Mandating investor relations post-IPO

Pricing an IPO before it is launched is a tricky area. — Bloomberg

MALAYSIA has seen a fair share of increase in the number of companies that are listed, with the latest count showing we have 10 companies that have launched their initial public offerings (IPOs) since the start of the year. And perhaps up to 30 more to do so during the course of the year.

Year-to-date, seven companies have been listed on the local bourse, while the eighth listing will be on Monday when Prolintas Infra Business Trust make its debut on the Main Market.

In the last three years alone, some 97 companies were listed on Bursa Malaysia, of which 19.6% were Main Market listings and the balance were ACE Market (61.9%) and the LEAP Market (18.6%).

An IPO involves the full spectrum of capital market intermediaries as the process kicks off with initial discussions with investment bankers and advisors.

Depending on the target listing market, the process can vary as the qualifying criteria are different for all three markets.

An IPO journey is a long, tedious, and thorough process as everything in the prospectus is vetted by a team of professionals, which among others include the legal team, valuers (if needed), the auditors and the reporting accountant, the independent market research analysis as well as underwriters and placement agents.

All the intermediaries involved in the IPO are strictly governed by the Capital Market Services Act, 2007 (CMSA), and the Companies Act, 2016. In addition, adherence to Bursa Malaysia Listing Requirements is a must, while the Securities Commission’s (SC) approval is required for a Main Market IPO.

Typically an IPO involves both an offer for sale and a public issue as it is rather rare to get an IPO that is solely either an offer for sale or a public issue in its entirety.

In the IPO itself, the bulk of the shares is offered to institutions (both bumiputra investors approved by the Investment, Trade, and Industry Ministry and other institutions) or even high-net-worth individuals, as well as a retail offering, comprising both bumiputra and the general public.

An IPO is seen to be a “successful” IPO when at the closing of the application, the book is well covered and that is where most companies would declare the level of oversubscription.

In Malaysia’s case, very rarely an IPO is undersubscribed. During the IPO process, the investment banks or advisors will also carry out marketing of the IPO to investors, in particular, the institutional investors.

In some cases where the IPO is large enough, a company going public will also undertake pre-marketing to secure what is referred to as cornerstone investors, which gives other investors at the IPO stage some form of confidence in the attractiveness of the IPO itself. Marketing an IPO In an IPO, the key document other than the prospectus is the presentation material that is prepared for the consumption of investors and this deck is often prepared by the company itself, either via its own investor relations (IR) team or an outsourced IR team.

The presentation deck will cover what is in the prospectus in a much-simplified manner to enable investors to understand the company.

The information will include the history of the company, the business that the company is in, the shareholders, the key management, the overview of the industry or target market, the growth prospects, risk, financial information, the details of the IPO itself and, not to be missed, the utilisation of proceeds if the IPO has a public issue element in it.

During the investor presentation, there are bound to be questions raised and management will typically answer them to the best of their ability and based on publicly available information.

Forward-looking statements that are not disclosed in the prospectus itself are usually avoided by management at these presentations.

In terms of the price of the IPO itself, a peer comparison is generally provided to give potential investors a benchmark that shows how attractive or pricey an IPO is, and in general, this is based on certain valuation parameters, which can range from price-to-earnings ratio, dividend yield, or even discounted cash flow values.

Post-IPO activity

Upon listing, depending on the size of the company and the resources available, most companies do not have an IR team or department.

Hence, this is either kept at a bare minimum in the company’s website with links to announcements that are made to Bursa Malaysia, or in certain cases, they are outsourced to third-party service providers who are paid depending on the scope of work involved and coverage.

Most of these outsourced service providers have extensive networks within other market intermediaries (brokers, fund managers) to enable them to present their clients’ investment prospects and outlook based on guidance given by management.

After all, institutional investors who have bought the shares at the IPO would want to know the company’s progress, both financially at every quarterly reporting period, as well as non-financial information, which is more related to the company’s plans or industry prospects.

The issue with outsourced service providers for IR is that these are a group of market intermediaries, who are unlicensed by regulators and do “tell a story” of their clients to investors as well.

Whether these are facts or material misrepresentation is difficult to verify as the main objective is to ensure the shareholders or potential investors in their client’s company are convinced and satisfied to either keep their shareholding or purchase the company shares in the open market or via placements when there are private placements carried out.

Worse, if non-public information is shared with investors, it can cause a material impact on the company’s share price, either significantly higher or lower.

IR is an important part of companies’ public image and if officers of the company or other market intermediaries are licensed by the SC, why should those involved in providing IR services be exempted?

Bursa Malaysia or the SC must step up to regulate IR activities to ensure those involved are licensed, knowledgeable and responsible in their communication with the investment fraternity.

This can be carried out via a certification process or modules, similar to how an investment advisory licence is issued.

In this way, we are able to have a stream of qualified IR practitioners, similar to the growth of investment analysts or fund managers. Once regulated, these IR practitioners can be more responsible and ethical in the work that they are carrying out as governed by the CMSA.

This is key as we have seen how some large IPOs in recent times, where at the time of IPO, the company’s prospects were all hunky-dory but post-IPO the share prices underperformed, mainly due to the inability to deliver the expected earnings, or perhaps an overpromised expectation that would likely not be met.

The sell-down in some of these stocks occurred right after listing as investors cut their positions in anticipation of earnings that would miss estimates on market rumours that turned out to be true.

In the past year, several IPOs have tanked and these are all the Main Market-listed companies. In addition to regulating IR activities, Bursa Malaysia should also make it compulsory for all listed companies, especially those that aspire to be listed on the Main Market, to have an in-house, dedicated IR team. This would ensure no other intermediaries are providing inaccurate information to other stakeholders, especially shareholders or potential investors.

In addition to the above issues, pricing an IPO before it is launched is another tricky area. In recent times, we have seen some IPOs coming to market at hyped-up valuations with so-called forward price-to-earnings multiples that are north of 20 times and closer to even 30 times.

For the company and the selling shareholders, selling at a higher price gives them more proceeds from the IPO, but failure to deliver guided earnings would result in a significant downgrade and sell-down.

For investors, a fairly priced IPO leaves some bites of the cherry on the table to enable these new shareholders to realise some profits from the investment.

Hence, it is a tough balancing act to price an IPO, but the listing advisers can play a much more active role in ensuring that the listing price is fair to all.

Pankaj C. Kumar is a long-time investment analyst. The views expressed here are the writer’s own.