IPO boom feeds corporates. Will it benefit investors?

Edgewise

IPO boom feeds corporates. Will it benefit investors?

By: 
The Edge Singapore
04/12/17, 08:00 am

SINGAPORE (Dec 4): After a stellar performance in its first year as a publicly listed company, spray paint maker Samurai 2K Aerosol is raising more money at a valuation some five times above its IPO price. The Malaysian company, which makes coatings for the automotive industry, was the first to come to market this year and saw its shares jump 25% when it made its Jan 16 debut on Catalist. The company had placed out 20 million shares at 20 cents each, to raise net proceeds of $2.35 million.

In a Nov 21 announcement, Samurai 2K said it has spent $1.2 million of its IPO proceeds — mostly on the expansion of its production facilities. Now, the company is raising another $9.6 million for business development and expansion. It intends to place out up to 10 million new shares at $1.008 each, which represents a discount of nearly 10% to the last volume-weighted average price prior to the announcement.

Samurai 2K’s shares have soared more than 400% since its IPO, and are now trading at 157 times earnings. Investor sentiment was no doubt buoyed by the company’s recent results. For 1HFY2018 ended Sept 30, it reported unaudited earnings of RM6.4 million ($2.1 million), more than four times the earnings recorded for the same period last year. Turnover for the six months doubled from the year before to RM34.5 million.

Indeed, Deloitte Singapore observes that this year’s crop of Catalist-bound IPOs has demonstrated better profitability than those that came to market in the previous two years. At the same time, some of these companies have big backers. Japanese restaurant group RE&S Holdings, which listed on Nov 22, counts Temasek Holdings as a cornerstone investor. Event and concert production company ­UnUsUaL, which listed in April and is the board’s second-best IPO performer this year, secured Singapore Press Holdings as a pre-listing investor. UnUsUaL is trading at 58 times forward earnings.

With economic growth up and market sentiment becoming more bullish, companies are able to come to market at higher valuations and raise more funds. That has fuelled a surge in new listings, as we highlighted in our Cover Story last week (“IPO rush”, Issue 807). There were five listings in November alone. Another could come this month. On Nov 24, lab testing and diagnostics company Clearbridge Health filed a preliminary prospectus on Catalodge.

The increase in the number of IPOs is typically good for investors, as they have an opportunity to acquire stakes in companies and participate in their growth. Yet, overly high valuations can lead to disappointments.

Malaysian marketing and shopper engagement services provider shopper360, for instance, is trading at some 10% below its IPO price. Its stock had gained as much as 15.5% on June 30, its first day of trading. In July, the company posted a 61% y-o-y slump in earnings for FY2017 ended May 31. This was attributed to the lack of significant one-off gains that the company enjoyed the year before, particularly from the sale of property. Excluding exceptional items, shopper360 says its earnings of RM13.4 million would have been 53% higher than the RM8.8 million recorded the year before. Turnover for FY2017 was up 17% y-o-y at RM132.5 million.

Another company whose shareholders are underwater is Aspen (Group) Holdings, a Malaysian property developer. It listed on the Catalist in July at 23 cents, and is now trading at more than 10% below that. On Nov 30, the company said it is acquiring a plot of industrial land in Selangor for RM190 million via a 30%-owned associate. It plans to develop the 71 acres into an e-commerce hub comprising integrated logistics, transportation and warehousing facilities that will benefit from direct access to the KTM railway.

Other listings that are underwater include gas supplier Union Gas Holdings, down 4%; human resource services provider HRnetGroup, down 5.6%; and property developer World Class Global, down 3.8%.

Meanwhile, the two IPOs that made their debut on Nov 30 got off to a fair start. European commercial and industry property play Cromwell European Real Estate Investment Trust ended the day at 55.5 euro cents, 0.9% above its IPO price of 55 euro cents. Local restaurant operator No Signboard Holdings closed at 29 cents, 3.6% above its IPO price of 28 cents.

Market watchers still see a steady pipeline for the Singapore IPO market, even as rival Hong Kong pulls ahead with listings such as Sea, formerly Garena, and is set to gain momentum with a move to accept dual-class share listings. Investor appetite seems evident and bolstered by sufficient liquidity.

However, investors should exercise some restraint. On Nov 30, strategists at investment bank Goldman Sachs cautioned that with the prolonged bull market, average market valuations are now at their highest since 1900. Goldman Sachs says a market correction is almost certain, although it also suggests putting even more into equities as they have greater risk-adjusted returns.

Investors should not forget that only a strong business proposition and intrinsic value can cushion a fall when the market takes a turn.