Initial Public Offering : IPO

In the current economic uncertainties, initial public offering or IPO is not going to be
famous. Essentially, IPO is the first sale of stock of a private company, new or old, to the public. So often, smaller or private companies use IPO as the main platform to seek capital injection for growth or expansion programs and to become publicly traded companies. Statistically speaking, according to Bursa Malaysia, the highest number of new listings was 92 in 1996. The number was massively declined during a period from 1998 to 2001, when Malaysia was hit with the financial crisis. In 2002, the number was starting to grow especially new listings on MESDAQ market.

In the process of getting listed on Main or Second Board, an underwriting firm assists the issuer in shaping the criteria of the IPO including type of security, the best offering price and the best time to offer to the market. For average investors or beginners, you might need to be concerned on the offering price. However, I need to warn you on the risk of investing in IPO.

For private investors, it is fairly difficult to forecast how the stock would react on the first day of listing especially if you could only refer to the lengthy prospectus of the issuers and some good words from your brokers. You probably would not have any historical data to analyse. You may need to put your entire belief on the management team and the projected performance that they ought to achieve in the next 5 years or so. Thus, many risk adverse or conservative investors concur that the uncertainties looming around their future values would deter them from putting their cash on IPOs. Having said that, after taking into account the potential reward, I am confident you would include IPO in your investment list.

To buy or not to buy
The timeframe to trade IPO should be very short. Take a day or two. And I, personally, would not go beyond 5 trading days. On these initial days, most investors rush to buy a new stock in frenzy, but then, like everything else, interest wanes when as the true picture of the company emerges and the market will determine the fair value of the new stock. You would not want to be caught at this moment.

What is more, many IPOs issued last year had never been able to recover to their initial opening prices. Usually on the day two of listing, you should be able to assess the responsive of the market and to figure whether the market would just go sideways. I favour to monitor the volume. It would tell the whole story especially the momentum of the investor ’crowd’.
The capital market in 2008 were so bearish even Perwaja (5146) and TM International
(also known as Axiata) had lost more than halves of their expected value. Everybody
seemed to preserve their capital and played a wait-and-see game.

But in 2009, you might want to re-consider IPOs. For the last three new listings, the
market seems to be more optimistic and bullish. For example, Samchem Holdings
(5147) was opened at RM 0.69 and at the highest RM 0.95 on the second day of listing.
About 38% gain in two days. Not bad aye? Handal Resource (7253) was opened on 30 July 2009 at RM 0.90 though the original price was 72 cents. Handal Resource continued to gain heavy interest in the market when it recorded the highest price on the second day at RM 1.47. Amazingly almost 100% return.

Although the figures look overwhelmingly appealing, you may also want to assess the principal activities and the industry of the IPOs. Given at certain stage of economy, some sectors might be bearish and normally the market would not respond as you expected. Is it too late to join the crowd? I believe not.

Some IPOs are still at the early stage. In fact, the Securities Commission of Malaysia (SC) had approved seven IPOs, so far. Five IPOs were for the Main Board and the balance for the Second Board. The performance of the previous three aforementioned IPOs indicates that the capital market is responding well.

Conclusion
Investing in IPOs is a risky business but it may come with startling rewards. Even so, some factors should be taken into considerations such as offering price, timing, the principal activities in the industry and overall market sentiment (bullish or bearish). There is no perfect blueprint on what is working and what is not. The best thing to do is assess available information and then make your judgement call. If it didn’t work, cut your losses. Re-visit when things calms down.