Stock Commentary

Medilines Distributors just had the worst IPO in modern PSE history

Merkado Barkada
Medilines Distributors just had the worst IPO in modern PSE history
What will happen today is still a mystery.
Merkado Barkada

The medical distribution company, Medilines Distributors [MEDIC 1.61 30.00%], owned by Manny Villar’s brother, Virgilio Villar, is the first IPO in my memory to crash so hard on opening day that it smashed into the price floor.

MEDIC never once even traded at its offer price of P2.30; the first trades of the day came through at P2.12 (down 8%), and things literally never got better. In just 30 minutes, MEDIC had reached a low of P1.68/share (27% down).

It dead-cat bounced up to P1.82/share (21% down), but steadily lost steam over the final hour of trading to hit its price floor of P1.61/share just before the close. 

Worst IPO in memory: Going back to the early days of MB, I covered the Axelum [AXLM 2.96 0.34%] IPO which spent some time in the red on its first day, but ended up down over 6%. My message to readers at that time was this: it’s a good lesson that not every IPO is destined to moon hard. Well, MEDIC just taught us all a follow-up lesson, which is that not only might some IPOs fail to moon, they might also totally crash and burn. MEDIC’s -30% easily beats the -9% that Converge [CNVRG 31.85 2.00%] did on its first day. 

Does this hurt MEDIC? Not really, or to put it more accurately: not yet. The company already received the proceeds of the IPO during the offer period. Same goes for Virgilio Villar; he already sold his shares to IPO offer buyers a couple of weeks ago. The huge price drop doesn’t even materially hurt Villar (yet) since all of his shares are under mandatory PSE lockup for a year anyway. Even if he wanted to, he wouldn’t have been able to join yesterday’s panicked selling. 

Some big churn: It wasn’t like MEDIC crashed on low volume, either. Over 387 million shares changed hands yesterday, which is over 46% of the 825 million shares in the public float (the number of shares that were sold at the IPO). While the first-day churn wasn’t as heavy as say Fruitas [FRUIT 1.24 0.80%] IPO (99% churn), it’s definitely heavier than previous recent Villar Family IPOs: AllHome [HOME 10.00 4.17%] (23%), AllDay Marts [ALLDY 0.69 2.82%] (6% churn).

But what about the stability fund? What stability fund? Virgilio Villar and PNB Capital (the sole issue manager, lead underwriter and sole bookrunner on the IPO) decided against using a stability fund. After a long stretch of IPOs used stability funds through 2019 and 2020, it seems like ditching the stability fund has come into fashion. Half of the upcoming 4 IPOs have also decided against using stability funds (Solar Philippines Nueva Ecija [SPNEC 1.00 pre-IPO] and Haus Talk [HTI 1.50 pre-IPO]). Perhaps this is what HOME’s IPO might have looked like if it had not employed a stability fund (though it’s hard to compare since MEDIC’s crash was backstopped by a 30% price floor; when HOME did its IPO, the price floor was down at 50%)? Hard to say.

Valuations and comparables: MEDIC thought that it was valued at 32.5x FY21 estimated earnings per share, and the market was like: “how about 23x?” So far. COL Financial said that MEDIC’s closest non-PSE comparables trade at 14.7x FY21 earnings, which would still give MEDIC a pretty far fall from where it is now to reach a similar valuation multiple. A 14.7x multiple would predict a MEDIC price of around P1.04/share, which is just below today’s new price floor. 

So now what? Well, for anyone that bought the IPO and held through yesterday’s crazy trading day, you’re sitting on a 30% loss (so far). The stock needs to go up 43% from here just to break even. If you bought MEDIC just because you were hoping for a pop, you should really take a long and hard look at your position. Don’t get stuck in a relationship with a stock that you were only hoping to have a one-night stand with. If you are a long-term holder, though, see if anything has changed that might invalidate your thesis (or further validate it). Like Charlie Munger said (paraphrased), if everything still looks good in the long-term, who cares about the short term? (Not sure if he was saying that about a 30% one-day loss, though).


What will happen today is still a mystery. Would yesterday’s drop have been deeper without the intervention of the price floor? Does MEDIC need to fall further to reach a supply/demand equilibrium, or will it float back up a bit to bring some relief to white-knuckled bagholders?

I have no idea! We don’t have any on-point comparisons currently trading on the PSE that we could look at to get our bearings, and the price action yesterday was so wild that I don’t feel comfortable predicting what will happen next.

It would be tempting for the Wizards of Hindsight to say things like “This is why I never touch anything Villar”, or “You could tell by lack of retail interest that it was going to sink.” On the first point, tell me more about ALLDY’s first-day 50% gain.

The second point might have more juice, but it’s hard to infer much from a situation with an overbought institutional tranche with spotty oversubscriptions on the retail side. Similar situation for CNVRG, wasn’t it? And that didn’t swim like a brick.

Getting back to MEDIC, and to the use of valuations specifically, is the Philippine medical market different enough to justify a higher multiple?

Is MEDIC as a company different enough to command a higher premium? Was valuation even a primary component of yesterday’s selling? We’re about to find out. 


Merkado Barkada is a free daily newsletter on the PSE, investing and business in the Philippines. You can subscribe to the newsletter or follow on Twitter to receive the full daily updates.
Merkado Barkada's opinions are provided for informational purposes only, and should not be considered a recommendation to buy or sell any particular stock. These daily articles are not updated with new information, so each investor must do his or her own due diligence before trading, as the facts and figures in each particular article may have changed.

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