When ‘good’ IPOs go bad – why listings stumble and how to evaluate them
Many recent IPOs face a structural disadvantage because they are relatively small companies
[SINGAPORE] Despite the lacklustre performance of many Singapore initial public offerings this year, first-time investor Sri Haran has no regrets buying shares in Foundation Healthcare.
“I was attracted to the company’s long-term growth potential,” said the 31-year-old, who bought shares in the Temasek-backed healthcare group a week after its mainboard debut.
But his optimism has yet to be rewarded. Foundation Healthcare’s shares have traded broadly flat since listing on Jul 8, reflecting a wider trend among this year’s new listings.
As at market close on Friday (Aug 7), five of the nine major IPOs this year were trading below their offer prices, with two flat.
The situation is not much different for last year’s crop of IPOs. Six out of the 12 listings last year – excluding secondary listings and reverse takeovers – are still underwater as at close on Friday (Aug 7), with one flat.
Why recent IPOs are struggling
Many recent IPOs face a structural disadvantage because they are relatively small companies, said Carmen Lee, OCBC’s head of equity research.
Without the backing of institutional funds, these stocks often suffer from low daily trading volumes, making them highly vulnerable to price drops once initial retail interest wanes, she added.
Veteran investor Gabriel Yap said how an IPO is structured can also determine its early performance.
The executive chairman of investment firm GCP Global cited UI Boustead Reit, which listed this year with an occupancy rate below 90 per cent. Compared with established real estate investment trusts that consistently exceed that level, such a portfolio is less compelling to institutional investors, making post-listing weakness more likely.
Local listings also face fierce global competition for capital, with many funds preferring bigger companies with strong growth potential, said Lee.
What to look for before buying
Retail investors should pay close attention to valuation before subscribing to an IPO, said Lorraine Tan, Morningstar’s director of equity research for Asia.
“More often than not, IPOs that stay above their offer price reflect valuations that leave upside,” she said, adding that investors should avoid companies priced with little to no upside relative to its fair value.
Yap – who recommended investors to “stay away” from Singapore IPOs entirely – said investors should also remember that newly listed companies lack a public track record, making management credibility harder to assess.
Rather than focusing on management buzzwords, investors should examine how executives intend to grow the business, whether organically or through acquisitions.
Similarly, Geoff Howie, market strategist at SGX, said investors should understand a company’s business model, growth prospects and intended use of IPO proceeds instead of relying on early share-price movements.
When to hold and when to fold
For investors already sitting on losses, the decision to hold or sell should depend on whether the original investment case remains intact.
Yap said investors should distinguish between a stock that is temporarily mispriced and one with a fundamentally weak business model. For loss-making companies, they should assess whether the business has sufficient cash flow and capital to avoid repeated fundraising.
Gerald Wong, founder of investment platform Beansprout, echoed the sentiment and added that investors should review whether the company’s fundamentals have deteriorated.
To that end, investors can look out for specific warning signs in a company, such as repeated earnings misses without a credible recovery path, a meaningful loss of revenue to competitors, and a weakening balance sheet.
To limit the impact of a poorly performing IPO, Wong also advised investors to size their positions carefully and keep such investments separate from their core portfolio.
Howie, meanwhile, said investors should remember that newly listed companies are only at the start of their public market journey and should ultimately be judged on their ability to execute their growth plans and create shareholder value over time.
That is the approach Haran said he is taking.
“While there are certain weakness in IPO performance this year, it should not stop investors from recognising the potential of companies,” said the investor.
“If they continue to meet business objectives, I believe the share price will eventually reflect the company’s success.”
