Capital markets reform

Pakistan's pipeline: Bankers expect up to six IPOs in 2020

After a lacklustre few years thanks in part to over-regulation, Pakistan is cleaning up its image for issuers and investors and betting on simplified IPO rules to catalyse the market. Three IPOs are waiting for approval and more are in the wings, bankers claim.

In a move that has been welcomed by market participants, the Securities and Exchange Commission of Pakistan (SECP) has, what it calls, “revamped” its initial public offering (IPO) regime to make the IPO process simple, cost-effective and more efficient.

As Aamir Khan, chairman of the SECP, said in his exclusive interview with FinanceAsia earlier this week: “We are definitely looking to promote competition by reducing the entry barriers to products, to new ideas, to people who want to come to the capital markets as issuers.”

Announced at the end of the year, the new regulations have a number of significant changes.

First, is that unprofitable issuers with a track record of fewer than three years can now raise capital from the securities market, though sponsors will have to own at least 51% of the company until it reports net profits for two consecutive years. The issuer must also submit a business plan and provide enhanced risk disclosures in the offering document for prospective investors.

Second, the requirement of submitting audited accounts has been reduced from five to two years. In addition, updates on progress reports after the IPO now can be submitted twice a year, rather than four times a year.

Third, greenfield projects that want to list will also have to be at least 51% owned by sponsors and offer an exit mechanism to protect the investors in case of a change in the principal purpose of the issue.

Finally, and to encourage foreign investment, margin requirements for institutional investors including foreign investors have been waived.

Of course, quibbles remain. Some bankers grumble about the allocation process during IPOs (anchor investors tend not to receive preferential treatment and allocation is determined by price) and international investors complain about settlement dates which are generally longer than the conventional T+3. But in general, people are happy.

“Overall the changes will definitely help investor advisors like us to market successfully and to compel more and more companies to come to list,” said Mohammed Sohail, chief executive Topline Securities, one of the country’s fastest-growing brokerage houses.

ENVIRONMENTAL PROBLEMS

There is no doubting that the Pakistan Stock Exchange has been a backwater for a number of years. Despite the fact that it has been 40% owned by a consortium of Chinese investors since January 2017 – Shanghai Stock Exchange, Shenzhen Stock Exchange and China Financial Futures Exchange – hopes that the investment would bring in innovations and breathe new life failed to materialise.

“The lack of activity has a lot to do with the overall environment,” said one international banker.

To put the lack of activity into context, there have been only three IPOs since the end of 2017. At the end of March last year, Faisalabad-based Interloop the largest global supplier of socks to Nike, Puma, Target and H&M, raised PRs5.025 billion ($51.32 million) in the country’s largest private sector IPO to date, for which it won the FinanceAsia Country Award for Pakistan. In January 2018, Matco Foods, one of Pakistan’s largest Basmati rice exporters, raised PRs757 million and two months later, pharmaceutical company AGP raised PRp2.8 billion.

The difficulty has been recent political and economic turmoil which culminated in a $6 billion bailout by the International Monetary Fund in July last year. “Pakistan is facing significant economic challenges on the back of large fiscal and financial needs and weak and unbalanced growth,” said David Lipton, the IMF’s first deputy managing director, at the time.

The outlook is good. An early Christmas present arrived from ratings agency Moody’s which, at the start of December, affirmed the country’s B3 rating, but raised the outlook from negative to stable.

“The rating affirmation reflects Pakistan's relatively large economy and robust long-term growth potential, coupled with ongoing institutional enhancements that raise policy credibility and effectiveness,” it said.

Fitch and Moody’s both have Pakistan at a B- rating with stable outlook.

Positive sentiment is likely to continue. After a 35.5% surge in the benchmark KSE 100-Share Index in the final quarter of 2019 to 40,735, JS Global Capital, the largest broking and investment banking firm in Pakistan, reckons that it could hit 52,500 by December.

KEEP IT LIQUID

There is certainly liquidity in Pakistan, indeed recent rights issues give an indication of how much there is in the market.

In early October, Maple Leaf Cement, one of the country’s largest cement manufacturers, successfully raised PRs6.1 billion. And at the end of October, Karachi-based downstream oil marketing company Hascol Petroleum announced plans to raise PRs8 billion. The deal is due to close at the end of January but is understood to be fully subscribed.

As Shahid Ali Habib, chief executive of Arif Habib, which led the IPOs for both Interloop and Matco, said: “The market is very deep. The market has got the liquidity, the institutions have the liquidity, the insurance sector, the mutual funds, the banking sector and the corporate sector and the high-net-worth individuals all have money to place.”

So, how many IPOs are we likely to see?

Bankers are upbeat, with most reckoning on five or six this year. Three IPOs are known to be waiting for approval and others are in the wings.

The pipeline includes a mixture of sectors: a leading meat exporter to the Middle East, a holding company of automobile services, a vehicle tracking business and a company within the food sector.

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