One of the greatest myths of the modern IPO is the belief that a surging stock price is some measure of a successful offering.
The first day pops garner a lot of attention, but all they do is show that the stock has been mispriced. Instead, the success of IPOs can be judged on volumes, because a high number of trades shows many buyers and sellers coming together to agree on a certain price.
Equally to be dispelled is the notion that listings must price at a discount to the company’s value to attract new investors. IPOs rely on hand-picking investors. In this process, the value of the bank changes from an underwriter to that of an advisor, especially if the asset or company is well run and/or part of the privatization program that is attracting significant interest on its own.
There is no doubt that subsequent price performance impacts the ability of the program to continue. But for the most part, the UAE has been able to deliver returns for investors ever since the IPO train began.
From complex offerings such as Bourouge and Fertiglobe to the more straightforward ones such as Salik and Dubai Taxi, investors have responded with increased interest. Even as in the background the US equity markets resumed their march to new records, there was a sense of anticipation that a re-allocation of funds needed to be made to capitalize on domestic opportunities.
At a discounted offer price
It helped that the valuations of these offerings were at a discount, but it does create some friction when companies had to explain their business models and how it could not possibly be compared to the ‘Magnificent 7’ and some of the other AI companies that everybody draws a comparison to.
SP Plus for example, traded on Nasdaq trades at a valuation of 30x earnings, far greater than the Parkin IPO UAE investors are now considering. Far more significant is the fact that there is no dividend that is being offered, and yet the SP Plus share trades close to its 52-week high. And despite the significantly higher level of competition that it is exposed to, unlike Parkin which will operate on a public-private sector model to propel its revenues.
As the ecosystem of analysis improves, investors expect better clarity on the forecasts regarding earnings and growth. Most importantly, investors seem to have caught on to the fact that there is a “moat” around some of these offerings and are gravitating towards these, as attested by their rising secondary market trading.
Forgotten in the literature is that even companies like Meta (then Facebook) traded at below their IPO price for months after they were listed. This created some amount of disillusionment for not only investors but also employees.
Banks and advisors need to factor in when they look at the investors they choose, limiting retail access in most cases such that people are not too distracted by the daily gyrations of the share price. To dismiss these factors is to demonstrate some sort of insouciance, which of course has been witnessed in other parts of the world.
Look at the returns
Fortunately, there has been a voice of reason that has prevailed for the most part in the listing process of Parkin, the third such divestiture from the RTA stable. Dubai Taxi has been up more than 22 per cent, while Salik has delivered an astonishing 80 per cent, with both companies exhibiting further upside potential.
Most prognosticators agree that the evolving IPO process has been something that companies in the Middle East will take forward, and we will be looking for the innovators and disruptors to pave the way. Parkin is another candidate, which proves that the process it has undertaken does exactly that.
Its strong earnings growth (72 per cent over 3 years) and initiatives to convert unpaid spots to paid ones as well as enter into agreements with the private sector, alongside with a high expected dividend payout, will be a magnet for domestic and foreign investors.
The fact that they have appointed XCube as part of market making is a further indication of market maturity, which is a welcome sign for long-term investors. Investors, big and small, will look not only at the allocations, but also look to build their positions as volumes increase in the secondary markets and infrastructure assets gain momentum.
