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UAE: Some smaller investors sell shares to raise cash to subscribe Lulu IPO

Heavy oversubscription level is expected as enthusiasm stems from the retailer's strong market position and potential significant listing gains

Published: Thu 24 Oct 2024, 10:11 PM

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Some small retail investors in the UAE are selling their existing portfolios to raise cash to subscribe to Lulu Retail IPO which will open for subscription on Monday.

Industry insiders say that Lulu Retail’s IPO will be one of the most sought-after share sales, similar to some of the initial public offerings (IPOs) in Dubai and Abu Dhabi, which were oversubscribed more than 100 times.

Abu Dhabi-headquartered Lulu Retail will sell 25 per cent of its stake through an IPO from October 28 to November 5 and list on the Abu Dhabi Securities Exchange.

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"As the anticipated Lulu Retail IPO approaches, reports suggest that some retail investors are rebalancing their portfolios to generate subscription liquidity. Although recent trading volumes hint at repositioning, the data doesn’t conclusively confirm large-scale portfolio offloading,” said Ahmad Assiri, research strategist at Pepperstone.

"Retail investors could sell their current portfolio investments to raise funds for the Lulu IPO subscription. High expectations of strong returns could support this trend, given the successful track record of recent UAE IPOs," said George Pavel, general manager at Capex.com Middle East.

He continued, "A heavy oversubscription level is expected as enthusiasm stems from Lulu Group's strong market position and the potential significant listing gains, similar to previous UAE IPOs that have seen substantial retail investor participation."

Impact on local bourses

Trading volume on Dubai Financial Market stood at 60 million shares on Wednesday, below the monthly average of 80 million, and the overall market slipped by 0.45 per cent.

“This suggests that liquidity is somewhat constrained, but broader market forces, including global monetary policy uncertainties, are also weighing on investor sentiment,” said Ahmad Assiri.

He added that speculation is circulating that the announcement of Lulu’s IPO has contributed to a dip in UAE bourses.

Ahmad Assiri

Ahmad Assiri

“While t is reasonable to think that some investors are selling shares to raise cash for the IPO, this may not be the sole reason for recent market softness. Both ADX and DFM indices have faced headwinds this week. These movements align with global trends reflecting caution amid expectations of tightening global growth projections,” said Assiri, adding that local market behaviour is closely tied to international dynamics, and the current macroeconomic backdrop is creating a cautious mood.

Pavel said the local bourses were affected by the broader negative sentiment affecting regional markets due to ongoing geopolitical tensions in the Middle East and sliding oil prices, not just a sell-off to raise cash ahead of the Lulu Retail IPO.

George Pavel

George Pavel

“Some investors may be selling shares to raise cash for the upcoming Lulu IPO subscription, and this could be an additional factor driving the market's decline. The market movements are more reflective of the current regional uncertainties and their impact on investor confidence across GCC markets," Pavel said.

Post-IPO performance

Lulu Retail enjoys a strong position in the GCC, operating more than 240 stores in the region. It plans to increase them to 270 by the end of 2025. Analysts expect its share will perform well in the post-listing period as well.

Ahmad Assiri said the underwhelming post-listing performance of Spinneys has raised concerns about investor appetite for retail IPOs.

"However, Lulu Retail distinguishes itself with a larger footprint, boasting over 240 retail stores and a 13.5 per cent market share in the GCC. This scale and presence could position Lulu more favourably among investors seeking exposure to the retail sector, despite the challenges faced by Spinneys.”

He cautioned that IPOs come with inherent risks, particularly in a dynamic retail environment that is sensitive to consumer spending patterns.

George Pavel said Lulu's strong market position, robust financial performance with $7.28 billion in revenue, and strategic expansion plans, particularly in Saudi Arabia, could give the stock a significant edge and help drive performance.

“Additionally, Lulu's attractive dividend policy and expected IPO oversubscription indicate strong potential. These factors could build a promising outlook for Lulu Retail shares, despite the challenges faced by its peers, which has a smaller market presence,” he added.

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