How would Aramco’s IPO affect Saudi Arabia and MENA region?

Ever since it was launched on November 17, the initial public offering (IPO) of Saudi Aramco has been gaining significant traction among investors. Within just five days after the IPO opened for subscription, it had already garnered around SAR 73 billion in orders from retail and institutional investors, of which retail investors’ share alone was SAR 14.5 billion.

By November 25, retail investors' share had jumped to SAR 21.77 billion, and by Nov 27, a day before retail offer closed on Nov. 28, the retail tranche of IPO was already 102% oversubscribed – a strong indication that the IPO is no ordinary share sale.

By mid-day (12 pm) on Nov. 28, the retail portion of the IPO was 119% covered. Orders reached SAR 38.13 billion from 4.17 million retail investors, who subscribed to SAR 38.13 billion worth of shares.

Retail subscriptions, which concluded on Nov 28, 2019 midnight, reached SAR 47.4 billion from 4.90 million subscribers, who bid for 1.48 billion worth of shares. The retail offering of the IPO was 148% oversubscribed.

No matter what the final valuation and the issue price would be, the listing of the world’s biggest IPO on the Saudi Stock Exchange (Tadawul) is expected to have wide-ranging implications, not only for the domestic equity market but the entire financial sector across the Middle East.

The issue price will be disclosed on December 5 once the book-building process is completed.

Argaam spoke to analysts, brokers and market experts to gauge the magnitude of impact that the mega public offering – the mother of all IPOs – will usher in Saudi Arabia and the region.

They unanimously agreed it is just the beginning of the mammoth change touching many sectors across the region. Here’s how:

Boosting stock market liquidity

The world’s largest oil exporter has set the IPO price range between SAR 30 - SAR 32 per share, floating a 1.5% stake, or 3 billion shares in its IPO for retail and institutional investors.

Also read: Saudi Aramco IPO raises SAR 21.8 bln by end of Nov. 25

More staggering is the size of the share sale that is widely expected to be the biggest in history, beating the $21.77 billion (SAR 81.6 billion) raised in Chinese e-commerce giant Alibaba's 2014 IPO.

Analysts say a mammoth issue like this would naturally create a lot more buzz by multiplying market liquidity not only in Saudi stock market, but will have spillover consequences far beyond the borders of the Kingdom.

“As a result of the listing in Tadawul, Aramco’s current market capitalization of around $500 billion will significantly increase, as the IPO is valued at $1.7 trillion at the top end of the pricing range,” Shakeel Sarwar, head of equities asset management at SICO, told Argaam.

According to Aditya Pugalia, Director, Financial Markets Research, Emirates NBD, the listing would be a very positive development for capital markets in the region on multiple fronts.

Further, the potential inclusion of Saudi Aramco in the broader indices like the MSCI Emerging Market (EM) Index is also expected to bring substantial inflows in the Kingdom, and effectively into the region.

Riyadh-based Al Rajhi Capital estimates the passive/active inflows following MSCI and FTSE EM inclusion could be between $2.4 billion and $ 1.4 billion respectively, based on Aramco’s 0.6% to 0.5% weights in respective EM Indices.

Enhancing corporate governance

Given the robust regulatory requirements that go along with public listing of big companies, analysts believe Aramco’s post-listing will help spur tighter corporate governance structure as well as strengthen transparency and compliance in the capital markets across the MENA region.

“As the companies need to ensure high corporate governance standards post-listing, this will attract higher foreign capital and further boost investor confidence in the region,” Mazen Alsudairi, Head of Research, Al Rajhi Capital, Riyadh, told Argaam.

Analysts say Aramco has always been the benchmark in Saudi Arabia and the region for business efficiency, social responsibility, and financial performance. And therefore, post-listing of the company will not only help boost liquidity and market volume on Tadawul but will also add more depth in the Kingdom’s capital market.

“There’s no doubt that the listing will raise the bar for the rest of the market whether in Saudi Arabia or regionally, especially among blue chip-listed companies and those owned by the governments,” Mohamad Hawa, Head of Equites at Deutsche Securities Saudi Arabia said.

Strengthening banking & financial sectors

Experts and analysts are also upbeat about the IPO’s cascading effect on the banking and the wider financial sector.

Particularly, the doubling of leverage limits by Saudi Arabia’s central bank for retail investors looking to buy shares in Saudi Aramco is a major positive for local Saudi banks.

Apart from banking, another sector that stands to gain from this mega offering is the asset management and investment banking business.

Saudi Aramco has named 25 underwriters to cover its IPO, apart from appointing financial advisors, book runners, international coordinators, as well as local and international IPO managers. Their large participation for one issue will enhance their ability to generate sustainable cash flows in the Saudi market, experts maintained.

Read more: Saudi Aramco kick-starts IPO today

Encouraging investment and economy

The listing of Saudi Aramco would also open doors for new opportunities for foreign capital in Saudi Arabia and the overall MENA, both the form of institutional inflows as well as foreign direct investments, analysts said.

“The IPO will have far reaching implications for the economy in terms of overall improvement,” Junaid Ansari, VP-Investment Strategy & Research, KAMCO Investment Co. noted.

Another sector that is going to get a boost is privatization, analysts maintain.

“The listing of the biggest state asset would also open doors for further privatization of other assets, which would serve the dual purpose of funding state budgets, as well as take advantage of the intrinsic value of the business,” Ansari maintained.

Overall, the ecosystem around Saudi Aramco’s IPO is widely expected to have wide-ranging influence on financial institutions locally and globally. It’s not only the size of the IPO that matters, but also the ongoing reforms that the listing will create in capital markets, asset management, banking, equity, and other sectors.

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