IPOs in 2015: Tadawul was most active market in GCC

MANAMA: IPO activity in GCC stock markets slowed down considerably in 2015, with only five listings compared with 14 in the previous year and the average over-subscription decreasing to 10.6 times from 18.5 times a year earlier, says a recent equities strategy report issued by SICO Research.

Saudi Arabia’s Tadawul was the most active market with four IPOs (versus six in 2014). There were no listings in UAE compared with four the previous year.
The report from SICO Research, the research and analysis arm of Bahrain-based Securities and Investment Company (SICO), adopts Micro approach instead of Macro focus in analyzing GCC equities.
GCC nations are in challenging times due to lower oil price and governments are taking appropriate measures through fiscal reforms, it said.
The report analyzes the impact of these measures on different industries and focus on companies which are overly punished, post broader market correction and are trading attractive at current valuations through bottom up approach.
GCC equities started 2016 on a shaky footing, and at the time of publishing the report on Feb. 21, S&P GCC Index was lower by 10.8 percent to date.
This was led by Saudi Arabia at minus 14.9 percent, Kuwait at minus 8.4 percent and Qatar at minus 4.4 percent. Key factors behind this sell-off included uncertainty about crude oil prices; the lifting of feedstock subsidies in Saudi Arabia, resulting in higher production costs for petrochemical companies; stretched valuations; and heightened geo-political tensions in parts of the MENA region.
However, according to the report, the broader market correction has pushed yields higher, and created deeper value in selective names owing to attractive and sustainable yields.
SICO has identified 14 stocks that have a clear earnings growth despite the changing macros, with a demonstrable ability to generate and distribute cash.
These companies, which are analyzed in detail in the report, are active in the transportation, banking, real estate, health care, petrochemicals, telecommunications and consumer goods sectors.
The SICO report also notes that foreign investors pulled out from most GCC equity markets except for the Abu Dhabi Securities Exchange (ADX), due mainly to the inclusion of Etisalat in the MSCI Emerging Markets Index in November 2015.
Net foreign inflow was highest in the ADX compared with other GCC markets, increasing to $ 1.58 billion from $ 0.97 billion in 2014.
Negative market sentiment and persistent low crude prices pushed foreign investors away from Tadawul, despite the market opening up to qualified institutional foreign investors in June 2015.
SICO Research expects crude oil prices to remain soft in 2016, after declining by 48 percent in 2014, 35 percent in 2015 and 14 percent year to date (Feb. 21), due to a supply glut and lack of consensus among OPEC members to cut production.
Sequentially, SICO is assuming quarterly prices this year of $35, 40, 40 and 45 per barrel respectively, led by demand growth (1.2 million barrels per day in 2016 versus 1.6 million bpd in 2015) which should decrease the current supply glut and bring markets to balance by 2017.
Nishit Lakhotia, head of research at SICO, said: “Despite the sell-off, further risk to downside persists. In applying our stock-picking framework in this difficult environment, we recommend stocks that have a clear earnings growth and strong cash flow generation despite the changing macros. Our top 14 names in the recommendations list are from UAE, Saudi Arabia and Kuwait, offering a total return (price return and dividends) from 24 percent to 53 percent over the next year. Most of our picks offer a strong sustainable yield of 6 percent+, an important factor for our recommendation.”