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FINANCIAL CHRONICLE™ » DAILY CHRONICLE™ » Investment bankers’ reputation at stake with reduced growth targets Expolanka, Softlogic post IPO growth forecasts:

Investment bankers’ reputation at stake with reduced growth targets Expolanka, Softlogic post IPO growth forecasts:

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Sstar

Sstar
Vice President - Equity Analytics
Vice President - Equity Analytics

By Ravi Ladduwahetty

The credibility of the investment bankers in the Expolanka and Softlogic Initial Public Offerings, is now in tatters with the planned reduction of the growth targets, contrary to the hype generated during the IPOs.

"The much debated Initial Public Offerings of Expolanka and Softlogic were aggressively priced by the Investment Banks. These two IPO’s in particular was heavily debated in media circles and the public since both initially came with private placements which were way below the IPO price. Both miserably failed in the secondary market. They may be good companies, but valuations always were an issue," a senior market analyst told The Island Financial Review yesterday.

"The issue mangers in there Expo Lanka IPO Investor presentation made a forecast net profit range of Rs. 1.75 billion - Rs. 1.85billion, and recurring Earnings per Share growth forecast of 55 percent – 65 percent for 2012. Now we are in the second quarter of 2012. The Group made a profit of Rs. 574million for the first half of 2012 versus Rs. 606 million in 2011. In short, to achieve the forecast, Expolanka will have to make excess of Rs. 1 billion in the second half of the year," he said.

As per the forecast made available from the issue mangers on Softlogic Holdings, its forecast for the year ended 2012 is Rs. 1.7billion. Softlogic Holdings has made close to Rs: 500 million (Rs. 499.8million) for the first half of 2012. So, Softlogic needs to make Rs. 1.2billion in the second half to match the forecast.

"Both joint issue managers dressed up the brides elegantly, showing how beautiful they were. It was a good fairy tale at the very beginning. With barely a year gone by, now you see the cracks. The same issue Managers were now slowly slashing the forecasts what they made few months ago," the analyst said.

"It’s quite difficult to predict the price on the first day. But analysts should be mindful not to be too biased towards the company. What went wrong was that analysts became too biased, but it was important to set some realistic expectations about each stock’s potential," said a well seasoned investor who spoke on the basis of anonymity.

These are good lessons for investors. Investors need to do their own home work before investing rather than relying on other people’s forecast. "Investing without research was akin to playing stud poker without looking at the cards," Global Investment Guru Peter Lynch once said.

Warren Buffett recommends avoiding IPOs, for the following reason which he succinctly said, "It’s almost a mathematical impossibility to imagine that, out of the thousands of things for sale on a given day, the most attractively priced is the one being sold by a knowledgeable seller (company insiders) to a less-knowledgeable buyer (investors)."

It was quite clear that these Investment Bankers lived for the day and in the short term. They never looked at sustainable earnings. A good share did not mean a good company while a good company did not mean a good share as well, said a Portfolio Manager.

Responding to a question as to why they aggressively priced the IPO, he said the two companies were showing good earnings while also being under pressure from their management.

The analysts also pointed out that it was important to understand the industries in depth.

"Just because the war was over and the national economic growth achieved 8% of GDP growth, it did not mean a fanciful forecast was in order," said an analyst. "Accepting your mistakes and learning is the key to success. Sri Lankan capital market participants haven’t invested in this area."

He said short term gimmicks can result in the loss of credibility of the institution and the industry at large.
http://island.lk/index.php?page_cat=article-details&page=article-details&code_title=38985

Kumar

Kumar
Senior Vice President - Equity Analytics
Senior Vice President - Equity Analytics

Duplicated post.

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