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Galfar's IPO has set the record books ablaze and investors are looking forward to listing of the scrip.

R F Kumar, a banker, has never invested on the Muscat Securities Market (MSM) despite having lived in the sultanate for the last four years. But all that changed on August 12, 2007, the day Galfar Engineering and Contracting's initial public offering (IPO) opened. He has not only applied for the IPO but is also looking forward to trading his allotted shares once it lists on MSM on October 24. Kumar is no exception. Thousands of investors made a beeline for the offering making it the biggest-ever sale on Oman's capital market. When the issue closed on September 10, it had been oversubscribed by 14.5 times raising RO872.96mn (US$2.26bn) in its train. Says P Mohamed Ali, managing director, Galfar, "The response to the IPO has been in line with our expectations. We were confident as the projections for the construction industry are good and Galfar has shown strong growth over the last 35 years."

Inherent irony

With institutional investors getting a measly allocation of the scrip, analysts are bullish about the future prospects of the scrip. A look at the IPO's arithmetic is revelatory. Galfar's IPO comprised 100mn ordinary shares at an issue price of 602bz. The shares on offer were split up into two categories. Category one, comprising 60mn shares (60 per cent of the offering), was kept aside for individual investors applying for up to 10,000 shares. Category two, comprising the remaining 40mn shares (40 per cent), was offered to individual applicants applying for more than 10,000 shares and corporate bodies, institutions and investment funds. Distribution of shares in both the categories was to be on a pro-rata basis.

When the bids were counted category one saw 28,127 individuals putting in RO82.24mn, while category two had 771 individuals and institutions investing RO790.72mn. With a majority of shares being reserved for cate-gory one, the overwhelming response from institutions created a strange anomaly. Once the equations were worked out, each institution got only 2.97 per cent of shares that they had bid for against 43 per cent that individuals in category one received. Says V Gowribalan, assistant vice president, asset management, Fincorp, "An individual investor who put in RO600 would end up getting more shares than an institution which invested RO4,000." The good news is that there are hundreds of disappointed institutions that are waiting to pick up Galfar shares once it starts trading on the market. Obviously, this augurs well for the stock. "I expect the scrip to hit anywhere between RO1.200-1.500 by February 2008," says Gowribalan.

Cautious approach

The revenue projections of the company is a bit disconcerting. The company's revenue grew by 67 per cent in 2006 and 46 per cent in 2007. Compared to this, the projections for 2008 and 2009 are just eight per cent per annum. Reasons Ali, "Our projections are based on current order book and therefore look conservative." With revenues in the construction industry being a function of a company's ability to win new contracts it seems fair that the projections are based on existing contracts. Galfar's order book in September 2007 stood at RO600mn. It is also the lowest bidder for projects worth RO120mn, giving it a strong chance to win them. "The company has taken out the element of uncertainty. It would like to give conservative estimates and outperform them rather than give out speculative figures," says Gowribalan.

A growing order book and an attendant need to raise capital have been the primary reasons for Galfar going public. In 2007 it managed to convert 36 per cent of its existing contracts and win 25 per cent of new contracts. With more projects coming its way, Galfar now needs more capital to fund its ongoing projects. Traditionally, bank loans have been the only source of funding for contractors in Oman. However, regulatory restrictions make it impossible for banks to lend beyond a certain threshold. According to Central Bank of Oman rules banks can lend only 15 per cent of its networth to a single party. Out of Galfar's revenue of RO164mn in 2006 bank borrowings comprised only RO34.9mn. Though the existing shareholders have raised their funding from RO20.7mn in 2005 to RO30mn in 2006 it was clearly not enough.

The money factor

Out of the RO60mn raised from the IPO, RO24mn will be used by Galfar for its capital expenditure and working capital requirements while the remaining RO36mn will go to existing shareholders. This raises a question. If the company needs capital why are the shareholders cashing out? Says Abdul Qaiyum Hafiz, head of corporate finance, UAE, Gulf International Bank, "It is a regulatory requirement that has led the existing shareholders to dilute their stake but they will continue to hold 60 per cent of the company's shares so there is no question of cashing out."

The company is listing itself on the MSM using a mix of a fresh offer of 40mn shares worth RO24mn and the promoters diluting 60mn of their shares worth RO36mn. Says Ali, "If we had a chance to sell less of our stake we would have done that."

Though the engineering, procurement and construction (EPC) industry boasts of some of the biggest names in the corporate sector of Oman none of them have dared to go public. "This is because there are transparency issues," says an analyst.

In an industry driven by contracts there is a perception that decisions are made on extraneous considerations and underhand dealings. This makes companies wary of going public as it would force them to throw open their books for scrutiny. Says Ali, "I do not think this charge is true. We are comfortable with being transparent. It will only make us more efficient and responsible as we now have to look after the interests of 30,000 shareholders."

With Galfar taking the plunge one can only hope that more EPC companies will summon the courage to list on MSM. This will give scores of retail investors a chance to partake in their growth while increasing the depth of the sultanate's market. g