IPOs are not so hot
By Duruthu Edirimuni Chandrasekera
With the market shooting up as it is right now, there are many firms who will be enticed to come into the market through Initial Public Offerings (IPO) enticed by the attractive valuations, but all these may not be ‘snapped’ up by investors who may prefer to keep the money in the market as they fear that there may be ‘really bad IPOs’ in the coming months, according to share market experts.
Scam artists
“Amongst the IPOs (that are to come), a lot might be some scammers or companies not even near ready for the responsibilities concerned with a listing on the Colombo Stock Exchange (CSE). Either of these could lead to a bad IPO (ie under subscription, or market price crashing post IPO). The responsibility of ensuring that this does not happen, lies with investment bankers and the regulators (to ensure that these are weeded out),” Deshan Pushparajah, Manager Corporate Affairs Capital Alliance Holdings Ltd, said.
Milinda Ratnayaka, Research Analyst SMB Securities agreed saying that the CSE trading multiples are at an all time high and are compared to the highest multiples in Asia along with countries like Hong Kong and Singapore. “So this is the perfect time for 'bad' companies to seek an exit route through the gullibility of the investors (PCH being a good example),” another analyst noted.
Market savvy
Mr. Ratnayaka noted that many investors tend to be pretty IPO savvy and the general thought is that IPOs are 'cheap'!
However, Mr. Pushparajah noted that IPOs continue to be a significant attraction to most investors and traditionally it has been a great entry point for retailers, but of late, the large oversubscription of issues and the consequent negligible allotments have become a caveat. “Investors may believe now that keeping the money in the market might be a better option.”
IPO craze
He said that certain recent IPO’s which didn’t perform as expected may have now rationalized the “IPO craze” with investors now more choosy of what they invest their money in. “You may not see levels of 60 times oversubscription again,” he said, adding that an investing public that asks more questions is very good for the country.
He also noted that the market run in the last two months has been an anomaly (although everyone has enjoyed it) and will not last forever. “Therefore the investors will stand to gain by buying into good IPO’s at valuations which are at a discount to the markets. In any case, the banks are now more forthcoming with bank guarantees for IPO applications. This enables investors to both have the cake and eat it at the same time,” he pointed out. He said that what is evident from past post-war small sized IPOs is that the market is now ready for bigger ones.
He said that large IPOs (above Rs.1 billion) may in effect draw much more interest than smaller ones (with investors being more confident about reasonable allocations.
No black or white!
Sarath Rajapakse, Director Capital Trust sees it differently. “There are no good and bad IPO's. We should aim to get as many companies as possible to go public and be listed at the CSE. Markets grow and become strong when practically every significant organization in the private sector has their shares listed at the bourse,” he said, noting that equity funds should dominate the capital structure of a company to bring it strength and stability.
Waruna Singappuli, Head of Research NDB Stockbrokers noted that it’s good to get more companies in (through IPOs) so that the market has more depth. “It is the responsibility of CSE and the manager (or investment bank) to the issue to ensure these companies do adhere to the accepted norms etc (prior to the listing as well as after the listing),” he added.
He also said that as long as the pricing is attractive it is unlikely the issue would be under-subscribed or the price will crash post IPO. “The valuations you see in the CSE are very much sentiment driven (more than pure fundamentals based), so long as that factor is met IPOs should do well,” he noted.
Insurance Board to send superannuation funds law for Treasury nod
The Insurance Board of Sri Lanka (IBSL) is preparing to send a draft law bringing Commissioner of Labour approved superannuation funds under IBSL to the Treasury for approval, according to IBSL sources.
An IBSL official said that all necessary amendments were drafted and sent to IBSL in February by the Central Bank (CB), who initiated this move, whereby the IBSL board has sanctioned the draft law last month.
He added that the CB has concluded that fund managers of a life insurance fund are similar to fund managers of a superannuation fund. “This was done in a bid to better regulate these funds, while paving the way for these to be invested in the capital market,” the official said.
The International Monetary Fund, he said was also keen to see the government bringing in pension funds to the capital market in a bid to develop this sector.
Presently, there are about 170 such private provident and pension funds with about 150,000 members and assets amounting to nearly Rs. 125 billion, registered with the Commissioner of Labour (CL).
“Although these funds are regulated by the CL, the supervision does not include prudential rules and guidelines.
The absence of a regulatory and supervisory system for private superannuation funds has been identified as one of the gaps in the regulation of the financial system,” the official added. All commercial banks, Unilevers, Sri Lanka Telecom and Mercantile Sector Provident Funds Society, John Keells Holdings are some of these superannuation funds.
Firms exposed to private equity better prepared to go public
Firms which go in for private equity are better prepared to list publicly, according to capital market experts. “Businesses should finance their growth carefully. Not all firms have the ability to fund their growth by directly going to the share market. This is why they seek intermediary capital financing (such as private placements) which augur well for them in the longer term - especially when they decide to list their firms publicly,” Nissanka Weerasekera, Regional Managing Partner Aureos Capital told the Business Times.
