The upcoming listing of the world’s largest company in terms of market capitalisation and profitability has indeed come at a time when we in Malaysia should perhaps be asking the same question – should we list Petronas on Bursa Malaysia?
Saudi Aramco (Aramco) launched its much awaited prospectus last week and the share offering will start tomorrow, while listing is probably be in mid-December. While the final number of shares for sale as well as price is yet to be finalised, but it is widely believed that its offering for the Tadawul stock market listing would entail retail offering of just 0.5% of the company’s current size.
It is also expected that Aramco may list on a more established stock market at a later stage and this would likely be the New York Stock Exchange.
Valuation wise, the numbers thrown into the ring ranged between US$1.2 trillion and US$2 trillion but much of the range of value sits at between US$1.5 trillion and US$1.7 trillion. Taking a valuation benchmark of US$1.6 trillion, Aramco is effectively valued at about 14.4x 2018 net earnings as it reported profit of US$111.1bil last year on a revenue of about US$355.9bil.
Based on the total 200 billion shares in issuance, the US$1.6 trillion valuation suggests that the IPO will be priced at US$8 per share. The retail offering of 0.5% or one billion shares would raise some US$8bil in for the Saudi government.
All in, the Saudi government expects to sell between 1% and 3% of the total shares outstanding as the bigger portion is expected to attract large global institutions and sovereign wealth funds. Due to its sheer size, the IPO will likely be well received as it will be a constituent in major global stock market indices, especially the widely tracked MSCI index series. At between 1% and 3% of the total number of shares, the Saudi government will raise between US$16bil and US$48bil in total proceeds from the sale of the shares.
What are Aramco’s fundamentals like?
Looking through Aramco’s prospectus, information on the company was gathered and is highlighted in table above.
A further analysis also reveals that should the IPO be priced at US$1.6 trillion in value, the shares are basically valued at 14.4x and 7.1x PER and EV/EBITDA for 2018 numbers and if one were to annualised the performance for the 1H of 2019, the US$1.6 trillion valuation translates to a PER and EV/EBITDA of 17.1x and 8.1x respectively.
At US$1.6 trillion valuation, Aramco will be the king of all stocks as the current market capitalisation of the stock exchanged is only US$510bil. Hence, upon listing, Aramco would be approximately three-quarters of the exchange’s market capitalisation.
With the listing of Aramco, it brings to question whether Malaysia too should list its crown jewel, Petronas. As we know, the state-owned oil company is presently a global player and is ranked 158th in the Fortune 500 Global 2019 list. Of course, the question then, should we proceed to list Petronas on Bursa Malaysia, is what is the value of Petronas?
The table above shows Petronas’ market capitalisation and enterprise value, which is derived by using Aramco’s benchmark multiples (i.e. the same PER and EV/EBITDA for FY2018 and FY2019) on Petronas’ reported financials.
It can be seen that Petronas has a range of values of between RM690bil (at 14.4x 2018 earnings) and RM981bil based on the derived market capitalisation value after applying the 8.1x EV/EBITDA multiple based on the 2019 annualised EBITDA. From here, the average value is about RM862bil.
Based on Bursa Malaysia’s current market capitalisation of about RM1.7 trillion, the listing of Petronas on the local bourse would leapfrog the market’s total value to RM2.56 trillion, and Petronas itself will account for about one-third of the market.
For the Malaysian government, depending on the size of potential offer, the government could raise RM86bil (or US$20.7bil) should it sell 10% of Petronas to the market or RM215bil (or US$51.7bil) if it sells 25% of Petronas.
After all, our Prime Minister did mention that Malaysia may monetise some of its assets and this could raise about RM200bil to reduce the nation’s debts.
Assuming the government goes for a 15% share sale (which will make Petronas eligible to be included in some key benchmark indices), the government will be able to raise RM129bil (US$31bil) – potentially making it the second largest IPO ever after Aramco’s offer based on Aramco’s offering in size at the upper end.
This will help the government to reduce its current official debt as at June 30 June of RM799bil to RM670bil and our official debt-to-GDP too will fall to 44% from the current level of 52.6%, which is an 8.6 percentage points reduction.
Of course, these numbers are mind-boggling in terms of size as to go for an IPO with such huge size requires global recognition and coordination.
While our large local institutions may have the appetite for a Petronas IPO, it is likely that more than half or up to three quarters of the demand will be generated from offshore institutional investors. This will also help to boost the demand for the ringgit and allow it to appreciate against the greenback.
The listing of Petronas on the local bourse would also mean that the company will be included in some of the key benchmark indices, which among others include the KLCI, the MSCI Index Series as well as other relevant benchmark as its size is significant.
Based on the RM129bil free float, Petronas can be fast-tracked and entered into the KLCI as a benchmark index and this will result in an increase of the KLCI’s net market capitalisation by about 26% based on the current market value of the index.
Petronas will be taking the lion share of the index-weight at about 20%. Unless and until we have an index-capping of let’s say 10%, the weighting on Petronas would remain.
Judging from the above, it will be good for Malaysia to consider an IPO for Petronas with an offer for sale of 15% of its current shares to investors.
Not only it will help the government to address the debt/GDP ratio, but attract portfolio inflows into the stock market as well as boost the market’s appeal. An offering of shares in Petronas could also provide an avenue for retail investors to be shareholders of Malaysia’s most prized asset too, similar as to how investors flocked to shares of Tenaga Nasional and Telekom many years ago.
The views expressed here are the writer’s own