Monday, July 5, 2010

Is the IPO flame fizzling out?

The Malaysian equities market has seen a renewal of interest so far as initial public offerings (IPOs) are concerned, but does the current appetite for IPOs go beyond mere excitement?

There have been a dozen IPOs since the start of the year, with two blockbuster deals standing out. These are JCY International Bhd’s and Masterskill Education Group Bhd’s IPOs, which were listed on Feb 25 and May 18, respectively.

Another seven companies will be listed by mid-August, bringing the total to 19 for the first eight months of 2010 versus 14 IPOs for the whole of last year.

Of the upcoming IPOs, Sunway Real Estate Investment Trust (SunREIT) will be the biggest this year. The REIT plans to raise RM1.66 billion, and will have a market capitalisation of RM2.41 billion at its indicative offer price. The REIT will list on July 8.

Indeed, what sets 2010 apart from the past few years is not just the larger number of IPOs, but also their size. SunREIT’s IPO surpasses the previous two largest of the year — Masterskill and JCY, which were also the second and third-largest IPOs in six years after Maxis Bhd’s RM11.2 billion IPO last November.

The number and size of IPOs this year have raised some concern on whether they will drain liquidity and “saturate” the market with new choices, leading to lower gains for the IPOs and potentially more sluggish market conditions ahead. And this will also be set against a background where global stock market conditions have turned more choppy.

No more easy gains from IPOs?
The toll on IPOs is already starting to show. The fortunes of the companies that went public this year have been mostly negative. Out of a dozen already listed, only three companies, Shin Yang Shipping Corp Bhd, Sarawak Cable Bhd and Masterskill have seen their shares rise above their issue prices. Even then, the gains have been small -- at 1%, 11% and 7% respectively, based on last Friday’s closing prices.

Among the bigger companies, JCY’s shares have fallen 3% from the retail offering, closing at RM1.48 from its IPO price of RM1.60 apiece.

Masterskill, however, has seen its share price appreciate somewhat since its IPO, closing at RM3.73 last Friday. This was perhaps helped by the recent increase in investor interest for education stocks, although Masterskill’s gains are lagging far behind those of SEG International and HELP International Corp.

The current fortunes of IPOs are a stark contrast to the days of the IPO craze, where they were an almost “sure thing” for lucky investors who received a piece of the initial offering. Back then, a “pink form” was often seen as the ticket to guaranteed gains.

The investing landscape has changed considerably since then. But despite the floundering fortunes of the newly listed IPO shares, some companies say they will press on with their plans.

“Currently, the stock market is not so good, but due to our plans, we are going ahead with the IPO. We can’t forecast what will happen next. At the moment, we will keep to our schedule,” said SCC Holdings Bhd executive director Soh Kian Teck.

SCC is a supplier of animal feed additives and food service equipment. The company is en route to an ACE Market listing on Aug 3. One of the smallest IPOs this year, SCC aims to raise RM8.7 million from the listing exercise, and will have a market capitalisation of RM33.4 million, based on its offer price of 78 sen per share.

Quality of companies an issue?
Despite the poor performance of IPO companies thus far, the spirit of the intermediaries, namely the investment banks which earn fees for advisory and underwriting services, has not dampened.

Usually, the IPO price of a company is discounted from the anticipated trading price in order to entice investors. It is therefore puzzling that the security prices of these companies are languishing.

Some quarters have suggested that this may have something to do with the quality of the companies being brought in. This criticism was most recently raised when a group of Chinese athletic-wear companies listed locally.

An investment banker, however, told The Edge Financial Daily that investors are still “waiting to see” how these companies performed, at least over a year or two, before jumping on board.

The trend, nonetheless, has spread to some of the smaller IPOs that were recently done, such as that of ECS ICT Bhd (down 26% from IPO), Seremban Engineering Bhd (down 22%), Oversea Enterprise Bhd (down 20%) and Homeritz Corp Bhd (down 27%), the first IPO of 2010.

There are a number of reasons for the poorer IPO landscape. The most obvious is the continued volatility in the capital markets, which have retreated yet again owing to concerns about the European banking situation. As a result, investors are more likely to invest in safer instruments such as sovereign bonds rather than comparatively riskier equities.

Foreign investors have also shied away from the Malaysian capital market, preferring to invest in more lucrative Asian assets such as those located in China. Foreign investors usually have a limited amount of funds set aside to invest offshore. This being the case, they would certainly prefer to invest in locations where they get a better bang for their buck.

There is still, however, excitement building on the horizon for the local capital market. The upcoming listing of SunREIT is being billed as the biggest real-estate investment trust in Southeast Asia, and this would certainly whet the appetite of investors.

Also, Malaysia has recently been approved as an investment destination for Chinese funds looking to invest offshore. Bursa Malaysia could certainly see a revival if even a small percentage — say between 3% and 4% — of the US$47.7 billion (RM153.83 billion) quota is brought locally.

In that regard, IPOs could see more institutional interest from foreign sources.

Still, there is no guarantee that Chinese participation would create more excitement. The listing of the Chinese athletic-wear companies were supposed to do just that, but very little developed since then.

Only time will tell whether the fortunes of the IPO companies will improve. Over time, these companies will garner a longer track record for investors to assess their performance, management and prospects.

Ultimately, investing in stocks, either through the IPO route or open market purchases, still boils down to the same basic principles — fundamentals and stock valuations matter most.


Written by Fong Min Hun & Koo Jie Ni
This article appeared in The Edge Financial Daily, July 5, 2010.

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