Middle East IPO market set for 2010 revival as conditions stabilise

Dubai: The issuance activity in the Middle East initial public offering (IPO) market which ground to a halt in the third quarter of 2008 is set for a revival from the second quarter of 2010, according to the latest investor survey by the Royal Bank of Scotland.

"Our research shows that primary equity issuance conditions in the Middle East have improved substantially since the beginning of this year and should improve further as volatility continues to normalise," said Durk van der Zee, Head of Equity Capital Markets Middle East, explaining the results of their latest survey of international institutional investors who are keen to invest in the regional markets.

Unlike most global equity markets which have seen significant re-equitisation via rights issues and accelerated offerings in 2009, Middle East equity issuance has been minimal over the same period.

Companies have resisted equity issuance at significant discounts to previous market highs, preferring to renegotiate with banks and issue in the bond market to extend maturity profiles.

Raising millions

According to a recent report by Ernst & Young, a total of four companies listed in the Middle East in the third quarter of 2009 and raised $871.79 million (Dh3.2 billion) compared to five IPOs raising $1.021 billion in the previous quarter and 14 IPOs raising $3.74 billion during the third quarter in 2008.

A total of $1.97 billion has been raised in Middle East IPOs in the first three quarters of 2009 compared to $12.44 billion in same period last year.

Three IPOs in Saudi Arabia and one in Syria raised a total of $871.79 million in the third quarter 2009. National Petrochemical Company of Saudi Arabia was the largest regional IPO in the third quarter of 2009, raising $640.85 million followed by the Saudi Steel Pipe Co with $106.81 million.

Saudi Arabia's Al Mouwasat Medical Services with $87.99 million and Qatar National Bank — Syria with $36.14 million were the other two new issues.

"Companies are still wary of the strength of the recovery in the region. Whilst the market may not change significantly during the remainder of this year, once there is evidence of a sustained recovery in the region, there is likely to be an increase of fund-raising on the regional stock markets," said Phil Gandier, Managing Partner, Transaction Advisory Services, Ernst & Young Middle East.

Risk appetite

RBS' van der Zee sees regional corporates returning to the equity capital markets with new issues starting early next year as the regional market performance and risk appetite improves.

The risk tolerance levels of international investors have improved substantially in the recent months as they have started taking exposures in the emerging markets to tap outperformance, especially of the BRIC (Brazil, Russia, India and China) markets.

In last six months most investors have not changed allocations to MENA markets reflecting their underperformance relative to BRICs.

According to RBS research a significant majority of investors believe the MENA equity markets are undervalued.

"Middle East exchanges have outperformed traditional markets but underperformed the BRIC markets, in part due to a preference for liquidity in volatile market conditions. This underperformance has created a significant valuation gap between BRIC and Middle East equities, making the latter a lot more attractive," said van der Zee.

This year has witnessed a surge in government bond issuance, and to a lesser but increasing extent corporate bond issuance, at the expense of equity market issuance in the Middle East.

According to RBS, given the already high levels of bank debt, expectations are that conditions for bond issuance will continue to remain strong, with the IPO market reviving in the near term.