Post-stock split tick sizes or fluctuation limits should be revised: Analysts

Tadawul trading screen 

Saudi Arabia's new Companies Law, which entered into force on Jan. 19, 2023, allowed the companies listed on the Saudi Exchange (Tadawul) to split shares.   

Under Article 103, shares may be divided into shares of a lower nominal value or merged in order to represent shares of a higher nominal value.   

The competent authority may set the necessary rules.  

Companies are showing interest in stock splits, which are deemed necessary to bring stock prices to affordable levels and stimulate high trading.  

Some companies reduced the stock nominal value to SAR 0.10, bringing the stock price below SAR 1 a share. The move limited the stock trading and kept it within a narrow price band.    

The following table shows Tadawul’s latest update on June 4, 2017, about tick sizes on the Main Market and Nomu-Parallel Market for companies, exchange-traded funds (ETFs), REITs and rights issues.  

Khalid Al-Zaidi, a financial analyst, told Argaam that the applicable tick sizes are currently not appropriate for stock prices. Al-Baha Investment and Development Co.’s stock price dropped below SAR 1 after the stock split action.  

If the stock moves two halalas, this implies a 12% fluctuation. Therefore, the stock cannot move higher, he added. 

Financial analyst Khalid Al-Zaidi 

Al-Zaidi stated that Tadawul should update tick sizes, as halala accounts for 1:100. However, adding a new digit 1:1000 would be more appropriate, given that the Saudi Central Bank (SAMA) has no currency less than the halala. 

The other option is expanding the fluctuation limit, which may imply high risks due to the traders’ lack of financial proficiency, and the fact they primarily depend on rumors rather than corporate financial statements. 

A solution for companies that suffer low liquidity as well as sharp and narrow fluctuations, as is the case with Al-Baha, is to raise the percentage of the fluctuation limit from 10% to 25% at first, ahead of increasing it gradually to achieve better results. 

The companies planning to split their shares to 10 halalas will face the same situation of Al-Baha, he expected, adding that the market is currently not ready for similar stock split conditions. 

"There is no much opportunity for companies to move in a wide scale, especially those that have not clearly succeeded in benefiting from stock splits," Al-Olayan concluded. 

Financial analyst Abdulaziz Khrais 

On the other hand, financial analyst Abdulaziz Khrais, said Al-Baha shares are now “crippled” following the stock split and the increase in the number of shares to 2.7 billion. 

This weighed negatively on the stock amid lack if trading and a decline in the traded value, he added, stressing that even if drivers are found, the stock cannot move more than one digit even if there are stimulators, Khrais said.  

Investors shunned from trading in Al-Baha shares and may lose over 6% of the stock value if they resort to the selling option. This will be reflected negatively on the retail sector’s stocks.  

Expanding the fluctuation limits, as is the case in the sukuk market, may fix these issues since it will allow traders to buy/sellshares amid many bids and offers instead of the current three digits, Khrais concluded.