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Sunday, 4 January 2015

P/E Valuations for IPO - Why Promoters Want the Best

As we are touching about IPO, would like to share on the reason why Promoters (owner) always ask for the highest possible P/E for their IPO. This IPO job is being done by the Corporate Finance Dept of the appointed Broker/Investment Bank.


Year 2013 = Company A made RM10m Net Profit
Year 2014 = IPO @ P/E 10, Market Capitalization = RM100m
If the Principle Adviser (Investment Bank) able to place out the Placement of Shares at a higher P/E assuming P/E 12:

Net Profit Year 2013 RM10m X P/E 12 = RM 120m Market Cap post IPO

Promoter (owner) is selling/placing 30% of his shares out:

If P/E 10 = RM 30m raised for Owner's 30% stake
If P/E 12 = RM 36m raised for Owner's 30% stake

Same amount of 30% of shares being placed out but EXTRA RM 6m just because the Principle Adviser able to get the clearance from SC and getting the Institutional Buyer to take up the shares.
When the Promoters really push the IPO P/E too high, there is limited upside for investors like us.
That is when we say NO for the placement.

FYI, currently market practice are:

Ace Market: P/E 8 to P/E 10 : Anything above, the Bankers are really pushing it.

- During year 2008, 2009, as long as you made around RM1m net profit, you can apply for IPO but since 2013, you do not see it anymore. Reason being is SC has tightened the listing requirement.
Although you can't see this ruling in any SC guidelines, it has been made as a market practice. Basically SC is looking at minimum RM3m net profit and Ace Market is just a temporary place for you. You must be able to transfer to Main Board in 2 to 3 years time.

Main Board - Small Cap (RM500m and below market cap)
P/E 10 to P/E 12

Main Board - Mid and Large Cap (RM500m and above)
P/E 13 to P/E 18 (Depending on your sector and business model)

If it differs, then we should sit down and drill their Prospectus to look for more info, do not easily accept the reports/news/rumors out there.

 Disclaimer and Declaration

The full content of the article is for educational purposes only and should not be used as investment recommendations. We are not responsible for all investment activities conducted by the participants and cannot be held liable for any investment loss. Examples of specific shares may be citied for illustration purposes.

Humble Pie

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