Saudi Aramco, the state-owned oil company, has defied sceptics by surpassing a $2 trillion valuation on the second trading day of its IPO.
The much anticipated flotation has been seen as the centrepiece of crown prince Mohammed bin Salman’s economic reforms and a diversification from oil-based revenues. It was hoped that the money raised would be used to develop other sectors.
However the IPO plans were repeatedly revised due to the doubts that it could meet the $2 trillion valuation sought by the crown prince. Not only was the share sale delayed, the company abandoned plans to list overseas, instead listing on the Saudi stock exchange. The amount of shares on offer was also scaled back, from 5% of the company to just 1.5%.
International investors went lukewarm on the valuation, thanks to concerns about corporate governance, leading Saudi Aramco to focus on domestic investors, issuing bonus shares for retail investors and encouraging wealthy families and sovereign wealth funds in the region to prop up the sale.
The stock rose by 10% on the first day of trading thanks to heavy local demand which made the IPO nearly five times oversubscribed. The company raised $25.6 billion, surpassing the previous record of $25 billion raised by Chinese e-commerce firm AliBaba.
The consequently high valuation remains a concern though for international investors given that dividend yield will be far less than for other international oil companies that have undergone an IPO.
A briefing note from analyst Bernstein stated that: “Aramco should trade at a discount rather than premium to international oil majors” and rated the company as “underperform”. Nevertheless, the listing is still expected to be supported by global funds wanting to buy shares in Saudi Aramco before it is included in the emerging markets indices followed by institutional investors.
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