At the height of the 2000s oil boom, attractively priced initial public offerings (IPOs) pulled record numbers of retail investors onto the Saudi market. The government viewed stock market listings as the primary means for its citizens to participate in the economic boom, ensuring that popular capitalism became enshrined in the Saudi business ethos.

The Saudi insurance sector is over IPO’d. There are simply too many insurance [firms] in the stock market

John Sfakianakis, Banque Saudi Fransi

The arrival in Riyadh of the cream of Wall Street investment banks, including Morgan Stanley and Goldman Sachs, suggested a rich pipeline of offerings in the making. These banks quickly picked up some good business. Morgan Stanley managed eight of the 26 Saudi IPOs that took place in 2007 and took seven mandates the following year.

That year saw a sharp increase in firms going to market compared with 2006, when there were only nine IPOs. In 2007, Saudi companies raised an estimated $4.8bn through flotations.

IPO slowdown in Saudi Arabia

The investment banks’ exuberance over the opportunities in the kingdom was understandable. With abundant liquidity and a government push to widen share ownership, Saudi companies were positioning themselves to sell off shares via public subscription. In early 2008, just before the global financial markets crashed, Morgan Stanley was predicting 110 IPOs in Saudi Arabia over the next couple of years.

That burst of activity never materialised, with dozens of firms shelving plans to list as regional equity markets froze in the wake of the collapse of Lehman Brothers in the US. According to local investment bank NCB Capital, about 80 Saudi companies postponed public offerings worth a total of $19bn during 2009. Overall, the number of issues dropped to 12 during the year, from 25 in 2008, while the average size of each offering fell by more than half.

In 2009, barely $1bn was raised through firms going public in the kingdom.

This year has hardly been any better. Seven IPOs were launched in the first six months of 2010, the largest being Knowledge Economic City (KEC), which raised $272m in May. Amid subdued equity capital market activity, these IPOs generated $773m in the first half of 2010 – an improvement on the trend of the previous year, but not the levels previously expected.

It may be cold comfort for investment banks, but the kingdom remains the region’s unrivalled market leader. Of the other five GCC states, only Qatar saw any IPO activity in the first half of the year, with a single offering for Mazaya Qatar Real Estate Company, which raised $144m.

Yet, as long as Saudi investors steer clear of equity positions, corporate appetite for listing on the Tadawul – the Saudi stock market – will remain tepid. Even the improved Saudi IPO figures relative to its Gulf neighbours are deceptive, since some of these offerings were either mandatory, under government regulations affecting the insurance sector, or government sponsored, as with KEC.

Under the licensing conditions prescribed by Saudi Arabian Monetary Agency, insurance companies are required to list a percentage of their shares to ensure they are appropriately capitalised and more transparent. Solidarity Saudi Takaful, Amana for Cooperative Insurance and Wataniya Cooperative Insurance each offered 40 per cent of their shares to the public during the first half of 2010, raising $59.2m, $34.1m and $8m respectively.

Some analysts question the need for these regulations. “The Saudi insurance sector is over IPO’d,” says John Sfakianakis, chief economist at the local Banque Saudi Fransi. “There are simply too many insurance companies in the stock market and many of these firms aren’t as active as they should have been.”

Gloomy prospects for Saudi IPO market

The IPO market in Saudi Arabia is unbalanced. The largest offering so far this year, KEC’s sale of 30 per cent of its shares, raising $272m, was twice as large as the next highest, a $137m offering from Al-Hassan Ghazi Ibrahim Shaker Company, a manufacturer and distributor of air conditioning products and home appliances.

The KEC offering was equivalent to more than 32 per cent of the total capital raised in the entire region in the first six months of 2010.

Shaker, a rare Saudi family firm to go public, saw its IPO meet with a strong response; the institutional tranche was oversubscribed 2.7 times. The Shaker floatation, fast-food chain group Herfy Food Services Company’s, $110m IPO in January 2010, and Alsorayai Trading Group’s $64.8m listing suggest latent interest among Saudi corporates in going to the market. But the reality is that these three flotations netted barely $300m combined. 

Despite talk that improving pricing and greater investor confidence will bolster the Saudi IPO market, analysts are still gloomy about prospects for a spike in activity over the near-term.

