The Egyptian Exchange (EGX) is preparing to welcome the initial public offering (IPO) of the Arabian Food Industries Company (Domty) in the next few days.
A number of questions were raised by the capital market about how Domty’s IPO will attract new institutional investors and increase the low trading volume, which reached an average of EGP 400m in one session.
Despite receiving three large propositions worth more than EGP 6bn last year, the trading volumes did not see any notable improvement and which is why the questions raised are so important.
These propositions belonged to Emaar Misr, Orascom Construction, and Edita Food Industries.
Investors are in a state of extreme uncertainty about the performance of Domty shares after trading, due to the experience they had with Emaar’s IPO, the last IPO the market witnessed in 2015.
Following the issuing of Emaar’s shares, the share’s price declined significantly which left investors “frustrated”. Despite the coverage of the private placement of Emaar for 11 times and over subtraction 36 times, the first week of trading the price of the stock declined by 13.4%.
Domty plans to offer a maximum of 122.5m shares, which represents 49% of the company’s shares, at a price of EGP 11.38 per share maximum. The company launched its IPO on 6 March 2016 and shares will be sold until 17 March 2016.
After the IPO is finalised, the company aims to increase its capital to EGP 300m to be confined to the shareholders who sold their shares during the IPO.
Mohamed Abou Samra, the vice president of the promotion sector and underwriting in EFG Hermes and the director of Domty’s IPO his company is offering three main objectives during the IPO to promote it.
The first objective is to fully underwrite the IPO among financial institutions in the private offering and individual investors in the public offering.
Abou Samra said the second objective is to “attract new liquidity to the stock market through attracting new investors to buy Domty’s shares”, while the third objective is to “achieve a good performance after the stock trading”.
He said EFG-Hermes is aware that the market is not at its best, but they can still receive new propositions that would attract new investments and increase the number of shares traded by companies, which is what any stock exchange is after.
Essam Khalifa, managing director and board member of the National Fund Management Company and a board member of the Egyptian Investment Management Association (EIMA), noted that the timing of Domty’s IPO in the stock market is tricky.
He attributed this to the weak liquidity, that reached a daily average of EGP 400m, and investor losses were high during the past period due to Emaar’s IPO.
Khalifa expected that the IPO would be entirely covered, attributing his confidence to the company’s line of businesses, which is in the food manufacturing sector.
The food product sector achieves good profits and has a good track record among investors in the stock market, after the successful IPO of Edita, Khalifa said.
Khalifa added that national and foreign institutional investors are able to cover the IPO especially since “90% of the offering is dedicated to institutions and the rest is dedicated to individual investors”.
Domty’s IPO rates will be much lower than the big coverage rates witnessed by Emaar’s IPO, Khalifa said.
According to the investment bank Prime BrokerageDomty’s IPO is relatively cheap compared to its counterparts in the Egyptian market, where the multiplier profit for Domty’s IPO shares is expected to reach 20 times on a stock average price of EGP 11.
This is compared to 21 times multiplier profit for Juhayna’s company, and 35 times multiplier profit for Edita Company.
The multiplier profitability is an outcome of dividing the share price on the share of the company’s profits. It is an indicator to assess the attractiveness of stocks, as the lower the multiplier profitability gives an indication that the stock price has a better chance to increase and vice versa.
Domty’s IPO is likely to attract new institutional investors to invest in the Egyptian stock market which will contribute to attract new funds to the market, Khalifa said.
However, he also stated that this new liquidity expected to follow Domty’s IPO will not play a significant role in raising the trading volumes in the capital.
“Present institutions of the EGX are expected to be participants in the IPO and will sell a share of their stock market investment portfolio to provide liquidity to subscribe,” he said.
“This segment of the institutions will carry out trading of stocks, which is the same thing that will be done by individual investors,” Khalifa added, which means that no new liquidity will be provided to the market.