IPO investments are soaring in the GCC. Here’s how you can financially benefit

Dubai: Shares in companies that are newly-listed on the stock market are now increasingly being offered to investors both in the UAE and elsewhere in the GCC. But how does that impact me?

You could decide to invest your hard-earned money into a company that has just decided to publicly list its shares on the stock market, and in doing so you can make your money reap enormous gains. But that’s not without its risks.

So let’s walk you through what an IPO is and what all you need to be looking out for when making such an investment.

What is an IPO and how does it make me money?

For starters, an IPO or initial public offering is the first sale of shares on the stock market by a formerly private company. It’s when a company “goes public”.

If you participate and buy stocks in an IPO, you become a shareholder of the company. As a shareholder, you can enjoy profits from the sale of your shares on the stock exchange, or you can receive dividends offered by the company on the shares you hold.

What are dividends? Dividends are regular payments of profit made to investors who own a company's stock. Dividends are payments a company makes to share profits with its stockholders. They're paid on a regular basis, and they are one of the ways investors earn a return from investing in stock.

Why else should I buy IPO stocks?

A stock bought during an IPO has the potential to deliver huge capital gains decades down the line, historical data shows. Even just the annual dividend income of a highly successful company can exceed the original investment amount, given a few decades' time.

However, you shouldn't invest in an IPO just because the company is garnering positive attention. Extreme valuations (when the cost of buying an IPO stock is severely overpriced) may imply that the risk and reward of the investment is not favourable at the current price levels.

For instance, while ride-sharing giants Lyft dropped about 40 per cent and Uber sunk 60 per cent since their IPOs in the US in 2019, vegan burger maker Beyond Meat soared over 500 per cent.

So investors should always keep in mind a company issuing an IPO lacks a proven track record of operating publicly and should make such an investment while aware of this risk.

Being hasty in an IPO investment can prove costly

Investing in an IPO can be like playing a video game — you need to hit the right button at just the ‘right moment’.

When investing in an IPO, you can make a lot of money in a very short span of time, if you are not hasty. Tactful and timely decisions can bring you very good returns over a period of time. That period maybe short or long depending on the stocks purchased.

A poll indicated that the top-performing IPOs in the last decade gained from 100 per cent to 150 per cent by the debut year’s end, some in the first weeks or months.

This may lure you into thinking an IPO is a sure-fire profit opportunity – till you consider that the worst-performing IPO companies lost between 50 per cent and 85 per cent of their value over the same time period. So be careful!

Why buy IPO stocks now? IPO listings on the rise in the UAE

After a year that featured three major IPOs on both Abu Dhabi's Abu Dhabi Securities Exchange (ADX) and Saudi Arabia's Tadawul stock markets, Dubai also announced plans to list as many as 10 state-owned companies.

Dubai recently revealed plans to list government real-estate operator Tecom on the Dubai Financial Market (DFM). Tecom Group houses business complexes such as Dubai Internet City, Dubai Media City, Dubai Design District and Dubai Industrial Park.

This was soon followed by Dubai’s plans to list Emirates Central Cooling Systems Corp. (Empower), a venture between a unit of Dubai Holding and a state-owned utility.

All this is in line with Dubai seeking to revive trading volumes on its stock market and catch up with rival exchanges in the region. It plans to increase the market’s size to Dh3 trillion and list government entities, including the Salik road toll system and Dubai Electricity and Water Authority (DEWA).

Al-Yah Satellite Communications Company’s (Yahsat) shares were admitted to Abu Dhabi Exchange (ADX) by state-backed Mubadala in July, marking Abu Dhabi’s first IPO since 2017. Abu Dhabi National Oil Company (ADNOC) listed shares in ADNOC Drilling in October and holding company ADQ announced plans to list port operator Abu Dhabi Ports.

More Gulf stock market IPOs expected in 2022: analysts

Gulf stock markets are likely to have another busy year of initial public offerings (IPOs) in 2022, possibly surpassing this year's bumper crop, US-based Bank of America executive told Reuters last week.

Saudi Telecom Company (STC) and Public Investment Fund (PIF) have increased the size of their planned public offering and trading has commenced on the shares of Saudi stock exchange operator Saudi Tadawul Group (STG).

The kingdom’s most prominent listing this year was that of Acwa Power, which started trading on the Saudi Stock Exchange’s (Tadawul) main market in October.

The IPO, which raised $1.2 billion (Dh4.41 billion), followed the Public Investment Fund (PIF), the sovereign wealth fund of Saudi Arabia, increasing its stake in Acwa Power to 50 per cent in 2020.

Saudi Tadawul Group (STG), Tadawul’s owner and operator that is solely held by PIF, also started trading on its main market in December — raising $1 billion (Dh3.67 billion), making it the kingdom’s second-largest IPO this year. STG shares soared 14.48 per cent on debut.

