A number of leading petroleum sector companies are at the center stage of the government’s Initial Public Offering (IPO) program. Market experts believe the IPO program will revitalize the Egyptian Exchange (EGX) by introducing new companies to the market, raising market capitalization, and allowing a better financing option to more successful companies, especially at a time when interest rates remain relatively high.
The Central Bank of Egypt (CBE) is committed to easing its monetary policy and lowering interest rates, supported by a cooling inflation, which will, in turn, reduce the cost of financing. Nonetheless, experts believe the benefits of the program will extend beyond allowing for new capital inflows to the participating companies, which are offering additional shares or being listed on EGX for the first time. The program could widen the base of ownership in public companies and encourage more people to invest in the stock market. It would also leverage the companies’ performances, and enhance transparency and governance within the public sector.
EGX and the Need for New IPOs
“IPOs are the main stimulus of the financial basis in stock markets around the world, and EGX has been in dire need for a similar vitality over the last years in order to attract more liquidity,” said Mohsen Adel, former Chairman of the General Authority For Investment and Free Zones (GAFI), who previously served as the EGX Deputy Chairman.
Radwa El Swaify, Head of Research at Pharos Holding, believes that the IPO program should help boost the stock market, increase foreign investments, and raise public revenues, which will support the governmental budget.
Furthermore, the IPO program could definitely attract new national, Arab, and foreign investors into the market by diversifying the offered stocks. “Introducing new companies will help revitalize the market. New companies entered the market in recent years, but others have exited, so the volumes have stagnated for some time. We have around 230 companies, and many of the blue chips are mature companies that are more affected by market conditions rather than their own performance and this has limited opportunities in the market,” said Mohamed Reda, Solid Capital CEO, noting that the program is set to be the biggest in Egypt since 2005.
Resuming the Program
Although the program was first announced in 2016, it has been delayed until earlier this year. In March, the first stage of the IPO program saw the offering of an additional 4.5% stake of Eastern Company; a company that was already listed on EGX and enjoys a dominant position in the local tobacco market that is mostly price inelastic, which gives an additional advantage.
Nevertheless, Minister of Finance, Mohamed Maait, has negated delaying the IPO program altogether, telling reporters on the sidelines of the recent Euromoney Egypt Conference that it could be resumed soon.
Likewise, the Financial Regulatory Authority (FRA) revealed, in a press event, that four IPOs are expected before the end of the year. The four potential IPOs include two public sector companies, as well as a private sector company with a capital of more than EGP 2 billion, and a medium-sized EGP 50-million company that targets listing on the Nile Stock Exchange (Nilex).
Current market conditions, from the CBE lowering interest rates to a relatively improved situation in emerging markets, allow for continuing the government IPO program now. El Swaify agreed but weighed down the effects of the global market situation on the Egyptian financial market since market dynamics now have a bigger role.
Meanwhile, Reda emphasized that choosing the proper time to launch the program is crucial. This comes after settling on the program’s final list of companies and the governing body, with different roles by the Ministries of Finance, Investment, and Public Business Sector; as well as the manager of the program to help revive the program.
Reda went on to explain that it all starts with promoting the program, perhaps through an international roadshow, then comes pricing, with a proper fair value evaluation proving to be an essential component in the success of the program. “Discounts could be offered to investors to attract more investments. This could be through a book building,” according to Reda.
Lower interest rates and clarity regarding the future of the stamp and capital gains taxes, which would increase the cost of investing, are also essential before resuming the program, Reda noted. He then added that the program will succeed by making one company the pilot for the program, as a model, which would entice the investors’ appetite towards the later offerings.
Petroleum Sector IPOs
The petroleum sector has recently been the nation’s main attractor of foreign direct investments. Egypt topped African economies in terms of Foreign Direct Investment (FDI) inflows during 2018, for the second year in a row. This came despite an 8.2% decline compared with 2017 and was mainly driven by investments in the booming Egyptian oil and gas industry, according to the United Nations Conference on Trade and Development (UNCTAD) World Investment Report 2019.
An agreement was reportedly signed in October 2018 to choose a consortium led by CI Capital, alongside Jefferies International and Emirates NBD, to manage the IPO of the Engineering for the Petroleum and Process Industries (ENPPI).
Listing the company on EGX, for the first time, is set to involve offering 24% of the stake owned by the Egyptian General Petroleum Corporation (EGPC). The deal is set to generate an expected return of around $100-150 million, according to market experts.
Enppi was established in 1978 and has expanded into more than 15 countries around the world, with operations ranging from onshore and offshore projects in the oil and gas industry to refining and petrochemical industries. Over the course of more than four decades, the name of Enppi grew into an internationally renowned provider of fully integrated engineering, procurement, and construction (EPC), and project management services.
Adel expects new IPOs, like Enppi’s, to revive EGX and attract individual investors, since having new companies from various sectors, such as the petroleum industry, increases the appeal of the stock market to old and new investors, thus reviving EGX and increasing the market capitalization.
On the other hand, El Swaify told Egypt Oil & Gas that “It is not only about the sector, as much as it is about the company itself. We need large-cap companies with large free float percentage, strong management and vision, and strong financial performance. If more of these companies are listed, then foreign investments will increase.”
Moreover, for petroleum sector companies like Enppi, it will not only be about the IPO, as it would allow a sustainable financing option, through capital hikes or offering of additional stakes. The standards that listed companies are obligated to follow would also definitely help develop the listed companies, by introducing new governance models and enhancing transparency. If any company fails to clearly reveal its financial results and performance indicators to investors and the general public, the company could face penalties from regulatory authorities, Reda affirmed.
With the petroleum sector being the main destination of FDI in Egypt, and foreign investments in debt instruments projecting investors’ confidence, listing more petroleum sector companies could help attract more investments to the Egyptian stock market.
“New listings on the stock market are at the core of the developmental and financing role played by stock markets to increase the economy’s added-value. It takes bourses from being merely speculation markets to an economic framework, which creates a new climate that directs savings to fund developmental and expansion projects, in line with the broader economic system,” Adel explained.
“It can increase private sector involvement in the management of these companies, which might add strategic value,” El Swaify further noted, pointing to the enhanced governance and transparency.
“The government targets around $5 billion, which would help EGX enter into a new stage, and with the IPO program, the Egyptian government is revamping the public sector through a new model. Listing a number of the public sector’s most successful companies and using revenues to restructure the less successful companies, without any additional burdens on the budget, would greatly benefit the Egyptian economy at large,” Reda explained.
Experts agreed that the IPOs would send a message to Arab and foreign investors that the Egyptian Exchange is still maintaining its dynamism, supported by a stable financial market. Meanwhile, introducing new investors to the petroleum sector could have financial and strategic benefits, in line with the ongoing Modernization Project that is reshaping the industry as the main driver for sustainable economic development in Egypt.