Why new IPOs fizzle out

By Al Labita

TIME was when new initial public offers (IPOs) were selling like hot cakes, drawing a huge financial bonanza for the issuing companies. Because of low valuations such as price earnings ratio (PER), upbeat stock trackers used to flaunt them as the darlings in the share market.

Well, not anymore.

Lately, not a few IPOs turned sour, succumbing to the unpredictable vagaries of a stock market ruled by greed and speculation. Take aircon maker Concepcion Industries (CI) which fared miserably in its market debut. When listed last Wednesday on the Philippine bourse.

Amid a perceived weak market demand, CI shares fell by almost four percent to P25.15 apiece at the opening bell, a slip quite common these days for companies opening their ownership to the investing public for the first time. In more ways than one, CI’s over 50-year track record in the appliance manufacturing business failed somehow to impress upon the discriminating investors despite earlier road shows in Hong Kong, Singapore and Malaysia.

Poor Reception

Majority owned by the industrialist Concepcion family, CI had earlier planned to raise P2.7 billion from the IPO proceeds, the bulk of them to beef up working capital. What happened to CI appeared to be a market trend for new IPOs as traders opt for selective buying and selling positions in a market awash with newly issued shares.

Poor reception also spurred some companies to either downsize their IPO volume or pare down the selling price, obviously to woo investors’ interest in their shares up for grabs. Examples are tourism-oriented operators Travelers International and Discovery World Corp. which scaled down the volume of their IPO size and reset their market launch. Travelers, part of the corporate empire of ethnic Chinese tycoon Andrew Tan, operates the luxury hotel-cum-casino Resorts World, while Discovery owns a string of world-class hotels and resorts in tourism havens Boracay and Palawan.

High PER

Despite the much-hyped credentials like revenue stream, the IPOs of both companies failed to lift their stock price in their recent market debut. Robinsons, the retail wing of taipan John Gokongwei, also suffered a similar fate as its IPO price succumbed to selling pressures following an abbreviated market debut last month.

Why the slew of new IPOs lost their luster may be traced to the steep rise of PER of listed firms, now pegged at 19 times versus 2014 projected earnings, the highest in Southeast Asia, but comparatively lower than in Japan. The sudden shift of focus of cash-rich investors from emerging markets such as the Philippines to developed western counterparts also explains the outflow of foreign money.

Foreign funds – also known as hot money – account for 60 percent of the local stock market’s liquidity, hence their pullout usually trigger wild fluctuations of prices of stocks traded on the Philippine bourse.

Outflow vs Inflow

Latest data from the Bangko Sentral showed that US$20 billion flowed out from the equities market as of last month as against US$24 billion in inflow. High-yielding US treasury bills are now back on the investors’ radar screens after the American Congress eased last month the borrowing limits of the Obama government.

The spate of disasters in the Philippines and adverse projections of the economy next year also exacerbated stock market sentiments, driving out investible funds to the offshore capital markets. For six trading days since the other week, the bellwether Phisix index – the national economy’s show window to the outside world – shed by one percent to over 6,000 points, implying a depressed market.

As expected, the selldowns – pointing to a subdued capital plight – came across the board, pulling down share prices of big cap issues such as Ayala Corp., Megaworld and Petron Corp.

Time to Buy

But as punters love to say, it’s time to buy when share prices are down, ostensibly the key reason why state-run pension funds launched a multi-billion pesos buying spree. Despite slumping returns on investments from stocks in this year’s first half, the Social Security System (SSS), Government Service Insurance System (GSIS) and Pagibig remain bullish on the equities market.

Amid stinging criticisms of its nearly four percent dive of profit from stock investments to P18 billion in this year’s first half, the SSS is setting aside at least 30 percent of its huge P350 billion investment reserve fund in equities, a risk the GSIS and Pagibig are willing to take–whatever the costs may be later–in a feast-and-famine market.