Kazakh IPOs in London: Past and Future

analysis

By SRI ⋅ March 14, 2008 ⋅

Currently, ten Kazakh companies are listed on the Main Board of the London Stock Exchange (LSE), all of which have conducted their IPOs in the last three years. The post-IPO performance of their shares on the exchange may an indicator of the trends and prospects of the Kazakh economy.

Kazakh companies have become increasingly active on the LSE since the copper mining company Kazakhmys conducted an IPO in October 2005. A number of companies have followed suit on both the Main Board and AIM (a submarket of the LSE designed to allow smaller companies to float their shares), and the term IPO quickly became a part of daily vocabulary in Kazakhstan.

Following Kazakhmys, KazakhGold Group offered its shares in an IPO in November 2005. KazMunaiGas E&P, a subsidiary of the Kazakh national oil company, ShalkiyaZinc, a regional mining company, and two of the three largest banks, Kazkommertsbank and Halyk Bank, have tapped into global capital on the LSE in 2006. And in 2007, four other companies floated their shares in London. Besides the high profile ENRC Group, a large mining group, three relatively smaller companies offered their shares to international investors: Alliance Bank, a mid-size, retail-oriented bank, Kazakhstan Kagazy, an industrial group, and Chagala, a real estate developer.

Until last summer, Kazakh companies seeking an LSE listing were able to capitalize on global investors’ appetite for risk and the draw of Kazakhstan’s growing economy fueled by record-high commodity prices. Starting with the IPO of Kazakhmys, all Kazakh offerings were oversubscribed and priced at the top of their indicated pre-IPO price range.

This trend has reversed last summer, however, as it gradually became clear that Kazakh banks were overexposed to short-term foreign debt and the global financial system was running into trouble in wake of the U.S. subprime crisis. The IPO of Alliance Bank marked a shift in the prevailing attitude when all Kazakh share offerings were bound to be instant success, as its shares were priced at the bottom of the indicated range. Moreover, on the first day of trading, they lost almost 10 percent of their value.

While signs of trouble in the Kazakh economy have existed for some time, especially in the financial sector, and some analysts cautioned that the tide might have turned for Kazakh IPOs, Alliance’s share offerings was the first time when this new sentiment manifested itself to everyone.

ENRC’s IPO later the same year has been a relative success given the economic conditions in Kazakhstan, yet, the company was unable to repeat the previous successes of its mining peers, Kazakhmys and KazakhGold, and its shares were priced in the middle of the indicated range. However, following the IPO, ENRC clearly showed strong potential with its shares rising more than 80 percent in the first three months.

The difference between the IPOs of Alliance Bank and ENRC may be an indication of the prevailing attitude among investors towards Kazakhstan and its economy. The shares of ENRC, along with the other mining and energy companies listed on the LSE, like Kazakhmys or KazMunaiGas, have been almost immune to the domestic crisis that has hit Kazakhstan hard. On the other hand, the shares of Kazkommertsbank, Halyk Bank, and Alliance Bank, the banks that symbolized the heralded growth of Kazakh economy independent of energy and minerals, have performed disappointingly.

However, even within the sectors, there are marked differences. For example, the relative newcomer to the Kazakh banking sector, Alliance Bank, which grew to be a leading retail lender virtually overnight by aggressively tapping into the Eurobond markets, has been hit much harder than Halyk Bank, the legacy bank of the Soviet Sberbank with the largest deposit base in Kazakhstan.

On a similar note, the shares of Kazakhmys and ENRC, both among the global mining leaders, have performed significantly better than the regional ShalkiyaZinc whose share prices have actually declined since its IPO.

The following table shows two trends that have developed following the Kazakh banking crisis last summer. First, shares of companies active in the extractive sectors (energy, mining) have performed significantly better than shares of companies in the banking, real estate or manufacturing sectors. Second, larger companies have performed better than smaller companies, even within the same sector.

While these tendencies may not be surprising, they present a marked difference to times prior to the crisis when the share prices of Kazakh companies moved almost in unison on the LSE. It is clear that despite Kazakhstan’s efforts to make a shift from a petro-state to well-diversified economy, the progress has been slow. Kazakhstan’s natural resources sector remains the main engine of the economic growth and this will likely not change in foreseeable future. The outperformance of larger companies can likely be attributed to the inherent risk factors in investing in small cap equities and may indicate the investors’ concern about their exposure to economic and political risks in Kazakhstan.

How does this bode for future IPOs of Kazakh companies on the LSE? It is likely that the IPO pipeline will slow down as investors are clearly treating Kazakhstan differently than they did in 2005 and 2006 when nearly all CIS IPOs were a guaranteed success. Today, Kazakhstan is seen as what it is: a frontier market with enormous upside potential but significant inherent risks. It is unlikely that Kazakh companies seeking to float their shares on the LSE can count on raising record amounts of capital as they did before the crisis.

Nevertheless, the attractiveness of London as the main IPO destination for Kazakh companies is unlikely to disappear. Besides new capital, a listing in London provides a reputation boost, visibility beyond Kazakh borders, and, hopefully, protection from domestic political risks. And for international investors, Kazakhstan, despite the risks, is