The decision to put the oil giant's market debut on hold has removed a threat to investments in other Saudi stocks from what was set to be the world's largest IPO
There is a silver lining for Riyadh-traded stocks in the delay to Saudi Arabian Oil Co.’s massive initial public offering.
While putting the oil giant’s market debut on hold has reduced Saudi Arabia’s likely profile on emerging-market equity indexes when the kingdom joins them next year, the decision has also removed a threat to investments in other Saudi stocks from what was set to be the world’s largest IPO.
Listing Aramco would be “very positive long term, but at the time of the IPO, our biggest concern would be a drain of liquidity, because you would see a lot of investors selling off their shares in order to fund their applications for the IPO,” Fahd Iqbal, head of Middle East research at Credit Suisse Group AG, said in an interview with Bloomberg Television. “With the removal of that IPO for the time being, it removes a little bit of that overhang.”
When the IPO was initially flagged in 2016, Saudi officials hoped it would raise as much as $100 billion, based on a $2 trillion valuation that some analysts and investors have said was too high. With Aramco valued at those levels, Saudi Arabia was set for a weighting of almost 5% in MSCI Inc.’s emerging market indexes, according to estimates by EFG-Hermes Holding Co., bigger than Hong Kong, Russia or Mexico. Without Aramco, it’s looking more like 2.6%.
Saudi Arabia last week placed the share sale on hold as Aramco instead focuses on buying a stake in petrochemical maker Saudi Basic Industries Corp., or Sabic, for as much as $70bn. For the 32 Saudi companies under consideration for the MSCI indexes, the decision could prove a positive as it rules out a potential dilution under index composition rules, according to Mohamad Al Hajj, an equities strategist at EFG-Hermes.
Saudi Arabia’s markets regulator and the stock exchange have carried out reforms in the past few years aimed at attracting foreign investors and securing an upgrade to emerging-market status by foreign index compilers. FTSE Russell and MSCI announced earlier this year that the country will join their developing country benchmarks in 2019, a promotion that wasn’t tied to an Aramco IPO.
Passive investors use the indexes to guide their stock selections, with the MSCI gauges alone influencing $1.9tn of emerging-market allocations. Aramco’s IPO could attract as much as $11bn from fund managers, according to estimates by EFG-Hermes.
Sabic, the biggest Riyadh-traded company by market capitalization, is expected to be the largest Saudi representative within MSCI and FTSE indexes, drawing about $2.9bn to the local market, Al Hajj estimates. Al Rajhi Bank, National Commercial Bank and Saudi Telecom Co. are among other large-cap stocks Al Hajj sees on foreign investors’ radar.
“In general, the sort of international investor who would have considered Aramco would have less interest in Saudi domestic stocks,” said Hasnain Malik, global head of equity research and strategy at Exotix Capital in Dubai. “The local investor base might have cannibalized their holdings in the chemicals sector, assuming their overall investment in the market was constant.”