PIF is also selling additional stake in Saudi Telecom Company (STC) as part of a secondary public offering comprising 120 million shares, or 6 per cent of the telco’s share capital. The wealth fund holds a 70 per cent stake in STC.

Indicative of GCC stock market IPOs gaining momentum, Saudi Arabia’s Tadawul All Share Index reached a 15-year high in October and ADX’s general index grew by over 76 per cent since the start of 2021.

What so analysts say about this high demand for IPOs among investors?

Initial public offering (IPO) activity in the GCC gained traction in the fourth quarter of 2021, as listings of state-backed organisations progressed in the run up to 2022, wrote Neha Bhatia, Construction and Infrastructure Editor at MEED, UK-based research platform part of data analytics firm GlobalData.

“Investor confidence has grown amid high vaccination rates and reforms programmes introduced in both markets, and state-backed organisations have driven stock market progress this year.

“However, while government-led listings have successfully renewed the regional IPO wave in 2021, the long-term diversification and growth of regional financial markets will require greater private sector participation.”

“Regional regulators are likely to continue introducing funding and regulatory support to encourage more family and privately held businesses towards listings in 2022.”

Investor Lesson #1: Learning valuation, market feel before investing in an IPO

Taking a look at valuation might seem tricky for investors but is an important aspect that shouldn’t be overlooked. To begin with, see what the company is worth in the market (valuation) as compared to its peers or existing companies in the same industry.

Simply put, to measure a company’s market value or ‘worth’ a bank takes into consideration possessions the firm owns, debt it owes to lenders, number of employees, sales, profits and how many shares it has in total.

Simply put, to measure a company’s market value or ‘worth’ a bank takes into consideration possessions the firm owns, debt it owes to lenders, number of employees, sales, profits and how many shares it has in total.

A number of experts had one common thing to say when investing in an IPO and they cannot stress it enough, always look back at how the stock price of recent IPOs ended up performing in the market. So always look back at how the stock price of recent IPOs ended up performing in the market.

And what do I need to keep an eye out for vis-a-vis underwriters?

Successful IPOs are typically supported by bigger banks that have the ability to promote a new issue well. Be more wary of smaller investment banks because they may be willing to underwrite any company.

Investors should keep in mind that if seeking advice from banks that are handling that particular IPO, they might not get a balanced report and might get a biased view as it represents a conflict of interest for the lender.

Investor Lesson #2: Know the risks to look out for when spending money on an IPO

Now that we have brushed through some of the fundamentals, let’s get down into the proven tips and risk factors widely circulated by industry veterans and various country’s regulators:

While they are often thought of as exciting (recent market debuts of Lyft and Uber comes to mind), the offerings bring in a great deal of uncertainty, making them risky.

So while investors should expect higher returns as compensation for the higher risk, there are also lessons learnt from botched IPOs.

Big backers need not mean big returns: Big names in the list of investment banks or major stock brokers should not tempt you to buy the IPO they are backing. They may have different calculation scales for their backing.

Don’t fall for the hype: Remember that the company which is going public along with its investment banks have put in a lot of money into the process of IPO. They will not miss an opportunity to make it look like a piece of hot cake, which is in demand.

Ease your way into ownership: Buying a lot of shares of a volatile stock (stocks whose prices rise or drop constantly) at the beginning can set you up for a wild ride.

When a company’s share price is somewhat unpredictable, dollar-cost averaging (spreading out your trades and purchasing the stock at regular intervals over time) protects you from the risk of, say, buying shares at the peak.

You don’t have to be the first in line: Stocks like Apple, Amazon and Google have provided rich gains for investors who bought shares years after those companies’ initial public offerings.

Keep your portfolio in balance: Never let a single investment — IPO or otherwise — skew your portfolio’s allocation in a way that could be detrimental to your long-term goals.

To reduce your overall risk, experts recommend that the portion of your holdings devoted to individual stocks make up no more than 5 per cent to 10 per cent of your overall portfolio, with the remainder of your long-term savings spread out across a variety of mutual funds, which essentially comprises of multiple type of stocks or other assets.

7-question checklist before diving into an IPO

1. Why has the company elected to go public?

2. What will the company be doing with the money raised by the IPO?

3. What is the competitive landscape in the market for the business's products or services? What is the company's position in this landscape?

4. What are the company's growth prospects?

5. What level of profitability does the company expect to achieve?

6. What is the management like? Do the people involved have previous experience running a publicly traded company? Do they have a history of success in business ventures? Do they have sufficient business experience and qualifications to run the company? Does management itself own any shares in the business?

7. What is the business's operating history, if any?