The performance of DP World shares since it listed on the Dubai International Financial Exchange (DIFX) on November 26 at $1.30 a share may have disappointed some investors. For DP World, however, the fourth largest terminal ports operator in the world, the listing was a success raising $4.96 billion and being 15 times oversubscribed.
Since listing, the share price has been volatile, falling to as low as $0.79 but mainly trading between $0.88 and $0.92. Traded volumes are also considered to be relatively light.
Some of the questions that have been raised concerning the initial public offering (IPO) are that the offer price was overvalued, and the methods by which the offer was priced and shares allocated were not conveyed adequately to investors (in this case, 90 per cent of the share allocation went to international investors and 10 per cent to regional ones).
Some local investors also consider that the IPO could have been better managed (as a number of web site blogs claim). They allege that because shares were not allocated to their accounts in a timely manner they were not able to sell their shares quickly enough.
Are the observations justified? The initial offer price range, at between $1.00 and $1.30 was determined by a book-building process - the first time an IPO in the region has been priced in this way. The decision to price at the upper end of the range, at $1.30, was also permissible under DIFX rules.
One person close to the deal, who did not wish to be named, said: "There used to be a lot of certainty that investors may not be getting as high a value for their shares as they might. A book-building IPO changes the equation. It allows a company to maximise its share price. A book building IPO naturally absorbs the valuation and that is not necessarily the case with other IPOs. Investors in the region have become used to undervalued, fixed price IPOs." He added that they like to flip their shares quickly, often on the same day, to make a quick profit.
Avneesh Mishra, director, investment banking and head of investment services, at Mashreq Bank, the lead receiving bank for the UAE retail offer, said: "The pricing was decided based on the book building process which is an established international practice. If investors bid at the highest end of the range that's the price everyone pays and this was very clearly mentioned in all official communications. So the pricing was as transparent as it is in any international transaction."
As for the way in which shares were allocated, and claims that the offering could have been more welcoming to regional investors, Mishra said: "Although in percentage terms the UAE offer was less than 10 per cent of the total offer size, in absolute terms this was a large public offer in the UAE. The allocation policy was to favour the retail investor in the regional offering. It was made quite clear right in the beginning that the issue retains the right to use its discretion in arriving at the size of the UAE retail offering."
In terms of the appropriate value for DP World shares, according to analysts the current price is still below its long-term target price. But not all agree that the target price is as high as the initial offer price.
In the most recent research notes of Deutsche Bank and Shuaa Capital for example, dated January 15 and January 7 respectively, Deutsche Bank has a target price of $1.33 and calls DP World a "compelling growth story;" Shuaa has a higher target price of $1.47.
The less bullish Morgan Stanley, in a research note dated February 5, has a price target of $1.10 (at the time when DP World's share price was $0.99) based on the view that "DP world offers exciting growth prospects from capacity additions and margin expansion, and risk to near-term earnings is not a big concern". However, its discounted cashflow (DCF) bear case scenario is as low as $0.65.
In the most recent research note on DP World - one produced by HSBC and dated February 29 when DP World's share price had dipped to $0.89 - the target price is $1.05.
The multiples paid for DP World shares are also high. As Morgan Stanley states: "In this regard, we think the stock's valuation looks full, trading at about 20 times 2008e EV/EBITDA and a 2008e P/E of about 35. Its peer group trades at multiples of 14.0 and 24.1 respectively."
HSBC also notes: "DP World's stock has been weak and volatile since the IPO in November 2007. On a 2008e PE of 28.6x, it is still trading at a premium versus the global ports sector (on a PE of 27.2x)."
However, HSBC also acknowledges that this premium "is probably justified given its exposure to markets with strong growth dynamics and it appears well positioned for growth over the medium-term". In particular, it sees upside coming "from further capacity expansion and acquisitions," and "increases in utilisation of terminal capacity". The main downside risk is that "of contagion from the US on its Middle East, European and Chinese terminals," it says.
In many ways the DP World IPO has been a test case, not only for the DIFX - as the first listing on the exchange - but also because it was the first time in the region that a book-building process has been used. It is, however also a test case for investors. Are their expectations too high, expecting to make hefty gains, too quickly?
Many factors influence share price. As Mishra said: "Share price is a function of several factors including market sentiments, international market conditions and supply and demand. So, the fall in prices cannot be attributed to the offer price alone and certainly not to the IPO management."
