Complex Made Simple

Aramco’s retail strategy has worked, raising $25bn. Come Wednesday, will shares go up for investors?

Many retail investors borrowed and bought Aramco shares at IPO prices. Dec 11, 2019 will show if this was a wise choice to make

The Tadawul All Share Index rose 2.4% on Sunday, the most for a session since October 2018 The kingdom raised $25.6 billion from the world’s biggest IPO after selling shares at 32 riyals ($8.53) each Banks were told they can lend money to retail customers at a 2-to-1 ratio for every riyal they invest in Saudi Aramco, compared to 1-to-1 average

That’s the million-dollar question, isn’t it?  Trading of Aramco shares bought by retail investors and some regional institutional ones starts this Wednesday. 

When trading the world’s most valuable company, you expect good things to happen, and good things are already happening.

Tadawul feeling it

Saudi Arabia’s main equity index advanced the most in more than a year after the pricing of Saudi Aramco’s initial public offering and amid hopes of higher oil prices, according to Bloomberg.

The Tadawul All Share Index rose 2.4% on Sunday, the most for a session since October 2018. The kingdom raised $25.6 billion from the world’s biggest IPO after selling shares at 32 riyals ($8.53) each. That was the top end of the range and values the energy company at $1.7 trillion. It received total bids of $119 billion.   

Aramco has been “fairly valued and there is definitely some room to rally from here,” Aarthi Chandrasekaran, a portfolio manager at Shuaa Capital in Abu Dhabi, said in an interview with Bloomberg TV.

In fact, Aramco’s market value will exceed $2 trillion after its floating on its stock exchange, Saudi Arabian energy minister Prince Abdulaziz bin Salman said on Dec. 6, a day after the company hit a $1.7 trillion valuation.

Funds from the sale will be transferred to the Public Investment Fund, which has been making a number of bold investments, plowing $45 billion into SoftBank Corp.’s Vision Fund, taking a $3.5 billion stake in Uber Technologies Inc. and planning a $500 billion futuristic city, NEOM.

Read: OPEC Aramco coupling has global implications

Aramco retail shares

More than 5 million people – Saudi citizens, resident expats and nationals of other GCC countries – have bought shares in the Aramco IPO.

Samba Capital, the lead manager, announced that 5.06 million individual subscribers bought shares in the offer, spending nearly SR50 billion ($13.3 billion).  

Saudi citizens were by far the biggest number of applicants, with 4.95 million seeking to buy in the IPO. But there was also significant demand from expats resident in the Kingdom, with more than 106,000 applying for shares.

The government could decide to increase the number of shares on offer by a further 15% of the IPO via what the investment bank adviser calls the “green shoe” mechanism, designed to ensure price stability when the shares start trading.

Saudi Aramco shares will start trading on Dec. 11, the Saudi securities exchange Tadawul said on Twitter on Friday.

“Aramco got its deal away, with at least some non-Saudi interest and a book that in the end attracted 4.7 times the amount on offer. But the sale has come at the cost of leveraging its own citizens, companies and neighbors, according to Reuters.

Read: The Saudi Aramco IPO and Brent crude oil prices will fly in December!

All about the money

Bloomberg said Saudi Aramco wanted to sell a lot of shares at a high price, something like $10 a share to achieve a $2 trillion valuation.  That was not going to happen.  A survey by Bernstein Research of 31 major global investors found that the average valuation they put on Saudi Aramco was just $1.26 trillion—which comes to around $6.30 a share.

So they reduced the size of the sale.   

The company has 200 billion shares. Multiplying that sum by the initial public offering price of $8.53 (32 Saudi riyals) gives a valuation for the shares of $1.7 trillion. For comparison purposes, Apple and Microsoft are worth around $1.2 trillion each.

The Saudis managed to get an IPO price of $8.53 because they are selling only a 1.5% stake in the company, according to Bloomberg.      

Read: Outside of Saudi investors, are global fund managers keen on buying Aramco shares at $1.7 trn valuation?

The central bank, the Saudi Arabian Monetary Authority (SAMA), has told banks that they can lend money to retail customers at a 2-to-1 ratio for every riyal they will invest in Saudi Aramco, compared to average leverage ratio limit for loans of 1-to-1, the chief executive officer of Samba Financial Group, Rania Nashar, told the Al Arabiya news outlet.

Banks are also allowed to extend loans to corporate and institutional investors for buying Aramco’s shares at higher leverage ratios, depending on each corporate customer’s creditworthiness, Nashar told Al Arabiya.

Saudi Arabia will be offering up to 0.5% in Aramco to retail investors, while in total the Kingdom plans to list 1.5% of the world’s biggest oil company on the Saudi stock exchange, the Tadawul.