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Aramco IPO set to fall short of $2 trillion valuation, analysts say

Highlights

Analysts estimate Aramco's valuation at best at $1.8 trillion

Aramco dividend policy may lure some investors

Profits fell 18% in first nine months vs year earlier

Dubai — Saudi Aramco left plenty of unanswered questions regarding its delayed initial public offering that was approved Sunday, and despite incentives offered to investors, analysts say the oil giant will not come close to the kingdom's desired $2 trillion valuation.

The size and price of the Aramco local IPO will depend on the investor road-show and book-building process, Saudi Aramco officials said on Sunday.

Crown Prince Mohammed bin Salman, the mastermind behind the IPO, has previously valued Aramco at $2 trillion and said the kingdom wants to offer up to 5% of the company, making the upcoming flotation the world's biggest and beating the current leader Chinese e-commerce giant Alibaba's $25 billion offering in 2014.

"It appears that there has now been a compromise on the valuation with whisper numbers for the pricing range between $1.6 trillion and $1.8 trillion," said Tarek Fadlallah, CEO of Nomura Asset Management Middle East.

"This puts the dividend yield in the ballpark of other major oil companies although it still leaves the expected price to earnings at a premium. Aramco is suggesting that any premium would be justified by its competitive strengths."

Aramco announced its intention to grant aggregate ordinary cash dividends of at least $75 billion for 2020, in addition to any potential special dividends. On November 1, Aramco declared an ordinary dividend of $13.4 billion for the third quarter of 2019, it said on Sunday.

"Valuing Aramco is a challenging task and ultimately the market will determine the best valuation for the company," said Ellen Wald, president of Transversal Consulting and author of "Saudi, Inc.," a history of the Saudi oil industry.

"I think the most appropriate valuation will fall somewhere in the $1.2 trillion to $1.6 trillion range."

FOREIGN INVESTORS

Aramco and the Saudi government have taken measures to entice both local and foreign investors to subscribe to the IPO.

The Capital Market Authority has allowed non-resident institutional foreign investors to subscribe to the Aramco shares in the IPO as qualified foreign investors under certain conditions, Aramco said on Sunday. In 2018, the regulator eased rules for QFIs, who can directly buy shares of Saudi stocks, to help attract foreign investments.

Saudi nationals will be eligible for bonus Aramco shares under certain conditions, the company said.

"Undoubtedly the 10% bonus share incentive offered to local retail investors holding Aramco shares for more than 180 days is a positive surprise that will help attract domestic participants," said Fadlallah.

Aramco said on Monday it posted $68 billion in nine-month net profit, an 18% decline from the year-earlier period. Analysts said the company's profitability and dividend policy will be attractive to investors.

"I think it's a stock that is going to appeal initially to income-seeking investors just given that strong payout ratio and dividend," said Neil Beveridge, Bernstein Research senior analyst.

"We have got a much clearer understanding of the fiscal regime that Aramco is going to be operating under and the nine-month results look pretty strong on cash flow basis. It is going to be down to investors to look how Aramco stacks up relative to the rest of global majors."

Bernstein values Aramco between $1.2 and $1.5 trillion.

BIGGEST PROFITS

Aramco's profitability, the world's largest, will be a key incentive for investors to snap up shares in the IPO, according to analysts.

The company posted a net profit of $111.1 billion in 2018, but is expected to report reduced profit this year due to lower oil prices in 2019 vs 2018. Last week, BP reported a 41% fall in third-quarter underlying replacement cost profit to $2.25 billion, reflecting lower oil and gas prices, maintenance and weather impacts.

"Particularly in today's IPO scene, which is dominated by tech companies that often aren't making a profit and have no foreseeable projections to make a profit, Aramco really stands out," Wald said.

"Potential investors will surely compare Aramco's Q3 results to the largely disappointing Q3 results that other big oil companies released last week. The fact that Aramco is on track to make less profit this year than last year shouldn't detract from the company?s incredible profitability."

--Dania Saadi, dania.el.saadi@spglobal.com

--Edited by Claudia Carpenter, claudia.carpenter@spglobal.com