Revaluation concerns overshadow new DIFX IPOs

Investors in the DP World IPO on the DIFX last autumn got their fingers burnt, with shares currently trading around 30% down on the issue price.

The problem is that the DIFX is quite simply not the same, and not intended to be the same, as the old Dubai Financial Market, the local bourse. On the DFM the rules for IPOs are very different to the DIFX because the issue price is set well below the market value and the shares are priced in dirhams.

The DIFX by contrast uses an international ‘book building’ model for IPOs, which ensures that issue prices will be much closer to market value. The aim is still to give investors a fair deal but to discourage massive oversubscriptions and big profits on day one; and of course the IPO promoter gets a better price for their shares.

Revaluation worry

This is also an exchange priced in US dollars, and investors in the UAE do not generally want to hold US dollar assets at present. The reason is that a possible revaluation of the dirham is being considered by a cabinet committee, and nobody wants to be caught on the wrong side of a revaluation.

However, the promoters of the Depa and Future Pipe IPOs are undoubtedly fully aware of these challenges to their share issues.

The price-to-earnings ratios for these groups will be significantly lower than in the DP World IPO, which priced itself near the top of comparable emerging market groups, and has suffered since with the collapse of bourses in India and China.

However, the promoters have still not been able to resist whipping up public interest in the issue with advertising and promotions that make this sound like an old fashioned IPO on the DFM.

Past precedent

It is understandable that promoters of IPOs in the UAE are always likely to want to hark back to the good times before the crash of 2006. But given the very different rule book about pricing IPOs at the DIFX, this could be misleading, or at best over optimistic.

Besides, investors will surely also ask themselves: with all the turmoil in global capital markets since last summer, and the weakness of the UAE bourse this year, is this really the time to buy an IPO? For as with any ownership of shares, an IPO will leave you exposed to market events, positive and negative.

Nonetheless, both the Depa and Future Pipe IPOs offer exposure to the booming UAE construction industry, one of the few safe havens in troubled markets and are not being overpriced.

See also:
Depa initial public offer commences
Is the $10.5bn Gulf IPO pipeline resilient to market woes?