A ‘People’s IPO’ is but the first step

Oct 28. The Asset

By Nina Pablo

A ‘People’s IPO’ is but the first stepKazakhstan makes a compelling case for investors. Having recovered from its own 2007 banking crisis through dramatic crisis action from its government, the country is getting back on track with the progress it had been making a few years prior. With an abundance of natural resources and stable macroeconomics at its foundation, the country has much to offer, though it is not without risks that emerging markets are wont to have.

Kazakhstan stands ready to rejuvenate its dormant market, with plans to start with local investors. Considering the lack of an investor base in the country, this poses quite a challenge – one the government is facing up to with a massive privatization programme they have dubbed the “People’s IPO.”

Reinvigorating a sleepy market

While the local equity capital market is still relatively small, the “People’s IPO”, further privatizations, potential pension and other reforms should boost size and liquidity of the local market in the near future,” explains Darius Daubaras, director and head of Russia, the Commonwealth of Independent States (CIS), and Central and Eastern Europe (CEE) equity capital markets at BNP Paribas.

“Currently the local market doesn’t have a large, deep, captive investor base … so large listings (those above US$500 million) or privatizations would still need to encompass an international co-listing to attract capital and foreign investors. Here Kazakh companies would have choices between European and Asian stock exchanges, depending on specific company characteristics and equity story.” As of July 2011, the Kazakhstan Stock Exchange (KASE)’s market capitalization was US$54.47 billion, much too small to be able to take in a lot of Kazakhstan’s largest national companies, several of which are valued at billions of dollars, and disproportionately sized in comparison to the country’s estimated 2010 GDP of US$138.4 billion.

This is precisely what the People’s IPO programme intends to change. The economy is currently growing at an impressive 6% to 7% per year and has an industrialization plan that will further expand the economy. One of the People’s IPO’s primary aims is to increase the exposure of Kazakhstan’s 16.5 million citizens to that.

A vast proportion of Kazakhstan’s largest enterprises – companies in industries ranging from oil and gas, to infrastructure and transportation, to metals and mining – remain under state ownership. By selling down between 5% to 15% to local shareholders in the first privatization wave – slated to begin in 2012 – the government will be developing local capital markets and fostering retail investment in the region.

“The retail investing practice in Kazakhstan is still nascent,” Daubaras notes. “Hence the whole aim of this [programme] is to give access to citizens and to share the wealth of these state-owned companies as they grow and get listed.”

Wave one

The People’s IPO’s first phase is from 2012 to 2015, during which several major companies will be listing on KASE, and at a later time, even on international stock exchanges. The three companies that will be listing first, according to minister of economic development and trade Kairat Kelimbetov (?айрат Немат?лы Келімбетов), are national grid company Kazakhstan Electricity Grid Operating Company (KEGOC), flagship airline Air Astana and oil transportation giant KazTransOil.

While it will, of course, be essential for retail investors to look at the businesses and their fundamentals with an objective eye, the familiarity of these three companies could go a long way in getting attention and gaining momentum. A flagship airline or an electricity provider whose names are known well among citizens, for instance, will probably have an easier time attracting investors, who typically tend to be a tad sentimental.

Considering the size of these companies, it had been thought that listings overseas would be needed to generate sufficient investor demand. However, it was decided at the end of August that international listings would not be part of the first wave of companies in 2012 in order to focus on the development of the local stockmarket. International institutions will still be able to participate in domestic floats, since KASE has no laws prohibiting foreign investors from entering the market.

“This is an opportunity for the people of Kazakhstan to participate in the growth prospects of its leading companies,” Kuandyk Bishimbayev (Бишімбаев ?уанды? У?лихан?лы), deputy chief executive officer of national sovereign wealth fund Samruk-Kazyna (Сам?ры?-?азына) said in a statement. “We hope the programme will become an important driver of economic development and diversification for the country.”

He adds that demand from citizens for the shares is currently estimated at about US$100 to US$200 million, while demand from pension funds is at around US$200 to US$300 million.

