Zain Iraq to launch IPO before June

Zain Iraq will float its shares on the Iraqi Stock Exchange (ISX) by June, it has been reported.

The announcement follows Asiacell’s successful trading debut after an IPO worth $1.3 billion last month, the biggest in the Middle East since 2008.

Zain Iraq’s Chief Financial Officer Wael Ghanayem expected demand for the company’s shares to be high, he revealed in an interview with the Washington Post yesterday.

One of three mobile phone companies in Iraq, the firm is required to list 25% of its shares on the ISX under a 2007 licensing agreement. Korek Telecom will also need to comply with this arrangement.

Mena FM recently spoke to fund managers who predicted that the follow-on from Asiacell’s IPO could represent a big boost to Iraq’s economy.

They were positive that the telecoms sector would play a key role in upcoming Iraqi investments, particularly as the sector is seen as one of the fastest growing markets in the world.

Invest AD portfolio manager Sherif Salem saw Asiacell’s IPO as a catalyst “which would immediately add depth and liquidity to the Iraqi stock market.”

He added that telecoms companies presented a clear opportunity for revenue and subsidy growth, although Iraq’s banks dominate the market.

Michael Daoud, vice president MENA sales broker at Auerbach Grayson, said Iraq’s private sector domestic credit as a percentage of GDP (9% according the World Bank) showed prospects for growth.

Ghanayem was equally optimistic about the investment possibilities presented by telecommunications and said that the company planned to invest 15% of its 2013 revenues on modernization.

“Starting a 3G service will open new growth horizons in the telecommunications industry,” he added.

A unit of Kuwait’s Mobile Telecommunications Co., Zain Iraq has a 13.7 million-strong subscription representing a 50% share of the market.

Advisors to the offering will include Citigroup Inc., National Bank of Kuwait and BNP Paribas SA.


Unlocking Iraq’s True Value

Economic forecasts for Iraq continue to make for pleasant reading. The most recent IMF World Economic Outlook predicted GDP growth of 10.2% in 2012 and 14.7% in 2013 and Iraq has one of the world’s largest oil reserves.

But the IMF also acknowledges that the task of rebuilding the country remains immense and that reconstruction requires not only the rebuilding of its infrastructure, but also of its economic and social institutions and the creation of a business environment that attracts capital.

The scale of the challenge is reflected in the performance of Iraq-focused funds over the last 12 months. Northern Gulf Partners’ Iraq Investment Partners fund was down 3% last year - after growing by more than 20% in 2011 - although strong final quarters enabled the Iraq Opportunity Fund and the FMG Iraq Fund to venture into positive territory. Unaudited figures for 55 North Company’s Iraq Phoenix Fund indicate growth of 5%.

Invest AD’s Iraq Opportunity Fund also bounced back in November, mainly as a result of positive investor sentiment in some of the larger-cap stocks, particularly Bank of Baghdad and North Bank, explains portfolio manager Sherif Salem. He adds that companies in the telecoms sector present a clear opportunity for growth in terms of both revenues and subsidies.


Telecoms boost


“In a market dominated by the banking sector, the upcoming IPO of Asiacell could give the market a boost,” adds Salem. “It is expected that it will involve the floating of a 25% stake in a deal that could be worth as much as $1bn, which would immediately add depth and liquidity to the Iraqi stock market.”

Iraq’s three mobile companies - Asiacell, Korek and Zain Iraq - are required to list 25% of their shares under the terms of licences bought in 2007, and forthcoming flotations could mean telecoms become a leading theme in many portfolios.

FMG investment analyst Henrik Kahm describes Iraq as one of the fastest growing telecoms markets in the world, while he is also bullish on the banking sector. He also refers to consumer stocks as “looking interesting, but still very few options currently listed” and expects more funds to enter the market once the custody issue is resolved (see box out).

There is general agreement that Iraqi assets are still undervalued. “Many companies have book value several times their market cap and companies in general are operating at a fraction of their future capacity,” says Kahm.

