Spinneys’ IPO numbers throw down a marker for UAE family businesses

It would not be much of an exaggeration to state that the story of the revival of the UAE capital markets in the last 3 years has the ingredients of a Hitchcockian thriller.

The spectacular rebound in investor interest, spurred on by the privatization program and the capital gains, has by now defenestrated the opinion that the markets are to be left alone. Retail and institutional interest has been astonishingly high with conversations finally making it to the living room, just as they had for the real estate sector.

This achievement now moves up a notch with private sector companies joining in on the bandwagon, and money managers demanding a higher share of an allocation and/or a discount to the offer price. (Not unlike what happens in the US where fund managers were known to have withdrawn their interest in an IPO if they did not get either their preferred allocation or their desired price.)

But markets have a habit of changing faster than what people anticipate, and investors have increasingly demanded a piece of the next big thing, putting issuers in the driving seat as the level of financial education increases.

With the media getting into the action and hyping things up, especially the price gains on the first day, the frenzy has given banks even more power to underwrite these offerings. Of course, the issue of valuations remains at the forefront, as they should.

With the Spinneys premium brand coming into play - their expansion ambitions both geographically as well as vertically (with food production at the back end) and increased retail space at the front end - a dividend yield in the range of 3.3-3.5 per cent alongside a forward P/E of under 20 augurs well for investors. It will be seen as a litmus test for UAE family businesses on how to price their own offerings.

The growth story is all the more critical given that we will soon enter what will be euphemistically known as the ‘war of the supermarkets’ given the imminent IPO of Lulu in addition to another rumored offering.

The winner is the investor, even though what is largely hidden from the investing public is the allocation process.

A sure-fire IPO hit

Regardless of the size of the offering (Spinneys would be considered a relatively modest one), in each IPO, bankers may have had their ‘favourite’ investors.

Through sheer force of applications, the retail investors have made their presence felt, putting their money where their mouth is and demonstrating confidence in not only the macro growth story of the country and the region, but more specifically of each company that has come to market.

Subsequent secondary market performance of some of the more recently listed IPOs paint a varied story of success. It is this report card that investors resort to in their decision making.

With incentives changing, and secondary market performance coming to the core, the focus has shifted to company performance. And how ‘first day pops’ translate into sustainable gains, no longer allowing much leeway for preferential treatment.

On the other hand, the rapidly expanding retail investor base is a boon for the capital markets as it augurs well for market makers, brokerage houses and the stock exchange itself, as secondary market liquidity becomes a critical factor in portfolio allocation.

Ever onward retail investors

This has forced banks to continually increase the size of the retail offering in IPO after IPO. Even though retail investor interest can be fickle, the current stage of evolution of capital market suggests that there is a paradigm shift underway for the broadening of the investor base. Thus setting up the stage for local pension funds and investment schemes to play larger roles

In the background, there is also the story of inflation and the fact that on a relative valuation basis, the ‘home country’ effect is being switched to that of being the UAE.

That will play out over time. For now, capital markets seem to be on course to perpetuate their virtuous cycle, driven by competitive valuations and business models, with more stakeholders rushing in to fill the space of commentary, analysis and decision making.

Cold calling for local IPOs have boomed (a welcome change from the traditional calls encouraging investment into international stocks and commodities).

As levels of information dissemination continues to rise, everyone appears likely to gain. And Spinneys, the latest addition to the IPO list, promises further capital formation in a home-grown success story that is now going both regional and ‘hyper-local’ simultaneously.

For the UAE capital markets, its renaissance would surely skyrocket up the bestseller list for any financial thriller.