January 18, 2020 Real Estate Publication

‘Dean of Valuation’ says Saudis got the Aramco valuation right, but he’s still not buying

NYU Stern professor Aswath Damodaran, known as the “Dean of Valuation” for his company analyses, says that Aramco more or less valued their IPO correctly, but that he still wouldn’t invest because of the inherent limited upside as well as the political risk that surrounds the world’s largest oil company.

Valuing the company from three different perspectives — dividends, potential dividends and free cash flow to firm  — Damodaran came up with valuations of $1.629 trillion, $1.648 trillion and $1.672 trillion, all of which are within “shouting distance” of Aramco’s own valuation.

On Sunday the state-owned oil company announced an IPO price range of 30-32 riyals, which would value the company at up to $1.7 trillion. This is less than the $2.3 trillion valuation, at the high end, that the company previously fetched. 

The world’s largest oil company said that it plans to sell a 1.5% stake in the company, or about 3 billion shares, and that it will begin trading in December on the Saudi stock exchange.

Aswath Damodaran

Source: CNBC

Damodran wrote in a blog post that the stock is a “dressed-up bond where dividends will remain the primary form of return and there will be little price appreciation,” but that it’s a “solid investment” so long as investors recognize that what they’re getting is “more bond than stock.”

And yet, while all three of Damodaran’s valuations are close to Aramco’s, the Professor said it’s not a stock for him given  the risks surrounding the company — both material and political.

Since the government has absolute control of the company a regime change could cause upheaval. Additionally, Damodaran notes that even if the price of oil goes up, which someone investing in a large integrated oil company would be expecting, upside will be limited for investors since the company’s royalty structure states that royalties will rise if the price of oil rises. There have been a number of delays since Aramco first considered an IPO in 2016, and Damodaran argues that the royalty and tax structure were the reason why.

Putting the known risks like falling oil prices aside, Damodaran said that the company’s image more generally makes it a difficult buy for foreign investors.

“It is worth noting that this company will be the ultimate politically incorrect investment, operating both as a long term bet on oil, in a world where people are as dependent as ever on fossil fuels, but seem to be repelled by those who produce it, and as a bet on Saudi royalty, an unpopular institution in many circles,” he said.

Given that, he said that college endowments in the United States as well as conventional fund managers will likely stay away from the stock “just to minimize backlash.”

After factoring in these risks, he says the valuation looks more like $1.5 trillion.

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