Monday, July 10, 2017

100 - Mega IPOs - out of vogue?

100 - Mega IPOs
- out of vogue?







Lotte Chemical Titan Holding Bhd's (LCT) ambitious mega plan to list its shares back on Bursa Malaysia after a seven year absence was given a wake-up call by the very poor response from the investing public, particularly the foreign funds.

Touted as one of Malaysia's biggest initial public offerings (IPOs) in recent years, it nearly didn't take off. The high pricing of RM8 per share and its too huge shares issuances sizes were too much for the investing groups to absorb.

It was after some 72 hours of tough re-negotiation again that finally a re-pricing and a reduced number of shares issuances agreement finally to see LCT on track for its listing debut.

Is the days of mad-scrambling for big reputation companies' Initial Public Offerings shares over? I do not have the answer. I can only point out to a few recent giant IPO that those who subscribed to their shares and stayed invested  until today will rue their actions sadly.

In 2012, palm oil firm Felda Global Ventures Holdings Bhd (FGV) listed at RM4.55 and surged to as high as RM5.46 bringing cheers to hundreds of thousands of plantation farmers and family members whom were offered guaranteed IPO shares. (Many must have taken bank loans to finance their IPO purchases. If they are still keeping the shares which most likely to do so, they are now face with a loan to service with interest yet their shares prices are down more than one dared to dream).

Since then, nothing has gone right for FGV and its shares price dropped to as low as RM1.18 on Aug 26, 2015. The share price is now at RM1.65.

In 2015, Malakoff Corp Bhd, a giant independent power producer to the country's main power company Tenaga Nasional Bhd (TNB), listed at RM1.80 Despite having a stable cash flow and a 70% dividend policy, its share price has not done well. It touched a low of RM1.02, incidentally at the time of writing on July 10, 2017.

For those employees at Malakoff with bank-financed loan for its IPO shares must be feeling gutted to be now, in debts and most probably cursing their position now. How to have motivation going to work everyday with such a situation?

More recently, this year In April, another very large IPO, Eco World International Bhd (Eco World) listed at RM1.20. But its share price even touched a low of RM1.00 and a high of RM1.36 since listing debut. Currently it is trading below its IPO price and closed at RM1.12. (The fortunate thing is the successful bidders for the IPO shares were given two free warrants for every five shares held after the IPO).

So why did all these mega companies flopped after making its listing debut? Save for Eco World's mild decline, the other two, FGV and Malakoff's declines are  sharply painful for the faithful subscribers or those who invested in the market directly and still holding on to their investments.

I think one reason must be the over valuations. It is common sense that if a company is going for listings, valuations play a very important role in determining the IPO price eventually. And this is where valuations come in.

The higher valuations accorded, the higher price will be offered to those who subscribed successfully. And the company would have collected its IPO proceeds regardless of what happens to its share price later.

Back to LCT, there are many puzzling questions that needed some answers. We can't blame the promoter of LCT for trying to price its valuation IPO price as high as possible. But what about the five cornerstone investors? The five : Permodolan Nasional Bhd (PNB), Maybank Asset Management Sdn Bhd, Maybank Islamic Management Sdn Bhd, Eastsprings Investments Bhd and Great Eastern Life Assurance (Malaysia), who agreed to acquire around 136 millions IPO shares (representing 18.4% of the base offering of the IPO).

Did these five companies with their huge resources and research investing team conduct any own analysis of LCT and arrived at their own valuations? If they have done so, then they must have arrived at a "surprisingly" collectively same valuations of LCT at this IPO price of RM8 per share.

I am sure if one of their research team had valued its IPO price at example below RM8, they would have advised their company about the difference and hence would have perhaps renegotiated with the  IPO promoter of LCT.

Remarkably, it needed the absence of interest to subscribe for the portion from all those foreign funds that set up the alarm bell. Thus the promoters had to reprice the share from RM8 to RM6.50 which is a big discount of around 18% and also cut the numbers of shares issuance by one-fifth.

At this adjusted price of RM6.50, I think the valuation of LCT would have be at a price earnings ratio of 20 (based on its net profit of RM1.3bil). This is also considered on the high side unless the market perceived LCT as another premium chemical player which deserved a higher PE ratings. The other is Petronas Chemicals Group Bhd (PetChem) which is trading at a PE of around 19.

But of course by the time you are reading this, LCT would have made its debut on Bursa Malaysia on July 11th and market would have its own natural mechanism of trading between buyers and sellers to determine the price again.

Mr Market will deliver its verdict today!




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