“What we’ve seen is a bit similar to what we have seen in bond and sukuks, in that people are interested, but are inclined to delay listing if they sense market uncertainty or have any reason to believe that they would make significantly less money than they otherwise would have done,” says Jarmo Kotilaine, chief economist at NCB Capital.

Al-Tayyar Travel Group cancelled a $320m IPO this year after the book-building process failed to attract enough demand.

“The reality is there isn’t much in the pipeline,” says Sfakianakis. “Nothing of significance will make it through in the next few months. The sizeable IPO was KEC and that is now trading below par.”

Investor caution to list on Tadawul

The IPO slowdown reflects investor caution over rushing to list on the Tadawul. Despite a recent pick-up in activity, the Saudi bourse has had an underwhelming year. By mid-September, the Tadawul share index was up less than 4 per cent on the start of the year at 6,121.76 – well below its late April peak of 6,900.

In the past, the assumption in Saudi Arabia was that with corporate IPOs, people would buy the stock to make a quick return. Since that is not really happening anymore, says Kotilaine, even if a company manages to tick all the other boxes, there is some anxiety as to whether investor expectations can be met.

“The market has gone up recently, but not significantly,” says Sfakianakis. “It won’t be easy for the index to pass beyond 6,900. Of course, it all depends on the severity of the global economic slowdown and oil prices.”

When share prices and valuations do recover, this could spur companies to return to the market. “The appetite was always there, it was just quelled by global events,” says Steve Drake, head of Middle East capital markets group, PricewaterhouseCoopers. “We are starting to see interest coming back into the market – there were a few listings in the first half and probably we won’t see that many this year, but certainly we will going into 2011.”

Since it has been a pattern of delays rather than outright cancellations, once market confidence returns some of the postponed IPOs – totalling 39, according to the local Jadwa Investment – might be revived.   

The green shoots may already be visible. In July 2010, Riyadh-based Al-Jouf Cement Company raised $173.3m in a sale of 50 per cent of its shares, the proceeds of which are intended to fund its expansion plans.

However, the long-awaited burst of listings from Saudi family-owned businesses still looks a distant prospect. “The important ones are the family conglomerates that are keeping away from equity and debt markets. They prefer to remain closed companies for the time being,” says Sfakianakis.

There is still a widespread reluctance to list among family firms, which make up the majority of Saudi corporates. “I’m not sure that family firms really see the advantages of listing. This may change, if name-lending really is phased out and bank credit becomes more difficult to access. But it would be more of a ‘push’ rather than a ‘pull’,” says James Reeve, an economist at the local Samba Financial Group.

Although there are sizeable family conglomerates that could easily tap the equity market, family firms find it more opportune to borrow, if they have access to credit from local banks. 

“The view a year ago was that the unwillingness of banks to lend would compel family conglomerates to IPO themselves, but that’s not been the case – we haven’t seen any,” says Sfakianakis. “If you are not issuing corporate debt, then you will be wanting to go into the IPO market, but even that isn’t being tapped.”

There are deeper questions that the dearth of IPO activity is asking about the Gulf capital markets. Key issues such as the function of the Saudi stock market are coming into focus.

“Even if companies do more IPOs and transparency improves, there isn’t necessarily a depth of management and strategic planning that allows them to make the most of the opportunity,” says Kotilaine. There also are not many success stories where companies have come up with a clear vision, gone to market and raised money and mobilised it effectively, he adds.

Wider role of equity capital market in Saudi Arabia

“The wider question is what the true role of the equity capital market in Saudi Arabia is, and it’s not been fully answered yet. It’s more a case that they have a stock market because everyone else has one. They’ve managed to get a number of firms to list – which is all well and good – but if you judge how has this changed the economy, the answer is still a bit ambiguous,” says Kotilaine.

A revival of the IPO market will certainly have a positive impact in deepening the Saudi capital market, but if it is to fulfill its potential it will need to attract more institutional investors. This should encourage better research, greater transparency, more liquidity, and more accurate pricing. This in turn should encourage more family firms to list – the kind of outcome that Saudi authorities, corporates and investors alike hope will eventually emerge.