The valuation matrix

REPORTS that Lotte Chemical Titan Holding Bhd is having to reprice its initial public offering (IPO) are unexpected, but not necessarily out of the ordinary.

The book-building process is one in which investors can throw in whatever price they feel they want to pay for the shares, and sometimes, that price could be below the indicative price range. This is likely what transpired in the case of Lotte Chemical. The company was looking to value itself at a historical price earnings (PE) multiple of 14.2 times earnings, which fell just above the range of PE multiples of selected comparable companies that trade at between 4.7 times and 13.7 times.

Could it be this fact that got investors wanting a lower price?

Perhaps. But if that is the case, it is puzzling. There are many companies in different sectors on Bursa Malaysia that have less specialised businesses than Lotte Chemical and yet command much higher PEs. If investors are unwilling to fork out money for a successful chemical company valued at 14.2 times historical earnings, could they be also likely to shy away from the many companies that trade at much higher PEs on the local exchange?

Lotte Chemical’s PE is also lower than that of Petronas Chemicals Group Bhd’s earnings multiple of 15 times. It could be that investors are generally taking a more cautious approach to the market going into the second half of the year.

It should also be noted that Lotte Chemical’s offering is massive, seeking to raise around RM5bil. It is one of the biggest listings in Malaysia in recent years. It cannot be compared with all the small IPOs proclaiming huge oversubscription rates, which at times are only taken up by friends and family of the owners.

Lotte Chemical’s listing is a huge boost to our market, and hopefully this repricing incident does not impact the proposed local listing of another mega-IPO, namely, that of Brunei’s largest lender, Bank Islam Brunei Darussalam, which reportedly wants to raise more than RM2.1bil in proceeds.