RESEARCH ON SAUDI Arabian stocks is at least consistent on one point. The market, say analysts, has reached a trough. Time to revisit is the title of Egyptian investment bank EFG Hermes’s November 6 strategy note on Saudi Arabia.
And well it might be. As 2007 comes to a close, the Saudi stock market’s capitalization, having fallen from a peak of more than SR2 trillion in early 2006, stands at around SR800 billion ($214.5 billion) – much the same as it was at the beginning of the year. The market, say analysts, has gone through a textbook "double bottom" pattern preceding a recovery, with the index sinking below 7000 at the end of January, rising, and then dropping to almost exactly the same point at the end of June. Average valuations are lingering at around 17 times earnings: not a bargain-basement figure, but more reasonable considering the high oil price, an economy that is growing at about 6%, and the presence in the market of stocks such as Sabic, one of the world’s largest chemicals manufacturers.
However, in February 2006, one of the most inflated bubbles the world has ever seen burst spectacularly in Saudi Arabia. Valuations on the Tadawul, the largest stock exchange in emerging markets, had reached an average of more than 56 times earnings. By the end of the year, 53% of market cap had been wiped out.
Saudi citizens had been taking out massive loans to invest on the market. Some IPOs were subscribed to by almost everyone who possibly could put their names down for shares – up to about 9 million people out of a total Saudi population of 17 million.
On one occasion, retail investors rioted outside trading halls to try to get a piece of an IPO. Adding spice were an active array of powerful market manipulators and insider traders.
There is still a lot to be wary of in Saudi Arabia. The country’s capital markets (which, given the almost non-existent state of the bond market, are effectively limited to equities) are still rife with speculation and dominated by retail investors. In evidence of this is the disproportionate interest shown in companies that have a small capitalization, are relatively poorly researched and reported, and are generally easier to manipulate, such as those in the agricultural and insurance sectors. Banks on the Tadawul, for example, constitute about 25% of total market capitalization, and about 30% or more of the total earnings of listed companies. Yet they often only account for some 3% to 5% of trades. Agricultural stocks, on the other hand, which account for about 2% of market capitalization, regularly contribute 20% of turnover.
More IPOs, but worth how much?
Post-crash, subscribers for IPOs in Saudi Arabia can still reach huge numbers: 3.6 million, for example, this May for the Saudi Kayan petrochemicals project. In August last year, Economic City attracted a record 10 million subscribers.
 |
|
"We are aware of several IPOs over $1 billion that are in advanced stages of preparation"
Tim Gray, HSBC |
Yet IPOs garner a disproportionate amount of interest thanks to the large number of flotations (with Emaar Economic City and Saudi Kayan as examples) that are priced at par, rather than at par plus a premium. Some analysts accuse the authorities of using IPOs as a means to redistribute wealth in the Kingdom. "The opportunities to earn on a regular basis six times your money on a morning is a function of a specific process here, rather than something you could derive from fundamental evaluation," says Peter Hutton, an equities analyst at HSBC.
The rule is that only companies without operations have to be priced at par. But in 2007, opportunities to make a killing on an IPO priced at par have been in abundance. There have been 26 IPOs this year, compared with 10 in 2006 and only four in 2005. This has brought the total number of companies listed on the Tadawul to more than 100 for the first time, and it has been hailed by some as a sign of a market with more depth that is less easy to manipulate. "Before, there was a lot of money chasing very few stocks. Now, there is less money chasing more stocks," says Beshr Bakheet, chief executive of Bakheet Investment Group, a local fund management firm.
But Bakheet fails to mention that more than half of these IPOs were insurance companies now regulated under a tighter regulatory regime by the Capital Markets Authority (CMA), and granted licences on the condition that they listed at least 30% of their stock. Just one of these insurance IPOs raised more than the equivalent of $30 million, and most of them raised between $5 million and $20 million. Across the sectors, just three Saudi IPOs have raised more than $500 million this year.
There might be opportunities for more meaningful IPOs in Saudi Arabia in the future. There is an increasing will in the government to float public companies in the drive to spread wealth to retail investors. In addition, the larger family offices, such as the Olayan group, are exceptionally strong companies, and some suggest that they are more likely to float as a younger, western-educated generation takes over. According to Tim Gray, chief executive of HSBC Saudi Arabia, patriarchs are also beginning to see the wisdom of listing as a means to less complicated and more equitable handovers on their deaths – something he has seen work at first hand.
"HSBC is working on a couple of issues in excess of $1 billion, and we are aware of several other IPOs over $1 billion that are in advanced stages of preparation," says Gray. One thing that has been keeping him busy has been the sale of 25% of Petro Rabigh, a joint venture between Saudi Aramco and Japan’s Sumitomo. When it launches in early January 2008 it could become the second-biggest Saudi IPO ever after Saudi Kayan.
Promoting long-term investment