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Gulf IPO market could ride out global jitters with state offerings

Presight AI Abu Dhabi Securities Exchange bell ringing Presight AI
Presight AI listed on the Abu Dhabi Securities Exchange in March

A wave of initial public offerings in Abu Dhabi shows little sign of abating, despite global market jitters and rising interest rates as investors bet on the emirate’s part-privatisation drive.

While Saudi Arabia and Dubai’s bourses have also offered a flurry of new listings over the past 18 months, it’s the UAE capital that is the focus of attention. 

Adnoc Gas, a subsidiary of the emirate’s flagship oil company Adnoc, raised $2.5 billion in March in an offering of 5 percent of its shares, while data analytics firm Presight AI raised $496 million by selling a 24 percent stake. Adnoc also wants to raise $1 billion from a float of its shipping and logistics unit, according to reports.

Investor enthusiasm has boosted Abu Dhabi’s market capitalisation to AED 2.71 trillion ($736 billion) as of April 5, having more than trebled over the last two years following several IPOs and a 57 percent rise on the bourse’s index.

“There’s a consistent theme across the region of governments seeking to reduce their stakes in government-owned companies,” said Tarek Fadlallah, chief executive of Nomura Asset Management Middle East in Dubai. “Those they can sell, they’re trying to sell.

“The story is the same region-wide. It’s just in the execution and implementation where there are subtle differences.”

Last year, 71 IPOs were completed in the Middle East for a combined transaction value of more than $25 billion, according to S&P Global Market Intelligence. That compares with $15 billion from 87 offerings in 2021. 

Government-related entities are likely to dominate offerings in the year ahead. Private companies will follow, although regulators will need to carefully manage the IPO pipeline “to avoid oversaturating the local markets”, said Akber Khan, a director at Al Rayan Investment in Doha.

Abu Dhabi’s flotations of state-linked entities have generally provided big gains for investors.

Shares in Abu Dhabi Ports have nearly doubled in value from their IPO price, regional investment bank Shuaa Capital says. The share prices of Adnoc Gas and Adnoc Drilling are up 28 and 71 percent respectively. 

Recent UAE IPOs saw only a relatively small percentage of a company’s total shares going to independent investors. For example, Dewa, Dubai’s main utility, raised $6.1 billion by selling an 18 percent stake in April 2022.

But so-called cornerstone investors, which are mostly federal or government-controlled entities, committed up to $1.3 billion.

Similar investors bought one-third of the shares sold in the Adnoc Gas offering, leaving around 3 percent of its total stock available to other subscribers. 

“The participation of large multinational corporations and conglomerates as 'cornerstone' investors has played a significant role in recent listings,” Fawad Tariq Khan, Shuaa Capital’s group chief executive, said.

“This involvement has led to positive valuation trends and increased trading activity, reflecting greater investor confidence.”

So, is the Gulf IPO market in the grip of irrational exuberance? Excluding IPOs by small-cap companies, oversubscription rates – when demand outstrips the shares available – in 2022 were 29 times for Abu Dhabi flotations and 35 times for those in Dubai, according to Shuaa.

A price-to-earnings (PE) ratio measures a company’s current share price against its earnings per share. A ratio of around 20 to 25, the Abu Dhabi market’s historic range according to Shuaa, is on the high side, but brokers say valuations reflect investors’ belief in the future earnings of the stocks.

“This elevated range for IPOs in Abu Dhabi can be attributed to the growth-oriented nature of the corporations entering the market,” said Shuaa's Khan. 

And not all floats are offered at high valuations. Adnoc Gas came in at only 13 times historic earnings, Shuaa estimates.

The higher valuations are largely confined to Abu Dhabi. Further north, Dubai’s benchmark index is trading at a PE ratio of 10, below its historical norm of 12-15 times earnings. 

This mirrors a slump in the MSCI emerging markets index over the same period, as rising interest rates dented investor confidence globally.

Stock in Dewa is down 7 percent on its IPO price, and free zone operator Tecom is 16 percent lower, although Salik, a toll operator, and district cooling firm Empower are both above their offering price. 

In the longer term, Nomura’s Fadlallah said Saudi Arabia’s demographics mean it has many more family conglomerates that can be floated.

Saudi’s bourse capitalisation has more than quadrupled since 2018, ending 2022 at $2.63 trillion, although last year’s annual trading volumes were the lowest since 2019.

The kingdom’s bourse’s PE ratio fell by nearly half last year, from 22 in January to 12 in December. Its stock index is now down about 20 percent from last May’s 16-year high.

This slump, along with less-pronounced declines on other Gulf bourses, has made some retail traders wary of buying into new IPOs.

“Investors began to be more discriminating from the latter half of last year,” said Shakeel Sarwar, head of asset management at Bahrain’s SICO investment bank.

“In 2021 and early 2022, investors could make a quick profit on almost every IPO – they were assumed to be a source of free money. IPOs will be scarcer this year, especially those by private-sector companies.”