Emaar Malls shows Return of Confidence in Gulf Markets

Euromoney, September 2014

The news that Emaar Malls Group is to launch an IPO in Dubai has several layers of significance to it. First, it’s a big state-backed stock in a smallish market; second, it’s a handy barometer of Dubai’s revival; third, it has technical innovation; and fourth, it shows a somewhat rare level of faith in the liquidity of local markets over the usual procession to the London Stock Exchange.

Emaar Malls Group is part of the Gulf behemoth Emaar Properties, formed in Dubai in 1997 and now boasting US$19 billion of assets and a 226 million square metre land bank worldwide. Emaar is the group behind Burj Khalifa, by far the world’s tallest building, and the tower’s trophy nature is emblematic of a company that wants to be noticed and is very much part of the Dubai story. The malls group itself is a key part of the business, and includes Dubai Mall, the world’s largest.

Emaar will sell 15% of the malls business in the offering, and potentially up to 25%. Working out the precise valuation is inexact, but there are a few indicators: Jones Lang LaSalle has valued the malls group’s assets at AED39.8 billion, or AED 33 billion after net debt is considered: a net asset value equivalent to US$9 billion. Deutsche Bank analyst Athmane Benzerroug estimates the group’s valuations at between AED27-38 billion, concluding: “EMG should have the largest market cap in CEEMEA and be ranked second in EM post its IPO,” though naturally that’s not the same as the value of the free float from this launch. Emirates NBD’s chief investment officer, Arjuna Mahendran, expects the IPO to be worth Dh5 billion (US$1.36 billion). Emaar Properties itself says that valuation “will be dependent upon the bookbuilding process”, but notes it has earmarked AED5.3 billion (US$1.44 billion) from the IPO proceeds to be paid as a dividend to Emaar Properties shareholders.

This will be a considerable injection of liquidity into a market that clearly needs it. The UAE’s two principal exchanges, in Abu Dhabi and Dubai, have about seventy listed stocks each. DFM’s market cap, at about US$80 billion, is a fraction of neighbouring Saudi Arabia’s US$590 billion. Anything that boosts the Dubai market’s size and liquidity is to its benefit, and should help attract foreign investors to the market, although if anything it increases the Emaar group’s dominance of the Dubai bourse (Emaar Properties having been the first company to list on DFM back in 2000, and today accounting for about a third of the market’s entire capitalization).

It also brings a sense that Dubai, having come so close to default in 2009, is now well and truly back – which is exactly the sense one gets when visiting Dubai today. Construction is back up and running again, property prices are rising, and the capital markets are more active than they have been for years. By early September, the DFM was up more than 50% year to date and was at a six-year high.

Does that revival story stack up? Well, in capitalization terms, Dubai is still a pale imitation of what it once was, but perhaps that’s not a bad thing. DFM’s market cap today is just over half the level it stood at in 2007. Nevertheless, it’s on its way back up – DFM says traded value in the first two quarters of 2014 was on track for a record – and there is hope that growth today is more sustainable and less of a bubble. A deal like this restores faith in the idea that local businesses can get what they need at home, in contrast to, for example, Al Noor Hospitals Group, the UAE healthcare provider which last year opted for the LSE instead.

For its own part, Emaar calls the malls IPO “a milestone for the development of the UAE capital markets.” However, it does so not because of its own size, but because of a local innovation: the deal will combine sales to institutional and retail shareholders, for the first time on the DFM. Retail will take 30% and institutions 70%, with 10% of the total targeted for preferential allocation to existing Emaar Properties shareholders. In investment banking terms, Americans are the big winners. Bank of America Merrill Lynch, JP Morgan and Morgan Stanley are joint global coordinators, alongside EFG Hermes, Emirates Financial Services, HSBC and National Bank of Abu Dhabi as joint bookrunners and Rothschild as financial advisor.

The real significance of the IPO will rest upon whether it prompts many more big names to come to market. Certainly, there’s a sense of activity in the broader region: Saudi Arabia’s National Commercial Bank is expected to launch an IPO in that market in October. And with Saudi preparing to open to international investors (see story) and Qatar and the UAE now fully-fledged members of the MSCI Emerging Markets index, there’s a growing sense that Gulf stock markets are developing sufficient sophistication to warrant greater attention from world investors.