MUSCAT: The Muscat Stock Exchange (MSX) has recently witnessed a wave of new listings, sparking discussions around pricing strategies and the fairness of initial public offering (IPO) prices. Speaking to the Observer, an economic expert specialising in financial markets outlined the key factors that influence IPO pricing, emphasising the importance of balancing investor appeal with the fair valuation of companies and the broader economy.

IPO Pricing: How is it determined?

The expert identified three critical elements that play a central role in determining IPO pricing:

Market Yield Averages and Comparison with Peers: One of the most significant factors in attracting investors is the expected return on investment. The expert explained that IPO prices must be competitive, offering better yields compared to dividend returns and growth rates of similar companies, both in the domestic market and in neighbouring markets.

“For instance,” he noted, “when companies like Abraj Energy Services in Muscat or ADNOC Drilling in Abu Dhabi went public, ensuring attractive expected yields was crucial in determining their pricing and attracting investors.”

Market Conditions and Economic Outlook: The overall economic climate heavily influences IPO pricing. The expert stressed that timing is critical:

• In periods of economic growth and stability: Investor sentiment is typically more optimistic, allowing companies to price their IPOs closer to or above their fair value.

• In times of economic downturn or uncertainty: Pricing needs to be adjusted downwards to compensate for increased risk and to draw in cautious investors.

“When investor sentiment leans towards caution,” he added, “high IPO pricing can lead to failure. Flexibility and alignment with prevailing conditions are therefore essential.”

Offering Size Relative to Market Liquidity and Depth: The success of large IPOs depends significantly on the market’s capacity to absorb them. “A company with a listing size of $2 billion cannot succeed in a market where daily trading averages are as low as $8 million,” the expert explained. “In such cases, extraordinary measures are required to stabilise supply and demand.”

He further noted that some countries inject liquidity into their markets or provide direct government support during major listings to bolster stability and project the resilience of their economies.

The expert highlighted the importance of establishing a regulatory and strategic framework for IPOs to ensure their success. Drawing on international examples, he pointed to several measures that could be implemented in the MSX.

The Financial Regulatory Authority, he noted, should consider introducing conditions tailored to the size and type of the IPO, with sufficient flexibility to align offerings with market conditions.

He also underscored the need for a comprehensive divestment strategy, including appointing an official to oversee IPO processes. Successful listings, he argued, require seamless coordination between all stakeholders to serve the national economy effectively.

Likewise, he stressed the importance of adopting long-term strategies to boost daily market liquidity and attract a more diverse pool of investors, both local and international.

The expert concluded by asserting that stock markets are not merely trading platforms but vital indicators of a nation’s economic strength. “Revitalising the Muscat Stock Exchange requires a holistic vision that encompasses regulatory reforms, enhanced transparency, and expanding the investor base. With ongoing reforms, the Omani bourse has the potential to become a cornerstone of sustainable economic growth.”

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