Don’t rely on IPO over-subscription rates

by **Cals** Mon 11 May 2015, 02:12

Don’t rely on IPO over-subscription rates

Saturday, 9 May 2015
By: RISEN JAYASEELAN

ALL eyes will be on the performance of Malakoff Corp Bhd’s shares once it begins trading on May 15. Although its initial public offering (IPO) had garnered a lot of interest, considering it enjoyed a 13% over subscription rate by institutional investors, that is hardly any indication that the shares would enjoy a similar demand once its begins to be traded.
But why is that? If the demand for Malakoff’s shares exceeded supply by 13 times, then shouldn’t these very investors (who did not get the amount of Malakoff shares at the IPO as they wanted) be lining up their orders to scoop up Malakoff’s shares if they are traded in the market at the same price as the IPO? What will be even more confounding is if these investors are no-where to be seen even if Malakoff’s shares drop below the RM1.80 IPO price level.
And yet, this has happened time and again in the Malaysian context. Felda Global Ventures Holdings Bhd and AirAsia X Bhd are good recent examples, where its over-subscription rates did not really tally with the ensuing performance of the stock in the market, although in FGV’s case, the stock had initially performed well only to begin sliding down a month after its listing.
So why is the over-subscription potentially a misleading indicator? Part of the reason could simply be that many of the funds participating place a larger order from what they really want so as to ensure that they get enough shares in the event of demand outstripping supply.
The book building process by the advising banks is also somewhat a complicated one. Interested buyers not only bid for the quantity of the shares they want, they also state the prices at which they want the share. This is part of the book building process from which the allocation and final prices of the offering is determined by the advising banks and issuer.
In the case of Malakoff, it is interesting to note that while it was initially seen as not such a “hot” IPO, interest was surprisingly strong once its road show began
What had work to the advantage of Malakoff is the increasingly grim outlook for IPOs on the Malaysian market. The few large ones that are supposed to come to the market may be thinking twice. A news report indicated recently that Sime Darby Bhd has postponed indefinitely its plans for an IPO of its automotive business.
Another big IPO that was anticipated to hit the market this would have been that of Weststar Aviation Services. Weststar is the largest provider of chartered helicopters to oil and gas companies in South-East Asia. However the sluggish oil price and overall depressed market sentiment is believed to have given the owners second thoughts about a listing now. In fact insiders say the owners of all companies slated for IPOs this year will will be watching closely the performance of Malakoff’s shares once its listed. It would appear that even they aren’t convinced about Malakoff’s high oversubscription rates to deem Malakoff’s IPO a huge success already.