Iran looks to lay the groundwork for landmark NIOC and NIGC asset-backed IPOs by broadening and deepening TSE in coming months. Simon Watkins reports from Tehran
In the 12 months since the Joint Comprehensive Plan of Action (JCPOA) came into effect, the value of stocks traded on the benchmark Tehran Stock Exchange (TSE) has more than doubled, to around US$20 billion. This has driven up the exchange’s valuation by nearly 30% over the period.
In the last six months, 45 companies have asked to list their shares and at least 13 major initial public offerings (IPOs) are expected in the next 12 months, according to local finance industry sources, up from seven in the previous year.
By far the most significant of these from the international hydrocarbons industry perspective will be a planned partial IPO of a holding company that would include all oil and gas field discoveries made since May 2016. According to a senior oil and gas industry source who works closely with the MoP, this will be managed by the Ministry of Petroleum (MoP), the National Iranian Oil Co. (NIOC), and the National Iranian Gas Co. (NIGC).
“This first IPO would usher in a similar IPO every year for the foreseeable future in which a set percentage of the holding company would be offered internationally at a level that would yield at least US$8 billion per year for Iran,” he told NewsBase Intelligence (NBI).
As it stands, the backdrop for such IPOs is propitious for international investors. “Global investors are never going to see a country of this size and sophistication open up again,” Charles Robertson, chief economist for Renaissance Capital, told NBI.
On demographics alone, he said, the investment fundamentals of Iran are at least as attractive as any emerging market in the world. It has a population of around 80 million, more than any of the long-running investment favourites in Eastern Europe, and around three times that of Saudi Arabia.
Iran also has a large middle class, easily comparable to both Turkey and Saudi, with an 88% overall literacy rate comparable to the 95% each in Turkey and Saudi, and a total internet user figure of 15%, in between the two neighbours.
“Basically, Iran has everything Turkey had when it was top of all global emerging markets’ investor lists but with the added bonus of having 10% of the world’s oil reserves and nearly 20% of its gas reserves to boot,” Robertson added.
Moreover, Iran’s GDP of around US$440 billion is the 27th largest in the world, on the same scale as much-vaunted emerging markets of Argentina, Taiwan and Thailand, and ahead of a developed EU member, Austria.
“In addition, it has a truly diversified economy, with exports in every single category of the IMF’s ‘breakdown of exports’ list bar none, and no other country in the Middle East comes even close to that profile,” Robertson noted.
Despite this, foreign investment currently accounts for less than 1.2% of the TSE’s total market capitalisation of around US$35 billion. Inward investment has been hampered by a myriad of convoluted regulations, lack of adequate brokerage and custodian services, complications over using foreign currency, and antiquated trading procedures.
Notable examples of these include the fact that the TSE is only open for trading between 09:00 to 12:30 Saturday to Wednesday and foreign firms are not permitted to hold more than 20% of the total shares of any company listed on the exchange or on the OTC (over the counter) market. Meanwhile, overseas companies are not allowed to sell shares for a period of two years without the express permission of the Securities and Exchange Organization.
“This limits the breadth and depth of capital pools available in Iran at a time when around US$350 billion in foreign capital over the next five years to develop key industries such as oil and gas and transport is required,” Mehrdad Emadi, senior economist for global risk analysis and energy derivatives markets consultancy Betamatrix, told NBI.
“This is why major changes are being looked at that will make it easier for foreign companies to become involved in the TSE and to broaden out the universe of investment opportunities available to them,” he added.
Central to these initiatives, to begin with, is the creation of a new international brokerage geared towards investment in the TSE in foreign currencies, both when entering trades and exiting them.
NBI understands that to this end, the TSE, in conjunction with the Central Bank of Iran, is in advanced discussions with a Spanish bank, a German venture capital fund and a UK investment firm to create such a brokerage. This would also include the full suite of custodian services, including seamless money transfers and settlement facilities involving foreign currencies. Once this has been put in place, a new method of awarding licences to foreign investors would be implemented.
