The fall of the Tadawul index from more than 20,000 points in February 2006 to less than 7,000 a year later was the biggest correction in the bourse’s history. This year, the Saudi stock market has traded in a narrow margin of 6,850-9,300 points, with a surge in activity in October and a 10 per cent gain in total market value to more than $400bn.

One surprising post-crash trend is the con-tinued success of initial public offerings (IPOs), which will total 23 offerings in 2007 worth $4.6bn, and instant profits for those who invested.

Profits total more than 1,000 per cent for investors buying into offerings from Malath Insurance, Sabb Takaful and insurance company Salama on each.

Only the Kingdom Holding Company’s listing in July came close to disappointing investors, and even then losses were minimal. Some 20 Tadawul-listed companies also increased their capital in 2007 - 18 through stock dividends and two via rights issues.

In most developed and emerging markets, IPOs and capital raises would not be attempted in such difficult equity market conditions. IPOs are usually a feature of rising rather than falling stock markets.

IPOs in the kingdom have traditionally been a mechanism for redistributing national wealth, with share issues being priced in such a way as to allow a mark-up on the IPO price in the market, automatically delivering a profit to investors. But this is changing with offerings increasingly being used to raise capital and redefine company structures.

“Saudi Arabian companies are increasingly using IPOs as a vehicle for raising capital,” said Nasser al-Dawood, deputy governor of Riyadh, at the second Saudi IPO summit in mid-November.

“This is now attracting local and international investors, with overseas capital being drawn into the market and supplementing the existing high levels of liquidity.”

The size of share offerings in the kingdom is set to get bigger. In the coming months, four issues, ranging in size from $1bn to $2.5bn, will be issued by the Petro-Rabigh refinery joint venture of Saudi Aramco and Japan’s Sumitomo Chemicals; Zain, the Saudi venture of the former MTC mobile phone company of Kuwait; the new Inmaa Bank; and Saudi Arabian Mining Company (Maaden).

“Not surprisingly, 2007 saw a low level of confidence in the local market,” says Gray. “But we are now seeing signs of stability and renewed confidence by high net worth individuals, and the market was up by about 10 per cent in October.”

However, new IPOs are now being priced by a method relatively new to the region - book building - which will impact on the automatic profits previously enjoyed by Saudi investors. “Book building will probably limit the level of price appreciation in the secondary market to more like 20 per cent,” says Gray.

Jadwa Investment chief economist, Brad Bourland points to a healthy flow of no less than 58 IPOs through to 2009. This is a remarkable for a recently dented stock market. He predicts more than 200 companies will list within two years.

High-profile listings

The IPO roll call for the next few years features some high-profile names including Saudi Arabian Airlines (Saudia), National Air Services (Nas) and the Power & Water Utility Company for Jubail & Yanbu. Issue sizes are not always known, but, according to the Jadwa list, the smallest announced is $24m for Mouawad National Jewellery & Watches, while the largest is the $2.5bn Maaden listing.

Regional observers are also impressed by regulatory progress in the Saudi stock market, which they say is running ahead of any of the other local bourses, aside from the Dubai International Financial Exchange.

Bourland cites eight new Capital Market Authority (CMA) acts regulating market conduct, authorised persons, securities, listing rules for offers of securities, investment funds, corporate governance, real estate investment funds, and mergers and acquisitions.

In March this year, the Tadawul was turned into a shareholding company, with a capitalisation of SR1.2bn. This appears to be the first step towards a public listing similar to the pioneering IPO of the Dubai Financial Market.

And the market continues to evolve. On 20 October, the next-generation trading platform for the Tadawul, NewGen, was launched, expanding the speed and capacity for processing share transactions and providing greater market transparency.

However, foreign participation in the Tadawul remains restricted. Non-resident foreigners can only buy Saudi mutual funds, and only foreign residents can actually own shares, vote in general assemblies and sit on boards - a concession granted as the market crashed.

