We analysed 100 largest IPOs by market cap since 2012, comparing their current market caps and price-to-earnings (PE) valuations versus at listing time. Here are the results:
For those of you who remember the heyday of the early 1990s, being allotted shares in an IPO is almost akin to striking the lottery. This attracts substantial retail investor interests, which creates liquidity, since one is almost assured of making money. Over the past decade, however, the odds of making money by subscribing for an IPO have fallen to just about 50:50. We compared this to 52 IPOs that were listed between 1990 and 1995. The results are:
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Clearly, the odds of IPO subscribers making money were significantly better back then. Yes, we understand there are some caveats to this simple comparison. For one thing, we only looked at the share price performances within a relatively short two-year period, primarily because the market collapsed during the Asian financial crisis (AFC) and would have skewed all results thereafter. Our analysis also has a survival bias as we only managed to obtain information on the 52 companies that are still listed today. We attempted to broaden the sample size to all IPOs during that period by reaching out to Bursa. But the data they offered to sell us was quite limited (at a price that we thought was very expensive) and not particularly useful to our analysis. This is short-sighted and unfortunate as we think better archival and open public access to historical data sets are very useful for research and studies, which could help investor decisions and offer insights into ways to improve or develop our capital markets.
But let’s just take this simple analysis at face value. Why did IPOs prior to the AFC perform so much better? Was it because of the exceptional environment (the super bull rally) at the time or was it the quality of the companies going for listing? Perhaps there have been major changes in the way IPOs were valued since then, that limited their post-listing price gains and therefore, reduced retail interests? We think it is a combination of all the above factors. People making money created the bull market where people made money.
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For sure, we saw many big-name IPOs from 1990 to 1995 — large companies with strong businesses such as Tenaga Nasional, Telekom Malaysia, Petronas Gas, Hong Leong Bank, Gamuda and MBM Resources — in part because of the government privatisation drive. But more importantly, these are companies with solid long-term prospects, that one can be reasonably assured that they will continue to grow post-IPO. And they did. We compared their profits today versus that in the year they were first listed.
In other words, some 60% of companies from the 1990-1995 cohort are making higher profits today (versus at listing) compared to less than half from the 2012-2023 cohort. Why? The obvious reasons are that the more recent IPOs are of poorer quality, have weaker earnings resilience (for instance, as operating conditions change) and/or these companies were already at peak profits (and valuations) when they listed or, worse, they front-loaded future earnings. The latter has further implications.
One, it is possible that the pre-IPO profits were “dressed up” or “front-loaded” to obtain higher valuations and prices for listing — but are clearly not sustainable longer term. This can be done by, say, delaying necessary expenses, maintenance or capex and thereby boosting short-term profits, capitalising certain costs instead of expensing them, and so on. If so, the question would be, is the IPO due diligence sufficiently robust? And when there are material discrepancies, pre- and post-IPO, are there sufficient monitoring by the regulators and, more critically, enforcement and repercussions?
Peak profits could also happen simply because the IPOs consist of more matured companies — where sales growth have already peaked (or near peak, at the top of the S-curve), and therefore, profits-margins fall as costs continue to rise at a faster clip.
As we mentioned above, there were 47 out of 100 companies in the 2012-2023 cohort where market cap had fallen post-IPO. Of these 47 companies, 13 in fact reported higher profits but market cap fell due to lower PE valuations. The implications are: one, the IPO prices were based on valuations that were too high to start and/or the companies’ growth failed to live up to expectations and thus, the stocks got derated. Remember, high-growth companies typically trade at higher valuations and vice versa. As Table 2 shows, both the average (35 times) and median (22 times) PEs for the 13 companies where PE contracted post-IPO were higher than the average market PE (FBM Emas index) of 18.6 times for the period.
