Why are companies that don’t trade listed?
The Merriam-Webster dictionary defines the word ghost as “a faint shadowy trace”, which brings to mind several stocks that are apparently listed on the Gulf stock markets. There are two kinds of ghost stocks in the Gulf: those that are actually listed but whose equity is so tightly controlled by a single family or two that they are rarely, if ever, traded; or those that are heavily traded but have a faint shadowy presence in real life.
Of the 61 stocks with a listing on the Dubai Financial Market (DFM), 40 of them (as of March 4) did not have a single transaction. That means that an enormous 65 per cent of the stock market listings remain dormant. If one looks at the remaining 35 per cent of the market, many of those stocks have one or two-digit trades, and that’s in a good day. The question that needs to be asked is: why bother listing these stocks in the first place?
According to the resourceful web portal Zawya.com, one major trade-starved bank listed on the DFM has a 10 per cent share free ﬂoat; hence, it is controlled and managed by a prominent family. This share does not trade and, oddly enough, did not decline in the 2005 UAE stock market crash, unlike almost every other stock.
Another strange phenomenon has to be that of GCC cross-border listings. On this day, for example, Gulf Finance House, which is listed in Kuwait, Bahrain and Dubai, with the promise of an upcoming listing in London (see Gulf News November 2006), didn’t have a single trade. It seems that the hopes of the bank’s CEO of becoming “one of the proactive companies in the DFM” vanished some time ago.
Also consider the abnormal occurrence of those firms that most people have never heard of, such as “Aerated Concrete Industries” (zero trades), “Shop” (apparently they have malls, but zero trades) and the interestingly named “United Kaipara Dairies” (you guessed it, zero trades). Pundits can recall the UAE ministry of economy’s ultimatum concerning the listing of all public joint stock companies two years ago, but couldn’t that be coupled with a minimum amount of shares being held by non-founders?
Some firms in Saudi Arabia present the second type of ghost shares, as there are several well-publicised cases of companies that exist on paper, but not much else. A case in point would be the firm known as Bishah Agricultural Development Company, which was suspended from trading in early 2007.
According to Tadawul, the official Saudi stock market website, Bishah, whose nominal value was SAR10, was trading at eight times its multiple and millions of riyals in value just one day prior to its suspension. What were these poor unfortunate investors (estimated at 10,000 people) buying and selling, other than empty promises? Keep in mind that Bishah was valued by investors at US$120 million the day before its suspension and had nothing to its name except three derelict pieces of land “in a good location”.
In February 2006, Bishah, which reported impressive profits to the tune of SAR206,000 (US$55,000) and a turnover of SAR1 million in 2005, was valued by investors at a staggering SAR489 per share, giving this grand daddy of all fiascos an astronomical value of SAR2.5 billion (US$650 million). Fortunately, the Saudi Arabian Capital Market Authority was quick to react and intervened only one year later to suspend the stock’s trading. These fantastical figures translate into a PE ratio of 13,000 (plus or minus one thousand), meaning that should you be a lucky investor in Bishah, you will be able to recoup your hard earned cash in the year 15,000 AD or so; a great stock for those of us looking for long-term investment opportunities.
What must be done is some form of fine tuning with regard to the regulations to at least maintain a façade of tackling the issue of equity, market and index manipulation. Illiquid stocks should not be featured in the primary market, nor should they be used in the calculation of the index. Regulators should also be more proactive and react quicker against firms such as Bishah to protect investors’ interests. Introducing market reforms, such as the above two, will provide investors with a more realistic picture of the available investment opportunities in terms of both liquidity and the quality of listed equities.
This article was originally published in MONEYworks on April 2008. (PDF Download)