JEDDAH, 14 November 2005 — There are many companies which are not fit and therefore not ready to go public, says Faisal H. Alsayrafi. During an exclusive interview to Arab News recently, the president and CEO of Financial Transaction House (FTH) felt many businesses need to undergo a major turnaround before they can join the structural reform of the stock markets. Alsayrafi’s FTH is a key player; it is among the first four companies to get approval from the Capital Market Authority (CMA) to arrange services in private placements, public offerings and mergers and acquisitions. Alsayrafi himself is a US certified valuation analyst. He is also member of the Makkah Region Governorate’s Advisory Council. FTH provides corporate finance advisory services to clients across the Middle East. “We have an extensive network of local and regional contacts, which includes high net worth individuals, financial institutions and governments,” Alsayrafi said during the course of the interview. “Our commitment to exceeding clients’ expectations sets us apart from the competition and helps us maintain our competitive edge and a position of leadership in the market. Our ultimate objective is to deliver extraordinary service and add real value to our clients.” Following are the excerpts from the interview:
Question. What will be FTH’s role after CMA approval?
Answer. The role will be to continue arranging services in private placements, public offerings and mergers and acquisitions. In addition, following the approval, we will begin providing services in the form of equity research and other investment advice to select clients.
Q. The CMA is gradually allowing more stock brokerages in the Kingdom. How will it benefit the investors?
A. A larger number of brokerage houses will provide access to a greater investor base by extending wider networks and incentives to attract smaller investors. By virtue of increasing competition in the brokerage field, the market is bound to see lower transaction costs and trade commissions, improved orders execution, and new innovative trading products. The CMA’s direction to support more brokerages is by all standards a solid step toward the development of the local financial market.
Q. Recently CMA suspended an investor for manipulation. Do you believe there is manipulation and insider trading in Kingdom? If yes, how can it be stopped?
A. The CMA has begun tackling the culture of insider trading that exists today. Insiders include corporate officers, members of the board and owners of 5 percent or more of any equity class of securities that are privy to integral information and may change their positions prior to abnormal price movements in the stock. It will not be long before the CMA applies a stronger base for transparency and firmer disclosure requirements for the safety and security of all investors.
Q. In the Saudi stock market only 77 companies are traded compared to twice that number in Kuwait and other Gulf countries such as the United Arab Emirates, Oman and Bahrain. Though Saudi Arabia tops in market capitalization, don’t you think more companies should go public?
A. The reason that there are comparatively few public companies in Saudi Arabia is due to old regulations that did not provide many incentives for converting private companies into public ones. With the new capital market law and the relatively large size of some private companies, there will be a constant stream of new issues. However, one needs to be careful. Many businesses are unfit to go public and need to undergo a major turnaround before joining the structural reform of the markets. Investors will soon be able to select successful offerings from unjustifiable ones. However at this phase, the CMA is likely to ensure that no unfit business will be able to list.
Q. Due to the relentless rise in oil prices, huge liquidity is available in the Kingdom. But there are no major avenues for investment available to park extra funds except the stock market and real estate. What measures should be taken by the government to absorb this liquidity?
A. The government is aware of this and is taking steps to address the issue. It has begun work on a new secondary market for government bonds and created the infrastructure for offering bonds and other innovative products on the stock exchange. General growth in the economy will also create other investment opportunities for investors.
Q. The government is adopting various reforms to attract FDI (foreign direct investment). How can investments be brought into the Kingdom and in which sectors?
A. The privatization program is one way to attract foreign capital. In addition, the government has opened several key infrastructure related sectors for investment such as power and water. It appears that the petrochemicals and even the oil industry will provide some investment opportunities for foreigners. With the entry into the Word Trade Organization (WTO), it is likely that the retail and distribution sectors may be able to attract additional interest from abroad.
Q. The Saudi-listed companies have announced their third quarter results. They were described by some experts as “unacceptable level.” What do you say? Do you think it will have a major impact on the stock market?
A. Most public companies announced significantly high third quarter results. For instance, the banking sector averaged above 40 percent EPS growth. Labeling the third quarter performance as unacceptable is mainly due to the short-term correction spreading the justification of the high multiples over a longer time frame. Many of the main reasons for the recent hike in stock prices are yet to be translated into earning such as the oil price increase and its positive effect on stocks such as petrochemical giant SABIC (Saudi Basic Industries Corp.)
Q. The recent initial public offerings (IPOs) were several times oversubscribed. Any particular reasons?
A. The speculative nature of IPOs and its relation to fast profit reaping is one reason. However, the lack of investment venues is seen to cause this oversubscription as well as the lack of IPO valuation understanding and fundamental analysis by small and novice investors.
Q. So far there is no fully-fledged stock exchange in Saudi Arabia. But there will be a complete stock exchange very soon. What difference will it make for investors?
A. Once a fully-fledged stock exchange is launched, it will have:
* Attractive investment channel for local and foreign capital
* Efficient market and developed financial instruments
* Better reflection and gauge of the local economy.
Q. So far expatriates have not been allowed to invest directly in the stock market but they can invest via mutual funds. Should not expatriates be allowed to invest directly?
A. Expatriates resemble a large portion of the economy and constitute one of the largest segments of disposable income. Allowing expatriates to directly invest in the economy would retain part of their remittances for savings or investments abroad and would also act as a catalyst to the local economy. The option is definitely a case for further discussion and further legislation.
Q. Some of the mutual funds from local banks are doing well. Why?
A. Most local funds have been highly correlated to the stock market which justifies their outstanding performance. As with all professionally managed funds, individuals choose mutual funds investments to avoid high exposure to the volatility of stocks. We will see further regulations to fund management and further specialized local shares funds as the market continues to grow. Other international funds were shadowed and were not attractive at any point of this year
Q. Do you think it is about time for family businesses to go public?
A. As I have said, there are many companies that are not fit to go public yet. The answer is not whether you should go public. The important question is: Can you go public? If a family business has the right level of corporate governance, transparency, controls, etc. it should perhaps consider going public. There are clear benefits to going public. However, it should also realize that life as a public company is very different than life as a private one. Accountability to shareholders will force companies to high level of disclosure and limit their control.
Q. Which sectors do you think are good for investment now?
A. I feel services, banking, petrochemical and industrial sectors have a lot of potential.
