Business Times

Expolanka ‘chosen few’ won’t sell; will take longer term view

By Duruthu Edirimuni Chandrasekera

A host of subscribers to the sell-down/Private Placement (PP) of Expolanka Holdings – which has raised questions in the market over its IPO pricing - will ‘not’ sell their stock in the short term, according to some High Networth Individuals (HNWI), institutions as well as Expolanka officials.

“Institutional and strategic investors are long term investors, having purchased the shares for long term vision and growth potential of the group and understanding the value of the company have communicated their confidence with an expected time horizon of 18-24 months, while affirming the original view to hold it for a longer period,” Hanif Yusoof, Group CEO Expolanka told the Business Times.

John Keells Holdings (JKH), the lead manager and financial advisor to the issue which has bought 83 million shares in the sell-down, on Friday assured that the company won’t be selling in the short term.
Mr Yusoof said that 72% of the sell-down of 300 million shares was subscribed by both institutional and strategic investors, who are largely long term investors who have understood and identified the potential of the group. Ashok Pathirage, Chairman Softlogic told the Business Times that he will not be unloading his shares in the medium term. “I see immense potential in this share and I’m taking a long term view on it,” he said.

He added that 28% of the rest of the investors are HNWI, of whom prominent personalities have maintained their investments and most likely be subscribing to the Initial Public Offering (IPO) on a very large scale. Mr. Yusoof said that the pricing for the IPO was based on the same market principles and fundamentals as it was for the sell down.

Pricing reason

Explaining the rationale for the pricing, he said that the sell down took place during the early part of the Financial Year 2010/11 and was firmed up with the strategic investors in September for a price of Rs. 6 per share. “The share price was determined based on the forecasted earning for 2010/11 with the discounted multiple to the market. The IPO price was based on the forecasted 2011/12 earnings with almost same multiples with a 20% adjustment to the multiple to account for the growth and liquidity of the share. Although there is an absolute difference in the price, the basis of the pricing has remained consistent with the market fundamentals with the discounted multiples based on the forward earnings,” he emphasised.

He added that the company has achieved significant growth over the last two years and has justified the conservativeness of the forecast over a period and the future forecast has also been based on conservativeness. Mr. Yusoof noted that although there is an absolute difference in the price, the basis of the pricing has remained consistent with the market fundamentals with the discounted multiples based on the forward earnings.
Ethical issues

When questioned on the ethical issue and conflict of interest pertaining to JKH being advisors to the sell-down of Expolanka and then subscribing for it while also being lead managers to the IPO, Mr. Yusoof said JKH was selected purely on merit to take forward Expolanka for the IPO. “However CT Capital was involved as Joint Managers in all aspects of the IPO, where the decisions were made to achieve the objectives of the IPO such as support its growth and take the company to the next level. Since all activities have taken place on the interest of the company there cannot be any ethical issues and concerns of conflict of interest," he said. He also said that JKH was offered the shares at the sell-down in order to increase the shareholder profile of the company.

On the feedback received by Expolanka on their IPO, Mr. Yusoof said that it has been overwhelming. "The reason behind all this is that they (potential investors) are aware of past track record, future potential, strong fundamental, skills and competencies the organization possesses. We have also noticed an increased hit ratio to our Investor web site over the last few days showcasing the demand that is there to learn about Expolanka and to get familiar with the IPO,” he said.

On the Expolanka sell- down, IPO and its pricing Krishan Balendra, President John Keells Capital responds to questions from the Business Times: Will JKH sell its holding in Expolanka in the short term? No, JKH will not sell the holding in the short term.

JKH was quoted in the media saying that they will subscribe to the IPO at Rs 14. What’s the rationale behind subscribing for the IPO at Rs 14 when already you participated in the sell -down at Rs 6?
JKH has confidence in the management and long term strategies of Expolanka Holdings. The IPO is an opportunity for the John Keells Group investment funds to acquire shares in a company with very good prospects.

Industry analysts say that there seems to be an ethical issue pertaining to JKH being advisors to the sell down of Expolanka and then subscribing for it and also being lead managers to this IPO. Isn’t there a conflict of interest?

There is no conflict of interest. John Keells Capital, our investment bank, was appointed by the Board of Expolanka Holdings to advise on an IPO on the Colombo Stock Exchange. The process leading up to it involved a restructuring to enhance value and position the company for an IPO.

As a part of this restructuring, the existing shareholders partially sold down their shareholding – a part of the proceeds were utilized to acquire some underperforming subsidiaries from the company.
The Board of Expolanka Holdings invited certain institutions, including JKH, to invest in the sell-down in order to have some blue chip institutions on their share register at the time of the IPO.

JKH independently evaluated this investment opportunity and made a decision to invest. Similar investments of this nature have been made by JKH in the past and we will continue to make such investments in the future.

Market buzz is that the sell-down was ‘deliberately’ undersold at Rs 6 while Rs 14 was prescribed for the IPO so that the HNWIs and institutions could make a killing by selling their stock which was bought in the sell-down in the short term. Isn’t this a wrong signal?

It was not undersold. The pricing for the sell-down was based on the circumstances at that time. The promoter shareholders made a decision to sell at the price.

What was the rationale behind this pricing?

The pricing for the sell-down was based on the circumstances at that time based on the expected performance of the company for the financial year ending March 2011. The company has, post restructuring, performed beyond expectations and the IPO price is based on this as well as the expected performance for the financial year ending March 2012.

Although there is a difference in the absolute price, the valuation is on the same basis. The pricing was based in both instances on the same multiple to forward earnings, with a small adjustment in the sell-down for the lack of liquidity and holding period cost.

What is your opinion about the general ‘feeling’ about the IPO?

There is overwhelming interest in investing in this IPO. Investors and analysts see the unique and attractive investment opportunity that Expolanka represents. Expolanka is one of the largest logistics/freight forwarding companies in fast growing economies like India and Bangladesh.
This is a rare opportunity for investors on the CSE to get an exposure to the regional growth story. The company has an excellent track record and their management is respected. John Keells Capital has had an unprecedented number of requests for application forms for the IPO. Certain high net-worth investors have indicated that they will subscribe for the entire issue or a substantial part of it.
Reports say that there isn’t much retailer interest due to the above issues. Is this true?

As indicated above, this is not correct. If not what kind of applications / interest is seen?

We are seeing significant interest from local and foreign institutions as well as high networth and retail investors. With a number of days still to go for the IPO to open, thousands of applications have been received.

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