2013-2014 could see another spate of listings from shipping company Kazmortransflot, Samruk-Kazyna power subsidiary Samruk-Energo, and national railway company Kazakhstan Temir Zholy. Giants Kazatomprom, the world’s third-largest uranium producer, and KazMunaiGas (KMG), the massive oil and gas company, are expected to list in 2015 at the earliest.

Educating investors

The government makes it clear that the overseas listings, particularly Hong Kong and London, are still likely to be part of the future waves of the People’s IPO programme, in view of Kazakhstan’s strong relations in both regions.

“There’s been a great deal of talk about the Hong Kong market, and for good reason. The general trend [of increasingly looking at Asian markets] is an underlying factor, as well as Kazakhstan’s relationship with China.” Bruce Wilson, managing director in Almaty for strategic communications firm The PBN Company, explains. “Kazakhstan sits right there next to China with a significant natural resource base – almost every element in the periodic table is in Kazakhstan, and China is a major market.”

The challenge remains that investor awareness of Kazakhstan in these markets is quite low, especially in Asia. “The Hong Kong market doesn’t know Kazakhstan, and … more effort is needed so that the markets and investors in Asia begin to understand it.” Wilson comments.

For Kazakh companies that are contemplating potentially raising capital on Asian stock exchanges, it would be essential to educate investors in Hong Kong or Singapore, because they are less familiar with Kazakh companies at this stage. “London-based investors have experience with a number of Kazakh companies but in view of Kazakhstan’s proximity and trading ties to China and Asia, the Asian investors’ interest in Kazakhstan and Kazakh companies should naturally be increasing in the near future,” Daubaras explains.

In spite of these obstacles, Kazakhstan still has much to offer investors as a high-growth country. “If you look at the growth opportunities in Kazakhstan, with the resources and the viable and credible growth stories for those companies and those markets, then there is something to be had. It is not only an oil and gas player,” Wilson remarks, adding that the country, essentially surrounded by three of the BRIC countries – and in a lot of business with them – has the potential to act as a major bridge to Asia and Europe.

Moving beyond natural resources

Kazakhstan has a wealth of natural resources at its fingertips, making it easy to assume that only the natural resource industries will be driving the economy. The reality is a far different story; the country has much more than that.

Daubaras sees several other industries, apart from oil and gas or metals and mining, which will drive economic growth and will attract investors’ attention: utilities, infrastructure and agriculture sectors.

The infrastructure – the companies building or operating railways, roads, pipelines, electricity grids – are the largest outside of the natural resources sector. For example, Kazakhstan Temir Zholy (KTZ), though not yet listed, looks poised to play a large role in the further industrialization of Kazakhstan with its vision of connecting Europe and China along a railroad. “Getting the rail to connect [China and Kazakhstan] into Europe … is an important long-term vision that, if realized, could be crucial to the company. That would have major appeal for European and Asian investors.”

Agriculture too will be key to the economy. A large, sweeping country, much of it plains, Kazakhstan is already a major exporter of several agricultural commodities, but has so far been relatively underinvested in. KazAgro National Holding is a state-owned grain trader that is a part of the People’s IPO programme as well.

“I think you can look at the financial sector too,” adds Wilson, though he cautions that this is more for the medium-term, with the sector still needing time to “get back on its feet” following its collapse during their crisis.

The way to success

The People’s IPO is a pivotal programme, one that has the potential to change the landscape of the Kazakh economy. As with any programme, there are numerous pitfalls it can encounter along the way – among these the internal restructuring that companies will have to undertake in order to prepare for their floats, the formation of policies that will be implemented to ensure organization and credibility, and the challenge of generating sufficient interest among investors, local and abroad.

Kazakhstan is not rushing anything, however, and is focussing on ensuring that the execution of the People’s IPO’s first wave of local listings goes well. “The government is taking the time to make sure it gets it right,” Wilson notes.

Nobody, not even the government, can predict as of yet whether or not the privatization programme will be a success, but nobody can deny either that this could be an integral first step towards revitalizing the stockmarket and boosting the economy.