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Based on our own perception, we think there has been a pendulum swing in terms of IPO valuations methodology (though we couldn’t perform a similar analysis on the 1990- 1995 cohort due to lack of publicly available data, including the average market PE during that period). In the 1990s, financial institutions underwrote the IPOs. So, they tended to push valuations lower to reduce their risks. Regulators (the Capital Issues Committee at that time) also set lower PE bands for new listings then.
Today, the listing/placement of IPO shares is done through bookrunning and consequently, valuations are already at market, what investors are prepared to pay.
In short, we think that IPOs in recent years are priced to near perfection — that is, valuations favour the promoters (founders/owners and pre-IPO shareholders, including private equity and venture capital). That means leaving little on the table for retail investors — and therefore, little incentive for their participation. Low investor interest equals low trading volumes — and low valuations (remember, demand and supply). It only works if everyone wins, not just the promoters, the big funds and investment banks.
And many of the recent IPOs were indeed “mature” companies — where their low growth prospects ultimately could not sustain the high IPO valuations. We performed a deeper dive into eight of the largest IPOs by market cap (excluding privatisation by GLC/GLICs) over the past decade (see Table 3).
Six of the eight companies had significantly larger offer for sale shares versus new share issues during IPO. That means more money raised went to the promoters instead of the company itself. This strongly suggests that IPO was an exit strategy rather than capital raising to fund future growth. Some companies even took on debts to pay huge dividends to shareholders pre-IPO. Case in point: MR DIY paid dividends totalling RM635 million in the two years prior to its IPO and started life as a public listed company with net gearing of more than 126%.
Additionally, some promoters continued selling down their stakes in the market post-IPO, including Astro, 7-Eleven, MR DIY, CTOS, Leong Hup and AirAsia X. The shares sold were primarily taken up by local institutions such as the Employees Provident Fund (EPF), Retirement Fund Inc (KWAP), Permodalan Nasional Bhd and local unit trusts, some at high valuations during IPO.
We understand the reality is that Malaysia’s private capital market is far less developed compared to the US. In other words, there are few options for owners and venture capitalists to exit except through an IPO. By comparison, because of its depth, the US capital market (debt and equity) is often the main source of funding for companies, to raise money for expansion, research and development, mergers and acquisitions, and other investments.
In Malaysia (indeed in many Asian countries), traditional bank borrowings are still the most common source of funding. However, if the IPO is mostly used for promoters to exit, and share prices fall after IPO (whether it is due to overpriced IPO or poor quality business), that means the public loses, for the benefit of owners, tycoons and promoters. Bear in mind that public investors are not just retail investors but also public funds, whether EPF-type or mutual funds and unit trusts.
Conclusion
Investing in an IPO on Bursa has been a hit or miss for retail investors. There is about a 50:50 chance of making money by subscribing for an IPO. Here is a more recent sampling — there were eight Main Board IPOs in 2023, four (50%) of which are currently trading below their IPO prices while one is flat, meaning only three (38%) are higher. (We know for the ACE Market, the post-IPO prices remain largely higher, as highlighted in a recent The Edge article. We excluded ACE companies because we do not trust the market prices, given their liquidity and size.)
As our data analysis shows, these companies are trading at lower prices either because profits fell and/or valuations contracted. We understand that the regulators are working very hard to attract more companies to list on the local bourse. And part of the incentives are likely higher valuations at IPO. However, when the valuation methodology is “too efficient” (priced to perfection, or beyond), when reported earnings at IPO are “front-loaded” and not sustainable, or when the outlook for continued good growth is poor, there is little prospect of post-IPO gains. That discourages retail participation and saps market trading volumes. The point is, we do need to leave some money on the table. Case in point: For the eight IPOs in 2023, six are now trading at lower PE multiples.
The intention behind a listing, not only whether the company qualifies, is also important. Are the founders and pre-IPO investors merely looking to cash out? Should we be more worried that local institutions are taking them out at high valuations? Is the public subsidising the tycoons? Worse, when profits fall after IPO, it hurts overall confidence in the market. We won’t name names here but some companies are using Bursa as their personal money printing machine, repeatedly issuing new shares and diluting minority interests when proceeds fail to generate additional profits. Should there be greater oversight, and critically enforcement, by the regulators? A robust stock market is not just having more listed companies, but good quality companies. Lowering quality to increase quantity is not a good idea.
