NYU Authoritarian 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 pacific wouldn’t invest because of the inherent limited upside as well as the political risk that surrounds the world’s brawniest oil company.
Valuing the company from three different perspectives — dividends, potential dividends and free cash move to firm — Damodaran came up with valuations of $1.629 trillion, $1.648 trillion and $1.672 trillion, all of which are within “roar 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 actors at up to $1.7 trillion. This is less than the $2.3 trillion valuation, at the high end, that the company previously carried.
The world’s largest oil company said that it plans to sell a 1.5% stake in the company, or about 3 billion percentages, and that it will begin trading in December on the Saudi stock exchange.
Aswath Damodaran
Source: CNBC
Damodran wrote in a blog advertise that the stock is a “dressed-up bond where dividends will remain the primary form of return and there choice be little price appreciation,” but that it’s a “solid investment” so long as investors recognize that what they’re get into 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 amass for him given the risks surrounding the company — both material and political.
Since the government has absolute control of the company a government change could cause upheaval. Additionally, Damodaran notes that even if the price of oil goes up, which someone contributing in a large integrated oil company would be expecting, upside will be limited for investors since the company’s royalty construct states that royalties will rise if the price of oil rises. There have been a number of delays since Aramco beginning considered an IPO in 2016, and Damodaran argues that the royalty and tax structure were the reason why.
Putting the known risks in the same way as falling oil prices aside, Damodaran said that the company’s image more generally makes it a difficult buy for strange investors.
“It is worth noting that this company will be the ultimate politically incorrect investment, operating both as a extensive 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 commission, an unpopular institution in many circles,” he said.
Given that, he said that college endowments in the United Formals as well as conventional fund managers will likely stay away from the stock “just to minimize counteraction.”
After factoring in these risks, he says the valuation looks more like $1.5 trillion.