Holy Week, the celebration of the event described in the Christian religion’s New Testament, as the resurrection of Jesus of Nazareth from the dead. Philippine Stock Exchange investors are perhaps looking for a similar “resurrection” of those recent issues that listed on the PSE through an IPO, Initial Public Offering.
Once upon a time, “IPO” was often an abbreviation for “Instant Profit Opportunity” and everyone wanted to be on board. No better example can be found than in the “Mother of all IPOs,” Petron Corp. (PCOR), which went public in 1994, said to have attracted 500,000 shareholders.
For price performance, the one IPO I remember best was Puregold Price Club. The stock listed at P12.50 per share in September 2011. Note this. The IPO was priced at about 12.5 times the retailer’s expected earnings for the coming year. That PER was the low end of the historical Price-Earnings-Ratio for the PSE Composite Index at the time.
From P12.50, the price was up 340 percent 18 months later at P43.60. Maybe not “Instant” but definitely an “Impressive Profit Opportunity.”
However, behind every silver cloud is a dark lining. The previous year, October 2010, Cebu Air/Cebu Pacific (CEB) listed on the PSE at an offering price of P125. The stock price rose 6.4 percent on listing day, which was the historic high.
On February 25, 2011, four months later, the stock was down 38 percent, closing at P77.30. The price did recover to its IPO price in 2016, but currently CEB is trading around P30.00.
PSE management is claiming that what the exchange needs for increased investor participation is “More IPOs,” presumably the good kind. After market hours though there is some “disappointment” that the recent batch of IPOs have not been a blessing to the Philippine equity market.
There are three factions, the Big 3, that work together to bring a private corporation to public ownership, and each has its own function and its own beneficial objectives.
The owners of the private corporation will decide to “go public” for several financial and business purposes. They must determine a general guideline as to how much of the company they are willing to sell and for how much. The IPO shares can come from the primary shareholders who then put the proceeds in their own bank account.
Shares can come from the corporation itself with the proceeds being used for debt repayment or business development. The final IPO can be a combination of selling from both entities, the first benefiting the original owners and the second the company.
The stock exchange is looking for companies to go public as they make a listing fee, and the stockbrokers are anticipating increased commission from the subsequent trading. A good stock market has a variety of listed corporations, large and small, which ideally should represent top-notch firms from all economic sectors.
The underwriter, usually a bank or its securities subsidiary, is tasked with putting the deal together including all regulatory requirements. But more importantly, the underwriter must “sell” the IPO shares and is responsible in most cases for pricing the IPO shares. Not too high so that the public will participate and not too low to get the owners the most for their share selling.
You would think that these three would naturally work closely together to bring a successful IPO to the market and beyond. But the reality is that once the company goes public and all three have received their piece of the proceeds, most of the time it is only the “fourth faction” of the IPO—you the public investor—that genuinely cares what happens to the price in the months and years after the listing day.
Corporate management will talk about how they are doing everything they can to “increase shareholder value.” Besides, the current share price is ultimately determined by the market.
The stock exchange will remind us that their job is to run a transparent and honest stock marketplace. Besides, the current share price is ultimately determined by the market.
The underwriter will show that they did thorough due diligence on the company and the pricing was based on what they saw as corporate “fair value.” Besides, the current share price is ultimately determined by the market.
If everyone did their job effectively and in good faith, why is the performance of the last 14 IPOs so dismal? Maybe, for example, it is because one issue came to market with an effective Price-Earnings-Ratio of 70. Another keeps getting suspended from trading for violation of the public ownership percentage. At least three others are deploying the IPO proceeds for other purposes and investments than originally stated in their listing prospectus.
Could IPO now mean “Imaginary Profit Obsession”?
E-mail me at mangun@gmail.com. Follow me on Twitter @mangunonmarkets. PSE stock-market information and technical analysis provided by AAA Southeast Equities Inc.