Always look at fundamentals: Research head

Investors should not read too much into the oversubscription rate of fresh initial public offerings


KUALA LUMPUR: Investors should not read too much into the oversubscription rate of fresh initial public offerings (IPOs) as an indication that when the shares are traded in the public domain they will receive a strong response.

"The oversubscription rate is only for the public portion of the IPOs, and for most of the second tier IPOs, the public offer is very small," said Mercury Securities head of research Edmund Tham.

"The public portion for second tier IPOs normally comes up to about RM10 million, unlike in the heydays when companies used to raise in excess of RM100 million, just from the public portion," Tham told Business Times.

In recent weeks the market has been hit by a row of fresh IPOs trading below their IPO price, soon after being listed on the exchange.

Among the IPOs that have faltered in recent weeks are PeterLabs Holdings Bhd, XOX Bhd, MCLean Technologies Bhd and Ideal Jacobs (Malaysia) Corp Bhd.

These companies are attempting to tap the retail investor market more than institutional investors, perhaps, because they are smaller in size, and are not within the market capitalisation size that falls under the radar of institutional investors.

Based on the data made available on Bursa Malaysia's website, smaller companies seemed to be more than willing to raise cash via the IPO route this year.

However, it should be noted that companies with a market capitalisation of less than RM500 million, normally, are unable to entice foreign portfolio funds to take up a stake in their company.

Although there would still be demand for such IPO-companies on the ACE Market, it will not be so much from institutional investors.

"Each IPO case is different. Investors should always look at the fundamentals and the pricing of the IPO," Tham said.

He said this is due to the various issues affecting the global financial markets presently, such as the US debt ceiling issue, and the sovereign debt issue in Europe (such as Greece).

Meanwhile, OSK Research head analyst and associate director Christopher Eng Poh Yoon said fund managers generally cannot invest in the ACE Market which limits its attractiveness given that retail participation in the Malaysian market continues to be somewhat lackluster.

"My view is that the listing of MSM Bhd and Bumi Armada Bhd means that a lot of institutional investors held back their funds to subscribe to these larger IPOs leaving less money for the smaller, less recognised IPOs," he said.