Four Saudi Arabian companies have drawn a combined SR659 billion or $176 billion in orders for their initial public offerings as fund managers flocked to share sales that have offered near-guaranteed returns over the last two years.
The demand for new IPOs — that’s exceeded orders for Saudi Aramco’s record issue in 2019 — is also weighing on the kingdom’s stock market.
The Tadawul All Share Index is trailing its emerging-market peers for the first time since the pandemic and has fallen almost 8 per cent from its March peak — partly because of investors who’re holding on to cash to invest in the offerings.
Institutional investors put SR341 billion of orders for the SR2.86 billion IPO of Dr. Soliman Abdul Kader Fakeeh Hospital Co. earlier this month, data compiled by Bloomberg show. Saudi Manpower Solutions Co. drew orders worth SR115 billion, or 128 times more than the shares made available to fund managers.
Rasan Information Technology Co., one of the first fintech firms to go public in Riyadh, received orders of SR108.6 billion for its SR841 million IPO, while water treatment firm Miahona’s listing was covered 170 times by investors, with SR94.4 billion in orders.
“There is a notable surge in demand and a rush to the market,” said Marwan Haddad, lead portfolio manager for Middle East and North Africa equities at Azimut. “The high demand can be attributed to several factors: an influx of hedge fund managers, substantial appetite from retail investors facilitated by up to 10 times leverage from banks, and the ease of subscribing through digital channels,” he said.
The level of demand was “somewhat inflated as investors adapt to smaller allocations,” he added. The high oversubscription levels in Gulf IPOs have led to frustration both among international and local investors as their allocations get scaled back.
First-day pop
The high levels of demand for the kingdom’s IPOs are also driven by their performance. Of the 61 companies that went public in the last two years, 17 rose by the maximum permitted 30 per cent on their first day of trading, data compiled by Bloomberg show. More than half ended their debuts above the offer price and the average return overall has been 32 per cent, the data show.
In the same period, IPOs in Europe that raised at least $100 million, have on average delivered returns of 5.2 per cent.
“The good returns given by the IPOs in recent past have attracted both the retail and institutional investors leading to the demand,” said Faisal Hasan, chief investment officer at Al Mal Capital. He too said that investors put in bigger orders knowing that their final allocations would be smaller given the level of demand.
The kingdom’s efforts to diversify its stock exchange is another factor at play. “Demand for new listings is strong in Saudi because every other IPO is adding a new sector to a market hitherto dominated by banks and chemical companies,” said Christian Ghandour, senior portfolio manager at Al Dhabi Capital. “Rasan for example adds the fintech and ‘insurtech’ flavors to the market.”
Intervention fizzles
The huge order books recently show that the Saudi market regulator’s efforts to dampen the over-exuberance have borne little fruit. In late 2022 the Capital Markets Authority changed the bookbuilding regulations to put pressure on investment banks to ensure that order books reflected genuine demand and were not inflated by leverage.
While that initially had some impact on oversubscription levels, the effect appears to be waning. The CMA’s intervention came after some IPOs in 2021 received huge levels of demand, such as ACWA Power Co.’s $300 billion in orders and the $126 billion investors placed for solutions by stc’s IPO. In contrast, Saudi Aramco’s record $29.4 billion IPO in 2019 drew $106 billion in orders from fund managers.
