Saudis Said to Delay Exchange IPO on MSCI Valuation Hopes

(Bloomberg) -- Saudi Arabia is delaying the initial public offering of its stock exchange on hopes that a potential MSCI Inc. upgrade could boost its value, according to people with knowledge of the matter.

The Tadawul, as the Middle East’s biggest stock exchange is known, has pushed back plans to sell shares from this year to 2019 at the earliest, said the people, asking not to be identified because the information is private. Waiting until after MSCI’s possible classification as an emerging market in June could improve trading volumes and help the bourse achieve a better valuation for its owner, the Public Investment Fund, they said.

The exchange’s main stock gauge, the Tadawul All Share Index, is among the world’s top 10 best performers this year after FTSE Russell classified the country as a secondary emerging market in March. That helped boost the gauge’s 12-month price-to-earnings ratio to the highest since 2015, the most expensive compared to emerging-market stocks in almost
three years.

The Tadawul “recognizes the importance of confidence-building and fair valuation in reflecting its capacity, infrastructure and liquidity,” a spokesman said in an emailed statement. As the bourse moves forward with IPO planning and consultations with key stakeholders, the Tadawul will determine the best timing for a sale, he said. HSBC and the PIF declined to comment.

It “makes sense for them to wait,” said Joice Mathew, the head of equity research at United Securities in Muscat. “With MSCI inclusion coming, entering emerging markets will bring a lot of attention from international institutional investors.”

The Saudi stock exchange hired HSBC Holdings Plc’s local unit in 2016 to advise on the IPO. The potential offering is part of the kingdom’s privatization drive to wean its economy off oil. It also includes plans to sell shares in oil giant Saudi Aramco, local soccer clubs and grain silos.

MSCI Upgrade

The bourse could attract $41 billion of foreign capital if MSCI Inc. follows FTSE with an upgrade this year, according to Al Rajhi Capital. FTSE will implement the classification from next year, and MSCI is expected to do the same. Foreign investors have been net buyers of shares in Riyadh for 16 straight weeks this year, but still only own hold about 5 percent of total shares.

The Tadawul index has advanced 15 percent this year, compared with a drop of 0.2 percent for the MSCI Emerging Market Index. While the 50-day moving average for the total value of Saudi shares traded is the highest in more than a year, it’s about 30 percent lower than it was two years ago.

The exchange is also preparing for the Aramco IPO, which could be the world’s largest. Saudi officials said they hope to raise a record $100 billion by selling a five percent stake, valuing the company at more than $2 trillion. Shares will be listed on the Tadawul and possibly on a foreign bourse, though there are questions about when the sale will happen.

For almost two years, Saudi officials said again and again the IPO was "on track, on time" for the second half of 2018. But for the first time last month they suggested it could be delayed until 2019.

“Aramco itself is a very big and determinant event on it own, trading volumes will be going through the roof, and this would unlock a lot of value for the stock exchange,” said Mathew. “It would be a perfect strategy for the Tadawul to come right after Aramco. It would give them the necessary reason for them to ask for a higher valuation.”

--With assistance from Filipe Pacheco

To contact the reporters on this story: Matthew Martin in Dubai at mmartin128@bloomberg.net, Archana Narayanan in Dubai at anarayanan16@bloomberg.net, Glen Carey in Riyadh at gcarey8@bloomberg.net.

To contact the editors responsible for this story: Stefania Bianchi at sbianchi10@bloomberg.net, Vernon Wessels

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