Enthusiasm over the launch of three initial public offerings (IPOs) on Egypt’s market this year has been relatively dampened by the disappointing performance of the most recently floated Emaar Misr stock.
In the first week of July, Emaar Misr for Development, the wholly owned subsidiary of Emirati property developer Emaar Properties, launched an IPO that was touted as the largest flotation on the Egyptian Stock Exchange since 2007. However, its less than inspiring performance has raised skepticism over whether this may derail an expected recovery in IPO activity on the Egyptian market.
Initially, Emaar Misr planned to raise up to LE2.82 billion by selling 600 million shares, about 13 percent of the company, valued at LE4.7 each. When it came down to it, however, the shares were offered at a reduced price of LE3.8 for a total of LE2.28 billion. The offering was promisingly oversubscribed from June 16-25. The first tranche, where 510 million shares were allocated to institutional investors, was 11 times oversubscribed, while the remaining 90 million offered in the second tranche were 36 times oversubscribed.
By July 7, trading of the Emaar Misr stock had brought down the price to 6.6 percent, closing at LE3.55. On August 11, the price had slid further to close at LE3.09.
In an attempt to stabilize the stock price, Emaar Misr has offered to buy back 90 million shares from shareholders.
Sherif Samy, chairman of the Egyptian Financial Supervisory Authority, tells Mada Masr, “This is a normal procedure that can happen in any IPO and takes place through the [company’s] stabilization fund.”
The buyback is heavily oversubscribed with shareholders submitting a total of 487,317 million shares for the company, or around 80 percent of the shares sold in the IPO.
While a buyback may be a normal part of the process, the Emaar Misr floatation has obviously bucked the trend of more successful IPOs that preceded it. Two senior executives resigned early in August, and media has speculated that it may be linked to the IPO’s poor performance.
Initial public offerings (IPOs) are undertaken by companies that are looking to raise capital and gain access to a more steady source of liquidity as they plan to expand or launch new projects.
IPOs made a comeback on Egypt’s bourse in 2005, after five years of dormancy, with three offerings valued at a cumulative LE7.6 billion. There were two in 2006 and another two the following year, as the activity peaked in 2008 with four IPOs valued at LE4.2 billion. After the ripples of the global financial crisis hit Egypt, IPO activity stalled for the whole of 2009, before recovering the next year with three offerings valued at LE2.2 billion. The last of these was property developer Amer Group, which went public in November of 2010, making it the last pre-revolution IPO.
In the aftermath of the 2011 uprising and the subsequent economic slowdown, Egypt saw a halt in IPO activity for three years as companies remained reluctant to invest or grow amid a climate of political instability and economic uncertainty.
Signs that this reluctance began to ease first appeared in 2013, after the removal of deposed President Mohamed Morsi. In the second half of that year, several companies announced their intention to go public, which indicated that they were regaining the confidence to once again seek growth on the Egyptian market after a period of merely keeping their businesses afloat.
The Arabian Cement Company led the way by listing on the stock market in the first half of 2014 and saw quite a successful response. The offering was 18.5 times oversubscribed and by the second day of trading, the stock price jumped from LE9 per share to LE10.41.
According to the Egyptian Exchange’s annual report, there were a total of five IPOs last year at a cumulative value of LE856 million, well below the value of offerings made in the previous years, indicating diminished market prices.
More companies expressed interest in going public, with plans to do so in 2015, including Edita Food Industries, Emaar Misr, Arabtec Egypt, Etisalat Misr, Egyptian Steel and Orascom Construction. So far, only Edita, Orascom Construction and Emaar Misr have followed through.
The offering of food company Edita that took place this past April performed well, according to analysts. Edita offered about 30 percent of its shares at a price of LE18.5 each. The offer was oversubscribed by 13.4 times in the private placement and 4.5 times in the public offering.
On its first day of trading, Edita’s stock price climbed 13-17 percent higher compared to its offering price, according to analysts at Pharos Research. In a note at the time, the investment bank said, “We view the offering price as already reflective of the strong growth story of a market leader.”
What happened to Emaar?
The success of previous IPOs raises questions as to why, in comparison, Emaar Misr’s highly anticipated listing was underwhelming, despite it being the largest flotation in years. Some analysts pointed to the timing of the IPO in context of what was happening in the country, while others wondered how this reflected the health of the company and the initial valuation of the stock price. Still, others thought it may indicate a slowdown in the overall real estate sector.
The EFSA’s Samy says the timing was unforgiving. “We should keep in mind that the offering happened at the same time as the Greece crisis, the assassination of the prosecutor general Hesham Barakat, and the [terrorist attacks] in Sinai. You cannot evaluate the offering without taking these factors into consideration,” he adds.
All this was also happening during the month of Ramadan, where business activity slows down and trading activity on the market is typically muted.
Hany Genena, head of research at Pharos Holding, explains the fundamental differences between IPO of Emaar on the one hand, in comparison to Edita and ACC on the other.
