No respite for battered Saudi stocks as IPO pipeline shrinks

The Tadawul is on track for its slowest listing lineup since 2004.

Add this to the reasons why 2016 isn’t the year for Saudi stocks – the IPO pipeline is drying up.

Two companies have announced plans for initial public offerings this year, down from six last year, putting the Saudi market on track for its slowest lineup since 2004. That compares with nine in Malaysia, another energy-dependent developing economy whose main stock index is poised for its third straight annual drop following the retreat in oil prices.

The dwindling IPO lineup is a complication for the kingdom as it plans to double the size of its US$371 billion stock exchange and boost the number of traded companies by about 50 per cent to 250 in seven years. The country is overhauling its economy to reduce its dependency on energy, and that includes cutting government spending and selling shares in the state-owned oil company Saudi Arabian Oil Co (Aramco) in early 2018.

“You can forget about new companies wanting to go public,” said Mohammed Alsuwayed, the head of capital and money markets at Adeem Capital in Riyadh. “Reduction in spending, contractionary policy and austerity measures are not good for the market, and if it’s not good for the market then it’s not going to provide any good valuation or sentiment for companies that were considering IPOs.”

While the head of the nation’s Capital Market Authority says the equity market is ready for Aramco’s IPO, potentially the world’s biggest, the Tadawul All Share Index is the worst performer across the Middle East and North Africa this year, even after the kingdom allowed foreigners direct access to its stock market for the first time last year and further relaxed the rules two weeks ago.

Al Yamamah Steel Industries announced its plan to go public at the end of March, and L’Azurde Co for Jewelry followed more than a month later. With the number of deals worldwide almost halving this year to about 1,290 compared with all of last year, Saudi Arabia’s dwindling IPO pipeline is not unique. But unlike most countries, the kingdom prohibits foreigners from participating in share sales.

That will soon change. As part of its plan to open one of the world’s most closed equity markets, the Tadawul Stock Exchange will allow foreign investors to subscribe to initial public offerings in the kingdom for the first time starting January 1.

It’s a “positive” step, said Mohamad Al Hajj, a strategist at EFG-Hermes in Dubai. “A successful attempt in attracting foreign money following the new qualified foreign investor rules would help the IPO market going forward.”

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