A Saudi-based contractor has cut its initial public offering's retail tranche due to poor demand, highlighting the need to improve the investment culture and transparency in the Arab world's biggest bourse, analysts said.

Al-Khodari and Sons Co said the retail tranche -- accounting for half its $163.2 million IPO -- was 83-per cent covered at the end of an Oct 4-10 subscription period, according to a statement late on Monday.

Only 342,000 retail investors bought into the IPO, a pale figure compared to previous IPOs attracting millions of Saudis.

The contractor wanted to sell the equivalent of 30 per cent of its capital or 12.75 million shares at SR48 ($12.80) each, a price that was at the bottom of a SR48-51 offered range.

The company is now awaiting approval from the stock market regulator to allow it to cover the retail tranche shortfall from institutional investors, it said.

This was the first time in Saudi Arabia that an IPO failed to raise targeted funds after the introduction in 2007 of a book-building process.

"This indicates a climate of concern and lack of confidence that has been accumulating since the 2006 crash," said Abdulhamid al-Amri, a member of the Saudi Economic Association, a semi-official think tank.

The Saudi bourse has not recovered from the 2006 crash: The all-share index is still 68 per cent below the peak it reached in February 2006, despite the resilience of the Saudi economy during the global economic downturn.

The book-building process was among reforms introduced after the 2006 crash ruined tens of thousands of Saudis, leading many to question the pricing of IPOs during an equity boom in the previous two years for what eventually became worthless stock.

Since the crash the capital markets authority has been trying to end irregularities in the Saudi bourse such as stocks moving before corporate filings but analysts say transparency is still below other emerging markets.

Saudi retail investors are the driving force of the local bourse and are also active in regional markets such as the UAE and Egypt. In Saudi Arabia, they make up almost 93 per cent of daily deals, according to official data.

But some analysts also blame Saudi retail investors for lacking knowledge of market mechanisms and fundamentals and a prevalent expectation of quick profit in the stock market.

Hesham Abu-Jamee, head of asset management at Bakheet Investment Group, noted: "What happened with Khodari confirms that retail investors do not think about the fundamentals. The bourse regulator should allow retail investors to buy into IPOs through funds who would make a more informed decision about what to buy and what not to buy".

Only Saudis can buy into IPOs of firms selling shares at a nominal value of SR10 ($2.67) or at a higher price set by book-building processes. Authorities in Saudi Arabia encourage IPOs as a means to ensure distribution of massive oil revenues.

Amri said the number of retail investors and the volume of transactions has been declining since 2006. "It's not always about the companies that are being floated; some listed firms are more transparent than others, but you have two-thirds of listed firms making losses now and some newly-listed ones are now trading below their listing price".

In February, Al-Tayyar Travel Group cancelled an initial public offering after failing to attract enough demand from institutional investors. Property developer Knowledge Economic City is trading 19 per cent below its listing price which was at nominal value.

Emaar Economic City is trading 23 per cent below its listing price after failing to make profitable an ambitious plan to develop a property project unveiled five years ago.

An institutional investor -- who declined to buy into Khodari's IPO -- said the firm showed declining profitability over the 2008-2010 period.

"The business climate could not have been better for a firm that relies on government contracts when you have a $400 billion stimulus plan," he said. – Reuters