Saturday, 03 March 2007

Banker's are touting the present moment as the optimum time for going public. Liquidity is at its highest: government commitment to expanding privatization is unwavering: and investors are practically begging for places to put their money.

With this in mind, the Capital Market Authority (CMA) has given the nod to five private insurers to make initial public offerings (IPO) in about two weeks. This is the first time a batch of companies in the same industry has been given the go-ahead at one time. Officials at CMA view the move as an essential step towards fulfilling WTO membership requirements. Although there has been no announcement of the underwriters, banking sources told the Saudi Gazette that Arab National Bank, NCB, Riyad Bank, SAMBA F.G. and Saudi British Bank were the only banks to show serious interest. In spite of the religiously accepted format of co-operative insurance, Shariah-compatible claiming banks (Al-Rajhi and Al-Bilad) are not expected to jump in because of previously held ethical stances regarding insurance activities. 

Dr. Fawaz Al-Alami, president of the Saudi negotiating team to the WTO, told the Saudi Gazette last week in a "majlis" that banking, insurance, communication and transportation topped the list of industries singled out for privatization in Saudi Arabia. "We are committed to a strict timetable. The sooner we get on with it, the better are our chances to buy more time on other thorny topics." Al-Alami, according to sources, is the sole candidate to head the Saudi bureau for WTO membership follow-up in Geneva. Two weeks ago, the Council of Ministers approved a proposal by the Ministry of Commerce (MOC) to establish a technical-negotiating bureau concerned with "all matters leading to the fulfillment of Saudi Arabia's WTO membership requirements and to be administratively linked to the MOC office".

The five insurers set to go public are Saudi United and the Arabian Shield, each offering 8 million shares; Iyak offering up to 4 million shares; SABB, with 3.5 million shares; and Saudi French with an offering of 3.1 million shares. The total number of shares available to the public is 26.6 million (out of a total of 70 million shares). A total of SR266 million could be paid by subscribers. Share price for all IPOs in the Kingdom is limited to a maximum of SR10.

Public ownership of each company will vary. It could reach 40 percent of Saudi United, Arabian Shield and Iyak; 35 percent in SAAB; and a maximum of 31 percent in Saudi French. The ownership disparity is a reflection of each company's current market share and is also attributed to the absence of a stipulated minimum for an IPO. Specialists are not concerned at this point as to the need for the underwriters to intervene in the case of bids falling short of offers.

With projects in the 2007 national budget being carried out at an accelerated pace, there is no shortage of liquidity. Banks, in response to the Saudi Arabian Monetary Authority (SAMA) directive a couple of weeks ago, increased ROR on savings accounts by a half of a percentage point to encourage a shift from spending to saving.

"Go package peanuts shells and you'd find buyers; sell a share in a condominium project on the moon for married people only and people would join in. I guess good times are here again!" joked KAAU professor of financial markets, Mohammed Yaghmour.

In 1995, right after the Kuwait liberation war, joint-stock companies were urged to increase their paid up capitals in a move envisioned to slow down outward capital migration. That position, according to Yaghmour, was taken under austere budgetary conditions. But today, " the Iranian nuclear program plays right into the hands of the GCC governments' economic programs. As the conflict escalates, oil prices can go nowhere but up... More money would be in the coffers and much of it is not going abroad, so you have to find ways to keep it safe" added Yahgmour.

Over-subscription is nothing to bet against. Malath IPO, the second entrant to the insurance market, was covered 500 percent. Subscribers paid more than SR 710 million for a total share value of about SR 150 million. Share allocation for MedGulf IPO, the third entrant, has yet to be finalized, but banking sources hint at 300 percent oversubscription. Many believe there is no reason at all why the new entrants should tarnish such a shining record. 

The week in review   
TASI, the market index, closed Wed. (Feb.24) at 8176.37, down an insignificant 68.68 (0.84 percent) compared to the closing of the previous week (Feb 17-21).

Market valuation rose from about SR72.57 billion to SR84.69 billion, a gain of 49.01 percent. Total shares traded followed suit, increasing from about 1.43 billion to 1.86 billion (30.07 percent).

At last Wed's closing, market P/E was 15.62, less than the comparable historical value of 19.87. Similarly, P/BV was 4.73, compared to the historic value of about 3.0. Companies' net-profits-to-shareholders worth for Q4 2006 is 19.92. Net profits for the first nine months of 2006 increased by 19.3 percent, compared to the same period in 2005. 

Next week's predictions
TASI is projected to hover around 8,266 early next week. A strong support point at 8,165 is projected for now as a "steady floor" for non-daily traders. At the lower boundary, if average liquidity observed persists, TASI could comfortably go down as low as 8120.

By Omar S Bagour

© The Saudi Gazette 2007