As investors start to think more critically of the IPOs coming out in the Gulf and UAE in particular, one milestone bears worth highlighting.
With the latest Spinneys offering, the UAE capital markets are on the cusp of passing the $1 trillion in market capitalization, making it an even more likely recipient for foreign capital inflows. And which has always been the objective of the regulators.
It wasn’t 10 years ago when many were commenting on the fact that the UAE was ‘not a very friendly jurisdiction to IPOs’, with myriad reasons - from lack of liquidity to profitability criteria - being mentioned. Most of these constraints have been done away with, and even as Western equity markets grapple with high valuations and increased volatility, the UAE continues its juggernaut of expanding liquidity spigots.
Watch out for private sector listings
As the baton now moves towards the private sector and into newer sectors, there is compelling value to be had for investors as they are provided with ever greater choice.
As portfolio exposure becomes more critical, the following needs to be kept in mind:
* IPOs are not an asset class themselves regardless of the public imagination they have captured, but represent a piece of the overall capital markets. The fact that some of the offerings have been more attractive than others is something that will continue to occur from time to time, but valuations will continue to play a critical role in secondary market performance.
* The grocery sector in the US has outperformed the S&P 500 by more than 2x over a 5-year period. Despite that outperformance, trades at a discount to the overall indices, indicating both upside potential (especially as companies look towards moving increasingly online in terms of their delivery). Whilst investors will be looking at the pricing range of the company on the date of its announcement, it is likely that oversubscription is the most likely outcome.
Whether overall allocations are increased in response remains to be seen, but secondary market performance has become an equally important indicator for the company’s performance. Spinneys expansion plans will play hand-in-hand with how the stock performs in the secondary markets.
* The broader theme of private sector participation in the domestic capital markets is gathering force, sparking the next stage for growth. Clearly change is in the air. Even as valuations are expected to compress in the Western markets (in most sectors they already have), there will be a greater trend towards a new set of blue-chip stocks within every sector.
Spinneys (along with the upcoming Lulu IPO in the same sector) clearly qualifies.
IPOs have become a world within a world in the domestic capital markets. In many ways, they represent the changing structure of the economy away from the traditional bank financed approach towards a more broadly diversified investor base that can capitalize on the growth opportunities.
UAE’s IPO issuers have been ahead of the game in realizing that inflation will likely play a greater role in asset allocation decision-making, exerting downward pressure on assets that are not cash generating. Spinneys’ financials indicate a strong backbone of a loyal and expanding customer base, high cash flow generation and - therefore - a natural hedge against inflation, which has been a prime engine for the spurt in capital market activity.
As the surrounding ecosystem now races to catch up (research reports, analyst calls, fund formation), what all prognosticators can agree upon is that capital markets in the UAE and the Gulf are in their golden age of growth. Spinneys’ marks another feather in the cap, and investors will cheer this latest opportunity that has arrived at their doorstep.
