Sulja Bros. Building Supplies, Ltd (SLJB): Published: 08/13/2006 12:00 AM (UAE)...

Sulja Bros. Building Supplies, Ltd (SLJB)

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Sunday, 08/27/2006 8:55:38 AM

Sunday, August 27, 2006 8:55:38 AM

Published: 08/13/2006 12:00 AM (UAE)

'Market needs huge amount of restructuring'
Reuters

Riyadh: The initial public offering of a small Saudi housing company opened yesterday under unprecedented scrutiny amid growing pressure for reforms to address some of the problems that led to a stock market crash in February.

In this conservative kingdom that tolerates little dissent, analysts and the media are now questioning the merits of the Red Sea Housing's 522 million riyal ($139.2 million) IPO, as well as the regulations around listings generally.

"This market needs a great deal of restructuring and enforcement of corporate governance, that's why people raise questions...," said Turki Fadak, head of the Arab Centre for Financial Consultancy.

During the equity boom of 2004-2005, retail investors in the world's biggest oil exporter snapped up every share offering, banking on a large profit when the shares started trading.

In the process, they paid astronomical prices for what eventually became worthless stock. In some cases the founding shareholders quickly sold off their holdings and the companies stopped making profits.

"After the crash people learned that they had been taken for a ride. This is the first time such a debate has emerged. It's...part of the learning process," said Abdelmounaim Addas, fund manager at Zad Investment. Much of that debate centres on the price of the IPO, which in Saudi Arabia is not determined by a process of book building. Shares are offered either at the book value of 10 riyals ($2.67) or at a premium determined by the company and its advisers.

Red Sea Housing, majority owned by the private Dabbagh Group Holding Co, has chosen to offer 9 million existing shares, or 30 per cent of its capital, at 58 riyals per share.

The 48 riyal premium has unleashed a storm. Several newspapers have run stories attacking the price, with the Saudi Gazette quoting analysts saying it was 35 per cent above fair value. Many demanded to know how the adviser arrived at the figure.

"Because there is a lot of liquidity in the market, some (financial advisers) tend to exaggerate premiums. This is not an exemplary market (in terms of transparency)," said Fadak.

The IPO's financial advisers, Swicorp, say the price is reasonable, giving the company a price-to-earnings ratio of 15 for 2006 against 22 for the broad Saudi market and 40 for the Saudi services sector.

"[The company] has a solid balance sheet... The Saudi investor talks about issue premium without any consideration for fundamentals," said Simon Rowe, executive partner at Swicorp.

That anyone is discussing the IPO price is remarkable in a country where retail investors have little understanding of fundamentals and where small cap stocks can still trade at several hundred times annual earnings. Those stocks are largely held by retail investors. Many borrowed to buy stocks during the boom and were ruined when the Arab world's largest market lost half its value between February and May.

The growing public scepticism stems from a sense that small investors were duped into trying to ride the equity boom, while wealthy entrepreneurs and dealmakers profited at their expense.

But a record 10 million Saudis applied for shares in developer Emaar Economic City's IPO, which closed this month and was offered at book value.

Although Saudis appear to have become more selective, their appetite for new issues has not been diminished by the crash.

http://archive.gulfnews.com/articles/06/08/13/10059732.html