Saudi Arabia bucks global slump in IPOs

Saudi Aramco’s base oil subsidiary Luberef is set to raise around 4.95 billion riyals ($1.32 billion) from its planned 30% initial public offering (IPO) within the next few days. The company set the final share price at the top end at 99 riyals ($26.4) per share amid strong investor demand. 

Luberef’s upcoming share float follows Americana, a regional fast food operator, which raised $1.8 billion through a dual listing on Tadawul (Saudi Arabia’s bourse) and Abu Dhabi Securities Exchange (ADX) at the end of November. The firm's market debut on Dec. 12 saw its shares surge by 12.6% to 2.95 dirhams on the ADX, and by 2.6% to 2.75 riyals on Tadawul. 

Despite a slowdown in IPOs in developed markets like the United States and Europe, due to the global economic downturn and stock market volatility, the MENA region and in particular Saudi Arabia have bucked the slump in IPOs. In fact, the kingdom led the way in regional listing activity with two on the main market and three on its parallel market during Q3 2022 raising $490 million in total proceeds, according to EY.

The listings are reflective of supportive oil prices, strong liquidity and local investor appetite for Saudi stocks as well as market reforms introduced by Saudi authorities over the past couple of years. Nomu, for instance, is a parallel market that the country set up for smaller companies looking to access the capital markets with lighter listing requirements.

The development of the kingdom’s equity market is key to the Financial Sector Development Program, which supports Vision 2030, the kingdom’s post-oil economy blueprint. The program aims to increase the market value of the stock market as a portion of GDP from 66.5% in 2019 (excluding the Aramco IPO) to 88% by 2030. The state authorities are encouraging planned privatization of state-owned entities through IPOs on the Saudi stock exchange.

“The Saudi government's push for privatization has prompted more IPOs and the involvement of key sovereign funds and stakeholders in the capital markets is helping the kingdom monetize its investments,” said Ibrahim Soumrany, a local partner at White & Case in Dubai. “There is a healthy mix of sovereign-owned companies as well as family-owned companies which are looking to list.”

In addition to state-led privatization, the changing business environment could also be prompting private enterprises like family-owned firms to consider listing on the Saudi stock exchange.

James Reeve, chief economist at the Riyadh-based investment bank Jadwa Investment, believes there is a growing realization within the business community that the old model of a steady stream of government contracts for often overpriced goods and services is being phased out.

“The authorities want to see private firms competing with each other to provide goods and services at the best possible price,” he said. “They also want to see firms invest in areas of the economy that they have not ventured into before. To survive and indeed thrive, firms will need to invest. And the stock market is the obvious place to raise the necessary funds.”

Tadawul’s inclusion and growing weight in global indices like the MSCI also means that Saudi stocks can no longer be ignored by international equity investors, according to Ali El Adou, head of asset management at Daman Investments, a Dubai-based investment company.

“There are two types of foreign investors looking at the region. The first are traditional active emerging market equity investors. The other is the index/passive investor,” said El Adou. “The region cannot be ignored as liquidity has increased significantly. The MENA region makes up 9% of [the] EM index."

However, some investors are unsure whether the Saudi IPO flurry is temporary because of recent higher oil prices or rooted in the kingdom’s longer term economic-growth story.

“Notwithstanding the attractiveness of non-oil/non-cyclical sectors in [kingdom], Tadawul is still viewed by non-regional investors as an oil play,” said Dipanjan Ray, portfolio manager and head of research at Emirates NBD Asset Management. As a result, he said, “many actively managed non-regional funds are skeptical about long-term growth prospects.”

Another key characteristic of IPO activity is that most Saudi firms are preferring to list locally rather than on more developed stock exchanges like London or New York. This is likely due to the disclosure and corporate governance, among other requirements.

“Showing an IPO to US investors can also require additional documentation. In the past, many companies have avoided showing their IPO in the US because of this,” said Dipanjan Ray. “Preparing for listing requires public financial disclosure and may require some restructuring of a business.”

But John Gollifer, general manager at the Middle East Investor Relations Association, said it is perfectly natural for local businesses to seek a primary listing on the national exchange.

“Your business is understood by a local audience. It is easier to subscribe to local rules and regulations and the potential investment community is there for the taking, be it regionally or internationally,” he said. “In this day and age, there is no excuse not to use technology to extend your market reach to new investor bases around the world.”

While the pipeline of Saudi IPOs for 2023 is strong, the volume of listings could be impacted by a looming global economic recession as well as stock market volatility and uncertainty. But one emerging trend could be foreign companies considering dual listing.

“We are witnessing more foreign companies considering listing in Saudi. There is a push to allow dual listings and in the future, we may see more companies seeking to list in their home jurisdiction and in Saudi Arabia,” said White & Case’s Soumrany.