Frontier Market IPO Update – November 2015
There has been a few FM-related IPOs over the last month or so and we thought it would be a good time to provide an update on the ones that interest us the most. Some of these IPOs we have been waiting on for a long, long time (Vietnam Airlines). IPO activity in FM has been robust for all of 2014, but we have definitely seen a pick-up in Q4 2014. We are unsure if this is the usual year-end push to get things done, or if this reflects concerns that we are expecting a softer market in 2015.
We expected Vietnam Airlines to file an IPO back in 2012, but they finally did on November 13. Some have been waiting even longer. They only managed to raise $51.3mm versus expectations of raising approximately $80mm. Unfortunately, Frontier Southeast Asia is fast becoming a textbook for how not to run capital markets. Offering only 3.5% of your company when you are not a runaway success is a recipe for disaster. Only 2 investors, both domestic were even interested in this deal. Vietnam Airlines’ prospectus indicates they thought they were worth $2.7bn, but the IPO valued them at about $1.5bn, even that is generous in our view. For comparison, last week Bangkok Airways in Emerging Southeast Asia had an IPO of almost $500mm, and it’s a third the size of Vietnam Airlines; it run much better however. The company has had sales between $2bn and $3bn for a few years but have only managed to generate a profit of less $10mm in each of those years. The return on equity is less than 2%. At least they aren’t losing money I suppose.
The opportunity that Vietnam Airlines has before itself is tremendously attractive, but the government needs to wrest more control and give private investors a meaningful stake in the company; something in the neighbourhood of 50%. Given how little was raised we expect this issue to be illiquid and would strongly advise against investing in it, unless you know something we don’t. Feel free to share.
National Commercial Bank
Saudi Arabia had a monster IPO on November 6 raising $6bn but receiving $89bn in bids from over 1.2mm people. The IPO was restricted to Saudis and that too, retail investors only. 10% was also allocated to the national pension scheme. As a result of who could actually purchase the shares, the government actually offered the shares at a very attractive value which implied a value of $40bn for the bank. This week the shares ended +10% reflecting the rather attractive terms at which the government disposed of the shares.
NCB is the largest bank in Saudi Arabia with $105bn in assets and a net profit of $2.1bn in 2013. Corporate governance is quite good and the bank has attractive growth opportunities through its own franchise as well as through its fully owned subsidiaries; NCB Capital and Turkiye FInans Katilim Bankasi, an Islamic Bank in Turkey.
You can see their annual report here. Saudi Arabia does not allow direct investors currently, but they are expected to allow foreign investors in mid-2015. It is a great opportunity to get familiar with the market. We are investors in Saudi Arabia, so if you have any questions, please do let us know. It is a $500+ market cap market and we may see it get immediately upgraded to EM status as far as MSCI is concerned when it allows direct foreign investment.
One of Tunisia’s largest companies, Delice Holding IPO’d in October and currently has a market cap of about $500mm. The IPO was 16x oversubscribed which indicates strong demand for quality offerings from Tunisia. The one country that has had a successful transition through the Arab Spring and appears to have a very strong economic outlook. Delice is primarily a dairy products company and its products are sold around the Middle East as well as select retailers in Europe such as London’s Harrod’s.
We are working on a ‘How to Invest in Tunisia’ piece which will hopefully provide you with what you need to access this interesting market with a bright future.
Inevitably when we discuss frontier markets IPOs the list of delayed/cancelled IPOs is always longer than the list of actual IPOs. It is understandable. Financial markets require a level of professionalism, transparency, and governance that is alien to the structure of numerous companies domiciled in frontier markets. Through the process, business processes improve and governance practices are cemented. It is better to wait till these are all in place than a rushed IPO. Of course the worst situation is Vietnam Airlines where you wait to IPO and you provide a poor offering and as a result attract no foreign investors.
Two delays caught our attention this week, one which reflects poor market conditions in Europe and the other which reflects the challenge of a state-controlled company transitioning to a public company.
Mota-Engil which is Portugal’s largest builder has been wanting to IPO its African unit for over a year. As recently as September, the CEO Mota-Engil had said their goal was for an IPO in 2014. However, he came out this week and said it would be pushed until 2014. Mota-Engil Africa may be worth as much as $2.5bn so it will be a very large IPO for Africa. It is important to note however that the listing will not be in Africa, it will be in Europe where at least 23 companies have delayed IPOs this year due to poor market conditions.
Botswana Telecommunications Corporation Limited (BTCL) has delayed its IPO which was supposed to occur on November 7. The IPO was delayed by employees who wanted more than 5% of the IPO which BTCL had agreed to provide and opposition parties suggesting the IPO process was not consultative enough. We are unsure if this IPO will happen in the foreseeable future, but we would love to see BTCL publicly listed.
As always, any questions, please let us know.