Perhaps the most successful example of a corporate turnaround is that of Apple.
Everyone knows the story; moreover the example remains vivid for the personality that drove the turnaround. In that sense, big business in America and the West get media coverage because of the cult following that accompanies such figures, all the more so when it comes to turnarounds.
The public at large have remained wary of big business, but attach a David and Goliath story to it, and attention (and headlines) is immediately captured.
In Dubai, two recent examples of turnarounds that have gone by largely unnoticed have been that of Union Properties and Amlak. There were remarkable periods of stress leading to corporate and debt restructurings with multiple creditors and stakeholders; heroic examples of management reorienting their business plan; lawsuits and disposing off assets in challenging environments (including during the pandemic).
And dealing with irate shareholders all the while being under the watchful eye of the regulator.
In the West, these stories would be the stuff of Hollywood and Netflix documentaries, but in the Middle East, these backstories for the most part remain in the background. In part, this reflects on the corporate culture, but in part, it is also the lack of an analyst ecosystem that scrutinizes and then comments on the turnaround progress that is being achieved on a regular basis.
Some of the wariness regarding investing in local capital markets (now undergoing a transformational shift) has been because of the information asymmetry observers believe that exists. Even when the information has been put out there for all to see, analyst commentary has been scarce.
With the recent IPO boom that has been underway to deepen the capital markets, more attention has been paid of late. But for the most part it has been either relegated to the performance of new offerings or that of the bellwether companies.
Both companies have seen their performance being reflected in their stock prices; Amlak is up more than 25 per cent over the last year while Union Properties has increased by 12 per cent (against the backdrop of Western indices being flat to negative).
Still in with an upside chance
Even after these rises, they trade at below book value, suggesting significant upside potential as the recovery pace gathers momentum. Critics would argue that the turnaround of both have been helped by a vibrant real estate market and a turbocharged economy. This ignores the fundamental point of the restructuring and belittles the achievements.
It is akin to saying that the Apple turnaround story is not that significant because the tech sector was booming in any case. The sheer brazenness of such responses are only matched by the chutzpah and illustrates the FOMO mentality more than anything else. (Herd mentality is contagious - and is also mostly fatal).
Warren Buffett famously said that turnarounds seldom turn. For the most part that statement is true, and studies suggest that less than 20 per cent of companies that get into trouble - defined as two years of consecutive losses after achieving profitability - manage to recover and ultimately declare bankruptcy.
This ignores the recent era of technology companies where making losses was almost in vogue; this era seems to be coming to a close as company after company is now getting their valuations compressed due to never ending losses). In the SME sector, the stats are even more grim, with a survival rate of less than 10 per cent.
All of this should leave the reader with three conclusions:
- Personality-based investing may work, but it will not the majority of the time as company fundamentals will eventually come to the fore.
- Local capital markets are not just about IPOs. Moreover, the management of each of these listed companies are making concerted efforts to put out as much information in the public domain as they can (this is being reflected in the growing investor base as confidence continues to rise).
- Valuations always matter. There is nothing juicier than talking about short-term flips, whether in the real estate markets or in capital market speculation, but investing is a long-term game. Unlike in real estate, for listed companies, the facts are there. And a good place to always start is to pick up the balance-sheet and in the word of Robert Gottlieb ‘turn every page’.
