By Sherif Salem.
While attending an investment conference in Erbil in November, I was struck by a theme that came through in almost all my meetings with listed-company executives: a desire to engage with foreign companies.
It seems as if expertise is more in demand than capital as companies look to grow and take advantage of the undoubted potential in Iraq’s rapidly expanding economy.
The Iraqi stock market is still relatively small, with a total market capitalisation of around $5.1 billion, but it has shown signs that it will thrive in years to come. In the year after a new government was formed in late 2010, the market rose steadily as interest grew among both local and foreign investors. The first half of this year saw a dip, but since August, the market has rallied again, and daily trading volumes exceed $3 million in most sessions.
Banks and other firms have successfully raised money through rights issues, and telecoms operator AsiaCell is due to launch an IPO in early January 2013 that should boost total market capitalisation, possibly by as much as $1 billion, liquidity and, consequently, investor interest. A successful listing should pave the way for similar moves from the other two telecoms firms, Zain Iraq — a subsidiary of Kuwait’s Zain — and France Telecom affiliate Korek.
But as companies look to invest, they realise the need to change the way they operate. Some have a history of state ownership and want to become more commercial, some just know that building scale means transforming business processes. And to implement change, they are keen to enter joint ventures, or simply to bring in foreign know-how into their management teams.
Al-Hilal Industries, which is minority owned by the Ministry of Industry, is a good example. The firm, which operates seven factories making evaporative air coolers, and air condition machines and equipment, raised 4 billion dinars in a rights issue at the end of 2010 to help fund expansion.
The company should be expanding quickly as rising income translates into demand for essential products in a hot country, but sales have stagnated in the last couple of years, partly because of rising competition from imports. The company says it is keen to find a partner to help improve operations, but discussions with a European firm have yet to yield any results.
Mamoura Real Estate Investment is in a similar position. The firm raised just over 3 billion dinar in late July to build much needed housing following a subdued 2011, when its development activities dropped markedly. Mamoura has a large plot of land in Baghdad and says it is looking to bring in an experienced foreign developer as a partner to develop it.
Obviously, security remains the major concern for foreign companies looking to do business in Iraq, as is uncertainty over the legal and regulatory environment. But at least from an economic point of view, brining expertise can yield fairly rapid and marked results.
Al-Kindi Veterinary Vaccines Drugs, for instance, recently entered into an agreement with a Russian company for the production of veterinary vaccines for sale to the Ministry of Agriculture. There has also been an agreement signed with the a French research institute that will help with upgrading production techniques. The company has made giant strides and has ambitious plans for the future even as sales have doubled in the last year, and operating profit has almost tripled.
Sherif Salem is portfolio manager at Abu Dhabi-based asset manager Invest AD. He manages the Invest AD Iraq Opportunity Fund, as well as helping to manage other equities funds investing in the Middle East and Africa.