Box Article: Online-only shareholder meetings must now STOP … the Covid-19 pandemic is long over
There is a reason why annual and extraordinary general meetings are mandatory for all public listed companies. They serve the purpose of transparency and good governance — a forum for minority shareholders to raise questions and concerns, and for the board of directors and top management to address those issues, before any proposed resolutions (ordinary and special) can be passed.
During the Covid-19 pandemic, the holding of physical general meetings was dispensed with in favour of virtual meetings, for obvious reasons. However, the world has since moved on. And yet, many companies on Bursa Malaysia continue to conduct ONLY VIRTUAL general meetings.
Both the Securities Commission Malaysia and Bursa (stock exchange operator) have remained silent on when, if ever, companies must revert back to physical general meetings. This is despite repeated transparency concerns highlighted by minority shareholders and the Minority Shareholders Watch Group (MSWG). Some of the issues raised by MSWG include unanswered questions or unsatisfactory answers, awkward pauses and insufficient allocation of time for questions. Under current guidelines, companies have the discretion on whether to share individual questions, those submitted prior to the meeting as well as those raised during the meeting, with all other shareholders. Many do not. That makes it easy for questions to be ignored altogether — only questions that are addressed by the board are displayed during the meeting — translating to lack of transparency and governance.
By comparison, even though the Singapore Exchange(SGX) too switched to virtual meetings during the pandemic, it also put guard rails in place. For instance, Singapore Exchange Regulation (SGX RegCo) requires companies to answer all shareholder queries that are sent in, and that the questions and company responses are made available on the SGX platform between 48 and 72 hours before the deadline for the submission of proxy votes. All queries raised during the general meetings and the accompanying answers must be made similarly available after.
In 2023, Singapore launched a public consultation into virtual, hybrid or physical general meetings following transparency and lack of interaction concerns raised by minority shareholders. In July 2023, SGX RegCo mandated that all companies must return to conducting their general meetings physically. Companies can choose to complement physical meetings with a virtual meeting option.
Not having physical meetings, which ensures all answers are given, goes against the rights (to attend, to ask questions and to communicate their views) of all shareholders. Ensuring better governance will, without question, boost investor confidence in the stock market. The Covid-19 pandemic is long over. There is no reason to NOT make physical general meetings mandatory again.
— End of Box Article —
The Malaysian Portfolio outperformed the FBM KLCI again for the week ended May 15, gaining 2.8% compared to the benchmark index’s 0.1% decline. All stocks in our portfolio closed higher with the biggest gainers being Insas-WC (+14.9%), CCK Consolidated Holdings (+8.0%) and IOI Properties Group (+5.6%). Last week’s gains boosted total portfolio returns to 203.1% since inception. This portfolio is beating the FBM KLCI, which is down 12.4%, by a long, long way.
The Absolute Returns Portfolio also finished higher last week, up 2.6% and lifting total returns since inception to 4.3%. Sentiment in the US market continued to improve, with the S&P 500 index recouping all lost ground, and more, from the recent sell down triggered by the now higher for longer interest rate expectations. The top gainers last week were Tencent (+5.7%), SHK Properties (+5.6%) and OCBC (+5.1%) while DBS was the only loser, down marginally by 0.4%.
Disclaimer: This is a personal portfolio for information purposes only and does not constitute a recommendation or solicitation or expression of views to influence readers to buy/sell stocks, including the particular stocks mentioned herein. It does not take into account an individual investor’s particular financial situation, investment objectives, investment horizon, risk profile and/ or risk preference. Our shareholders, directors and employees may have positions in or may be materially interested in any of the stocks. We may also have or have had dealings with or may provide or have provided content services to the companies mentioned in the reports.
