Opening doors: Increased activity should encourage more firms to put out offerings

With Oman’s capital markets long on interested investors but short on options, the focus now and in the past has been on what can be done to attract initial public offerings (IPOs) in a market where few lack access to capital. Institutional investors want more trading activity on the market, and have long hoped that the handful of family-owned diversified conglomerates that lead Oman’s private sector would come into the market. However, this is a group whose wealth has insulated it from the forces and circumstances that would ordinarily lead to public stock offerings.

In The Spotlight

When IPOs have come, however, they have had the intended effect of boosting trade volumes. Oman’s government divested its 30% minority stake in Oman Telecommunication (Omantel) in 2005, issuing 225m shares at OR1.28 ($3.31) per share and raising more than expected at OR700m ($1.8bn). The sale of the incumbent telecommunications provider brought with it a great deal of attention to the Muscat Securities Market (MSM): in 2006, the first full year in which the shares traded, overall trading value more than doubled, soaring from the 515m shares traded in 2005 to 1.11bn in 2006. In 2007 Galfar Engineering became the talk of the town when it listed, selling OR60m ($155.4m) in shares, a move which is now widely seen as highly successful for the company and its owners. The shares are now among the handful of listings large enough to offer a critical mass of trading activity that large-scale, international buyers favour.

Since the 2007-08 global financial crisis there has been an uptick in the rate of IPOs, chiefly due to supportive policies by the government that have mainly affected two sectors: financial services and utilities. There were six IPOs from 2008 to 2012, two from each of these segments and two from other sectors. The first of these was a manufacturer of transformers and other electrical equipment, Voltamp Energy, and the second was Nawras, the other main telecoms provider. The listing of Voltamp, a unit of private equity investment firm Al Anwar Holdings, was highly successful as share price was driven up as much as three times the issue price from OR0.54 ($1.39) to OR1.53 ($3.96), raising OR330.3m ($855.4m). The market expects another seven IPOs by the end of 2014, with the utilities and financial services sectors accounting for five of those. In the future, the question remains whether the pace of IPOs is sustainable or due to factors in the market that may only be short term.

Utilities Offerings

In the utilities sector, two IPOs have offered 35% of overall company worth, and in the first three quarters of 2013 new listings came from Sembcorp Salalah Water and Power Company and Sharqiyah Desalinisation Company. Sharqiyah is a joint venture of France’s Veolia Environment and the National Power and Water Company to build a reverse-osmosis desalinisation plant at Sur, located south-east of Muscat. The Sharqiyah IPO was targeted exclusively at individual investors and was oversubscribed by 13 times. Oman Arab Bank served as the issuer and said it received some 4700 applications, raising $82m, an indication of broad-based retail interest in the IPO market.

Sembcorp’s IPO closed on September 26, 2013, raising OR53m ($137.2m) and public trading in the company’s shares began in October 2013. Sembcorp is a Singapore-based company with global interests in the marine and utilities sectors, and Sembcorp Salalah is a joint venture with the Oman Investment Corporation to build an independent water and power plant to service the city of Salalah and the surrounding areas in the Dhofar region, in the south-west of the country.

Upcoming Prospects

In the future, IPOs are expected to come from three possible sources: the government privatising stakes in its own companies through stock market sales; family businesses that dominate the private sector but have not yet seen fit to enter the market; and the government’s licensing and tendering processes, which so far has only had an impact on the financial and utilities sectors. Oman’s government has yet to designate a group of public agencies suitable for privatisation through the MSM, although by late 2013 it was expected to announce some candidates for IPOs, and perhaps even establish a pipeline, which would be in line with the increasing public support for the MSM. “For the capital markets in Oman to further develop, more quality listings are needed,” said Pradeep Asrani, managing director of Gulf Baader Capital Markets. “A good place to start would be with the government privatising portions of successful state entities.”

The prime example of listings created through the tendering process has been in the electricity generation segment, and this is a model the sultanate is likely to continue using. The government’s bidding process for private sector participants in electricity generation and water desalinisation has mandated that winners float a stake in the entity they were awarded; the companies behind Sharqiyah Desalinisation and Sembcorp Salalah were given four years to do so. Beyond this, the country is also moving toward a new tendering process expected to impact foreign and domestic investors alike as it will incorporate requirements intended to help develop country’s economy.

New Rules

In recent years, new licences in the financial services sector have been awarded based on the condition that licensees list on the MSM. This policy will likely create more listings, and the current pace is due to additional government policies intended to complement this requirement. In 2011 the government decided to allow Islamic financial services to list, which led to an initial jump in licensees in financial services as a handful of companies have stepped forward to create sharia-compliant banks and insurers, initiating new IPOs in the process. Bank Nizwa and Alizz Islamic Bank have already listed. An existing conventional insurer, Al Madina Insurance Company, also plans to convert to a takaful (Islamic insurance) company and launched its IPO in late October 2013, floating 66.7m shares representing 40% of its capital. If fully subscribed, the float will lift the company’s paid-up capital from $26m to $43.3m. In addition, the Takaful Oman Insurance Company is under formation and has offered 40m shares through an IPO. The firm was set to close subscriptions in December 2013 and would be among the first companies to offer sharia-compliant insurance in the country. The company was reported to be receiving technical support from leading banks and insurance providers, and was planning on utilising a “bancatakaful” model. The Capital Markets Authority (CMA) has also issued a licence to Oman United Insurance to form a takaful operation, for which it plans an IPO in early 2014.

However, beyond this initial phase in which only a handful of operators have established Islamic financial institutions, it is not certain that more will come. The financial services sector is crowded, with the insurance market considered overpopulated and the banking sector increasingly regarded to be the same. Islamic finance is too new in the sultanate to determine its potential and whether it will bring new customers to market or take market share from existing conventional retailers. Possible entrants are likely to wait and watch the sharia-compliant market develop before deciding whether they, too, can compete (see Insurance chapter).

Insurers To Come

The conventional insurance sector may end up providing more potential in the coming years. There were 21 insurers as of late 2013, but just two publicly traded. The CMA, which regulates the insurance sector, is at work updating insurance legislation to reflect two key changes that could encourage listings: making a licence conditional on an IPO and boosting minimum capital requirements from OR5m ($13m) to OR10m ($26m). Insurers that struggle to meet the increased capital requirements would be encouraged to list to raise the money needed to meet the new threshold, or merge. Consolidation is something the CMA is pushing for, and if companies that merge are subject to the same listings requirement, this may lead to further new IPOs. Market watchers expected three insurers in the market could potentially miss the OR10m ($26m) threshold. Two of them, Falcon Insurance and Vision Insurance, were in merger talks as of late 2013. Should the talks end successfully the combined entity could be required to sell stock.

The CMA intends to seek government approval for another boost to capital, to OR15m ($39m), and although no timeline has been established for that change it could end up creating more mergers. The regulator also plans to introduce solvency regulations that may spur consolidation by changing the way insurers account for retained risks in ways that could limit the amount of capital they have to deploy.

Making Adjustments

The other two IPOs expected in 2014 are Al Maha Ceramics – which said in April 2013 it would list 40% of its value on the MSM but has yet to set a date – and Oman Arab Bank (OAB). The latter may end up setting an important precedent. OAB was the last local bank that had not listed, and one of the factors that prompted its decision was a successful appeal to the CMA to relax listing rules by allowing only 25% of equity to be sold in its IPO, instead of the minimum 40% proscribed by current requirements. This has created expectations that other firms will receive a similar exemption and thus be more willing to list.