The unprecedented size of the Saudi Aramco initial public offering (IPO) risks sucking the liquidity on the Saudi Stock Exchange (Tadawul), but will attract more capital to the Gulf’s largest market in the medium-term, analysts told Al Arabiya English.
The energy giant’s first leg of its mega IPO could reach $10 to $40 billion, and is expected to debut on the Tadawul – a move that will shake up the local market, but prove to be positive in the long-term.
Aramco is due to begin the process of its IPO “very, very soon,” Chairman Yasir al-Rumayyan said on Monday, and is expected to offer a domestic listing of 1 to 3 percent on the Tadawul. A follow-up foreign listing is anticipated to follow in 2020 or 2021 for the remainder of the planned 5 percent offering.
However, launching an IPO of this scale on what is in comparison to global markets a smaller exchange has never been done before.
Investors are therefore concerned over whether the market will be able to handle the vast influx of stocks – and how markets worldwide will respond.
Authorities have openly targeted a $2 trillion valuation, but some analysts and investment banks have predicted a range of $1.2 to $1.5 trillion. Even at the lower-end of this spectrum, the overall five percent listing of Aramco will dwarf any other IPO in history.
Aramco and the Tadawul
At a $2 trillion valuation, a 2 percent listing on the Tadawul would equal $40 billion worth of shares. This is a huge number for the Saudi stock market, which currently trades, on average, around $1 to $2 billion per day. The impact of the listing will likely be felt throughout the secondary market as other Saudi stocks face selling pressure.
“Usually when you have these big IPOs coming to markets they really suck a lot of the liquidity from other companies, and you may see some of those companies be under pressure … I would say that if that happens then some of those other companies, if they dropped substantially, could become attractive,” said Chief Strategy Officer of Al Dhabi Capital Mohammed Ali Yasin.
Investors looking to subscribe to the IPO may need to divest some of their holdings in order to free up liquidity to buy stock, exerting liquidity pressure on the Tadawul, Oliver Schutzmann, CEO of Dubai-based consultancy Iridium Advisers told Al Arabiya.
“When something that large comes to market there is there is a risk that liquidity will be drawn to this deal. One way of doing that is for investors to sort of rotate out of some of their existing holdings into this IPO, they need to make the liquidity available to buy the stock,” he said.
Further complicating the issue is the Kingdom’s recent inclusion in the MSCI and FTSE Russell emerging markets indexes. If Aramco becomes part of Saudi Arabia’s representation in the indexes, the valuation of the company will also likely increase. Likewise, the weight of Saudi Arabian stocks in the indexes will also increase to take into account Aramco’s high valuation.
“It will be a kind of a push and pull period of time when the IPO takes place, but if we look six months post IPO, the market should stabilize,” Yasin added.
Aramco plays a key role in the Saudi Arabian economy and has been central to the Kingdom’s historical wealth. In some respects, buying shares in Aramco is an investment the Saudi Arabian economy.
“We think individuals in Saudi Arabia and the GCC could be very interested [in investing] based on the reputation of Aramco, the sector, and the fact that you’re buying a share in the company that has the wealth of the Kingdom,” said Yasin.
In that line, the valuation of the IPO would play an important role in determining investor appetite.
Should the IPO come to market at the lower-end of expectations, Yasin said he believed “the appetite will be big and there could be a successful IPO in the sense that when it goes to the secondary market, we should see a good pop up in their share price.”
Aramco as an investment will help draw in global investors by nature of the company’s size and profitability.
“With the listing of Aramco on the Tadawul you have a really interesting product that people will want to buy, and that will attract a lot of attention, including global investors, which in the long run will probably attract more liquidity,” said Schutzmann.
Due to Saudi Aramco’s importance to global oil production – as shown by the effect of the September 14 attacks on oil prices – investments in the company could also be used as an indirect representation of oil prices.
Investors will therefore need to be aware that Aramco’s share price is going to be directly affected by the price of oil, which will be essential to long-term profits.
Assuming no significant increase in geopolitical tensions or substantial decrease in oil prices, the market will likely begin to see liquidity return into 2020 as the Tadawul and investors adjust to the effect of Aramco’s blockbuster IPO.
This dynamic will likely improve the overall market situation in Saudi Arabia as global and domestic investors alike are drawn to investing in what is expected to be the most valuable company on the planet.