IPO stirs reform debate from Saudis stung by crash

RIYADH - The initial public offering of a small Saudi housing company will open on Saturday under unprecedented scrutiny amid growing pressure for reforms to address some of the problems that led to a stock market crash in February.

By (Reuters)

Published: Thu 10 Aug 2006, 10:13 PM

Last updated: Sat 4 Apr 2015, 2:10 PM

In this conservative kingdom that tolerates little dissent, analysts and the media are now questioning the merits of the Red Sea Housing’s 522 million riyal ($139.2 million) IPO, as well as the regulations around listings generally.

“This market needs a great deal of restructuring and enforcement of corporate governance, that’s why people raise questions...,” said Turki Fadak, head of the Arab Centre for Financial Consultancy.

During the equity boom of 2004-2005, retail investors in the world’s biggest oil exporter snapped up every share offering, banking on a large profit when the shares started trading.

In the process, they paid astronomical prices for what eventually became worthless stock. In some cases the founding shareholders quickly sold off their holdings and the companies stopped making profits.

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“After the crash people learned that they had been taken for a ride. This is the first time such a debate has emerged. It’s...part of the learning process,” said Abdelmounaim Addas fund manager at Zad Investment.

Much of that debate centres on the price of the IPO, which in Saudi Arabia is not determined by a process of book building. Shares are offered either at the book value of 10 riyals ($2.67) or at a premium determined by the company and its advisers.

Red Sea Housing, majority owned by the private Dabbagh Group Holding Co., has chosen to offer 9 million existing shares, or 30 percent of its capital, at 58 riyals per share.

The 48 riyal premium has unleashed a storm. Several newspapers have run stories attacking the price, with the Saudi Gazette quoting analysts saying it was 35 percent above fair value. Many demanded to know how the adviser arrived at the figure.

“Because there is a lot of liquidity in the market, some (financial advisers) tend to exaggerate premiums. This is not an exemplary market (in terms of transparency),” said Fadak.

The IPO’s financial advisers, Swicorp, say the price is reasonable, giving the company a price-to-earnings ratio of 15 for 2006 against 22 for the broad Saudi market and 40 for the Saudi services sector.

“(The company) has a solid balance sheet... The Saudi investor talks about issue premium without any consideration for fundamentals,” said Simon Rowe, executive partner at Swicorp.

That anyone is discussing the IPO price is remarkable in a country where retail investors have little understanding of fundamentals and where small cap stocks can still trade at several hundred times annual earnings.