Stock split good option to spur liquidity: Analysts

A number of Tadawul-listed companies have opted for stock split after Saudi Arabia approved the new Companies Law and its Implementing Regulations.    

At the same time, Saudi Aramco is trading with no par value, while Americana Restaurants International is trading at par value of only SAR 0.08, which signaled a change in the par value applicable on the Saudi Exchange (Tadawul).    

Under Article 103 of the new Companies Law, which entered into force on Jan. 19, 2023, a company’s shares may be divided into shares of a lower nominal value or merged in order to have a higher nominal value. Regulations and controls for the stock split and consolidation may apply.    

“In the Saudi market, the stock split is a suitable and attractive option for companies to spur liquidity and complement the market amendments,” analysts told Argaam.   

An Appealing Option for Some   

The stock split option is an addition to corporate actions and builds on previous amendments made in 2006, said Jassim AlJubran, Head of Sell-Side Research at AlJazira Capital.  

Americana stock listing at a nominal value of SAR 0.08 is an initial indicator for the market tendency to change the standard nominal value of SAR 10, especially after Saudi Aramco shares were exceptionally listed with no par value, AlJubran added.  

Similarly, Bassam BinSolaiman Al Obaid, a capital market expert, told Argaam in a phone call that a stock split usually aims to lower a stock price to be affordable for everyone.  

Further, such an option will drive investor appetite for trading and increase volumes. The low price of a stock will attract many speculators and place the stock among most actives by volume. Accordingly, the company’s stock will be the focus of speculators as was the case with Americana shares upon the initial public offering (IPO) and Al Kathiri Holding after par value reduction, said Al Obaid.  

Meanwhile, AlJubran noted that changing par value allows companies to increase the total number of outstanding shares, while maintaining the market capitalization unchanged.

This is deemed a normal action with no subsequent changes to a company’s market value, shareholders’ equity, financial performance or the financial valuation in general. 

Companies resort to stock splits partially to reduce the stock trading price to a more desirable range for retail investors, which may boost liquidity and attract more trader categories. 

Change to bid and offer dynamics may boost trading prices post stock split - in the short term, due to a possible premium amid the expected rally in the stock liquidity. However, this does not necessarily imply material changes in the fundamentals of a company, its financial performance or attractive valuation.

In addition, overvalued stocks will unlikely sustain in the medium and long term, said AlJubran, adding that cautious trading should be adopted after stock splits, as higher prices do not reflect fundamentals. 

The stock split action would sometimes act as a support factor for companies with strong fundamentals, which suffer low liquidity, as it may accelerate the fair value after balancing bids and offers, since these stocks would be prone to trade below their fair value compared to highly-liquid peers. 

Companies with High Prices and Heavyweights

Companies with a share price exceeding SAR 200 on Tadawul and Nomu-Parallel Market would consider such an option, Al Obaid said, citing as examples Jahez International Company for Information System Technology, Elm Co., Arabian Internet and Communications Services Co. (solutions), Saudi Azm for Communication and Information Technology Co., Dr. Sulaiman Al Habib Medical Services Group, etc.  

AlJubran pointed out that 19 companies so far have applied for a stock split, adding that this step would get a response from many companies with prices over SAR 100.   

More listed companies are expected to proceed with stock splits, which will accordingly impact price levels in the market, he added.   

Stock split by heavyweights in particular could boost bids for stocks, which would reflect positively on the market index, said AlJubran, expecting more actions in the coming period.  

Traders should pay special attention to corporate fundamentals and financial performance, which mirror the stock’s true and fair values.