Saturday, May 26, 2012

Featured Article: Beware the highly priced IPO

On Star Biz: Beware the highly priced IPO sometimes

  • Saturday May 26, 2012
    Beware the highly priced IPO sometimes A Question of Business

    Malaysians should take heed that IPOs don't always make money as the Facebook fiasco has amply demonstrated.
    IF you think an initial public offering (IPO) is a sure way of making money, think again things can go seriously wrong and companies can open a lot lower than their IPO price.
    If anyone has delusions about an IPO automatically making money for those fortunate enough to have obtained the shares at that stage, the recent episode with Facebook should dispel any such notion.

    Barely a week into trading, Facebook is trading at an 18% discount to its IPO price at the time of writing, hardly something that inspires confidence in IPOs in this current poor market.

    Facebook was offered at US$38 per share to raise US$16bil for the vendors that included founder Mark Zuckerberg, who became a cash billionaire after the deal and whose company was valued at US$104bil based on the IPO price.

    And this for a company that had earnings of less than US$1bil and revenue of US$3.7bil, giving a historical price earnings ratio (market value divided by earnings) of over 100.

    But still investment bankers felt they had a deal, secured the IPO investors and then listed the stock on May 17, only to see a steep fall from the very first day of trading, which eventually saw a cut in value of almost a fifth.

    That's amazing for a stock pushed by some of the top investment firms in the US including Morgan Stanley and Goldman Sachs and a company with such a strong brand recognition too.

    Now disgruntled investors are crying foul and amidst reports of selective information given to some banks by Facebook, shareholders have started suing Facebook and Zuckerberg in an embarrassing development that threatens to overturn yet again how Wall Street does business.

    The entire Facebook fiasco underlines one key important lesson ignore fundamental valuation at your own risk. True, markets have their own madness and sometimes stocks trade way above what can be considered their intrinsic value.

    But they don't stay there for long if they ever do especially if the earnings stream does not start kicking in soon. And if there are any indications of problem, one can expect no less than a collapse in share prices if valuations were excessively high in the first place.

    As the Facebook saga unfolds in the US, the applications closed yesterday for Gas Malaysia's IPO here. Those who follow the situation here closely may realise that disclosure in IPOs, while it may seem better than before, need not necessarily be so.

    Try as I might I could not find a forecast for earnings for Gas Malaysia in its prospectus, a company with a blue chip reputation owned by amongst others, an MMC Holdings-Shahpadu joint venture, Petronas Gas and Tokyo Gas-Mitsui. The Petronas name attached to it gives it a certain mystic and pedigree, no doubt.

    But still I could not find forecast earnings per share or dividends for this year in the thick prospectus of over 300 pages. If it was in there and I doubt that should it not have been highlighted? And how does one value the company without such figures?

    There was a time when every IPO had forecast earnings and dividends, sometimes for more than a year. That gave retail investors a good feel for the company they were buying but apparently that's no more the requirement. In the light of the Facebook fiasco, that's a retrograde step.

    Whether it's in the US or here, there is a clear need to tighten up IPO procedures and disclosures so that all investors have equal access to information and are not discriminated against. That helps in the creation of a fair, orderly and clean capital market, which people can generally rely upon.

    In Gas Malaysia's case, some analysts put the forward price earnings ratio at the issue price of RM2.20 a share at 18 times and the dividend yield at 4.4%. It is academic now since applications have closed but those don't look particularly attractive.

    At 18 times, the price earnings ratio is above that of many Malaysian blue chips. The dividend yield at 4.4% look respectable but is based on 100% of earnings being paid out as dividends, which makes it equivalent to the earnings yield and also implies very little or no future growth because nothing is being retained in the business for expansion.

    In that context it looks less than attractive. But the Malaysian public, perceiving IPOs as a means to make money and attracted by Gas Malaysia's affiliations, including that with national oil corporation Petronas, might think otherwise.

    One hopes not, but if the valuations turn out to be expensive, then there could be nasty surprises. To reduce the possibility of that, regulatory authorities should probably revert to older, more stringent standards for IPOs which require profit and dividend forecasts to be clearly stated and verified, subject to the usual conditions, by the merchant bankers and accountants.

    That will go some way to reassure investors, and especially retail investors who are the last to know things, that there is substance in the company that supports the issue price.

    We certainly don't want a Facebook-style fiasco in Malaysia.

    Independent consultant and writer P Gunasegaram ( is not a fan of Facebook, the service or Facebook, the company.
Gas Malaysia's IPO prospectus, which is more than 300 pages, includes no earnings forecasts?


Ok I have mixed feelings here.

I am not a fan of earnings forecass but despite me not being a fan, I still feel all companies should include their earnings forecasts in their IPO. Yes, these earnings forecasts tends to be over the top but for some, how theses company make their earnings forecast and how they actually perform, they do give a fair guide on what kind of a company it is.

For instance ( or shall I say let the the broken recorder repeat once more), let's use AirAsia.

Before they list, they made the following remarks:
  • AirAsia expects profit to soar

    BUDGET carrier AirAsia Bhd expects net profit for the financial year ending June 30 2005 to more than triple to RM159.9 million compared with RM49.1 million before. Revenue is also expected to jump 90.1 per cent to RM746.6 million from RM392.7 million, according to its prospectus.
AirAsia expects its net profit to triple the very year its stock will be listed!

I kid you not!

And that's how AirAsia sold its IPO to the market.

Yeah, jack up the earnings forecast and the sold could be then sold to the market at a 'fairly cheap' price for its IPO. Sweet simple strategy eh?

And how did AirAsia do? Here's the snippet the next year,

  • Monday August 29, 4:09 PM
    Malaysia's Airasia Misses Yr Net Profit Forecast

    ]KUALA LUMPUR, Aug 29 Asia Pulse - AirAsia Berhad (KLSE:5099) has reported group profit after tax and minority interest of RM111.635 million (US$29.6 million) for its financial year ended 30 June 2005, up 127.5 per cent year-on-year.

    However, the net profit was 30.2 per cent below the RM159.9 million forecast for the year in the prospectus issued in relation to its initial public offering [IPO] last year, the budget airline said in a filing to Bursa Malaysia on Friday.
Anyone remember how did AirAsia IPO fared?


Mun Wai said...

Facebook = 非死不可

No good name ! :P