Areca Capital CEO and executive director Danny Wong Teck Meng says companies that intentionally misguide or mislead investors should face penalties. Investors who suffer significant losses should have the right to seek compensation through a straightforward arbitration process.
IT is important to be highly selective when participating in IPOs by taking a deep dive into the fundamentals of the companies, including examining their track record and evaluating their growth prospects.
Meeting with the management team, especially the founders and key decision-makers, is a crucial part of the process at Areca Capital.
The focus is on understanding their value systems, their backgrounds and how they arrived at this point. This includes understanding the challenges they have faced and how they have overcome them. The clarity, ambition and feasibility of their growth strategies is of particular interest.
Valuation
Valuation is another critical factor to assess whether the price is justified and if there’s room for growth.
We are also discerning about the types of businesses we invest in, actively avoiding industries that are in decline. Once an IPO that aligns with our long-term strategy and meets our investors’ mandates is identified, we aim to become cornerstone investors.
One example of a successful IPO with significant returns is Keyfield International Bhd, which was listed in April and has already gained 177% as of Aug 22.
Another recent success is Johor Plantations Group Bhd, which has appreciated by 17% since its listing on July 9.
Mixed performance of IPOs
A simple analysis of companies listed since January 2020 shows a mixed performance.
Generally, the ACE Market has seen more success than the Main Market, both in terms of the number of listings that have delivered positive returns and the magnitude of those returns.
Out of 93 companies listed on the ACE Market, 76% have delivered positive returns, with an average gain of nearly 100% since listing. The gains in the ACE Market ranged from modest increases of 1% to 2% — such as Alpha IVF Group Bhd and CEKD Bhd
— to impressive returns of 336% from MN Holdings Bhd and 403% from Nationgate Holdings Bhd.
Even those that did not perform well only lost an average of 21%, significantly lower than the losses of those that failed on the Main Market.
The Main Market saw 26 companies listed during the same period, with about 54% achieving success, averaging returns of 56%. However, the unsuccessful listings had average losses of 41%, which were quite painful for investors.
Notable underperformers include Senheng New Retail Bhd, MST Golf Group Bhd and Innature Bhd, all of which saw declines of more than 50%. Top performers like ITMax System Bhd and Keyfield delivered gains exceeding 150%.
Why are some large listings failing?
Main Board listings often face challenges due to stricter requirements and the mature nature of the companies, which may result in less dynamic growth prospects than those on the ACE Market.
ACE Market companies, typically in their growth phase, may set overly ambitious targets, leading to investor disappointment and weaker share price performance when these expectations are not met.
The limited historical financial data provided in prospectuses can hinder investors’ ability to fully evaluate a company’s long-term potential. Additionally, business environment risks, such as geographic exposure, can make investors cautious, even in companies with strong earnings.
Market sentiment at the time of listing also plays a crucial role. Poor timing can lead to underperformance, regardless of a company’s fundamentals.
Lastly, mismatches in peer comparisons, particularly in high-valuation sectors like consumer and healthcare, can result in inflated IPO prices and subsequent under-performance.
High valuations at IPO are a critical issue — overpricing or mispricing can quickly erode investor confidence, causing poor stock performance.
The lack of moratoriums or lock-up periods for institutional investors can also result in early profit-taking, which pressures share prices. Additionally, many companies reduce investor engagement post-IPO, leading to a loss of investor interest.
There have been numerous instances where companies appeared fundamentally sound at the time of their listing, but their subsequent guidance and forecasts were off the mark. Some companies provided optimistic earnings prospects but failed to meet these expectations, with earnings even dropping significantly shortly after listing.
This suggests there may be room for improvement in the approval process by advisers and regulators.
Seeking input from experienced sector analysts on historical financial results could also help determine whether strong past performance was a one-time occurrence or is likely to be sustained.
The performance of recent IPOs has been mixed. Investors tend to favour ACE Market listings due to their relatively better short-term performance, though long-term returns are not guaranteed.
Investors may become hesitant or indifferent towards IPOs that have underperformed in terms of investment returns, particularly in sectors that have struggled. It is important to note, however, that some mandates are restricted from participating in ACE market listings, limiting them to the Main Market.
However, the Main Market’s performance has recently lagged behind the ACE Market, leading to lukewarm response from investors. Despite this, strong companies with clear and steady earnings growth prospects, especially larger ones listed on the Main Market, will continue to attract significant interest.
Fixing the problem
The regulator should mandate post-IPO investor engagement, requiring at least quarterly result briefings.
Companies that intentionally misguide or mislead investors should face penalties. Investors who suffer significant losses should have the right to seek compensation through a straightforward arbitration process.
Additionally, authorities might consider implementing a cap on valuations, aligned with the industry’s price-to-earnings band as advised by industry experts.
