Demand for Aramco's secondary offering offsets market woes: Analysts

Tadawul trading screen

The Saudi Exchange's (Tadawul) main index, TASI, ended May in the red, logging losses of about 900 points, or 7.2%, amid anticipation of news of Saudi Aramco's secondary offering, geopolitical developments in the region and the expected changes to interest rates by the US Federal Reserve.

A number of analysts told Argaam that the selling pressure in May was normal due to Aramco's secondary offering, alongside continued high inflation and interest rates.

They also pointed out that the demand for Aramco’s secondary offering was a positive factor in offsetting the negative impacts and returning liquidity to normal levels.

Saudi Aramco's secondary offering

Jassim Al-Jobran, Head of Research at AlJazira Capital, said that it was normal to see pressure on the main index during the past weeks due to the secondary offering of Saudi Aramco. This would require the provision of liquidity from investors, whether funds or individuals, which caused selling pressure due to uncertainty, previously on the timing of the offering, which had a negative impact on the index.

The news at the beginning of the week regarding the strong demand for the secondary offering in the first hours was a positive factor that helped mitigate most of the negative impact on market movement and attracted additional foreign investment in the Saudi market. Liquidity levels are expected to return to their normal state after the end of the secondary offering period, he added.

For his part, Khaled Al-Zaidi, a financial advisor, said that TASI fell by 950 points in May 2024, which is the largest monthly decline in the past two years. The decline was due to the secondary offering of Aramco shares, which significantly impacted the movement of the general index.

He indicated that the decrease of SAR 1 in Aramco’s share price negatively affects the value of the main index by about 156 points.

Yasser Al-Mutlaq, Head of Investment Portfolios at Mayar Financial, believes that the sale of additional shares in Aramco is a major event and will attract new investments and boost liquidity in the Saudi market.

Selling pressure on TASI

Despite positive growth in the profit of Tadawul-listed companies (excluding Aramco) by about 8% in Q1 2024, recording the first growth year-on-year after five consecutive quarters of declines, the recent pressures on Tadawul may not solely be due Aramco's secondary offering Al-Jobran said.

He added that the recent regional geopolitical tensions, oil price fluctuations and their impact on oil revenues, as well as their implications on the prospects for the economy and local growth may be considered among the key pressure factors.

Al-Jobran pointed out that optimism in profit expectations was impacted by inflation rates in advanced economies remaining above their target rates, delay in interest rate cuts, as well as impact on costs of deposits in the banking sector and corporate loans.

Al-Zaidi added that the market sees Aramco's huge offering as an opportunity to correct the movement of the general index, and to correct the share prices of some companies that have reached high levels with high profit multiples.

The main index fell by 900 points. Are there investment opportunities?

Banking sector

The recent decline in TASI, which exceeded 9% from its highest levels recorded last March, has provided attractive investment opportunities in several sectors, most notably the banking sector, in light of exaggerated selling trends without fundamental reasons related to financial performance. These stocks are not expected to continue trading at a discount for a long time. The continued growth of the sector’s credit portfolio and expectations of the positive impact of lower interest rates in the future on the cost of deposits are considered factors supporting the continued growth in future performance, especially for some banks with greater exposure to fixed lending rates and high-cost deposits, according to Al-Jobran.

Al-Zaidi stated that the banking sector put pressure on TASI, as the sector index corrected by about 1,100 points in May 2024, led by Saudi National Bank.

Telecommunications sector

Al-Jobran stated that the continued growth momentum in the telecommunications sector, both from the business sector due to structural transformations in the local economy towards digitization, as well as the growth of the consumer sector supported by the volume of penetration and the changing consumption pattern in data and the Internet, provide good opportunities, especially after the notable decline in some shares of this sector.

Transportation sector

Al-Mutlaq pointed to the factors underpinning growth in the transportation sector, which are represented by government support through supporting tourism and expanding the logistics and business sector, in addition to new projects such as the opening of the Riyadh Metro, which is expected during the current year, and the numbers of tourism and Hajj inflows, which increases the demand for transportation companies.

Al-Mutlaq preferred SAL shares for high growth, strong profit margins, and market share size.

For his part, Al-Zaidi pointed out the annual growth observed in revenues, operating income, and net income before one-off items for Budget Saudi during the last three years, adding that the company saw the highest figures for the previous financial items in 2023 compared to the last 20 years.

Health and Pharmaceuticals sectors

Al-Mutlaq said that the price correction in health and pharmaceuticals companies created investment opportunities in some of those companies, considering that companies that invest in innovation and expand their services may see significant growth.

He added that Al-Mouwasat posted high-profit margins and a low P/E ratio compared to the sector, in addition to its plan to increase the number of clinics.

Petrochemicals sector

The state of uncertainty still dominates the outlook for the petrochemicals sector due to the lack of decisive indicators for the sector’s recovery so far. The recent recovery levels in the average selling prices of products, the increase in inventories in China, and expectations of a decline in feedstock prices in the coming summer period are factors that may justify taking the risk in exposure to some sector stocks that have a diversified portfolio of products and feedstocks, in light of the sharp decline in the share prices of these companies, with some of them falling below their book values in the current period, said Al-Jobran.

Cement sector

Al-Jobran said that conservative sentiment still prevails in the cement sector, in light of fears of rising production costs over the coming quarters, despite the sector’s consolidated profits exceeding average market expectations as a result of the rise in average cement selling prices.

There are fears of an additional increase in feedstock prices in the coming years, and fears of a return to the price war between some companies, especially with the lack of solid indicators of demand. Therefore, exposure to sector stocks should be selective, and based on the size of the market share and the type of feedstock used by the company, he added.

Consumer services sector

According to Al-Mutlaq, the restaurants sector faces huge challenges due to intense competition and the entry of new players. In contrast, the education sector is expected to witness continuous growth with the privatization of the sector and increased demand for private education.