The return of the IPO fever

The year 2006 marked the much anticipated return of the feverish trading through initial public offering (IPO) and additional share issuances with a total of P57.22 billion raised from the stock market, exceeding levels not seen since 1994.

Philippine Stock Exchange president and chief executive officer Francis Lim said this was the biggest amount of capital raised from the stock market since the heydays of stock trading in 1994-1995.

The 2006 figure is 10.7 percent higher than the P51.7-billion fresh equity raised from the stock market in 2005.

Improving government revenues, double-digit growth in exports, lower domestic interest rates, and record overseas remittances have helped set the stage for a return of confidence in the stock market and the country as well.

Figures from the PSE show that bulk of the new equity amounting to P29.7 billion represented proceeds from follow-on primary offerings of six companies – Metropolitan Bank & Trust Co. (P6.6 billion); Ayala Corp. (P5.8 billion); Megaworld Corp. (P5.6 billion); Robinsons Land Corp. (P5.4 billion); Universal Robina Corp. (P4.8 billion); and Chemrez Technologies Inc. (P1.5 billion).

According to the PSE, at least P19 billion was raised from the IPO of four firms this year – PNOC Energy Development Corp., which was the last company to list on the exchange in 2006, raised P9.09 billion excluding the proceeds raised from the secondary offering, followed by the Lopez-controlled First Gen Corp.(P9.09 billion), fish exporter Aliance Tuna International Inc. (P180.9 million); and online brokerage house CitisecOnline.com Inc. (P149.6 million).

The balance represented offering proceeds from stock rights (P2.3 billion) and private placements (P6.2 billion).

On its listing day, Alliance Tuna closed 50 percent higher from its IPO price of P1.35 per share on strong buying interest. PNOC-EDC was also a big hit, rising 42 percent to close at its peak of P4.55 on initial listing date as investors snapped up the company’s shares on good fundamentals.

In 2005, only two companies – Manila Water Corp. and SM Investments Corp. – went public, raising a total of P33.5 billion. SMIC raised a record-breaking $530-million from the maiden offering of its shares to the public.

In 1994, a total of 21 companies listed on the stock exchange, raising P37.4 billion. Among these companies were Petron Corp., SM Prime Holdings, Universal Robina Corp., Megaworld, Aboitiz Equity Ventures, Cosmos Bottling Corp. and Cebu Holdings Inc. The IPO fever made instant millionaires when new issues soared. IPOs such as Benpres and Petron closed more than double their IPO price during their first listing day.

The IPO fever symbolized the boom in the 1990s when virtually all kinds of company shares were gobbled up by investors of all stripes. That fantasy land, however, disappeared when the Asian financial crisis erupted in July 1997, taking shareholder wealth with it.

The economy plunged and several companies that went public teetered on the edge of bankruptcy, leaving gullible investors holding the proverbial empty bag.

Following the crisis, the value of stock offers diminished, reaching a low of P186.14 million in 2003 as companies avoided going public during the longest bear market.

The IPO market bounced back somewhat in 2004 – the best environment since the bubble – but remained far below the earlier peaks.

But the IPO fever is now said to be back, thanks to the string of positive developments on the country’s political and economic fronts. "It appears all but one of the offerings in the last two years have generated significant returns to investors basing on current prices (gains ranging from 18 percent to as high as 660 percent). So far, more than 90 percent of those that have gone public have made good or even exceeded their promises," said AB Capital Securities’ Erwin Balita.

Lim said the continued advance of the stock market benchmark PSEi, which is now at its highest level in nine years and nine months, has created a strong urge among many companies to offer their shares to the public rather than borrow from banks.

The PSEi has grown by 42.3 percent since the start of the year.

"Companies sometimes entertain second thoughts about offering their shares to the public, especially when the market is uncertain. But the continued rise in the PSEi, which we have been enjoying since 2004, has provided these companies with the confidence to offer shares to the public. And they are not regretting their decision," said Lim.

Lim said developments in the political and economic fronts will play a crucial role in further spurring the growth of the stock market.

"We are facing an election year, but I am sure our political leaders understand that the market can sustain its growth in 2007 and in the coming years, only if we can keep in place correct, sober and predictable political and economic policies," Lim said.

Contributing to the continued upsurge of the market is the strong interest from foreign funds. Net foreign buying surged 191.2 percent last year to P68.53 billion from only P23.53 billion in 2005.

The stock market ended 2006 with a bang on follow- through buying due to the traditional year-end window dressing. While it failed to test the 3,000 level, the main composite index inched up by 1.33 percent or 39.16 points to close at 2,982.54, its highest close since April 7, 1997. The broader all-share index also rose 16.67 points to 1,860.34.

AB Capital Securities said the strong closing for the year may likely spill over to the first trading session of 2007.

The broker firm said it may take a while before the market can finally break out of the 3,000 level since it hasn’t had a major correction yet.

Lim expects 2007 to be a much better year than last year, noting that many companies (some of them part of the big conglomerates that dominate Philippine business), have expressed interest to tap the market to help finance their expansion projects.

Broadcast giant GMA Network Inc. is reportedly eyeing an IPO in the second half of the year or after the elections.

More energy firms are also expected to go public this year. These include the state-owned Philippine National Oil Co. and Aboitiz Power Corp.

An IPO boom usually means business for many – from the printer who gets to print the forms and other documents to roadside distributors, sub-brokers, underwriters and financiers, apart from merchant bankers. The buoyant market is pushing a lot more companies to come out with IPOs.

Lim said the trend is widely expected to continue, with investors seeing a varied crop of companies looking to float stock. Small to mid-cap growth companies are expected to be the biggest group pursuing IPOs this year.

"We at the PSE have not doubt that the stock market can grow further and contribute more to the economy as long as leaders from different political groups continue to exhibit increasing maturing and sobriety in resolving their differences," Lim said.

The PSE had a market capitalization of P7.17 trillion as of end-December 2006 or 20.6 percent higher than the previous level.

So while IPOs are returning, there’s still a long way to go to mend the bruises from the last boom. " I don’t think anyone wants to go back to the speculative market we had before," an analyst at a foreign brokerage house said.