DUBAI (Reuters) - Saudi Arabia’s state oil company kick-started its initial public offering (IPO) on Sunday, announcing its intention to list on the domestic bourse as the kingdom seeks to diversify and create the world’s most valuable listed company.
SALAH SHAMMA, HEAD OF INVESTMENT, MENA, FRANKLIN TEMPLETON EMERGING MARKETS EQUITY
With Aramco likely to list 5% of the company over time (1% locally and 4% on an exchange abroad) at a hypothetical $1.5 - $2 trillion valuation, the offering could add up to 1.8 percentage points to its MSCI EM Index representation. This will bring the MENA region’s overall weighting close to 7%, putting it on par with the likes of Emerging Europe, Brazil, South Africa and India, a significant milestone in the evolution of MENA capital markets.
It is a colossal public offering that could potentially generate more than 10 years’ worth of proceeds raised through IPOs in the country.
Some local investors could be selling other shares in order to shift their investments to Aramco and we have seen some ripple effects with the Tadawul All Share Index losing more than 20% from a recent high in early May. In our view, however, this could well be a case of short-term pain for long-term gain.
Aramco will have to offer a dividend yield of more than the international oil majors as it is not necessarily a profit maximizer and is more heavily swayed by national development and political objectives than other oil majors.
Investor rule of law over Aramco is also weaker. A $75 billion dividend would therefore imply a valuation of well below $1.5 trillion, let alone $2 trillion.
Whatever this local round achieves, with domestic players being strong armed into investing, international investors are still going to value this well below the expectations of (Crown Prince) Mohammed bin Salman.
The part-IPO is a cornerstone of Saudi Arabia’s transformation plan and a listing will be a high profile symbol of progress with the reform program. From an economic perspective, it will provide funds to progress with the key megaprojects that are central to the transformation plan, though the amount raised if 1-2% is listed is unlikely to make a significant dent in the capital requirement. The critical questions still remains the amount to be listed and the valuation.
This is the most important economic event in Saudi Arabia in decades. The beginning of a new era which will reinvigorate a sluggish economy overly dependent on oil. The pathway for economic development is now clear but will KSA (Kingdom of Saudi Arabia) make the right investments to energize growth and provide jobs for a young, growing labor force whose patience is not unlimited? Selling a small piece of Aramco in a captive market gives the KSA more control to prop the value of Aramco up over its fair value.
The dividend announcement is in line with previous statements.
Some perspective on the Aramco IPO for the overall Saudi diversification story is needed. The likely Aramco IPO proceeds will be less than the Aramco dividends the government received in the first half of 2019 alone.
According to publicly available information, the Kingdom is targeting a valuation of $2 trillion for Aramco. Last year the company made profits of $111 billion and it is planning to pay dividends of $75 billion next year. The valuation looks stretched at 18 times earnings and with an expected dividend yield of 3.75%.
A quick study of the energy companies with a market capitalization higher than $100 billion will show that the median PE (price to earnings ratio) as well as dividend yield are 16.44 and 4.8% respectively. From that aspect, a valuation of $1.5 trillion to $1.8 trillion seems justified.
Reporting by Davide Barbuscia and Dmitri Zhdannikov; editing by Frances Kerry and Jason Neely