Tuesday, 23 October 2012

Astro's Major Owners Take Advantage of IPO Craze

Share drops below IPO price on the second day of trading, providing a clear reminder to investors that IPOs are not a sure thing

Astro's stock price closed at RM2.74 today, the third day of trading, well below its offer price of RM3.00 to retail investors.

This is a clear reminder that IPO stocks don't just go up, they might actually come down. The surprising thing about Astro is that it fell so soon, i.e.on the second day of trading.

I wrote an article on my malay blo,g observing that many stocks fall below their IPO price (click here). However, the drop usually occurs over time, when people start to forget about their 'newness'. Those that drop soon are usually saddled with problems, but this is not the case with Astro.

What does this mean for the small investor?  It means you can buy Astro at a lower price, without having to go through the IPO application and balotting process.

In fact, you can buy the stock now cheaper than many institutional and cornerstone investors who purchased at the price set for them.

The fall had been attributed to a few factors, including forced sellling and people making stop loss deicisions, but in my opinion the main reason is that the IPO was set at a price that was to high, whichleft nothing on the table for investors.

High IPO Price

According to a TA analyst, the P/E ratio for Astro at the IPO price was 32 based on forecasted 2013 earnings.  This may be a little bit too high, and can only be acceptable if earnings can rise dramatically in the future. But based on the consensus opinion, this was not going to happen in the next two to three years. 

Furthermore, if you read articles during the run-up to the IPO, you would find that there were quite a few analyst who thought that the price was too steep.

Another thing to consider is that when Astro was taken private by the owners in 2010, the total market value for Astro in the privatisation process was  RM8.3 billion.

At the price of RM3.00 per share, the value of the new Astro entity minus foreign operations is RM15.6 billion. This is almost double the value in 2010.

If the stock was not taken private, I believe its market value would not come close to RM15 billion.  At that time, Astro hardly generated any interest from investors.

So why then, that during the IPO, investors suddenly become interested again?  Is it because that they feel that IPO's are a sure way of making money?

The major shareholders have taken advantage of investors' preoccupation with IPOs to 'unlock' the value of the company, which was falling off the radar, and obtain a much higher valuation now.

From a business point of view, this is a brilliant move. We cannot blame them as nobody forced anybody to by any shares at RM3.00.  In fact, they were still oversubsribed even at that price!

The quick fall of Astro below its IPO price provides valuable lessons.  Firstly there's no guarantee you'll make a quick buck when subscribing to IPO's.  Secondly, there's a risk you'll make even bigger losses percentage wise if you use leverage to buy shares (although you may also win big) and finally investors should treat IPO stocks in the same way that you treat other stock in the market.

Even IPO stocks need be analysed before you make the purchase decision and if you did, you'll probably realise that IPO's could have easily stood for Its Probably Overpriced!


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