IPOs
and shareholder value
Our columnist advises investors not to blindly invest money in shares
because of media hype or to follow the herd mentality but rather
to evaluate their potential based on certain criteria.
The
recent Dialog IPO was a mega success with a five times over subscription.
One observation I had in this period was that many investors were
simply clueless as to how to decide on whether they should invest
or not in the IPO. I would like to discuss the factors I believe
should be considered by an investor as significant prior to investing
in an IPO.
Factors
to be considered
I would look into the following factors which may be quite useful
in deciding whether to go ahead with the investment:
* Earnings per share
* Gearing
* Assets per share
* Strategy of the company and management team
* P/E multiple of the sector and valuation
Earnings
per share
The total profits of the company divided by the number of shares
the company has in issue in total would give this measure. The higher
the earnings per share the better the company would be since it
is earning more for every share you hold. Check the history of their
EPS over a period of time and also the compare it with other listed
companies in the market.
Gearing
This is the comparison of the debt capital the company has already
with the share capital they have.
The IPO will increase the share capital and this can be considered
when calculating the gearing.
The gearing is generally calculated as: debt capital / share capital.
The higher the gearing the higher will be the financial risk facing
the company. Any fall in earnings will put the company in a position
where it will be unable to service its debt.
Assets
per share
This can be calculated by dividing the total net assets of the company
by the total number of shares. The asset value per share would indicate
the lowest value of the company in terms of its assets. One has
to be cautious at this point since the asset values are at their
book values which can be significantly below their replacement or
market values. In the case of technology companies and trading companies
their assets can be in the intangible form as brand names or good
will and may therefore not be included in the balance sheet.
Strategy
and the company’s management team
As an investor whether you are going to receive wealth would depend
on the strategy of the management as well as their track record.
The IPO prospectus will most probably discuss how the management
intends to use the money to create more wealth. In addition to this
the past track record of the management would also be an important
measure to consider.
In the case of Dialog the management had increased the subscriber
base in a short period of time to 1.4 million.
P/E
multiple of the sector and share valuation
The P/E multiple is an indication of the level of confidence the
market has in a sector or a particular company. P/E multiple is
calculated as: market price/ earnings per share. A new company out
for an IPO will not have a P/E multiple since it is not already
listed. The P/E multiple of the sector can be taken and then adjusted
up if the company is considered as above the sector or adjusted
down if it is considered as below the sector or risk is perceived
to be high. The P/E multiple can be used to value the share of a
company. The potential value of a share could be EPS multiplied
by the P/E multiple.
Message
to the investor
An IPO is a good opportunity to invest since shares are generally
offered to the public at a discount to what they are really worth
since the company wishes to attract investors.
While
good IPOs should not be missed the ones which are not worth it can
be avoided by carrying out a relevant analysis which would show
whether the investment is viable. This is the prudent way to go
about it rather than acting on mere media hype.
(The
writer could be reached at -ravim@icbsgroup.com) |