Iraq is not a ‘dirt cheap’ market - banks are trading at 1.5 times trailing earnings, on average - but future growth opportunities are evident when you look at domestic credit provided to the private sector as a percentage of GDP. The World Bank puts this at 9%, compared to 56% in Kuwait, 47% in Russia and 40% in Saudi Arabia, observes Michael Daoud, vice president MENA sales at broker Auerbach Grayson.

Paul Collison, managing director of investment management firm 55 North Company, agrees that there are investment opportunities both in ISX listed stocks and in foreign-listed firms with activities in Iraq. But he adds that many investors - especially retail/individual investors - will not be able to fully understand and evaluate risks. “Furthermore, we have come across numerous situations that (upon more detailed analysis) we would short if we were able to. Many listed companies have dismal prospects so investors must be careful of company-specific situations. Some can (and will) go to zero over time and others will experience negative news and shocks to their valuations, most likely around corporate governance and other issues.”

Northern Gulf Partners portfolio manager Bartle Bull reckons telecom IPOs and the continuing extraordinary growth in assets, deposits and profits of Iraq’s top banks are the next big investment story for Iraqi funds.

To this list, Collison adds completion of a critical mass of the oil and gas export infrastructure from Kurdistan to Turkey, and enactment of federal oil and gas law. “As hydrocarbon production ramps every quarter, incoming cash flows become extraordinary relative to the size of the country’s GDP, let alone the market valuation of its stock exchange,” he said.


Suppressed consumption


Daoud says the main investment story in Iraq for the last several years and for the foreseeable future is suppressed consumption because of previous wars and the sanctions imposed on Iraq from 1990 to 2003.

“Now this consumption is driving growth, alongside the rapid increase in oil and gas exploration and production. It is very hard to play specific sectors or themes in Iraq as the market is heavily dominated by banks, which constitute around 60-70% of the market cap and most of the activity on the exchange. The one name that I like outside of the banks is Baghdad Soft Drinks.”

For investment funds, Daoud accepts that the majority of investment is still going through companies listed on the ISX, but adds: “if you are talking about general investments going into Iraq, I would say it is off the exchange.”

Indeed, Bull concludes that the real foreign investment in Iraq to date has been direct investment, in private equity opportunities and oil. “With the Asiacell IPO and the follow-on opening up of the ISX to other capital raising, 2013 will be the year that public markets start to catch up as a way into Iraq’s economic boom.”

Saudi Arabia to remain hub for IPOs

Saudi Arabia will remain the regional hub for initial public offerings (IPOs) in the Middle East and North Africa over 2013, according to a report released by Ernst & Young International.

The new report, which annotates findings in the Middle East and North Africa, shows that Saudi Arabia was the leader across the Mena region for new IPOs in 2012, raising $1.4 billion through seven IPOs.

The KSA was followed by the UAE with $277m and Oman with $264.4m reached in IPOs respectively.  Morocco and Tunisia were the only other countries with IPO activity in 2012.

The year closed with regional companies across the Mena region raising a total of $339.8m through three initial public offerings (IPOs) in the fourth quarter of 2012, according to the report, which was significantly higher than the $226.1m raised in the fourth quarter of 2012.

Share sales were up 50 percent from the equivalent period in the previous year, with Dallah Healthcare Holding raising the biggest issuance at $144m on the Saudi Stock Exchange (Tadawul) In November.

“The outlook for 2013 will be to a great extent influenced by investor sentiments, against the backdrop of regional developments,” Phil Gandier, head of transaction advisory services for MENA, said in a statement. “Saudi Arabia and the UAE will continue to be the regional hubs of IPO activity for investors in 2013.”

“It was an eventful year for the region, with mixed implications for the capital markets,” Gandier added. “Drawing comparisons over the last two years we have noticed a steady climb in the amount of funds being raised by IPOs possibly hinting that markets are inching towards better results.”