By Ahmed Kamel A sound evaluation and a carefully-outlined timetable for free floating stakes in state-owned companies are deemed to be the key elements to turn Egypt's initial public offerings (IPOs) into success stories. Banking on a stock market uptrend, the IPO programme is forecast to attract local and foreign investors to buy into the floated stakes. The Egyptian government last week unveiled a long-awaited plan to free float stakes in 14 state-owned companies for the first time and increase the floated stakes in nine others. The 23 state-owned companies comprise the nation's first phase of IPOs are expected to be carried out in the coming 24-30 months. The 23 companies were selected from the oil and petrochemical, logistics, financial services, real estate and manufacturing sectors. Egypt's top companies include Misr Insurance, e-finance, the Housing & Development Bank, Banque du Caire, Bank of Alexandria, Engineering for the Petroleum and Process Industries (ENPPI), the Middle East Oil Refinery Company (Midor) and Sidi Kerir Petrochemicals. The market value of the 23 companies is estimated at LE430 billion (around $24.4 billion), Finance Ministry data showed. Key drivers A booming equity market is the most essential driver that guarantees the success of the IPO programme. Since November 3, 2016, the currency float has been a boon for local equities with Egypt's benchmark index jumping 21.66 per cent in 2017. The broader EGX70 and EGX100 indices rocketed 78.59 and 79.91 per cent to 827.66 and 1,971.76 points respectively in 2017. The planned IPOs will take advantage of a depreciated pound that attracts foreign investors into injecting fresh funds into newcomers listed on the stock exchange. The market conditions are positive given the political stability and growing investor confidence in the Egyptian economy. In their study entitled "The Effect of Market Conditions on Initial Public Offerings", Raghuram Rajan and Henri Servaes stated that firm managers and investment bankers bring IPOs to market when sentiment is high, and when feedback risk is small. Market sentiment has been improving since the currency float thanks to legislative and economic reforms initiated by the Sherif Ismail-led Cabinet. "Sentiment is important even when returns are adjusted by returns on matched firms within the same industry. This suggests that sentiment for an industry may have a special influence on the price of IPOs, over and above its influence on the price of seasoned firms," the study said. Rajan and Servaes urge the parties concerned with the IPOs to examine the market conditions well so as to avoid underpricing. "Underpricing should be positively correlated with feedback risk and it should be negatively correlated with investor sentiment. Also, past work has shown that the degree of underpricing is related to the size of the firm going public," the study said. "Sentiment or over-optimism drives price above fundamentals. When prices revert to fundamentals in the long run, returns are more negative for issues that came to market during periods when sentiment was high," it said. The lawmakers have amended the Capital Market Law 95/1992, in a bid to strike a balance between investor protection and business facilitation. The amendments will intensify the role of the stock market in the coming years. The amendments protect the rights of minority shareholders in the event of mergers and acquisitions. The new set of regulations toughens penalties for insider tips and launches a federation for securities' firms for the first time in Egypt. Transformation process The IPOs should be deemed a transformation process rather than a mere financing instrument through the free floating of state-owned stakes in public companies. The IPOs can provide companies, whether public or private, with opportunities to increase issued capital. However, this transformation process relies on the market liquidity, which can be measured in different ways, according to a World Bank (WB) working paper on IPOs. The local market liquidity has been on the rise over the past month, with an average of LE1.2 billion per day, bourse data showed. "A liquid market is one in which there is a reasonable amount of turnover or trading, and where large transactions can take place quickly and efficiently. Emerging stock markets typically have very low turnover, with only a few companies responsible for a large percentage of the total trading that takes place," the WB working paper said.
