Distinguishing the real value of an IPO from the hype

One of the reasons why newly-listed companies often reporting weak results is due to the hype surrounding the initial public offering exercise.

ONE concern among market observers is the tendency for freshly-listed companies to report weak quarterly results shortly after listing.

On Bursa Malaysia, it’s been reported that more than half of the companies that listed between January 2022 and November 2024 have registered declining earnings.

Everyone who is familiar with the market knows that while earnings play a key role in a stock’s performance, they are not always the main determinant of a stock’s movement.

However, earnings are crucial for a company’s long-term survival – something investors should always keep in mind. One of the reasons why newly-listed companies often reporting weak results is due to the hype surrounding the initial public offering (IPO) exercise.

Before the IPO, there is a lot of excitement, and many companies and their promoters will endeavour to report attractive profits in order to match the expectations and, of course, to ensure the highest possible IPO price.

While this approach may seem logical in the short term, it is ultimately unsustainable.

Once the IPO is completed and the initial excitement settles, the company’s earnings typically “fall back” to reflect its true, underlying fundamentals.

This is when observers often notice the weak earnings materialising.

Companies that continue to report weak profits quarter after quarter, coupled with weak balance sheets, are often at risk of being delisted.

In many cases, the major shareholders of such companies may have exited a long time ago, leaving minority shareholders to reel in pain.

So, what can be done, and who is responsible?

This highlights the importance of conducting thorough research before making an investment decision.

While earnings are obviously an important component, there are many other factors to consider, such as the company’s industry outlook, past track record and strength of its management team.