Breaking the large IPO curse

MANY mega initial public offerings (IPOs) on Bursa Malaysia have failed to perform in recent years, with share prices remaining under water since their listing, leaving many investors weary of large IPOs.

99 Speed Mart Retail Holdings Bhd, listed at a price-to-earnings (PE) multiple of 35 times, initially seemed likely to fall into this group, especially given the lacklustre uptake of the IPO – oversubscribed by only 3.04 times.

However, it has defied the odds and now trades at a historical PE of more than 50 times, based on its share price of RM2.46 as of Oct 8.

On its debut on the Main Market of Bursa, 99 Speed Mart’s stock rose as much as 16.4% from its listing price of RM1.65, raising RM2.36bil in the biggest domestic listing in seven years.

Although the gain was not as significant as its low liner peers, it was the subsequent upward trajectory that caught investors’ attention.

The counter touched a 52-week high of RM2.54 on Oct 9, breaking into Bursa’s top 30 largest stock.

This means that as of that date, the stock had surged over 50% from its IPO price, and investors would have seen over 30% gains if they had bought the shares for RM1.85 at the opening bell on its maiden trading day.

On Oct 9, the stock reached a 52-week high of RM2.54. As of that date, the stock had surged over 50% from its IPO price, and investors who purchased shares at RM1.85 on the opening day would have seen gains exceeding 30%.

What makes 99 Speed Mart different and most importantly, can its performance be sustained over the longer run? Has the mini-market chain successfully broken the large IPO curse, paving the way for more substantial listings to thrive?

It is still early days for 99 Speed Mart, having listed just a month ago on Sept 9, but market experts expect the uptrend to continue, albeit at a slower pace.

Apex Securities head of research Kenneth Leong believes 99 Speed Mart’s share price performance has somewhat broken the curse, particularly for home-grown brands which have a dominant position in Malaysia or globally.

“However, bear in mind that companies operating in different sectors and (with varying) business models that aim to file for an IPO may see their fortunes differ,” he tells StarBiz 7.Dominant market presence

He opines that 99 Speed Mart stands out due to its home-grown status and dominant market presence, with more than 2,600 outlets.

“This is pretty similar to another home-grown retail giant, MR DIY Group (M) Bhd, which listed back in October 2020 and saw its share price surge by approximately 250% in about half-a-year post-listing,” Leong adds.

Apex Securities expects 99 Speed Mart’s performance to sustain over the near term, aligned with the increasing number of outlets, as it targets 3,000 stores by end-2025.

Also, the stability in the labour market and gradually rising wages among Malaysians will remain supportive of the growth outlook.

“Meanwhile, the improved outlook on Bursa Malaysia also led to better performance not only for 99 Speed Mart, but the general performance across stocks listed on the exchange,” Leong states.

That said, MR DIY, which raised RM1.5bil in 2020, only managed to post a relatively low gain on its maiden trading day versus its low liner peers that listed over the past year. MR DIY closed at RM1.75, up 15 sen or 9.4% against its IPO price of RM1.60 on its debut.

However, the stock saw significant movements in subsequent years, touching an all-time high of RM2.92 in April 2021, showcasing strong growth momentum shortly after its IPO.

As of Oct 10, MR DIY has surged about 50% year-to-date to close at RM2.17. The stock remains a popular choice among investors due to its consistent dividend payouts and stable revenue growth.

Likewise, 99 Speed Mart will likely mirror MR DIY’s trend.

“We expect 99 Speed Mart to follow a similar trend to MR DIY where it hit a peak of about 40-45 times PE before tapering off,” Malacca Securities head of research Loui Low tells StarBiz 7.

“At RM2.50 to RM2.60 with a forward PE of 36-40 times, 99 Speed Mart is likely to be fully valued. For it to trade at these PEs, the counter would have to record a net profit of between RM600mil and RM700mil, which may only be seen in financial year 2026 (FY26) to FY27,” he adds.

Inclusion in KLCI Top 30

Low believes the ultimate catalyst for 99 Speed Mart would be its inclusion in the KLCI Top 30 as this would attract foreign institutional investors.

“99 Speed Mart is seeing a similar trend as MR DIY, whereby foreign institutional investors are starting to pick up the stock.

“You can see above RM1.90-RM1.95, there is strong buying, which I believe comes from foreign investors as they want to participate in the economy that is benefitting from the stronger ringgit,” he explains.

Hong Leong Investment Bank (HLIB) Research expects 99 Speed Mart to record a revenue compound annual growth rate (CAGR) of 13.1% from FY23 to FY26, with a net profit CAGR of 15.8%.

The projected growth will be driven by the opening of 250 retail outlets annually and stable same-store sales growth of 2% per annum, adds HLIB Research.

Founded by Lee Thiam Wah in 1987 as a traditional sundry store, 99 Speed Mart plans to have around 3,000 outlets by 2027, up from the 2,526 outlets as at Dec 31, 2023.

Meanwhile, Nixon Wong, chief investment officer at Tradeview Capital Sdn Bhd, believes that 99 Speed Mart offers a unique value proposition with its large market cap and significant daily trading volume, making it attractive to foreign investors.

“The listing of 99 Speed Mart is impressive, especially after such a long hiatus, and it showcases the company’s distinctive profile that few can match.

“Its success is largely due to the nature of its business, growth potential, and favorable macroeconomic conditions,” he explains.

“However, this success should not be seen as representative of the entire large-cap listing segment on Bursa, as each company’s performance depends on its individual business model and external factors,” he explains.

As a consumer staple, 99 Speed Mart aligns with healthy local consumption trends and stands to benefit from the upcoming Budget 2025, which is expected to be consumer-friendly.

“Although its current valuation is at a premium compared to most listed consumer peers, this premium may persist as it serves as a proxy for the consumption patterns of the domestic middle-class segment.

“With its ongoing expansion into new locations, 99 Speed Mart’s growth is likely to continue until it reaches the saturation point in the mini-mart sector, expected in the next two to three years, depending on the pace of expansion,” Wong says.

He notes that 99 Speed Mart’s goods and service offerings stand out from other convenience stores, as it primarily focuses on daily necessities and fast-moving consumer goods.

This strategy appeals to neighbourhood shoppers and housewives, rather than just catering to the working class segment and tobacco or beverage buyers.