It is only individuals and institutions from the neighbouring GCC countries that enjoy a level playing field with Saudi nationals on the Tadawul. This contrasts with the growing liberalisation of foreign share ownership and market participation in most other GCC stock markets.

However, share ownership reforms do not yet appear to be on the national agenda, although investment bankers remain hopeful that the mood will change.

Another paradox is that while foreigners are barred from owning shares directly, there has been a proliferation of licensed foreign brokerage firms. This is because of the CMA liberalisation of the sector, allowing the number of financial services companies to rise from 11 to 95 in three years.

Foreign brokers can therefore lead manage an IPO for their international clients who remain unable to buy shares directly. Deutsche Bank, for example, is lead manager of the $400m IPO announced for the Prince Abdulaziz bin Mosaed Economic City.

The correlation between the oil price and the performance of the Tadawul is always a major consideration for analysts, although record oil prices this year have not prevented the equity slump. Jadwa Investment predicts the Tadawul will reach 13,000 by the end of 2010 on a gentle upslope from current depressed levels, with the non-oil sectors supplying growth momentum and oil prices staying at high levels.

This is a consequence of the high levels of domestic investment during the oil boom. Manufacturing, for example, is forecast to grow by 9.4 per cent over the next three years, compared with 6.8 per cent in the previous three.

The market trades on an overall price-to-earnings (PE) ratio of 17, with electricity the lowest ranking sector, on a PE of 11, and services the most highly valued, with a PE of 30. Jadwa predicts average annual earnings growth will be 15 per cent between 2008 and 2010, leaving ample scope for its predicted rise in the Tasi to 13,000 by the end of 2010.

Some commentators say a rally in the Saudi market is overdue, claiming it is odd that the emerging stock markets of China, India, Russia and Brazil have been booming at a time of record oil prices, while the bourse of the world’s biggest oil producer has slumped.

Ample liquidity alone ought to induce a bounce from the Tadawul’s depressed levels, and the long-term future of energy producers in a world of higher prices looks assured. Local market sentiment has become too gloomy, creating a buying opportunity. So far, too few investors seem to be following this view.

As ever, geopolitical instability is the wild-card that could upset any forecasts for the Saudi stock market. Rising regional tensions between Iran and the US would boost the oil price and probably drive the stock market up, while an actual attack might provoke a damaging military response by Iran and send local stocks plunging.

Equally, a peaceful settlement of the stand-off would depress oil prices and be bad for stocks. Perhaps it is therefore not so surprising that local investors remain undecided about which way to jump.

Upcoming IPOs

Oil and gas

• Chemanol Company, 50 per cent

• Petro-Rabigh refining/ petrochemical complex, 30 per cent

• Aramco-Total export refinery, 30 per cent

• Petro-Rabigh refining/ petrochemical complex, 30 per cent

• Ras Tanurah refining/ petrochemical complex, 30 per cent

• Aramco-Total export refinery, 30 per cent

• Mecca Petrochemical Industries Company, 30 per cent

Power and industry

• Saline Water Conversion Corporation

• Power & Water Utility Company for Jubail and Yanbu, 30 per cent

• Shuaibah Water & Electricity Company

• Saudi Arabian Mining Company (Maaden), 50 per cent

• Al-Ittefaq Steel Products Company Mining & Minerals, 30 per cent

Real estate

• Prince Abdulaziz bin Mosaed Economic City, 30 per cent

• Al-Khozama Management Company, 49 per cent

• Dar al-Arkan Real Estate Development Company

• Ajyad Development Company, 30 per cent

• Olaya Real Estate Company

Telecoms

• National Technology Group

• Saudi Mobile Telecommunications Company, 40 per cent

• Itsalat International Communication Company

Transport

• Saudi Arabian Airlines, 30 per cent

• Saudi Arabian Airlines catering services

• National Air Services

Source: MEED; Jadwa

Key fact

A total of 58 IPOs are expected to be launched on the Tadawul by 2009.