Lessons from Leong Hup’s lacklustre debut


  • Business
  • Saturday, 25 May 2019

Leong Hup International is one of the largest fully integrated producers of poultry, eggs and livestock feed in Southeast Asia.

INITIAL public offerings (IPOs) are supposed to perform fairly well, especially in the first few days or the first month.

When they do not do so, it begs the question if valuations were right when the company was listed, and if investors needed more convincing of the company’s ability to grow revenue and earnings in future.

For instance, the share price of Facebook hardly moved when it was listed in 2012 at US$38 per share. Now, it is about 4.5 times more when investors were convinced of its growth story.

Leong Hup International Bhd came into the market with much fanfare, as it was touted as one of the few large listings on Bursa Malaysia with a regional flavour. However, its share price faltered, which tells us a few things beyond merely blaming the weak stock market sentiment.

Firstly, Leong Hup’s IPO was priced at 15 times the price earnings multiple. Based on this valuation, was there any money left for investors on the table post-IPO?

The IPO probably fully priced the stock on its current earnings. If there is some value that can emerge in Leong Hup, it is only in the future.

Hence, this allows investors ample time to assess the company that was listed at RM1.10 per share. The smart money would compare Leong Hup to some of its peers in the region that are trading at about the same valuation, but operate in a bigger market place.

An example is PT Charoen Pokphand, which is Indonesia’s largest producer of poultry feed and chicken with a 35% market share in a population of 230 million people. The company, which is part of Thailand’s CP Group, is trading at 17 times the price earnings multiple.

Secondly, the more astute of investors would probably wait and see if Leong Hup would be impacted by the weakening ringgit and the trade war between the US and China.

The investment bankers have blamed the trade war as a reason for Leong Hup’s poor performance post-IPO.

But the “smart money” looks at Leong Hup as a company with exposure to the vagaries of the currency and commodity price movements. They are not sure if Leong Hup would suffer from the deprecation of the ringgit, as the raw material for the processing of poultry feed is imported.

Thirdly, investors do not easily forget old names that were previously listed on Bursa Malaysia and taken private.

Leong Hup is actually an old name coming into the capital market with an expanded business proposition.

It is just like Lotte Chemical Titan Bhd that was re-listed in June 2017 and has performed miserably since then after a string of results that came in below expectations.

When Leong Hup was de-listed in 2012, the company was valued at RM318mil. Even the independent advice stated that the offer price by Emerging Glory Sdn Bhd, a company that is controlled by Tan Sri Francis Lau and his family, was not fair, as it was below what the industry valued such companies at.

However, shareholders were told to accept the privatisation offer from Emerging Glory, as it was “reasonable” on the grounds that there were no competing offers on the table and that it was an opportunity to exit the company, as its share price had under-performed the market.

To be fair to the Lau family, when Leong Hup was de-listed, it was only operating in Malaysia and Singapore and not a big player in the poultry feed business.

Now, it has a presence in five countries in the region, including Indonesia and Vietnam, where the population is large and chicken is a popular source of protein. It is an integrated poultry player.

However, in the last five years, other companies have also come into the capital markets tapping the investors’ funds keen on stocks that are into the food and poultry business.

Some of these companies have been regularly rewarding shareholders with dividends, capital gains and earnings growth. They have built a track record of growing and rewarding shareholders.

Leong Hup has to build a following among investors, which will only come with time.

Investment bankers say that Leong Hup’s share price performance is generally due to a structural problem in the region that does not encourage capital from international investors. They say even Singapore has hardly attracted any major listings in the last few years.

A banker points out to Hong Kong as the favoured destination for large listings. Last year, Hong Kong attracted 101 companies that raised US$36.5bil.

However, there is also a view that without the mainland China factor, the Hong Kong stock exchange would not be able to attract the most amount of money among capital markets.

Also, some of the companies that list in Hong Kong register double-digit growth in earnings, a feature that tends to attract a lot of investors.

Leong Hup has not been showing a double-digit earnings growth. Otherwise, it would have probably listed in Hong Kong at a huge valuation.

Nevertheless, Malaysia offered Leong Hup the best valuation, which explains its listing on Bursa and not in Singapore or Hong Kong. For investors to put their money into the stock, it needs a catalyst, which will come when there are prospects of growth in earnings.

The bright side of Leong Hup’s listing exercise is that there are investors prepared to put money into companies seeking a listing on Bursa.

Even old names that were de-listed can attract a fair amount of capital when they seek a re-listing. The decent valuations Leong Hup and Lotte Chemical Titan commanded are proof enough.

It is only a matter of the company leaving some value post-IPO for investors and convincing potential investors of its ability to show growth in earnings.

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