EXCLUSIVE: Saudi Tadawul undecided on its share float size

23 May 2017

Exchange has yet to file IPO application to the regulator and has not fixed a date of its 2018 share sale

Saudi Stock Exchange (Tadawul), the region’s biggest bourse by market capitalisation, has yet to formally submit an application to Capital Market Authority (CMA) for its initial public offering (IPO) and has not made a final decision on either the date or the size of its share float in 2018, according to a top bourse executive.

“All of these questions are important and we have not concluded that with our shareholders [yet],” Khalid Abdullah al-Hussan, the chief executive of Tadawul told MEED in an interview. “As far as a specific date in 2018, I don’t have that. That process will start once we complete our activities as well as submit our application to the regulator.”

Tadawul is required to float a minimum of 30 per cent of its shares to public, however, a float of more than that will be the decision of the exchange’s owners.

Established in 2007, Tadawul has a capital of SR1.2bn ($320m) divided into 120 million shares valued at SR10 each, all of which are subscribed by Public Investment Fund (PIF), the state-controlled investment arm of Saudi Arabia.

It is not clear if the proceeds from the eventual IPO of Tadawul will go to PIF, which is at the heart of Riyadh’s investment strategy at home and abroad to generate much needed cash as government revenues dwindle on the back of lower oil prices.

These questions “need answers from the shareholders and our board of directors,” Al-Hussan said, adding that the Tadawul will make public announcements of details once the exchange has completed all IPO-related matters.

Tadawul, which is set to become only the second regional exchange to sell its shares to public after Dubai Financial Market, is working with UK’s HSBC on its float and Al-Hussan in May 2016 said that exchange has already conducted an IPO-readiness exercise.

Tadawul, which has market capitalisations of close to $450bn, is home to the country’s 12 commercial banks and the Saudi Basic Industries Corporation (Sabic), one of world’s top petrochemicals producers. Shares of region’s biggest mining firm Maaden also trade on the exchange. Tadawul, along with a yet undecided international bourse, will be the future trading home of Saudi Aramco when the top global oil and gas exporter sells less than 5 per cent of its shares to public in what is billed to be the largest-ever IPO in the world.

Saudi IPO pipeline

In terms of attracting new listings on the exchange itself, Al-Hussan said that there is greater interest in listings this year and the exchange is speaking with several potential issuers. “I would say the interest indicates a healthy IPO pipeline within the next two years,” he said, adding that the number of companies that have already submitted applications for equity market floats is known to CMA, however, generally speaking, the interest is from across sectors.

IPOs in the wider GCC markets have slowed down in the last two years with the fall in oil prices since the mid-2014 peak of more than $100 a-barrel, which drove the regional equity markets down and dented investors’ confidence. A total of $1.12bn was raised through six equity deals including the rights offerings in the GCC last year.

Several government-related entities are expected to part-sell their shares to public as part of Riyadh’s Vision 2030 privatisation plans. However, Al-Hussan said it will be some time before the government-owned companies will come to the market.

“It’s a big reform that the capital market and Vision 2030 is introducing to the country. These things takes time to realise the results,” he said, adding that the state entities will have to go through several phases of execution before they come to the market and they are at different levels of readiness in terms of their IPOs.

Tadawul, last year allowed listing of real estate investment trusts (REITs) in the kingdom and in February 2017 introduced parallel equity market for small and medium-sized companies. It is also working on establishing a debt market and all of these steps will bring more issuers and listings to the Saudi market, according to Al-Hussan.

MSCI inclusion

Tadawul, which has implemented structural reforms in its bid to be a part of MSCI’s Emerging Markets Index, is hopeful the US index provider will consider its inclusion as it has “ticked all the boxes”. The exchange is working closely with MSCI and other index providers for a favourable consideration for an upgrade that could bring billion of dollar in investment to Tadawul.

MSCI, earlier this year, said it could launch in June a review of whether to include Saudi Arabia in its emerging market index. It will continue to monitor positive developments and the inclusion in the review list would be conditional on feedback received from the market participants.

FTSE, a rival index provider, has said it make call in September on whether to upgrade Saudi Arabia to a secondary emerging market.

The Tadawul, in May 2016, had received approval from the regulator to extend the current T+0 (same-day settlement system of transaction) to T+2 and it activated the package of reforms including T+2, delivery versus payments and custody framework in April this year.

“All of these are part of the MSCI requirements to achieve emerging market status. What we believe is that all the requirements to join the emerging markets have been completed,” according to Al-Hussan.

If the exchange gets MSCI’s nod in June review, Al-Hussan said, Tadawul as an organisation, will work with institutional investors to educate them about the changes. “By the end of the day, they are the ultimate assessors for any market to be included. That’s the focus of Tadawul this year,” he said.

The same-day clearance of the transactions has been the biggest impediment in the flow of investments from foreign qualified institutional investors into the Saudi market, which is currently at about 1 per cent of the total market inflows and Tadawul has not set particular target to increase that ratio.

“I would say we always aim for more liquidity and more participation of institutional investors in the Saudi market and we will not limit ourselves by putting a target,” he said. “[The] aim is to grow this number at a faster pace.”

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