IPOs should be priced at least at a 20% discount to what industry peers are trading at and companies should also “have a sustainable strategy post-IPO to provide an upside for the share price to increase over time”. — Image by Gray StudioPro on Freepik
MALAYSIA’S initial public offering (IPO) market is sizzling. The country came out tops for IPOs in South-East Asia in the first half of this year, with US$450mil (RM1.97bil) raised from new offerings.
But all is not rosy. One fact that troubles investors more often than not, is that a number of large offerings have failed to deliver.
Just using a cut-off of 2012, there were 10 major listings that came to Bursa Malaysia to raise more than RM1bil. Only two of them have performed. Eight saw their share prices tank, a few even delisted.
Large listings are significant because it is only in those cases when investment funds can buy a significant number of shares.
Funds like the Employees Provident Fund (EPF) which manage around RM1 trillion, need to make chunky investments. Malaysia’s stock market sees a lot of IPOs but most of them are small or mid-sized ones, with no worthwhile allocations for funds like the EPF to invest in.
And when these funds do invest in the big ones, chances are that they lose money, going by the performance mentioned above.
So what gives?
One reason is overpricing of listings. The IPO pricing process is complex, undertaken by the investment bankers in the deal with their client, the issuer, who are the owners of the company coming to the market.
While the owners would naturally want to price their shares at the highest possible, a process of price discovery in the form of a “book building” ensues where the companies and their financials are presented to investors (namely the institutional funds).
Interested buyers would then put into the book the prices and quantity of shares they are willing to pay for. That process, quite hidden from the public, then results in a price agreed by all parties, including the regulator.
It does seem that despite that process, some listings have been overpriced which has led to funds losing loads of money from buying these IPO shares.
It should be noted though that going further back in time, many large IPOs have performed well.
The listings of Malaysian banks and the subsidiaries of Petroliam Nasional Bhd are good examples of that. Others include conglomerates such as IJM Corporation, Gamuda and the YTL Group as well as utilities such as Tenaga Nasional and Telekom Malaysia.
But coming back to the recent underperformance of large listings due to bad pricing, Danny Wong Teck Meng, the CEO of Areca Capital, says this in his op-ed accompanying this article: “High valuations at IPO are a critical issue. Overpricing or mis-pricing can quickly erode investor confidence, causing poor stock performance.”
Similarly, Brahmal Vasudevan, the CEO of private equity firm Creador writes in his op-ed: “On the question of why many listings on the Main Board and several ACE Market ones in recent years have failed to perform in terms of their share price performance, there are two key issues. These are a decline in their earnings growth and the fact that they had listed at high price earnings (PE) multiples”.
There are other factors.
Areca’s Wong explains: “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.”
Wong also says that there are numerous instances where companies that appeared fundamentally sound at the point of their IPO but subsequently provided guidance that was “off the mark”.
“Some companies provided optimistic earnings prospects but failed to meet these expectations, with earnings even dropping significantly shortly after listing,” says Wong.
So what can be done to fix things?
One suggestion from Brahmal is that IPOs should be priced at least at a 20% discount to what industry peers are trading at.
He says companies coming to the market should also “have a sustainable strategy post-IPO to provide an upside for the share price to increase over time”.
Similarly, Wong suggests that the market regulators consider implementing a cap on valuations, aligned with the industry’s PE and as advised by industry experts.
He reckons that there should be mandatory post-IPO investor engagement by the companies that list and that these briefings should at least be on a quarterly basis.
Interestingly, Wong also suggests more drastic action: Companies that intentionally misguide or purposely mislead investors should face penalties.
“Investors who suffer significant losses should have the right to seek compensation through a straight-forward arbitration process.”
This article first appeared in Star Biz7 weekly edition.
