A $2 trillion valuation for Saudi Aramco is still possible thanks to overwhelming interest from retail investors in Saudi Arabia and beyond, a bank researcher told Al Arabiya English.
The state oil giant – already the world’s most profitable company – is expected to become the world’s most valuable company when it lists for the first time on the Saudi Stock Exchange, known as Tadawul, on December 11.
“They can achieve a $2 trillion valuation,” said Talha Nazar, head of research at Riyadh-based Al Jazira Capital, the investment arm of Saudi Arabia’s Bank Al Jazira.
The government has targeted a $2 trillion valuation for the company ever since it first announced its intention to sell shares in 2016.
The target has been a constant source of contention since then, with many international analysts predicting that the ultimate valuation will be lower. Global asset management firm Alliance Bernstein, for example, recently predicted a valuation between $1.2 trillion and $1.5 trillion.
Nazar pointed to the company’s commitments to pay out a significant dividend, estimated at $75 billion in 2020, and a bonus shares guarantee as elements that could lift the valuation.
The company has announced that Saudi Arabian retail investors who hold their shares for a minimum of 180 days, or six months, will be eligible for a 10 percent discount through the allocation of additional bonus shares.
“The company has done enough. Now it depends on oil prices, because the oil price trend is something that is primal. Saudi Aramco is the cheapest producer by a distance, so any increase in oil prices will have a multifold impact,” he added.
Another factor that could push up the valuation is the volume of demand for shares. Retail investors are expected to take up 0.5 percent of the company, and bankers report very strong demand for the shares, including from people who are even borrowing money to invest.
“There is great retail investor demand for the Aramco IPO, which is the main reason why 0.5 percent has been allocated to them. This might sound small in percentage terms but it is sizeable in real terms,” said Munther Hilal, founder and CEO of Dubai-based Gate Capital.
“The retail sector still drives the liquidity on stocks and uses much of the margin facilities given by banks,” he added.
Banking sources have told Al Arabiya that the company intends to sell a total of 2 percent of its equity in the IPO, which would leave 1.5 percent for professional and institutional investors.
Although stock markets across the Gulf region are predominantly retail-driven, Aramco’s IPO was initially expected to be allocated only to institutional investors – such as banks or hedge funds, said Hilal. But, Aramco is considered a part of Saudi Arabia’s sovereign wealth, so a retail element in the IPO was seen as essential.
Hilal said that some prospective buyers had raised questions over the lock-up period and the possibility of an additional listing.
The company said in its IPO prospectus published on Saturday that there would be two lock-up phases: A statutory lock-up – under which the government will prohibit Saudi Aramco from listing additional shares for six months after the commencement of trading; and a twelve-month contractual lock-up – which will stop shareholders from selling any of their shares except to foreign governments or a strategic investor affiliated with a foreign government.
“The main concern of the retail [phase] is the lock up period and whether a second listing will actually take place or not, but overall, there is unprecedented demand for the IPO,” Hilal said.
Saudi officials had initially spoken of a sale of five percent of Aramco’s equity, and many analysts expect the company to list shares on an international exchange in due course.
The Aramco IPO is at the center of Saudi Arabian Crown Prince Mohammed bin Salman’s Vision 2030 economic reform plan. Proceeds are expected go towards investments in other sectors to diversify the Kingdom’s economy away from oil.
“While [Saudi Arabia] is going through a major reshaping of its economy and its dynamics, it is imperative to engage the retail into all facts including a major IPO like Aramco,” Hilal added.