First Saudi cross-listing: a trend-setter?
Dubai, March 21, 2013
By Nadia Saleem and Mirna Sleiman
An Abu Dhabi real estate developer's plan to list its shares in Saudi Arabia is a step towards making Gulf equity markets more international. But it is not clear that the company will benefit enough to start a trend.
Eshraq Properties, which listed in Abu Dhabi in 2011 and posted a net profit of 286 million dirhams ($78 million) last year, announced last week that it was seeking approval from regulators in the UAE and Saudi Arabia to cross-list on the Saudi market.
If Eshraq's plan goes ahead, it will become the first company from outside Saudi Arabia to obtain a cross-listing in the kingdom, analysts said.
The benefits could be significant; the Saudi stock market is much larger and more active than other Gulf markets, so Eshraq could gain a major new fund-raising channel while lifting its profile in the region's biggest real estate sector.
"The Saudi market offers stability, depth, growth prospects and high-quality exposure," said Jamal Al Kishi, chief country officer and head of corporate and investment banking at Deutsche Bank in Saudi Arabia.
On the other hand, it is not clear that long-term Saudi investors will want to pour money into a relatively small real estate stock, and if Eshraq's share price languishes in Saudi Arabia, that could hit the valuation of its shares in Abu Dhabi.
Hesham Tuffaha, a Riyadh-based fund manager, said there was a risk that if Eshraq floated only a small number of shares in Saudi Arabia, the stock could easily be moved around by short-term speculators, creating volatility that would deter institutional investors.
Saudi Arabia's Capital Market Authority amended listing rules in January last year to allow cross-listings, and the stock exchange said it would focus on attracting firms from elsewhere in the Gulf.
The cross-listing policy is seen by analysts as part of a slow trend towards internationalising the Saudi market. Authorities have also been preparing for several years to permit direct investment in the market by foreign institutions, though a date for the reform has still not been set.
Managing cross-listings would require cooperation between financial regulators in the Gulf - for example, over corporate disclosure requirements - that could pave the way for other steps to remove barriers between the region's capital markets.
The size of the Saudi market is one of its top attractions to companies considering listings. It has a capitalisation of around $380 billion, making it the Middle East's largest bourse, and is far ahead of the second biggest, Kuwait at $105 billion.
The environment will not necessarily be benign for Eshraq's shares, however. Local retail traders dominate the Saudi market, accounting for about 70 percent of turnover, and stocks with small free floats and prices close to their par value of 10 riyals become the targets of speculators.
Eshraq has a market capitalisation in Abu Dhabi of around $250 million, which would put it in the smallest 25 percent of stocks in Saudi Arabia, a market that has over 130 listed companies.
This suggests that if Eshraq cannot attract institutional investors to its Saudi shares, they could be easily manipulated.
"There is a lot of liquidity for smaller companies and new listings perform well," said Farooq Waheed, senior portfolio manager at Riyad Capital in Saudi Arabia. "For the short term, yes it's a good play, but not for long-term shareholders."
Some analysts also believe Eshraq could attract more money to its stock without the time-consuming and costly process of obtaining a second listing. With the exception of the Saudi market, Gulf citizens can easily trade stocks across the region, so Eshraq might do just as well advertising its Abu Dhabi-listed shares to Saudi investors.
The company says, however, that because it plans to expand its operations in Saudi Arabia, the public relations benefit of listing there is too large to ignore.
"Companies thinking to cross-list on the Saudi exchange have to make sure that they have business in the Saudi market, regardless of the sector - that's one prerequisite for success," Jamal Al Saghir, managing director at Eshraq, told Reuters.
The company plans to develop real estate projects in the kingdom and acquire some hotels, he said.
"The target is to invest close to 1 billion riyals ($265 million) in the first year in developing projects, selling and renting property, and investing in the hotel business." - Reuters
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