This would allow differing sets of investment parameters to be applied to three tiers of investor, based on assets under management, with the first tier being comprised of banks and investment firms with assets under management that place them in the top 25 financial institutions in the world, the next tier being the following 25 and so on.
“These foreign investors would then apply for licences that would be issued for five years before then being reviewed by the Central Bank, the chief auditor of the TSE and a special independent board of oversight, like the UK’s FCA [Financial Conduct Authority], that would comprise representatives from the UK, continental Europe and Asia, in the first instance,” said Emadi.
In order to expedite such investments by anticipating as much of the risk analysis as possible for the foreign firms, they would then be presented with a breakdown of the firms available for investment listed on the TSE.
This would cite a range of investment metrics, but most importantly the price/earnings to growth (PEG) ratio, which determines the relative trade-off between the price of a stock, the earnings generated per share (EPS) and the company’s expected growth.
The price/earnings (P/E) ratios of Iran’s TSE-listed firms are extremely compelling, with an average P/E ratio of seven, compared with the 14 to 16 typical of frontier markets, emerging markets and the rest of the Middle East.
However, while P/E is often used to gauge a company’s attractiveness, Iran and its advisors consider the PEG metric is a better gauge of long-term potential excluding short-term political concerns.
“The certified foreign investors would then be provided with lists of three categories of companies according to PEG values and potential returns,” Emadi told NBI.
Tier 1 is made up of those that have seen a rise of 2% plus in this ratio since the implementation of the JCPOA – these are generally mining companies. Tier 2 is comprised of those between 0% and 2% – these include pharmas, leasing companies and autos, for example, and Tier 3 is made up of those in the negative return area, which have been generally banks and oil and gas and petrochemical firms, he said.
“Of course, this latter group will contain companies with perhaps the greatest potential of all, as their PEG values have been particularly negatively impacted by fears over fresh US sanctions, which are likely to be focused on the energy sector but which are also less than certain to occur,” he added.
Ongoing financial sanctions in the US, though, do present a problem for Iran’s plans for the TSE but not an insurmountable one.
Many ‘real money’ funds (long-term money, such as insurance and pension funds) – are only allowed, within their investment mandates, to invest in companies in countries that have both a current credit rating and are also included in major global investment indices, such as MSCI.
In both cases, the major institutions administering these are US companies, including Standard and Poor’s, Moody’s and Morgan Stanley respectively. But Iran is in talks with similar players in the UK with a view to an accommodation being made whereby both credit ratings and inclusion in key global indices can be effected.
In addition, there are many other funds and investment vehicles that do not require credit ratings or inclusion in, or by, specific firms in order to make investments. This more discretionary type of investor is likely instead to be attracted to the returns on offer, as a balanced mix of companies from the aforementioned three tiers of companies could easily be expected to yield a net return of 11% per year after all expenses have been taken out, Emadi underlined.
“Any possible negative effect from foreign currency movements against the [Iranian] rial over the duration of a trade would be more than compensated for by this net yield, and the OEG valuations for Iran’s oil and gas companies would give a foreign investor around a 40% greater return than on the Saudi equivalents because the baseline is so much lower,” he said.
Taking this in the context of the US$350 billion required by Iran over the next five years to develop its oil gas and transport sectors, the value of the Tier 1 firms is conservatively estimated at US$48 billion, Tier 2 US$140 billion, and Tier 3 US$600 billion.
This is even without the rolling partial privatisations of the holding company for recently discovered NIOC and NIGC assets, which are expected to begin after the IPO of Saudi Aramco scheduled for the first half of 2018.
“With these included, clearly you would be talking about a lot more,” Emadi added. Indeed, even without the NIOC and NIGC assets, sources close to the TSE and Central Bank told NBI last week that they expected the level of foreign investment in the TSE to comprise at least 10% of its overall market capitalisation within the next three years. In absolute terms, this would total at least US$50 billion.