Initial Public Offerings (IPOs) In Philippines 2017
IPO or Initial Public Offering is one of two ways for a company to get listed in a stock market. The other indirect way, is through backdoor listing, which is another topic altogether. For this article, we will discuss what an IPO is, its role in the Philippine Stock Exchange (PSE), and the newly or just about to be listed companies in 2017.
What is IPO?
IPO or Initial Public Offering is the first time a company’s stocks is offered to the public for purchase, the issuing company being the only seller and with a set IPO price. This price is announced before the offer period, wherein excitement in the market is generated prior the grand listing date. After this process, the company becomes ‘publicly-listed’ or ‘publicly-traded’. Once the IPO period is over, the sold shares are then traded just like other stocks with both the buyers and sellers coming from the investing public, or retail investors.
Small companies looking to expand often use an IPO as a way to generate capital. Capital can be used to fund research and development, fund capital expenditure, or even used to pay off an existing debt. Another advantage is an increased public awareness of the company because IPOs often generate publicity by making their products known to a new group of potential customers. Subsequently this may lead to an increase in market share for the company. At the same time, an IPO may also be used by founding individuals as an exit strategy. Many venture capitalists have used IPOs to cash in on successful companies that they helped start-up.
Another advantage of having a corporation’s shares publicly listed is the beneficial rate of stock transaction tax (0.5% of the gross selling price), as opposed to 5% to 10% rate of capital gains tax imposed on shares not listed with the PSE.
What’s the role of IPO in PSE?
The number of IPOs being issued is usually a sign of the stock market’s and economy’s health. During an economic downturn, the number of IPOs drop because it’s not worth the hassle to list a company when share prices are depressed. When IPOs increase, it usually means the economy is getting back on its feet again.
The PSE index has recently breached the 8,300 mark on the back of improving corporate earnings and the country’s economic fundamentals.
However, while continuing to attract companies, the stock market has yet to see the return of the IPO heyday of the 1990s or even prior to the 2008 global financial crisis when there were double-digit listings, peaking at 21 companies in 1994.
What are the forthcoming and the latest IPOs for this year?
Last year, there were four IPO listings, comprising of the Villar family’s Golden Haven which raised ₱778 million; Cemex Holdings Philippines (₱25 billion), Pilipinas Shell Petroleum Corp. (₱18.4 billion) and Shakey’s (₱4 billion). This year, the PSE hopes to see anywhere between six and eight.
So far, companies that has gone public are:
- Wilcon Depot (₱7 billion)
- Cement maker Eagle Cement (₱8.6 billion)
- Property developer Cebu Landmasters (₱3 billion)
- Dennis Uy’s Chelsea Logistics Corp. (₱8 billion)
- Financial service aggregator ExpressPay (₱528 million)
Others in the pipeline include:
- Technology firm Audiowav (₱2.7 billion)
- Investment holding company Pure Energy Holdings (₱1.5 billion)
- Xeleb, a subsidiary of listed gaming technology company Xurpas Inc. (₱736 million)
- Fruit shake chain The Big Chill (₱500 million to ₱600 million)
How to invest in IPO’s
There are two ways to participate in an IPO. The first way is through an online broker subscription.
If you already have a trading account with an online broker, chances are they will offer some number of shares to clients like you by announcing it on their website. However, the challenge here is the limited number of shares that the broker can offer, and so allocation of shares is not guaranteed.
If there are more buy requests than the number of available IPO shares allotted to your broker, a raffle is usually conducted to distribute the same. If you do not get chosen, then you will end up with no shares of the IPO. As such, you can try the second method, which is the Local Small Investors Program (LSIP).
LSIP is PSE’s own initiative to encourage more small investors to participate in IPO’s and a direct way to buy IPO shares from the underwriters or a bank or any other financial institution that pledges to buy all the unsold shares in an issue of new shares. A company going through an IPO must allocate shares for this program. The program is also designed to reach out to as many small investors as possible with its ₱25,000 maximum investment limit and accepts minimum board lot. Most clients have a higher chance of securing IPO shares with the LSIP.
But you have to take into consideration that investing in an IPO is just like buying regular stock and needs careful research. The key to profitable IPO investing is to know the company behind the stock. Most of the information you will need can be found in the IPO’s prospectus: the business model of the company, performance of the industry where the company belongs, earning power reliability of the firm based on its financial history, trustworthiness of the controlling shareholders, and the capability of the members of the management team.
Once you become familiar with the company, then the next step is to evaluate the IPO price to see if the offer is acceptable. You need to know how much you can potentially profit from investing in the IPO. One way to check is by getting the P/E ratio or price-earnings ratio, which is the ratio for valuing a company by measuring its current share price relative to its per-share earnings.
Consider also the liquidity of the IPO. How much of the company’s outstanding shares shall be available for the public to trade? If the free float or the proportion of shares of a publicly traded company that is traded in the stock market is small, say at minimum of 10%, then you can expect the stock to be more volatile because there are only a limited number of shares available. Higher volatility means higher risk because the share price can swing at a large percentage in a few days if it is actively traded.
If you are investing for the short term, this can be a good opportunity for you. But if you are investing long-term, choose an IPO with bigger free float, say 25% or more so that there is higher stability in the share price movement. Institutional investors, such as foreign funds, prefer larger free floats so they can trade with significant number of shares without necessarily affecting the share price.
Overall, it is good to buy an IPO if you know what you are buying. Don’t buy just because everyone is going crazy about it but uy because it is a good investment.