ABDULLAH AL-SUWEILMY, the general manager of the Saudi Stock Exchange, has the air of a contented man. For although there are periodic bouts of profit-taking in the market, there seems to be no end to the boom in equities and the positive developments look set to continue as more companies line up to make initial public offerings.
The figures for the first quarter of the year ? which is normally a quiet time in the Saudi equity market ? make breathtaking reading. Turnover is up 500% on the same period in 2003, and volume is up nearly 340%. Total market capitalization, boosted by the flotation of Saudi Telecommunications, has risen by 89% to $178 billion.
Investors, who are still reluctant to put money back into western markets, are confident about Arab economies, particularly as oil prices remain high. Regional investment bankers point out that P/E ratios are still good even in companies, such as Saudi Telecom and Saudi Arabian Basic Industries Corporation (Sabic), where share prices have powered ahead.
?We expect Gulf markets like Saudi Arabia to grow at less than the dramatic increases of last year but they are strong and should rise by about 10%,? says Haissam Arabi, head of asset management ? Arab equities at Shuaa Capital, one of the leading Arab investment houses.
However, for the Saudi exchange to have a chance of reaching its full potential, the capital markets law ? which is one of the most far-reaching reforms of the Saudi economy in
the past 30 years ? has to be implemented. And that cannot happen until a chairman of the regulatory body, the Capital Markets Authority, has been appointed.
Bankers are displaying a growing sense of frustration about the length of time it is taking to make the appointment; the announcement was expected in January and is still pending. However, bankers say they are willing to accept the delay as long as the person appointed is respected for knowledge of the local, regional and international financial markets.
There is no doubt that the capital markets law, which will place the stock exchange on a proper regulatory basis, makes it easier to float companies and allows international investment banks into the country, will trigger a substantial expansion in capitalization.
?At present there are only 69 companies in the market. Once the new law is in place, I believe we will see a significant increase in interest from investors, and the number of companies quoted on the market could rise to 300,? says Beshr Bakheet, managing partner at the Riyadh-based investment bank Bakheet Financial Advisors.
Bankers are also looking enthusiastically at the prospect of corporate bond issues, which have not previously been allowed. For the first time in years, government finances are on a sound footing so banks can no longer rely on earnings from treasury bills issued regularly by the Saudi Arabian Monetary Agency (Sama ? central bank).
Banks can no longer use these government bonds to hedge assets. They will now either need to issue these instruments themselves, or participate in a corporate bond market. And there is some concern that the delay in implementing the capital markets law is slowing this process.
Bankers concede that even when the law is implemented it will take some time to create a significant bond market and that the first step is likely to be a more active IPO market. Already there is considerable speculation about the companies most likely to tap the market.
First in line is expected to be a new bank, which is being set up by a group of seven money brokers to offer the full range of commercial banking services. Investment managers say they are confident that any IPO would be well received. However, this flotation would do little to diversify the exchange as it would boost the banking sector?s share of capitalization beyond the present 30% level.
Leveraging mobile expansion
Even more interesting, given the runaway success of sale of shares in Saudi Telecommunications, is the equity issues by whichever consortium wins the contract to supply the second mobile phone service. One of the conditions is that the winner creates a joint stock company that sells half its shares to the public.
Some 11 consortia, including leading western companies, have prequalified and the winner is scheduled to be announced in the autumn. The only reservation potential investors have concerns the type of service the new company will be able to provide.
Saudi Arabia still officially bans third-generation phones that can transmit photographic images, and some observers feel that, unless this principle is changed as part of the negotiations, the contract will be relatively unattractive from a revenue point of view.
It is the only reservation about a telecommunications market that is expanding at a remarkable rate; Saudi Telecommunications is already the fourteenth largest telecommunications company in the world.
It is reaping the reward for an annual investment of SR5 billion to SR6 billion ($1.3 billion to $1.6 billion) every year since 1998 ? though that figure is likely to slow. The company has also benefited from being able to fund all this growth from its own cashflow.
?Last year we made profits of SR8.5 billion, which was an improvement of 143% on 2002,? says Khalid Al Molhem, president of Saudi Telecom. ?We grew our revenue, cut our costs, managed our resources better and reduced the number of non-performing loans.?
Al Molhem is relaxed about the prospect of competition in mobile phone provision. His confidence is based on the belief that the market will continue to grow rapidly. Although fixed-line expansion is stagnating, the mobile network is growing at up to 30%, boosted by the introduction of pre-paid packages in 2002. ?We now have 7.5 million mobiles for a population of 21 million ? competition will broaden the market and make everything more efficient,? he says.
Another company looking to float is the National Company for Cooperative Insurance (NCCI). There were plans to take it to the market as early as this month, but there have been various delays, including the length of time taken to implement changes
in insurance regulation designed to open up Saudi Arabia to competition in this market. There is still hope that some 70% of the SR250 million paid-up capital could be floated this autumn.