By Filipe Pacheco, Archana Narayanan and Netty Ismail
The company will sell shares at a range of 30 riyals to 32 riyals each, for a valuation of as much as $1.71 trillion. That’s spurred speculation the dividend yield may range from 4.4% and 4.8%, say analysts and money managers in the six-nation Gulf Cooperation Council.
There’s potential for the yield to rise “if the price of oil rebounds,” said Malik Zahir, a senior money manager at Securities & Investment Co. in Bahrain who sees dividends at about 4.5% if the offering is priced at the high end of the range. Aramco is regarded as “a very unique asset” and a “well-run company with transparent cash flows,” he added.
Saudi Aramco is seeking to raise between $24 billion and $25.6 billion by selling a 1.5% stake, putting it close to Alibaba Group Holding Ltd.’s $25 billion deal — currently the world’s largest IPO.
While the company’s valuation is below Crown Prince Mohammed bin Salman‘s $2 trillion target set about three years ago, it’s higher than the company’s fair range estimated by a majority of money managers polled by Bloomberg News.
Aramco will probably rely heavily on local investors after receiving a tepid response from international money managers. The shares won’t be marketed in the U.S., Canada, Japan and Australia. The final price and valuation will be published on Dec. 5.
No listing date has been announced.
Here’s what investors and analysts say about the offering:
Securities & Investment Co. (SICO), Zahir
- Expects investors to be “satisfied with the price range”
- If oil price goes up, Aramco “will spew out much more cash compared to its peers even if you factor incremental royalties. It has reserves for over 50 years while in the case of its large peers, the reserves on average are less than 15 years.”
Shuaa Capital, Aarthi Chandrasekaran
- The price range translates to a dividend yield of about 4.4%-4.8%. Aramco is a net cash company with an unleveraged balance sheet that should appeal to “all classes of investors”
- Expects “decent cover” and for the offering to be two-to-three times oversubscribed. She sees retail investors participating
- Assuming oil hovering around $60 per barrel, “Aramco’s dividend would be fairly sustainable going forward”
- Sustainable dividend yield is “so attractive for long only funds, that institutional investors (especially passive funds) could consider it as a proxy for bonds (with 5% yield) and sit on it”
- “From a retail perspective, assured bonus shares and fixed dividend will support the stock price in the secondary market, not to forget the passive funds flow that follows in the few weeks after the listing.”
Dalma Capital, Zachary Cefaratti
- He plans to subscribe to the IPO in two funds because the preliminary valuation between of $1.6-$1.7 trillion is “in line with our expectations”
- Aramco will have “a sizable weight of nearly 10% in the Saudi local market index based on the current price range and stake.” Saudi Arabia’s weighting in MSCI Inc.’s emerging-market index will rise
- “It will be costly for MSCI-benchmarked EM investors and global allocators to continue to underweight Saudi Arabia significantly”
- He sees inflows of approximately $3.2 billion triggered by passive investors after Aramco is added to MSCI’s EM gauge
- “It is difficult for any large, globally diversified institution to justify no exposure to the world’s largest and most profitable company somewhere in their portfolio.”
Manaar Group, Jaafar Altaie
- “Aramco’s price range takes into account some uncertainties that weren’t fully absorbed when the IPO was first floated”
- “The lower range reflects uncertainties in the market. It takes into account issues of supply that’s very fluid and demand that doesn’t look so good now”
- “My concern is that at the current range it’s still too high. It’s a risk even at $1.71 trillion”
- The fact that the company pulled the No 144a listing “tells me two things. It tells me that the current atmosphere in Saudi-U.S. relations isn’t conducive to this IPO. It’s difficult to talk about compliance in this case and the ability to meet levels of disclosure required by a U.S. listing.”
Century Financial Consultancy, Vijay Valecha
- A dividend yield of about 4.41% “is in line with large cap energy companies. The company’s valuation is justified given it has the largest proven oil reserves and low cost of operations”
- “An analysis of energy companies with a market capitalization higher than $100 billion will show that the median PE as well as dividend yield are 16.44 and 4.8%, respectively.”
- Highlights that, for 2020, Aramco has promised a dividend of $75 billion, “and the good thing for investors who buy into the IPO is the promise from management to pay stable dividends till the year 2024, even if that means reducing the payout to the government.”
Tellimer, Nirgunan Tiruchelvam
- Valuation of $1.7 trillion could provide upside room for “discerning investors,” as there could be a boost to oil prices
- “There could be production cuts in the offing. The recent inversion of the yield curve could be a precursor for a bull run.” Major oil companies have cut their capital expenditure
- “We urge investors to position themselves in consumer stocks that can absorb higher commodity prices.”
United Securities, Joice Mathew
- He expected Aramco’s valuation to be around $1.5 trillion. But “maybe because it is Aramco itself, such an iconic company, the market is willing to pay a bit of premium”
- Initially, the stock might perform well. “Later on there could be a reaction to the price asked, and it could be under pressure”
- Trading in Riyadh should be “very volatile” in the upcoming days. “Banks could get a boost at first, since they could be making some money from it, but the rest of the market could be under pressure.”
Nomura Asset Management, Tarek Fadlallah
- The price is a “sensible compromise,” he said on Twitter
- The IPO should “easily raise the $8.5 billion from retail investors,” but the 29 global coordinators, managers and financial advisers “will need to find the other $17 billion. A few billion from China would help.”
- Expects dividend yield to “be at least 4.4%” and the price-to-earnings estimated for 2019 to be around 18.5 times earnings.