For many investors, the only real exposure they have to the IPO process occurs a few weeks prior to the IPO, when media sources inform the public. How a company gets valued at a particular share price is relatively unknown, except to the investment bankers involved and those serious investors who are willing to pour over registration documents for a glimpse at the company's financials.
The company tries to walk a very fine line. In THEORY, it should want the IPO price to be as close to the "opening market" price as possible, because that would mean that whatever value the market assigns to the stock will go directly into the company's bank account (since the only thing it gets directly are the proceeds from the first sale.) HOWEVER, the last thing it wants is for the market price to be lower than the IPO price, because that implies that the market thinks the company was overvalued, and once downward momentum starts, it may well be the only thing people remember about the IPO (just like FGV).
Another aspect of IPO valuation is industry comparables. If the IPO candidate is in a field that already has comparable publicly traded companies, the IPO valuation may be linked to the valuation multiples being assigned to competitors. The rationale is that investors will be willing to pay a similar amount for a new company in the industry as they are currently paying for existing companies. In this case Petronas Chemical was which they compare themselves to.
In addition to viewing comparables, an IPO valuation depends heavily on the company's future growth projections. Growth is a significant part of value creation and the primary motive behind an IPO is to raise more capital to fund further growth. The successful sale of an IPO often depends on the company's plans and projections for aggressive future growth.
So therefore, the company tries to err somewhat in the other direction, and price the IPO about 10-20% below where they think the market really is, because that way, if they guess correctly, the price of the stock will immediately rise, and the market will be signaling that it's a hot company, thereby making the overall company more valuable.
Lotte Chemical Titan (LCT) had offered an initial IPO price at RM8.00, which they THINK the market value of its price would be around RM8.80 according to the theory above and compare to PChem. Their confidence may also boosted by the recent overwheeming IPO proceeds from other companies (especially Eco World International which received 9 times oversubscription).
There was 21 million retail shares (approx. 4.6% of total number of IPO shares) unsubscribed at the end of the closing date. It was quite shocking to me given that RM8.00 was quite reasonable vs its peer, PChem (maybe I am too optismistic, haha). Most of the research reports set LCT's TP at only RM8.08 (wow, 1% growing space...). I believe overall the investors may preceived RM8.00 was too pricey for LCT. As a result, LCT decided to fix its IPO price at RM6.50 and offer share buy back option (fixed at final retail price, RM6.50) which is up to 59,200,900 IPO shares subscribed by the affected investors should they wish to exit their investment in LCT (not those ordinary shares traded in the open market after launch). So with RM6.50 relaunched IPO price and share buy back option but undersubscribed IPO share, do they good or bad for the applicants?
In humble my opinion, this is a really good bargain that we can't find often. These are the reasons
1. IPO price at RM 6.50
The initial IPO price at RM8.00 was putting LCT at P/E 15x, although it is still consider lower compare to its peers. The new IPO price RM6.50 would put LCT at P/E 11.40, which is to me, way below compare to its peers. There will be bigger room to grow.
LCT has 50% dividend policy, which expect to deliver 25 to 30 cents DPS per year. DY was only 3-4% at RM8.00. Investors have to aim at faster capital growth rate since the DY was almost comparable to fixed deposite. But the DY will be 4%-5% at RM6.50. Now the DY become acceptable and "holdable" for long term even capital growth rate were so so, less pressure on the investors' capital in LCT.
2. Share Buy Back Option
You may refer the buy back option, T&C in the link below
http://disclosure.bursamalaysia.com/FileAccess/apbursaweb/download?id=80540&name=EA_GA_ATTACHMENTS
Request form for buy back can be downloaded in the link below
http://disclosure.bursamalaysia.com/FileAccess/apbursaweb/download?id=80541&name=EA_GA_ATTACHMENTS
It provides a safety net for the applicants IF the stock price tumbles during the 1st day of trading (touchwood), which is very unlikely to happen given the fact that RM6.50 is consider slightly undervalue compare to PChem. How often can you buy a share with the condition: gurantee 100% fund return if you are not happy at the price that you purchased within 5 days?!!
3. Undersubscribed
- 100% success rate for the current applicants, you shall get what you applied. Simple as that. When the cake is big enough for all the guests, no one will go home with empty/half empty stomach.
- With lower subscription rate, there will be less opportunist to flip the share price during the 1st day of launch. Also because of the price of RM6.50, it is less attrative for them to flip (maybe this is also one of the reason contributed to below expectation subscription rate)
- Like what Harry Teo said: be careful at the crowded place (人多的地方要小心). Please like his FB page if you haven't done so. You shall get a lot of useful information in the FB page. Eco World International had 9x times oversubscription rate, the share price was flipped from RM1.20 to RM1.36 during the 1st day of trading then gradually sank to RM1.0+ over few weeks, now EWINT was floating at around RM1.10. Safer with less crowd (or opportunist).
*Disclaimer: The information above is only for sharing purpose, it does not contain buy or sell call. Trade at your own risk.
http://klse.i3investor.com/blogs/ifrit2020/126758.jsp
