UAE IPOs: Are analysts missing the trick on valuations, price performance?

Markukami once said: “If you only read what everyone else is reading, you will only think what everyone else is thinking”.

As the number of UAE IPOs increase, the power and influence of the analysts have increased with it as well. These are the men and women in charge of delivering new investment ideas and the subsequent trading revenue that would result.

It is somewhat surprising therefore to note that analysts for the most part have called the secondary performance price targets of most of these companies wrong; from Salik and Parkin to ADNOC Gas and Phoenix. Analysts have either been too conservative or too aggressive in their price targets, making their analysis somewhat ignored.

Missing the picture on Parkin, Salik

In a rapidly evolving market, there is always a vacuum in terms of the coverage that stocks will get, with inadequate skillsets mostly trying to sell the stock to institutional investors.

A cursory glance at the price targets of Salik and Parkin shows these stocks have blown past price targets months in advance, with no price forecast change and yet the ‘buy’ signal remains. In the age of social media, a new cottage industry of commentators have mushroomed (perhaps trying to emulate the success of Roaring Kitty).

Higher value than parent company?

Even here, there has been a lack of understanding of the business model in many cases, and the critical issue of valuation that comes along with it. Take the recent case of the Talabat IPO, whose price range announcement values it more than the parent company.

Although this is not unheard of, it is relatively uncommon, and typically occurs (outside of closed-ended mutual funds) in companies that are illiquid, have tax constraints, constraints on short-selling, or deadweight agency costs. (The latter is politely phrased word for inadequate senior management performance.)

It is abundantly clear that since the announcement of the Talabat IPO, the price of DeliveryHero has gone down, indicating that market participants are not viewing the spinoff with the positive halo that they should. What is astonishing is that the media has not covered this at all.

Talabat valuation higher than parent

There are no relative comparisons with the likes of LuLu or Spinneys. Or even the fact that in international markets, this is an aberration. Investors have had to look elsewhere to parse through the analytics and what it implies for the company’s prospects.

The fact that Talabat is the most profitable component of the Delivery Hero portfolio accompanies the rather generous valuations, which values it at more than 35x adjusted earnings. This in a market place that is becoming hypercompetitive with the likes of Careem, Deliveroo and Jahez making inroads into the ecosystem.

Nothing much for retail investors

Perhaps taking this into cognizance, the investment bankers have allocated a miniscule portion of the offering to retail investors, claiming that it would be better understood by institutional investors, thereby making the job of the analysts that much more difficult to ‘spin’.

What then to make of the analyst ecosystem? There is no doubt that analysts have a following, and that they have the ability to move markets (however amateurish they may sometimes appear to be).

With rising volumes in the market, and impending and ongoing pension reform to replace the end of service benefit system, the expatriate community is taking a greater amount of interest in the dynamics of the local and regional equity market mechanics.

There will inevitably be a proliferation of money managers wo will peddle their offerings to the public as the market continues to grow in size.

Information dissemination, however plays a key role, and it is over here that analysts play the ‘hinge’ role in the history building narrative.

It would be better in the interests of all that analysts come to the party and rather than flag waving, call a spade a spade. It would be equally beneficial if the media took a more critical insight into such peculiarities and scrutinized these statements, as they are supposed to do.

It is missed opportunity to present the different sides of a story that investors would have liked to read.