Saudi consumer boom is hidden jewel in Aramco IPO

Nirgunan Tiruchelvam
Nirgunan Tiruchelvam11/29/2019 07:00 AM GMT+08  • 4 min read
Saudi consumer boom is hidden jewel in Aramco IPO
“The Stone Age did not end for lack of stone. The Oil Age will end long before the world runs out of oil.” — Ahmed Zaki Yamani, former Saudi oil minister
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“The Stone Age did not end for lack of stone. The Oil Age will end long before the world runs out of oil.” — Ahmed Zaki Yamani, former Saudi oil minister

(Dec 2): In ancient India, there were jewels that were so well concealed that treasure hunters missed them even when they were staring at them. The treasure hunters were distracted by stones.

The hype on the Aramco listing is the modern equivalent of this quest. Investors are transfixed by the scale of the Aramco IPO. Saudi Arabia’s oil major is issuing 1.5% of its stock at a valuation range of US$1.6 trillion ($2.2 trillion) to US$1.7 trillion. At higher end of this range, the size of Aramco’s issue would exceed Alibaba Group Holding’s record IPO in 2014.

Aramco would have a larger market capitalisation than Apple, Microsoft, Google parent Alphabet or Amazon.com. The staggering valuation is driven by energy reserves of 257 billion barrels of oil (including natural gas reserves). This is more than 10 times the reserves of the next highest on the list — ExxonMobil.

But, investing in a mega-IPO of an oil major has its dangers. Oil may be a sunset industry — even Aramco is conceding the risk of peak oil.

Most of the demand for oil is for transport. The swift rise of electric carmakers such as Tesla could erode demand for petroleum. Further developments such as self-driving vehicles and ride-hailing could destroy demand for oil.

The International Energy Agency (IEA), a leading industry body, expects oil demand to flatten around 2030. Efficient cars and electrical vehicles would have advanced to a degree that it would threaten the incumbents in the auto industry.

Even the use of oil for energy production is declining. Natural gas is preferred to oil as a cheaper alternative. Solar power is now 50% cheaper than a year ago.

But, the real jewel in Saudi Arabia is not the black gold in the ground. It is the consumer boom from the country’s social and economic reforms.

The Aramco IPO is inspired by Saudi crown prince Mohammed bin Salman’s plans to reduce the Saudi economy’s dependence on oil. The plan is called Vision 2030.

Vision 2030’s aims include slashing unemployment. The proceeds from Aramco IPO would be used to invest in tourism, entertainment, manufacturing and technology.

MBS, as the crown prince is known, has radical plans for Saudi society as well. Since the siege of Mecca of 1979, Saudi has adopted strict restrictions. Women were not allowed to drive cars. Events where men could socialise with women with uncovered faces were forbidden. Women under the age of 40 had to be accompanied by a male relative in public. Cinemas were forbidden.

Over the last two years, MBS has helped lift these restrictions. There is now a concerted effort to hire women, who are just 4% of the workforce, even though female university graduates outnumber those who are male.

Saudi Arabia has been starved of entertainment. MBS has emphatically ended this drought. In October, the two-month Riyadh Season Festival was launched. This is a unique extravaganza featuring concerts, a game park and an outdoor cinema. More than five million people have attended the event.

As the Saudi youth soak in their new freedoms, a vast array of consumer business opportunities has arisen. These include cinemas, restaurants, retailing and gyms.

Women were barred from using gyms until 2017. Leejam Sports is a pioneer in that field. It raised US$218 million in an IPO last year. Its operating earnings are projected to rise at a compound annual growth rate of 25% in the next three years. At just 12 EV/ EBITDA, the stock is excellent value for a growth stock with steady cash flow and an untapped market. Gyms enjoy the benefits of a steady stream of membership fees.

Cinemas, a declining industry in the West, are enjoying the first flush of life in Saudi. AMC, the world’s largest cinema chain, is introducing theatres through a partnership with the government. AMC expects more than 40 movie theatres to open in the next four years.

In September, the government announced visa-free travel for 49 countries. This is a boon to a country that has been virtually closed to tourism. Dur Hospitality Co, a leading hotel operator, is trading at half its five-year peak.

Investors have been may be allured by Aramco’s listing. But, the real jewel could be the looming consumer boom.

Nirgunan Tiruchelvam is head of consumer sector equity research at Tellimer (Exotix Capital)

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