Talabat and Lulu post-listing slump dims allure of UAE IPOs

Alamy via Reuters

• Talabat and Lulu raised $3.75bn
• Ambitious pricing reduces gains
• Slump erodes investor confidence

Talabat and Lulu Retail Holdings were the UAE’s biggest initial public offerings (IPOs) in 2024, raising $3.75 billion amid huge investor demand. 

But the stock prices of both companies have slid since listing on the Dubai and Abu Dhabi bourses respectively, threatening investor confidence in future UAE flotations involving privately run companies.

It has also raised questions on the pricing and strategy in the sales pitch, experts say.

The IPOs of Talabat and Lulu were similar, raising the size of the stake sold with pricing at the top of their range after citing investor demand. 

Talabat said its IPO achieved a “double-digit oversubscription level“. Lulu was more specific, stating it received orders totalling $37 billion for its $1.72 billion flotation. It was more than 20 times oversubscribed.

Such orders suggested the stocks would surge. Instead, by Thursday’s close, Talabat was down 9.4 percent and Lulu 6.9 percent.

“Pricing has been ambitious in some IPOs, leaving little on the table in terms of potential gains after companies list,” says Tarek Fadlallah, CEO of Nomura Asset Management Middle East in Dubai.

“That’s starting to affect sentiment in the UAE IPO market, but it’s not hurting market sentiment in general.”

Talabat and Lulu remain relatively expensive stocks despite their post-listings slump with price-to-earnings (PE) ratios of 24.2 and 20.9 respectively. That compares with UAE listed companies’ combined PE ratio of 15.3 percent.

Another common mistake has been for banks managing IPOs to give high allocations to domestic investors compared to international institutions, or vice versa.

“Banks assume investors who receive small allocations will snap up shares on the stock’s first day of trading, but it doesn’t always work that way,” says Akber Khan, acting chief executive officer of Al Rayan Investment in Doha.

“If institutions managing tens of billions receive allocations of a few hundred thousand dollars, they will not necessarily seek to add to that.”

The upsizing of IPOs can prove problematic should a number of investors receive more shares than they want, as they tend to sell immediately, putting pressure on the price.

Lulu’s market slump follows its disappointing quarterly earnings that missed several targets stated in its IPO prospectus for international investors.

In an emailed reply to AGBI, Lulu's chief executive Saifee Rupawala said his company's third-quarter results showed "ongoing" revenue and profit growth across the business.

"We also continue to make good progress on our growth strategy … and with our guidance for 2024 remaining unchanged with the fourth quarter a seasonally stronger period," he added.

Digging into the numbers, Lulu’s nine-month revenue rose 5.7 percent year on year. In the prospectus, the company estimated that revenue would rise by 8 percent to 10 percent in 2024-25. 

Its biggest markets in terms of revenue are the UAE, Saudi Arabia, Oman and Qatar.

• ADX ripe for international investment, say asset managers
• US fund managers expected to accelerate Gulf investment
• State-backed UAE companies lead the pack for share price gains

“If companies miss earnings guidance in the first few months after listing, questions are raised about information given to investors ahead of flotation,” says Khan.

Similarly, Lulu’s Saudi Arabian revenue increased 6.7 percent in the nine months to September 30. That was below prospectus estimates of mid-double digit growth from 2024 and 2025.

An important metric in retail is companies’ Ebitda margin, which refers to earnings before interest, taxes, depreciation and amortisation. Lulu’s prospectus said it was aiming to raise Ebitda to 12 percent “in the medium term” and for it to remain flat in 2024 compared to the previous year.

That ambition contrasts with recent reality. Lulu’s nine-month Ebitda margin was just 9.9 percent and below the 10.4 percent achieved in 2023.

“For a company which is not raising new money through its IPO, having a guidance which is aggressive needs strong justification,” says Nishit Lakhotia, head of research at Bahrain’s Sico Bank.

Of the seven UAE companies to go public this year, four have stock prices below those of their IPOs, while supermarket chain Spinneys is up 3.9 percent and NMDC Energy has gained 3.6 percent. 

Only Dubai government-run company Parkin has dazzled, surging 127 percent following its March IPO.

“In many ways, IPOs are a play on investor sentiment,” says Khan. “Weak after-market performance of a string of IPOs could soften sentiment, and make this self-fulfilling.

“If you lose investors’ confidence, the risk is a shift from a virtuous cycle to a vicious spiral, but we’re not there with UAE IPOs because the economic outlook is positive.”