A batch of companies from emerging markets have been meeting with investors and sellers are hoping that the underlying quality of the assets on offer will trump any nerves investors might have should market volatility continue into 2019.
A good year for EM IPOS is being anticipated and much of that hope is being placed on Kazakhstan, as the central Asian state prepares to bring numerous companies owned by its sovereign wealth fund Samruk-Kazyna to market.
The largest of these listings is likely to be oil and gas giant KazMunaiGas (KMG), which could be the first major IPO from Kazakhstan next year, followed by Air Astana and Kazakhtelecom.
Luckily for KMG the appetite for Kazakh IPOs has already been tested. In November Kazatomprom, the country’s largest uranium producer, was listed in London and Astana.
The reception to the deal was good, even at a time when global equities were being routed in October — tumultuous conditions that persisted into November.
“I think that Samruk-Kazyna has at least three IPOs, possibly more that are being planned in the next 12-18 months,” says Anastasia Levashova, portfolio manager at Blackfriars Asset Management in London. “Kazatomprom, which has started to trade, was effectively a test IPO for the main listing they want to execute, the KazMunaiGas IPO.”
A banker on the Kazatomprom deal, whose firm is also working on a number of other Kazakh deals, says that the Kazatomprom listing had been a big success for the country and that it will likely use the same model for the other listings. If this is the case, the deals could be coming to London.
That the deal could get done at such a difficult time for global equities bodes well for KMG.
“I think Kazatomprom was chosen as the first of the wave of Kazakh privatizations because it had the clearest chance of a big success story at IPO,” Levashova adds. “At the bottom of the range, Kazatomprom is yielding between 6% and 7% dividend yield. It is a unique story and there are very few other opportunities to playing the nuclear space since Areva and Priargunskiy Company were de-listed.”
Not all EM IPOs were as successful — the listing of Belarusian retailer Eurotorg, for example, was withdrawn because of investor reticence following the sell-off.
The banks selling Kazatomprom targeted specialist sectoral investors and emerging market funds, carefully pricing the deal to a concentrated book of long-only funds. This model avoided having to market to dedicated ECM funds which were nursing flat or negative performance.
But both Kazatomprom and KMG are prestige assets, one the largest producer of natural uranium from the world’s largest uranium producing nation and other Kazakhstan’s foremost oil and gas company.
“There are a number of deals which are much discussed in Central Asia which are likely to be of a different quality than anything we usually see in the EM IPO space,” says Christopher Marks, head of emerging markets at MUFG in London. “They will be exceptional in nature, they will be large and plugged into sectors which have some big comparable stocks, which will help with value. Perhaps most importantly those transactions will be built with strategic investors as well as financial investors.
“That is a way to get out of a trap that sometimes comes with EM, and some of the mixed reviews that come with those deals. Large transactions which are backed by strategic investors will likely be more successful. Also those corporate and sovereign investment vehicles will only come when there is a proposition with far-reaching long-term value.”
Papa risk
As with many emerging market opportunities country risk is a big factor when contemplating investing in Kazakhstan. The country’s autocratic president Nursultan Nazarbayev, nicknamed “Papa” has been in power for 28 years, but he is now 78 and there is speculation that his time in power may be drawing to a close.
Nazarbayev has denied he is preparing to step down but he has already begun the process of delegating some of his presidential power to Kazakhstan’s parliament.
It is also natural given his central role in the governance of the country that investors will likely consider how long they think he will remain in office when they look at the deals.
“The IPO pipeline in Kazakhstan is not determined by private companies but by President Nazarbayev, so we have a good visibility on what is going to come to market and it’s unlikely that anything will be brought to list before the IPO of KMG,” says Levashova. “It is a prestige asset and what people appreciate is that it is going to be a very straightforward investment case. The big risk for investors is actually the potential for a change in government.
“Any potential power transition in the future from Nazerbayev, who is now quite old, will likely be smooth but there is never any guarantee. In KMG you are buying the most important asset in Kazakhstan with a risk of a change in power in the next two or three years and I think that will be a focus of discussion.”
Despite some potential uncertainty over Kazakhstan’s future the country still enjoys relative stability when compared with its neighbour.
It is also undergoing substantial economic reforms which make it an exciting opportunity for buyers.
“In the context of Eurasia, Kazakhstan benefits from relative stability, and that is a reinforcing fact for investors,” says Marks. “It is also trying to diversify and develop a range of sectors so that interesting employment opportunities are broadened for a young educated population and support a balanced growth trajectory.”
Saudi shock
Saudi Arabia was expected to be one of the star EM jurisdictions in 2019. The country was expected to move ahead this year with the world’s most anticipated listing, the IPO of Saudi Aramco, and begin a vast programme of privatisation.
But the flagship flotation has been delayed, a bitter disappointment for ECM bankers and investors who had been anticipating the transaction.
There is still a possibility though that Aramco might come to market. Just after the news of the IPO delay broke, Aramco announced that it would be seeking to acquire a majority stake in chemicals company Sabic.
“Aramco could still come to market in some form, through a listing of its downstream assets,” says Robin Kollannur, fund manager at RVX Asset Management in Fort Lauderdale. “It is finalising its deal with Sabic, but after that plays out it could come to market along with Sabic. That would mean we still get an Aramco listing but not necessarily the entire company.”
But the situation in the country has become far more complicated since the October murder of Saudi journalist Jamal Khashoggi in Turkey. The incident has cast a shadow over the country and its powerful crown prince Mohammed bin Salman (MBS), who has been leading an ambitious modernisation programme in the country.
“The Saudi situation in general is volatile given the lack of clarity on MBS and his future,” says Kollannur. “He was the influence behind this IPO push and growing the equity markets there. A lot of participants may now be waiting to see how this plays out. The way the equity markets have moved after the Khashoggi incident and the muted atmosphere around the October Future Investment Initiative conference in Saudi shows that sentiment around Saudi Arabia has diminished.”
He adds: “The news flow is also still trickling out and I think we may only be half way through the story. That has implications for the power structure in the Middle East and capital flows. What happens with Turkey is also very important — Turkey seems to be holding all the cards in this situation and is playing those cards very carefully. There is still a lot of uncertainty which the markets hate and they will price it accordingly. I don’t expect any near-term resolution on that.”
Turkey caution
Turkey was itself expected to a key part of 2018 IPO market but deals were rocked by the country’s currency crisis and US sanctions. Given the large pools of dollar denominated debt held by Turkish corporates the falling lira has made Turkish IPOs less attractive for foreign investors.
But the situation in Turkey has improved and in November the country’s benchmark BIST 100 was 5.5% above its August lows, despite the October sell-off.
However, investors will be wary of buying back into Turkey given the performance of the three major IPOs this year which, despite the recent recovery, are still all as a group trading down 29% below their offer prices.
“There is definitely a line-up of IPOs ready to go in Turkey, most likely in the autumn of next year if the currency stabilises and if we see inflation coming down from above 20% to 15% or lower,” says Levashova. “These will likely be predominantly retail but a few of the Turkish IPOs in 2018 left a bitter after taste and I think investors won’t be ready to buy Turkey again until later next year.”
There is also some uncertainty over potential Russian business, with petrochemicals company Sibur understood to be keen on a listing in 2019. But given the geopolitical pressures on Russia a deal is still far from certain.