Meanwhile, DP World was unable to comment. Its full-year results to December 31, 2007 are expected to be announced on April 7. Source
Since listing, the share price has been volatile, falling to as low as $0.79 but mainly trading between $0.88 and $0.92. Traded volumes are also considered to be relatively light.
Some of the questions that have been raised concerning the initial public offering (IPO) are that the offer price was overvalued, and the methods by which the offer was priced and shares allocated were not conveyed adequately to investors (in this case, 90 per cent of the share allocation went to international investors and 10 per cent to regional ones).
Some local investors also consider that the IPO could have been better managed (as a number of web site blogs claim). They allege that because shares were not allocated to their accounts in a timely manner they were not able to sell their shares quickly enough.
Are the observations justified? The initial offer price range, at between $1.00 and $1.30 was determined by a book-building process - the first time an IPO in the region has been priced in this way. The decision to price at the upper end of the range, at $1.30, was also permissible under DIFX rules.
One person close to the deal, who did not wish to be named, said: "There used to be a lot of certainty that investors may not be getting as high a value for their shares as they might. A book-building IPO changes the equation. It allows a company to maximise its share price. A book building IPO naturally absorbs the valuation and that is not necessarily the case with other IPOs. Investors in the region have become used to undervalued, fixed price IPOs." He added that they like to flip their shares quickly, often on the same day, to make a quick profit.
Avneesh Mishra, director, investment banking and head of investment services, at Mashreq Bank, the lead receiving bank for the UAE retail offer, said: "The pricing was decided based on the book building process which is an established international practice. If investors bid at the highest end of the range that's the price everyone pays and this was very clearly mentioned in all official communications. So the pricing was as transparent as it is in any international transaction."
As for the way in which shares were allocated, and claims that the offering could have been more welcoming to regional investors, Mishra said: "Although in percentage terms the UAE offer was less than 10 per cent of the total offer size, in absolute terms this was a large public offer in the UAE. The allocation policy was to favour the retail investor in the regional offering. It was made quite clear right in the beginning that the issue retains the right to use its discretion in arriving at the size of the UAE retail offering."
In terms of the appropriate value for DP World shares, according to analysts the current price is still below its long-term target price. But not all agree that the target price is as high as the initial offer price.
In the most recent research notes of Deutsche Bank and Shuaa Capital for example, dated January 15 and January 7 respectively, Deutsche Bank has a target price of $1.33 and calls DP World a "compelling growth story;" Shuaa has a higher target price of $1.47.
The less bullish Morgan Stanley, in a research note dated February 5, has a price target of $1.10 (at the time when DP World's share price was $0.99) based on the view that "DP world offers exciting growth prospects from capacity additions and margin expansion, and risk to near-term earnings is not a big concern". However, its discounted cashflow (DCF) bear case scenario is as low as $0.65.
In the most recent research note on DP World - one produced by HSBC and dated February 29 when DP World's share price had dipped to $0.89 - the target price is $1.05.
The multiples paid for DP World shares are also high. As Morgan Stanley states: "In this regard, we think the stock's valuation looks full, trading at about 20 times 2008e EV/EBITDA and a 2008e P/E of about 35. Its peer group trades at multiples of 14.0 and 24.1 respectively."
HSBC also notes: "DP World's stock has been weak and volatile since the IPO in November 2007. On a 2008e PE of 28.6x, it is still trading at a premium versus the global ports sector (on a PE of 27.2x)."
However, HSBC also acknowledges that this premium "is probably justified given its exposure to markets with strong growth dynamics and it appears well positioned for growth over the medium-term". In particular, it sees upside coming "from further capacity expansion and acquisitions," and "increases in utilisation of terminal capacity". The main downside risk is that "of contagion from the US on its Middle East, European and Chinese terminals," it says.
In many ways the DP World IPO has been a test case, not only for the DIFX - as the first listing on the exchange - but also because it was the first time in the region that a book-building process has been used. It is, however also a test case for investors. Are their expectations too high, expecting to make hefty gains, too quickly?
Many factors influence share price. As Mishra said: "Share price is a function of several factors including market sentiments, international market conditions and supply and demand. So, the fall in prices cannot be attributed to the offer price alone and certainly not to the IPO management."
Meanwhile, DP World was unable to comment. Its full-year results to December 31, 2007 are expected to be announced on April 7. Source
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