Arabian Gulf Business Insight - Salik’s $1bn IPO target ‘easily achievable’ after stake boost

Dubai toll gate operator Salik’s decision to increase the number of shares offered in its initial public offering will yield lower stock price volatility, and the $1 billion the government aims to raise “seems easily achievable”, analysts have predicted.

Salik Company announced on Friday that it has increased the size of the stake it is selling in the company due to strong investor demand and oversubscription across all tranches.

The emirate’s government upped the size of the public offer to 24.9 percent, or 1.867 billion shares, up from the previously announced 1.5 billion shares, which is 20 percent.

The government is planning to raise about $1 billion through the sale.

Salik said in a statement that the stake size was increased following the company’s decision to set the offer price at AED2 per ordinary share, providing investors with a “highly attractive value proposition”.

The decision also reflected Salik’s prioritisation of supporting aftermarket trading performance post-listing, the statement said.

“The rise in the number of shares offered in the Salik IPO from 1.5 billion ordinary shares to 1.8675 billion common shares will help increase the liquidity and free float of the company,” Vijay Valecha, chief investment officer at Dubai-based Century Financial, told AGBI.

“In addition, a larger free float will result in lower stock price volatility since more traders will buy and sell the shares. Furthermore, it will enable Salik to get added into global indices like FTSE Russell and MSCI.”

The increase in Salik’s offer size was widely expected after the public offer hit oversubscription on the opening day.

“Investors snapped up all of the shares on offer in Dubai’s road toll operator within hours of the IPO opening, indicating that demand for Middle Eastern listings remains strong,” Valecha said.

“It’s a good sign for UAE markets. The $1 billion target seems easily achievable.”

Salik is one of 10 proposed privatisations in Dubai as part of the city’s plans to bolster its capital markets.

Real estate developer TECOM Group PJSC, ultimately owned by Dubai’s ruler Sheikh Mohammed bin Rashid Al Maktoum, is among the most recent state-owned entities to go public, raising $454 million and with an oversubscription level of more than 21 times.

Dubai Electricity and Water Authority raised over $6 billion, becoming the biggest IPO in Europe, Middle East and Africa since 2019 and the largest IPO to date in the UAE.

Valecha said the automated toll system operator’s issuance is attractive as the shares will have a relatively high dividend yield.

“Given that [Salik] has an asset-light business model, the dividend should remain stable for multiple years,” he explained.

“Moreover, [Salik’s] decision to boost revenue through dynamic pricing methods could also bump up its payout to shareholders.”

The company intends to pay dividends in April and October each fiscal year.

The first dividend will likely be paid for the second half of 2022 by April 2023.

Salik expects to pay 100 percent of the net profit after keeping aside the statutory reserves required by law, amounting to AED 37.5 million for the first dividend.

The company has taken out a $1.1 billion loan from Dubai’s largest bank, Emirates NBD, to pay a special dividend to the government ahead of the stake sale.

“Salik is a pioneer with regard to its dividend policy, perhaps in the entire Gulf region,” Valecha said.

“It is the first company to offer 100 percent of its dividends as payout, and many other mature companies in the region might follow its lead.”

Atik Munshi, managing partner at UAE-based audit, advisory, risk and tax firm FinExpertiza, explained that the unique dividend policy induces further confidence for investors, as returns can be easily deduced at this stage.

“There is a lot of buzz in the market with respect to this offering, for varied reasons, one of which is the cash revenues which the entity is expected to generate,” Munshi said.

“The value of AED 2 per share, in my view, is reasonable though it is the market which will decide.”

According to the EY MENA IPO Eye report, the UAE and neighbouring Saudi Arabia – and the wider MENA region – remain a “bright spot in a challenging market”.

While heightened volatility, caused by geopolitical tensions and macroeconomic factors, declining valuation and poor post-IPO share price performance, has led to the postponement of many global IPOs during the first half of 2022, Gulf states are bucking the global downturn IPO activity in the first half of 2022, EY said.

S&P Global Market Intelligence data shows that the aggregate value of UAE IPOs so far in 2022 is higher than in any year since before 2008.

“An additional factor that is supporting the [Salik] issue is the relative stability of the entire GCC region,” Valecha said.

“There are relatively fewer geopolitical risks and macro-economic scenario is strong, which makes the assets here attractive from a global perspective.

“Salik’s IPO is better timed as global market sentiments are better this time. Furthermore, stock markets have recovered from their lows of this year so the Salik listing day might see a jump from the issue price.”

FinExpertiza’s Munshi added that the recent regulatory reforms are also drawing more investor confidence.

“UAE and Gulf public offerings are limited,” he said.

“Investors would not like to miss any good opportunity. The UAE government has made many positive changes in the company laws, visa regulations and governance procedures, which too has acted as a catalyst.”

Salik is expected to commence trading on the Dubai Financial Market (DFM) on September 29 2022, under the symbol SALIK.

The company’s starting market capitalisation is expected to be AED 15 billion ($ 4.1 billion).