Fund manager: Small and mid-cap stocks offer higher growth and valuations
THE initial public offering (IPO) pipeline for stocks on Bursa Malaysia is set to move up a gear this year with a number of large offerings slated for listing on the stock market.
The resurgence of large IPOs, surely, is likely to pique the interest of the market. However, not everyone is enthused about the large listings on Bursa Malaysia.
The disappointment stems from the fact that the vast majority of IPOs listed on Bursa in recent years have underperformed, and now cornerstone investors – often the large domestic institutional funds – have voiced their dissatisfaction over the valuations post-listing.
It would seem that the lethargy and underperformance of large IPOs in recent times, headlined by the steep decline in the value of Felda Gobal Ventures Holdings Bhd (FGV), Malakoff Corp Bhd and even Astro Malaysia Holdings Bhd, have seen big institutional funds ending up being disappointed after coming in to support them.
“The reality is that we institutional investors have always borne the brunt of a lot of the big IPOs,” says one institutional investor.
“There are so many examples of IPOs not having seen the light after being listed.”
In 2012, Bursa saw a number of big IPOs hitting the market. FGV headlined the entry of the large listings, as it was among the world’s biggest IPOs at that time.
From the RM4.55 offer price on day one of trading, shares in FGV slid to RM1.63 yesterday as drop in earnings, questions over its management and unfulfilled expectations have led to a fall in its share price and losses for the big funds that had backed the IPO.
The same was seen with the relisting of Malakoff, which went to the market at RM1.80 a share.
A number of issues have caused its share price to slide to RM1.03 yesterday. For Astro, meanwhile, the company’s share price has struggled to hold above its IPO price of RM3 a share and is trading at RM2.56. However, in the case of Astro, its adjusted share price for the dividends it has declared enabled investors to make a slight profit on the basis of total returns.
The one bright spark in terms of the large IPOs has been IHH Healthcare Bhd. Coming to the market at RM2.80 a share, shareholders of one of the world’s largest healthcare companies must be pleased to see its shares trading at RM5.57 yesterday.
What investors might be worried about is the pace of interest that has been set by the Lotte Chemical Titan Holding Bhd IPO, which after being repriced to RM6.50 from RM8 a share, has fallen since its IPO earlier in the week.
It closed at RM6.41 yesterday. One fund manager suspects the drop in the share price was caused by retail investors and non-cornerstone bumiputra investors approved by the International Trade and Industry Ministry selling their shares in the open market even though there is in place a programme by the promoters to sell back their shares to the company at RM6.50 a share.
With Bursa set to host the listing of Edra Power Holdings Sdn Bhd, which is reportedly seeking to raise US$1bil from its listing, and KFC operator QSR Brands (M) Holdings Sdn Bhd, institutional investors will fret over a potential repeat of waning interest post-IPO.
One of the reasons that large market-capitalisation IPOs have underperformed is down to valuations. Investors will balk at paying too steep a price with nothing left in terms of upside once the issue hits the market.
Like in the case of the Lotte IPO, one institutional investor says he did not participate in the first round of the Lotte IPO when it was priced at RM8 a share because it did not meet his expectations.
“We participated in the second round after Lotte repriced its IPO,” he says.
Striking a balance
One of the grouses fund managers have about the current IPO market is what is left on the table post-listing. With modern issuances now seeking to generate as high a return as possible for the issuer, some fund managers feel that highly pricey IPOs will make it hard to justify participation if the trend of poor performance post-listing persists.
“Sometimes you need to balance between institutional investor interest and the company’s interest,” says an institutional investor.
“But if it is one-sided, then even though we come in to support an IPO, we end up losing money. Institutional investors are tired of that.”
The IPO market has changed over the years. Back in the 1990s when corporate Malaysia was seeing a wave of large IPOs hitting the market as privatisation fever gripped the market, investors note that large market-capitalisation IPOs were priced with much more upside than their modern counterparts.
“Back then, it was mandatory to launch an IPO at a specific price-toearnings (PE) range. That provided a lot on the table in terms of upside for IPO investors,” says a fund manager.
The mid-single-digit PEs that the previous IPOs gave drew in lots of interest, as many knew that the shares once listed would boom. Coupled with the strong growing economy, IPOs back then had lots of room for potential growth.
The hindrance to modern IPOs is that investment bankers try to get as much value as possible for their clients, and as a result, the pickings are slim post-listing.
“It is always lopsided against institutional investors. I think ultimately, the whole idea is to diversify your investors and know that ultimately if everyone loses money, the investor will get fed up.
“So, I think there should be a balance that needs to be struck on this matter,” says the institutional investor.
A fund manager says it is rare for his firm to participate in IPOs, but that does not mean that it will not do so.
“For us, we have to have enough information on the company and its earnings potential. We really have to know the company before we invest,” he says.
“We have to justify in writing why there is a need to invest in an IPO. The higher valuations today make it harder to do just that,” adds the fund manager.
At a time when large IPOs are struggling to capture significant gains post-IPO, mid-capitalised stocks that enter the market are finding greater favour among fund managers.
One of the reasons is that these companies are priced cheaper than the large IPOs, and offer more upside once the stock is listed on the stock market.
“Small- and mid-cap stocks offer more growth and better valuations. Companies heading to the market have to offer investors more upside,” he says.