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| 10 September, 2018

Capital gains: Saudi firms look to IPOs, stock markets, amid cash flow concerns

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An investor walks past a screen displaying stock information at the Saudi Stock Exchange (Tadawul) in Riyadh, Saudi Arabia June 29, 2016.

An investor walks past a screen displaying stock information at the Saudi Stock Exchange (Tadawul) in Riyadh, Saudi Arabia June 29, 2016.

REUTERS/Faisal Al Nasser
Nearly three-quarters of respondents to a new survey in Saudi Arabia said their company would consider an initial public offering (IPO), as concerns about cash flow challenges for growing firms mean they are increasingly looking at funding opportunities through capital markets.
 
According to the latest results of the annual EY Growth Barometer, one third of middle-market businesses in Saudi Arabia are projecting over 10 percent growth this year, with 60 percent targeting growth of 6-10 percent, a 24-percentage point jump compared to the results of last year’s survey. (Read the full report here).
 
However, one of the key challenges to this growth is cash flow shortages, with 34 percent of survey respondents saying they currently rely on bank finance for funding and are hopeful that the opening up of the kingdom’s capital markets will free up for more funding opportunities.
 
In fact, 73 percent of executives surveyed said they are considering an IPO.
 
“Cash flow is one of the highest risks for companies on a growth journey. With growth comes the need for working capital, and in line with fast-growth companies worldwide, the gap between long-term financing and short-term needs is a constant challenge,” Abdulrahman Moulay Albizioui, Saudi Arabia transaction advisory services leader at EY, was quoted as saying in a press release issued with the survey results on Sunday.
 
“Growth strategies such as technology investment, entry into new sectors and sub–sectors, and new markets, all put a strain on working capital. Lack of cash in the balance sheet is a significant challenge to growth not just in Saudi Arabia, but across the world.”
 
The move comes as the Saudi index has increased by 6.3 percent so far in 2018, with the surge attributed to news in June that index complier MSCI will upgrade the kingdom to emerging market status from mid-2019, which is expected to attract billions of dollars from both passive and active foreign funds to the market.
 
According to a Reuters Poll of 13 leading Middle East fund managers conducted at the end of August, 8 percent of participants expected to raise allocations to Saudi equities in the next three months, compared to 31 percent that planned to raise allocations in the previous poll.
 
Some of the other highlights from the EY survey include:
• 35 percent of respondents said they regard regulation as the top driver of innovation, up 28 percentage points from last year
• 82 percent say they will have adopted artificial intelligence (AI) robotic process automation by 2020
• 95 percent said AI will be introduced within the next five years
• 29 percent said overseas expansion was a key growth priority, while 18 percent said they were focused on their home market
• 58 percent said they were looking to recruit new staff
 
“Contrary to the common belief that regulation stifles growth and innovation, Saudi executives believe that reforms set by the Crown Prince have been driving change and growth in the Kingdom. The decision of MSCI to add Saudi Arabia to its Emerging Markets Index is a testament to the progress being made in the Kingdom and the positive effects of the reforms,” Fahad Altoaimi, Saudi Arabia managing partner at EY, was quoted as saying.
 
Further reading:
 
(Writing by Shane McGinley; Editing by Michael Fahy)

(shane.mcginley@thomsonreuters.com)

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Disclaimer: This article is provided for informational purposes only. The content does not provide tax, legal or investment advice or opinion regarding the suitability, value or profitability of any particular security, portfolio or investment strategy. Read our full disclaimer policy here.

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