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FINANCIAL CHRONICLE™ » CORPORATE CHRONICLE™ » The over-pricing of new Public Issues

The over-pricing of new Public Issues

+2
Tiger
Dishan
6 posters

Go down  Message [Page 1 of 1]

1The over-pricing of new Public Issues Empty The over-pricing of new Public Issues Thu Jun 30, 2011 8:57 am

Dishan


Equity Analytic
Equity Analytic

Recent public issues have not been able to maintain their issue price in the secondary market. Expolanka, the most recent issue which was priced at Rs 14 has fallen to as low as Rs 12 odd. Hydro-Power Free Lanka (HPFL) which was issued at Rs 15 is trading at Rs 13 odd. Free Lanka Capital Holdings which was priced at Rs 5 is now trading at Rs 4/50.The market price of Union Bank issued at Rs 25 is falling close to it. Why is this so? I think it is because the companies issuing these shares have overpriced them. They have failed to take into account that investors have alternative sources of investment like government bonds which yield over 8% and fixed Deposits which give 10-11%.

Accountants value the companies using the Net Asset Value and the Earnings Per Share. Suppose a company’s net worth is say Rs 10 million and the company’s profit after tax is Rs 1 million and the prospective investor (not a trader who wants to make a quick buck by buying and selling in the secondary market in a short time) wants 9% return per year. How should it be priced? The dividend yields are very low being about 2%. So how can he get 9% unless the share is properly priced to give him such a return? This will depend on the issue price. How can the issue price enable an investor to earn 9%. Accountants pricing new issues go on the Net Asset Value of the company. They seem to take into account the market’s price to book value where the company’s worth is taken as its net asset value times the Price to Book Value. Of course in the case of Take-over’s & Mergers since the controlling interest is acquired it is usual to value the company at 2-3 times its net asset value. But this is for special circumstances and is not applicable for a minority share holder who buys only a few thousand shares.

Company Accountants also use the past earnings per share to value the company. But there is no guarantee that future earnings growth will be the same as the past. There is the risk that it may not be so and hence any earnings growth assumed should be discounted for the Risk factor at least using the variance of past earnings. Also how many years’ earnings should be taken into account? The future is so uncertain that even 10 years may not be a certain economic life for a business. Investors in government bonds don’t buy long term bonds exceeding 5 years. So the maximum period that should be taken into account is perhaps 10 years. If we use the Price Earnings ratio for valuation then I think a PE ratio of 10 is about the most that will enable the investor to make a return of 9%.

Consider the example given here where the company is worth Rs 10 million and earns Rs 1 million profits after tax. Then if the company’s share is priced at Rs 10 it will give a return of 9% for 11 million ( net asset value plus one year’s future earnings) divided by 1million will give a return of 9%. To generalize I think the company valuation should be on the basis of its current net asset value plus earnings for x number of years discounted for both a risk factor and the interest rate. I think recent issues have been priced at market PERs and market Price to Book Values.

Tiger

Tiger
Assistant Vice President - Equity Analytics
Assistant Vice President - Equity Analytics

This is a good post.
Valuing a company is one of the most difficult task on the face of this world, there are loads of theories, millions of best brains and billions of worth of computer modelling are trying to do that each single day, STILL man kind has failed to predict true value of a company and how it would reflect in share market. It will remain misty for eternity.

Slstock

Slstock
Director - Equity Analytics
Director - Equity Analytics

DIshan,
Good points.

The key thing is when new IPO or Introductions come to market we need to carefully study them to know that it is valued at. If we chase the wrong ones we will be in trouble. There are many examples. But then there are fundamentals will growth potential which comes down also due to market trends. We need to identify them when that happens as it can give us larger long term gains with these kind of shares.

sanjeewa88

sanjeewa88
Manager - Equity Analytics
Manager - Equity Analytics

Current Fixed Deposit rates are lower than the government Treasury Bill rate.

Can someone explain me what the reason behind it?

5The over-pricing of new Public Issues Empty Why FD Rate is low Thu Jun 30, 2011 10:39 am

waunandana


Stock Trader

sanjeewa88 wrote:Current Fixed Deposit rates are lower than the government Treasury Bill rate.

Can someone explain me what the reason behind it?

6The over-pricing of new Public Issues Empty Re: The over-pricing of new Public Issues Thu Jun 30, 2011 11:29 am

waunandana


Stock Trader

'Why FD rates are lower than T/Biils Rates' Most of the Banks invest on T/Biils & Bonds It is compulsory requirments for some govt banks Eg, N.S.B banks have to keep some marging also . Other than the "Sakvithi type' institutions therfore they give lower rates than the T/B rates

7The over-pricing of new Public Issues Empty Re: The over-pricing of new Public Issues Fri Jul 01, 2011 10:09 pm

sanjeewa88

sanjeewa88
Manager - Equity Analytics
Manager - Equity Analytics

waunandana wrote:'Why FD rates are lower than T/Biils Rates' Most of the Banks invest on T/Biils & Bonds It is compulsory requirments for some govt banks Eg, N.S.B banks have to keep some marging also . Other than the "Sakvithi type' institutions therfore they give lower rates than the T/B rates

Please refer these 2 sources. I said it depending on my FD in BOC

http://www.boc.lk/bochome/rates/Rupee_circular2009.pdf

http://www.cbsl.gov.lk/htm/english/_cei/ir/i_1.asp?date=&Mode=2&Page=4

limestone

limestone
Manager - Equity Analytics
Manager - Equity Analytics

some commercial banks are paying 9% per annum for FDs . which is higher than T/B rates.

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