Greater IPO appetite on ACE Market

Former senior investment banker Yoong said the response to IPOs this year has been “neutral to positive”.

KUALA LUMPUR: The listing of recent initial public offerings (IPOs) on Bursa Malaysia appears to show an encouraging trend – at least in the short term, which indicates a healthy level of interest that is sustained into such stocks post-listing.

Almost all of the listings locally in the year-to-date (y-t-d) period were on the ACE Market, implying that there are still smaller companies in Malaysia which can command a good level of interest, mainly from retailers, on this front.

The ACE Market, a sponsor-driven market, provides smaller and growth-oriented companies more visibility to raise funds.

In the y-t-d period, eight of the nine companies that were listed locally were on the ACE Market and one on the Main Market of Bursa Malaysia.

It is notable that seven of the nine companies that went public on Bursa Malaysia had recorded positive returns – most of these were on the ACE Market – while the other two had flattish to negative returns when compared to their initial listing reference price.

Up until Wednesday’s close, six of the seven companies that were listed on the ACE Market in the y-t-d have recorded positive returns from their initial listing reference price and up to 144% for one stock.

Analysts said companies with strong growth prospects and good management can drive further interest into such stocks but it is more important to look at the longer-term sustainability of its performance.

Former senior investment banker and high-net-worth investor Ian Yoong said the response to IPOs this year has been “neutral to positive”.

“In fairness to advisers and placement agents, it is difficult to gauge speculative interest, which is mainly retail. This has a bearing on IPO performance in the short term.

“I recall our principal adviser assuring us 10 years ago when we listed our food and beverage company that there has never been an IPO that has been undersubscribed. It still stands true until today,” Yoong told StarBiz.“In the long term, it is sound, honest management and strong growth in earnings that determine the share price performance.

“For example, Hartalega Holdings Bhd’s share price fell below its IPO price after the company was listed in April 2008. Investors who had bought at the IPO price would have earned manifold gains now,” he added.

Of the ACE Market companies that have recorded a positive return, among the biggest gainer is wire and cable manufacturer Master TEC Group Bhd with a 138% gain since its listing.

How the IPO was priced could be a key factor, as Yoong pointed out: “The IPO price of Master Tec must have been attractive as the major shareholder bought 15.8 million shares after the company was listed at a price above the IPO price.”

The other ACE Market companies that had seen double or even triple-digit capital appreciation from their reference price are KJTS Group Bhd of 144%, HE Group Bhd, 86% and TSA Group Bhd, 38%; while Zantat Holdings Bhd, which was just listed on Wednesday, added 50% on its first day of trading.

“There could be many reasons for KJTS’ outperformance. The IPO price could have been conservative to ensure full subscription, or the news flow after the IPO price was set was very positive.

“The news of KJTS’s Thai subsidiary securing substantial projects that will substantially boost earnings growth is very positive.

“The role of the investor relations consultant is crucial in the listing process,” Yoong said.

But gains in the share price is only one angle to measure a company’s performance or health and it is not the sole authoritative indicator that a company is truly doing well, analysts said.

A case in point is the Enron accounting scandal in the United States back in October 2001 that had seen the energy giant going bankrupt due to dubious accounting practices.

From 1998 to mid-2000, Enron’s share price had seen a dizzying rise of some 350%, up to its peak of US$90.75 per share.

With a high price-to-earnings multiples, Enron was one of the biggest companies in the United States being known as the darling of Wall Street and the rice bowl for many employees and their families.

Its share price subsequently crashed to 12 US cents in January 2002 and many of its employees suddenly found themselves out of a job.

Meanwhile, Yoong said there is also another side from the strong rise in the share prices of recent ACE Market listings, as an excessive gain may indicate undervaluations of the company when it filed for the IPO.

“The role of the principal adviser, and to a certain extent the placement agent and underwriter, is to advise on a reasonable pricing for the IPO.

“The prime objective is to ensure the IPO is fully subscribed.

“An outperformance in excess of 25% to 30% of the IPO price in the first month of listing could be an indication of underpricing of the IPO.

“The principal adviser and placement agents must be cognisant of fair market valuations at which the IPO will be fully subscribed.

“An outperformance of 50% to 200% from the IPO price is a disservice to the company that is listed,” he added.

This is because it could have commanded higher valuations upon listing. This, in turn, is subject to the market’s risk appetite during the entire IPO process.

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