades at a premium to those in Dubai and Abu Dhabi because it has bigger volumes and turnover.

"If there were some successful initiatives to increase trading and free float on UAE markets, this would boost company valuations.”