He said such moves enhance their risk appetites to go in for initial public offerings, etc.
Private placement or private investment capital is money invested in a company usually from private investors in the form of stocks and sometimes bonds. “Such companies are better prepared for the markets (when listing) rather than those who haven’t had any exposure to private equity,” Mr. Weerasekera added.
Analysts agreed saying that when businesses source funds for growth, commercial bank loans pose a snag as they’re often intended for businesses that have been around and have shown a steady stream of profitability. “Private placements are an attractive alternative for growing companies and also a cheaper way out,” an analyst said.
Some argue that the decision to go for private equity solely depends on a firm’s valuations, its profitability, assets, etc. “If all these are in order, then a company can get their public issue over subscribed. If not, it’s better to go for private equity,” Deva Ellepola, Vice President Acuity noted.
He also noted that private placements on the other hand offer better pricing, a firm can pick and choose who to offer the stakes and there will be better price discovery.
Another analyst said that in many private placements, detailed financial information is not disclosed and the need for a prospectus is waived. “Also since the placements are private rather than public, the average investor is only made aware of the placement after it has occurred,” she noted.
Moving the emotion out of share market investing
The Colombo bourse has seen too much of some emotional investments –especially in weak stocks in the recent past, which is mainly due to the herd approach by some investors, but there’s a way out of this, according to stock experts.
Pattern points
Says Srimal Liyanage, a research analyst based in the gulf-focusing on local shares, that when trading in speculative shares it is highly recommended to study the buying pattern of the particular share and daily number of trades.
“Discussions with your broker and other contacts will be an added advantage at this point. Generally it is better to sell shares when the market is up and when you see the buying interest reducing for the share,” he said. During the past few months, the bourse has witnessed traders shoring up into shares without fundamental value and getting caught in the peaks and valleys of such share cycles.
He noted that Colombo traders have a knack for piling into investments at the top and selling at the bottom – especially when they get caught up in media hype or fear and buy or sell investments at the wrong turns.
He says that when getting into fundamentally sound companies one should identify the justifiable value of the company and it is always better to hold shares until it reaches the justifiable price. “This is the strategy implement by international and local funds. For fundamental shares its better to do a proper valuation and identify the prices at which to buy and at which level to exit, irrespective of the market movements,” he added.
Some say that human behaviour is an intriguing subject, which explains why well educated and experienced experts and professionals often behave in a seemingly very irrational manner especially when they are trapped in particular situations.
“One such situation especially important from a financial market point of view is; when an individual is a member of a crowd. The market is a very good instance of a crowd. That is why some people buy when they are supposed to sell and vice versa. In the recent past two off shoot branches of Economics and Finance has emerged as a result, which are Behavioural Economics and Behavioural Finance,” Sarath Rajapakse, Director Capital Trust Securities noted, adding that in the past the false assumptions that human beings are always rational, able to access and assimilate all available information and that they always behave in such a manner so as to maximise their utility has been abolished. “The reality is that they are mostly irrational and impulsive.”
He went on to say that technical analysts ignore and disregard so called fundamentals and base their recommendations and predictions on market direction and market momentum. “We are more interested in 'what is' opposed to 'what should be', which is why technical analysis is always right and fundamental analysis is nearly always wrong,” he said.
Feeds on greed
Milinda Ratnayaka, Analyst SMB Securities noted that stock market feeds on greed. “People often lose money when they try to disregard fundamentals. They also should not be highly leveraged,” he said adding that emotions play a major role when investing because they tend to sometimes trump logic.
He said that it’s better for traders to always prepare in advance and have a plan that one is committed to stick with for a particular investment horizon.
“You should always plan your trading strategy ahead of investing by identifying support and resistance levels of shares. Therefore, it is important to control your emotions when investing to reframe from making mistakes even if it’s the hardest thing to do.”
Do your homework!
Nikitha Tissera, Head of Research Sampath Securities noted that there is absolutely no substitute to doing your own homework. "Its good if you have a knowledgeable, well informed broker who keeps your interests first. But don’t invest unless you are convinced that you are getting value," he cautioned.
Analysts say that investing in a diversified portfolio against solitary shares, investing in fundamentally strong firms and not identifying one’s real tolerance for risk are other aspects of avoiding emotional trades.
CSE tries to speed up live feed on website
The Colombo Stock Exchange (CSE) is trying to reduce the time gap between published web information and the actual information, officials said.“Due to the increased number of trades, the time gap between the actual and the published information has widened. Now we’re trying to rectify that and increase the live feed,” Tushara Jayaratne, Manager Business Development CSE, told the Business Times.
He said CSE is presently testing the feed. The CSE in April increased its bandwidth capacity due to website hits increasing by 300%. “We increased the CSE website bandwidth last year November from 1.5 mega bites (MB) to 10 MB. For the last one month alone there was an increase of more than 300% in hits, according to reports from e-futures, our Internet service providers,” he added.
Last month, the CSE also increased the memory capacity of the CSE website server from 2 Giga Bites (GB) to 8GB.
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