Why EGX stocks are going under the IPO wave

MNT-Halan’s retail book is 13.5x covered going into its final session: Retail investors’ orders for shares in MNT Tech Holding for Financial Investments (the Egyptian arm of fintech group MNT-Halan) covered the 48 mn-share public tranche roughly 13.5 times by the end of yesterday’s session, brokerage Thndr told its users in an app notification. That’s up from 5.26x on Tuesday, and it leaves retail more heavily oversubscribed than the institutional book: around EGP 15.9 bn of orders are chasing a tranche worth EGP 1.18 bn at the EGP 24.50 offer price, by our math. Subscriptions close at the end of today’s session.

REFRESHER- Parent MNT Investments B.V. is floating 320 mn existing shares, or 20% of the company, for some EGP 7.84 bn (c. USD 150 mn), set to be the EGX’s biggest IPO in USD terms since eFinance in 2021. The private placement closed 11.2x oversubscribed earlier this week, or 19.4x excluding cornerstones CIB and London’s Redwheel, and the window to upsize the offering closed without one. Shares are expected to start trading on 20 October. Our friends at EFG Hermes alongside Citi are joint global coordinators and bookrunners.

Somebody’s got to sell

Could the IPO rush be costing the EGX buyers? Egyptian equities shed roughly EGP 204 bn of market cap over the three sessions through Tuesday, according to data EnterpriseAM compiled from the bourse’s daily reports, before the EGX30 closed up 0.44% yesterday. The damage was concentrated well below the blue chips: the EGX70 lost about 9% over those three sessions, against 3.8% for the EGX30, by our math. On Tuesday, the exchange halted about 34 stocks for 10 minutes each after they moved 5%, among them Korra Energi, Middle and West Delta Flour Mills, Golden Tex, Egypt Hotels, and Minapharm.

Two things are driving the selloff. Fund managers are releasing liquidity for the ongoing IPOs of MNT-Halan and Banque du Caire and also for offerings expected over the next three months, including state-backed insurer Misr Life and EFG-backed Egypt Education Platform, three analysts separately tell EnterpriseAM. That leaves fewer buyers in the market as a months-long small-cap rally starts to unwind, Al Ahly Pharos Head of Research Hany Genena says.

“The liquidity of the big players is not really ample,” Genena says. Managers are either selling selected stakes to release liquidity for the offerings or not buying at all, he says, so an individual selling an EGX30 name finds no fund manager willing to take the other side. Amr El Alfi, Thndr’s chief equity strategist, independently points to the same pipeline as a likely driver, though he says he’s going on price moves rather than actual order data.

The flows back that up, at least at first. Institutions net sold EGP 364.6 mn of listed shares on Sunday and another EGP 187.2 mn on Monday, with individuals taking the opposite side of both sessions. Then it flipped. On Tuesday, individuals net sold EGP 307.8 mn and institutions net bought the same, with foreign institutions accounting for EGP 264.6 mn of the buying. Foreigners’ share of turnover jumped to 11.4% on Monday and 11.9% on Tuesday, up from 1.8% on Sunday. That’s hard to square with a regional risk-off story, in our read, since the money that prices geopolitical risk for a living was buying into the drop.

What’s unwinding in the small caps is a bubble, Genena argues. Most EGX70 names have been in one since around March, he says, with some running 200-600% in three to four months on small market caps and even smaller freefloats. At points, companies a fraction of the size were trading higher volumes than CIB or Talaat Moustafa, he adds. Korra Energi alone made up 12.7% of all equity trading on Tuesday as it fell 19.93%, by our math.

The mechanism is margin, and it runs both ways. Liquidity leaving the market pushes prices down, eroding margin ratios, which forces leveraged holders to sell and pushes prices lower again, Tycoon Securities’ Sameh Gharib says, describing a snowball. Genena sees it starting at the top: the party ends when one of the big players heads for the exit, and the smaller holders sell behind them, then the leveraged ones behind those. He expects it to continue, and welcomes it. Pockets of stretched valuations remain in the EGX70, though the number of names trading above roughly 50x earnings has come down, he says.

Analysts are split on how much the region mattered. Genena says rising political risk pushed individuals into panic mode and sped up a burst that was coming anyway. El Alfi plays down external factors and points inside the market instead, though he allows that forced selling by margined individuals could explain Tuesday in particular. Gharib is somewhere in between, saying the geopolitical backdrop is real but recurring, and it only bit this time because the subscription drain and the margin build-up hit at the same moment.

Retail investors have paid for the run. A lot of people were wiped out over the past four months following stock-tipping groups, whether deliberately or out of ignorance, Genena says. He thinks clearing out the froth is worth it, since the lesson for small investors is that speculation doesn’t last long. The benchmark is a different matter. “EGX30 will soften but will not crash because its valuations are much, much, much more reasonable,” he says.