“There are two types of IPOs that can take place, one used as an exit channel where a shareholder sells their shares, and the other aims at raising capital [for the company]. The first one is good for the market since a new company gets listed, but not so much for the economy since there is no cash injection. The second type helps bring FDI into the country, and therefore, helps the economy in general,” he explains to Mada Masr.
While the Edita and Arabian Cement offerings were of the first type, the Emaar Misr offering aimed at raising capital for the property developer’s new projects.
According to Genena, Edita and Arabian Cement are both profitable and stable companies, and investors have a clear picture of their cash flows, which is attractive particularly to foreign investors.
Emaar Misr, on the other hand, is in the real estate business, which is generally considered a riskier bet. Genena says that real estate is divided into commercial and residential, the latter being a more predictably profitable endeavour. “The residential…is much more stable since all it needs is a good real estate designer and the instalments paid by buyers cover the cost [of the project] and are reliable,” he says.
On the other hand, “commercial, as in shopping malls, is much more risky. The company builds the mall and then tries to get people to rent the spaces. They can’t guarantee they will be able to do that, which doesn’t sound good to investors,” he adds.
In announcing plans to raise capital for new commercial projects, Emaar had drawn out a timeline for their completion of between 2021 and 2024, which according to Genena, is a far off prospect for investors, especially since they cannot be certain whether the units available will be rented. In his opinion, the fall in the stock price was expected.
On his part, Samy says it is too early to be evaluating the Emaar Misr IPO and that it takes at least six months to judge the general performance of any flotation. “Things like these happen in IPOs all over the world all the time. As long as investors are buying, that means they do see potential in the offering,” he adds.
Genena agrees that the timing has worked against the stock price, but goes on to discuss technical conditions of the real estate sector’s performance on the market.
“The real estate sector in general was having problems. There was a slowdown in the second quarter of 2015 after a period of really high sales in 2014. Talaat Moustafa and Palm Hills were trading under fair value,” he says.
On another note, the offering being so heavily oversubscribed, while typically a healthy and promising sign, was not so in this case, according to Genena.
When the number of shares subscribed to are much higher than the ones on offer, companies resort to a method called allocation, thereby deciding how much each investor will actually get. Investors then end up with a much lower number of shares than they planned for, which may make them more willing to dump the stock if they see an opportunity to cash in.
This explains what happened when investors saw the Emaar Misr stock price declining, thus adding further downward pressure. At the same time, other real estate companies listed on the market are already undervalued, which makes them an attractive alternative for investors, he says.
“This could have all been avoided if the investment bank had offered a less ‘perfect’ price for the shares,” says Genena.
Cairo-based investment bank EFG Hermes served as the bookrunner for the Emaar Misr IPO. Company executives contacted by Mada Masr refused to comment on the performance of the IPO. Emaar Misr were also unavailable for comment.
”Investors felt the company had an overvaluation problem, since they started with the high price of LE4.7 per share and eventually reached LE3.8, which was also high. In investment world, setting a price that leaves room for error makes investors trust the company more…they should have settled on a lower price,” Genena adds.
Since 2013, Egypt’s stock market has been one of the best performing in the region, mainly because it was recovering from drastically diminished activity and investment in the two years after the 2011 uprising. However, the past few months have been less robust with lower trading volumes.
The Egyptian stock market has grown by 45 percent compared to its value in August 2013. However, compared to where it was this past February, it has declined by 18 percent. The benchmark EGX30 index has dropped around 10 percent year-to-date.
“The stock market had been going up dramatically until December 2014, but the past six months have been flat,” says Samy, describing it as a cooling down effect after a period of high growth.
“We expect a new dose of deals and transactions to trigger another market climb in the coming period, but what seek is liquidity and trading volumes in particular. Currently, trading volumes are not that great compared to 2014 and the period before 2011,” Samy says.
“The average volume in 2010, with a much lower exchange rate at the time, was between LE1 billion and LE1.5 billion per day. Now it is around LE500 million,” he says. In order to match the numbers that the stock market used to record before 2010, while taking the current value of the pound into consideration, Samy says, volumes need to reach LE1.8 billion daily.
Samy also links local market conditions with a trend of stagnation in European economies, Egypt’s largest trading partner, namely the Greece crisis, as well as economic turbulence in China, one of the leading economies of the world, all along with instability regionally with a war in Yemen and terrorism in Sinai.
Still, there are plans to expand the instruments available to investors on the market, such as a proposal to draw up regulations to allow for trading Islamic bonds, which can help attract more Gulf investors.
Genena says that despite its performance so far, the Emaar Misr IPO has the potential to benefit the economy the most when the company starts using the money raised to develop its new projects and spur business activity in the sector.
He also does not see the Emaar Misr experience deterring other companies from going public on Egypt’s market, mainly because it did not lose out in the process and was still able to raise the needed capital.
“It may make investors fear subscribing to IPOs in the future though, but at least investment banks will be more careful with the prices they set,” he says.