Saudi Aramco’s equity roadshow was a success, propelling the company's initial IPO valuation to the top of the charts at USD25.6bn, ahead of Alibaba’s USD25bn launch in 2014. The offering in a 1.5% stake of the world’s largest oil producer was 4.65x oversubscribed with roughly 50% retail orders. According to Bloomberg, around 4.9 million individual investors, ~15% of Saudi Arabia’s population applied for the shares in the Kingdom’s crown jewels. Demand was so strong a 15% green shoe option was exercised taking the deal size to USD29.4bn. The company's valuation at USD1.7tn did however fall short of Crown Prince Mohammed bin Salam’s USD2tn estimation. Following the surprise production cut at the OPEC+ gathering in Vienna last week, Prince Abdulaziz stated: “Aramco will be higher than USD2tn” within “a few months”.
Aramco shares started trading on the Saudi Stock Exchange today. Priced at the top of the company's indicative range, the 32 riyals per share deal was so huge that it managed to shift the banking equity league tables, boosting HSBC into the top ten equity arrangers, with Barclays falling out of the top-ten, the first time (for a full year) since 2012, according to Bloomberg. At debut, the valuation stood at USD1.88tn. According to the Wall Street Journal, Aramco is looking to list internationally over the next couple of years; with Japan and China mentioned.
The stock should remain well supported by: secondary market demand, the offer of bonus shares, huge dividend potential and index inclusion (due to the sheer size of the deal). During the marketing campaign, local investors were told that if they hold the shares for more than 180 days from launch they would receive an extra share for every 10 they hold, with the maximum bonus shares limited to 100 per investor. Moreover, Aramco’s board noted that aside from special payouts, the company will distribute at least USD75bn of ordinary dividends next year; dividend levels are to be maintained at least until 2024. The level of government backing lends additional support to the stock. In terms of index inclusion, MSCI Inc. said Aramco would be fast-tracked and added to its benchmark emerging market index by close of December 17th and FTSE Russell said it was also looking to add Aramco’s stock for inclusion in its indexes, but has yet confirmed whether it will also fast-track inclusion.
The major concern is the lack of international involvement, with Saudi Arabia (through PIF and local investors) the largest investor base. We will wait and see how the first deal of its kind will play out, how it will support the Kingdom’s Vision 2030 and whether neighbouring hydrocarbon rich nations will follow suit.
Aramco’s bonds have performed well since launch in April, tightening 75bps, to a yield of 3.67%, and continue to offer attractive risk-adjusted expected returns. Rated A1/A the 4.25% 2039 issue could gain almost 15 points (in capital appreciation) if it were to move to a fair value spread of 73bps, according to our models. The bond also offers ~3.4 notches of downside protection, at the time of writing.