IT goes without saying that the primary objective of all investors is to make money.
Here are the facts.
Of the 62 IPOs since the start of 2024, 31 are currently trading above the IPO price, 28 are trading below and three are unchanged from their IPO price.
This means that the odd of making money from an IPO is exactly 50 per cent. (If you had subscribed for the shares and held them).
In other words, it is better than a coin toss.
Worse, the price of 45 (or 73 per cent) of the 62 IPOs is now below their first-day closing prices – meaning if you had bought these shares on their debut, you would be making losses.
Of course, this is a simplistic point-to-point analysis.
In reality, stock prices fluctuate and one could have made money by trading during this period.
The point is that people making money was what created and sustained the bull market in the 1990s when people made money.
One of the biggest problems that Bursa is facing now, I think, is that many of the biggest, high-profile listings are mature companies at or near-peak
profits and their shareholders-promoters (pre-IPO) are using the stock exchange primarily to cash out rather than raise funds for growth.
Case in point: Table 1 shows the total number of IPO shares for four of the largest and highest-profile new listings in recent years.
For all four, there were significantly more shares offered for sale by founders/owners/promoters than new issuances.
That means the bulk of the IPO money raised goes to these pre-IPO shareholders rather than to the company.
In other words, the IPO is an exit strategy rather than a capital-raising exercise to fund future growth.
Some companies even took on debts to pay huge dividends to shareholders pre-IPO.
For example, Mr DIY paid dividends totalling RM635 million in the two years before its IPO and started life as a public-listed company with a net gearing of more than 126 per cent.
There is nothing wrong with using IPOs as an exit strategy.
It is one of the functions of the equity market.
The issue is that they are cashing out at fair, and even above fair valuations at a stage where the companies are, or are close to being, mature and at peak profits.
When you leave no money on the table for post-IPO investors, coupled with slow growth prospects, it is extremely hard to sustain interest and prices.
This is not hard to understand.
In the 1990s, financial institutions underwrote the IPOs.
So, they tended to push valuations lower to reduce their risks.
Today, the listing/placement of IPO shares is done through book running and consequently, valuations are already at or higher than the market – basically, what investors are prepared to pay.
The market capitalisation weighted average price-earnings (PE) multiple for the 62 companies at their IPO price is 23.6 times whereas the simple average is 16.2 times.
By comparison, the average PE for the FMB KLCI and FBM Emas Index was 15.2 and 16.5 times respectively over this period.
This means that all the IPOs, on average, were already priced at fair valuations, at least – and the larger–cap IPOs were priced at premium valuations.
Take, for example, the largest in terms of total monies raised since Lotte Chemical Titan in 2017 and the most richly valued IPO during this period, 99 Speed Mart Retail Holdings (listed in September 2024).
Its IPO was priced at nearly 35 times PE, well above the prevailing market average valuations.
I do believe that 99 Speed Mart is a genuine business, and the founders have executed very well to leverage changing consumer preferences, from big-store format to the convenience of neighbourhood shopping for daily necessities.
The company’s average transaction value of RM21.40 suggests that most customers purchase only a handful of items per visit.
Its strategy to focus on fast-moving products, curated to consist primarily of the most popular brands at low prices for the mass market has been very successful, underpinning its rapid store expansion.
Scale is an economic moat, for instance, giving the company significant bargaining power in purchasing and enabling it to charge suppliers additional fees such as product display fees, target incentives and distribution centre fees.
I think of 99 Speed Mart as the PAC-MAN of the mini-market industry, eating the market share of relatively less cost-efficient, small-scale mini-markets and sundry shops.
But is the stock worth 35 times multiples of profits? I estimate the company’s annual earnings growth at 10 per cent for the next three years based on its projected outlet expansion and same-store sales growth (SSSG).
Assuming a 50 per cent dividend payout and yield of 1.4 per cent at the current share price, that would give investors total annual returns of about 11 per cent.
That means investors will be paying more than three times the company’s expected earnings growth plus yields.
That is certainly not cheap, by most yardsticks, particularly if growth starts to slow over the coming years.
It reminds me of another large IPO, that of home improvement retailer Mr DIY in 2020.
That IPO, at RM1.60 per share, was valued at 31.6 times trailing earnings – sold on the promise of its considerable growth potential.
As I wrote back then, however, its rapid store expansion must come at the cost of lower sales per store, given the relatively small size of Malaysia’s population and addressable market.
Notably, the number of home improvement stores per million population in the country was already well ahead of that in Indonesia and the Philippines, just slightly below that in Thailand, and on par with some developed economies such as the UK.
As the number of stores continues to rise, the quality of this source of growth will inevitably deteriorate.
Retailers will always pick the best locations for the first few stores, with the largest catchment areas.
Subsequent outlets will push further into less lucrative locations and/or new outlets will start to cannibalise earlier, nearby stores.
Sure enough, Mr DIY’s SSSG has turned negative since 2023 – lowering the company’s earnings growth potential.
Total annual returns for the stock, including dividends, are now projected at only 10 per cent.
Accordingly, its valuations have been de-rated – its share price is currently falling from a high of RM2.70 (adjusted for dividends) to RM1.41.
At this price, Mr DIY is still priced at almost 25 times trailing earnings and more than double its projected total returns.
Those IPOs priced at or above fair valuations leave little to nothing on the table for retail investors, offering them little incentive to participate.
It is worse still when these companies pay out all the cash and even borrow to pay dividends on the basis that unsophisticated investors look only at earnings and not the balance sheet.
If the Securities Commission Malaysia wants to protect small investors, at least stop such practices.
And this is what we have been witnessing – declining retail participation in the local bourse and conversely, an increasingly dominant presence of local institutional funds.
To be sure, there are institutions (such as insurance) that invest primarily in lower-risk, mature companies that pay steady dividends.
For an equity market to thrive and retain vibrancy, however, there needs to be a wide range of participants, retail and
institutional.
And yes, a degree of volatility plus a healthy dose of speculative activities, which is not the same as market manipulation.
An IPO pipeline of quality and growing- companies will add to diversity and depth in the market that will attract more investors, improve liquidity and sustain higher valuations that will, in turn, attract even more quality companies to list here.
Given the ease of cross-border capital flows and increasingly cost-competitive stick trading platforms, there is intense competition for investor money.
The exchanges with the largest investment choices in terms of a mix of mature, high-yield and
high-growth companies from diversified sectors and businesses will attract the most funds, creating liquidity and higher valuations.
As a result, small stock exchanges will be increasingly marginalised by global and perhaps even domestic investors.
IPOs that are consistently priced to perfection also mean there is a minimal buffer to negative developments and news flow.
That is what we are now seeing, the sharp sell-off as market sentiment sours.
Once again, it’s not difficult to understand.
The thing is, when you burn your investors, it would be much harder to get them back.
Fool me once, shame on you; fool me twice, shame on me.
It works only if everyone wins, not just the promoters, the big funds and the investment banks.
Medecci Lineil leads a specialised quant team within Goldman Sachs’ investment banking division. He’s also a founding board member of consultancy firms in Kuala Lumpur and Singapore. Reach him at med.akilis@gmail.com.