Despite the ample liquidity in the Gulf region, Dubai’s exchanges still lack diverse debt-financing tools for small and medium-sized enterprises (SMEs) and are in need of new listings from major national companies to boost trading volumes and broaden the institutional investor bases of bourses.
New Listings
In the wake of the MSCI upgrade announcement, a trio of companies announced plans to float shares on NASDAQ Dubai nearly five years after the emirate’s last initial public offering (IPO). Britain’s largest stand-alone Islamic bank, Bank of London and the Middle East, was the first to list on October 8, 2013, when it floated 195.7m shares of its holding company at $2.57 per share, putting its estimated market capitalisation at $503m. The IPO was issued so current shareholders could exit the company, not to raise new capital or issue additional shares, according to a NASDAQ Dubai statement.
Just Falafel, the UAE-based, international fast-food chain, is also reportedly planning to float 25% of its shares on NASDAQ Dubai to fund the establishment of 720 new outlets in 19 countries, according to multiple media reports.
In September 2013 the UAE’s first real estate investment trust (REIT), Emirates REIT, was also preparing to issue an IPO on NASDAQ Dubai. The sharia-compliant commercial real estate investment fund has an estimated $210m of income-generating assets under management, Reuters reported.
Dubai Islamic Bank owns a 33% stake in Emirates REIT and Dubai Holding owns 31% of its shares through two of its subsidiaries.
There is no longer any doubt as to whether the UAE can absorb the new equity, however, whether the prospective listing of three relatively small companies will trigger a broader wave of IPOs and the long-term trading volumes to support them is uncertain as long as Dubai’s corporate giants continue to outsource their capital markets needs to the London Stock Exchange. “Whilst the GCC offers ample liquidity from petrodollars, the dearth of investable corporates currently available on regional exchanges and road-tested regulations that are positively perceived by investors are stifling the potential of these markets as sources of equity capital,” concluded a recent report published by Deloitte, GCC Equity Capital Markets Confidence Survey. “There is more confidence around the supply of prospective issuers, as local corporates and family-owned businesses, coupled with private equity investors seeking to exit their portfolio companies, look towards both regional and international markets to list. The challenge appears to be around the ability of exchanges to attract these corporates to list regionally and not seek [IPOs] on international markets, as some have chosen to do in the past 24 months.”
Nowhere is this issue more pronounced than in the growing positive market sentiment developing in the UAE. In June 2013 Abu Dhabi-based Al Noor Medical listed in London with a $1bn valuation, joining its rival, NMC Healthcare, which has seen its share price increase 55% since it issued an IPO to raise $188m there in April 2012.
Dubai developer Damac Properties has also reportedly hired two investment banks to arrange an IPO in London. According to a September 2013 report by Bloomberg, Abu Dhabi private equity group Gulf Capital is also preparing to list shares of its Gulf Marine Unit in London, and the Abraaj Group, a Dubai investment firm with $7.5bn in assets under management, is planning a London IPO for its Stanford Marine Group in the near future.
Competition
Though 70% of the respondents surveyed by Deloitte expected the number of IPOs in the GCC to increase over the next year as equity capital becomes less expensive relative to debt financing, the report also pointed out that the positive results of recent listings such as Al Noor and NMC Healthcare in London may put “competitive pressure” on “regional listing regimes to address the structural and regulatory issues that will then attract both issuers and investors.”
Challenges To Ipo Process
The persistent preference of local companies for London listings is often attributed to the onerous regulatory requirements of the UAE’s onshore exchanges. Companies must have a minimum market capitalisation of Dh50m ($13.6m), at least 10 shareholders and two years of audited financials in order to list.
In Deloitte’s survey, 47% of respondents regarded hard underwriting requirements and the lack of a tested book-building framework for the UAE’s onshore exchanges as a general disincentive to issuing an IPO. The DFM requires 55% of shares to be listed in an IPO, while the London stock market has a 25% minimum share float.
Other significant challenges to the IPO process that were identified by respondents were the “mismatch of valuation expectations”– fuelled mostly by petrodollars – and the “reluctance by regulators to permit innovative structures for IPOs that enable valuations to be more comparable to those achieved in more developed markets”.
While share price listings in London are usually established through a book-building system that matches demand for shares with their listed value, the Emirates Securities and Commodities Authority (SCA) requires that all IPOs on the DFM be priced at a par value of Dh1 ($0.27) per share, which deters prospective issuers who are looking for more flexibility in structuring an offering.
According to Nabil Al Rantisi, managing director, brokerage at MENACORP, there is significant demand from retail investors for IPOs, particularly in the sectors of consumer products, retail, food and beverage, education and health care, although the minimum share floatation required by the DFM remains a major impediment to new listings. “Since most large companies in the UAE are family-owned and do not need to turn to capital markets for financing, the main objective for them to do an IPO is to institutionalise corporate governance standards,” Al Rantisi told OBG. “First, you need regulators to encourage these companies to list by loosening up the requirements to around 20-25% of shares.”
NASDAQ Dubai requires IPO issuers to float a minimum of 25% of their capital, provide a full prospectus prepared by an investment bank and recently reduced the minimum market capitalisation requirement from $50m to $10m in an effort to court SMEs in underrepresented segments of the market, but it will have to overcome a track record of lacklustre IPOs and persistent low trade turnover to encourage the blue-chip companies that have traditionally migrated to London to issue locally instead. One of the two regularly traded stocks on the exchange, Depa sold stock at $1.55 per share on the NASDAQ in 2008 and was trading at just $0.46 per share in September 2013, while the last company that pursued an IPO on the NASDAQ, Damas, has since de-listed.
Financing For Small Business
The demand for financing the growth and expansion of SMEs is there, said Alexandar Williams, the director of strategy and policy division at Dubai SME, which is working with a handful of high-potential SMEs under the Dubai SME100 programme to prepare them for a possible IPO listing on NASDAQ Dubai in the first half of 2014. There are around 72,000 SMEs in Dubai that collectively contribute 40% of the emirate’s GDP and employ 42% of the Dubai workforce, and these firms would greatly benefit from expanded access to financing options on the capital markets. While 24% of commercial bank loans are extended to SMEs and most Emirati banks have dedicated SME divisions, they are still considered one of the riskiest segments of the market to lend to, which is reflected in the interest rates of 10-20% that they are charged. On top of this, small business owners are often required to use personal or commercial property as collateral. “The lack of a good, solid financial information infrastructure, such as a credit information bureau, is hindering the growth of financial markets in general and SME financing solutions in particular in Dubai,” Williams said.
At the moment bank loans remain “the mainstay of SME financing in Dubai”, Williams said, because the process of readying a small business for an IPO remains quite costly and daunting for would-be issuers that are used to operating in a non-tax regime. Williams estimated that obtaining high-quality audited financial statements can cost anywhere between Dh50,000 ($13,610) and Dh100,000 ($27,220) for a company that has 50 employees and an annual turnover of Dh5m ($1.4m).
All of this could change in 2014, however. A member of Dubai’s Supreme Fiscal Committee told Reuters that he expected a major government asset to be taken public on the DFM in an IPO sometime between 2014 and 2015. Unlisted government assets include developer Nakheel, Emirates’ airline services arm Dnata, and the Dubai Water and Electricity Authority.
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