Majority of broking firms are recommending subscription to the Expolanka Holdings IPO worth Rs. 2.4 billion largest so far this year.
Despite reservations largely from those who are keen for a quick buck, most stock brokers are recommending the IPO as a solid investment with long term upside.
The Daily FT yesterday did a quick take on ‘available for comment’ brokers and majority of those who responded recommend the IPO. Some however had reservations.
The CEOs to whom FT spoke were Acuity Stockbrokers CEO Deva Ellapola, Bartleet Mallory Stockbrokers Director Angelo Ranasinghe, SC Securities Director and CEO Harsha Fernando, Ceylinco Stockbrokers Director and General Manager Sriyan Gurusinghe, Asha Philips Director and CEO Dimuth Abeysekara, DNH Financials CEO Seedantha Kulathilake, Taprobane Securities CEO Dinal Wijemanna, Richard Peiris Securities CEO Jayantha Perera and IIFL Ceylon CEO Priyani Ratna Gopal. Asia Securities and Heraymilla have recommended as ‘Buy’ as well as IPO-linked brokers JKSB and CT Smithstockbrokers.
This is in contrast to few brokers and analysts who have raised various issues over the higher IPO pricing of Rs. 14 in relation to the Rs. 6 per share sell down last year. This criticism is despite being aware that fundamentals of Expolanka as well its underlying performance had dramatically changed between the pricing for private placement stage and the IPO. Incidentally shares acquired in the selldown were privately trading three times its price and at a high of Rs. 23 owing to demand.
Sources said that basis for pricing for the sell down was 2009/10 earnings and other market factors. The prospectus of the private placement also implied that those who take up might not have an exit for 1 or 2 years as Expolanka didn’t have immediate plans to go public. In reality Expolanka had outperformed most optimistic forecasters. For example its gross profit was Rs. 4.4 and Rs. 4.5 billion in FY 2009 and FY 2010 whereas within the first nine months of FY 11, this figure had been surpassed at Rs. 4.6 billion. After tax profit which ranged between Rs. 391 million and Rs. 591 million in FY 09 and FY10, had almost tripled to Rs. 1.45 billion in the nine months of FY11.
Forecasting a tripling of after tax profits would have been challenging and questioned. When private placement was structured the ASPI was also not as high but was getting re-rated following the bubble in mid-2010 whilst only in February 2011 the ASPI hit an all time high.
Some also noted that the 22% increase in earnings multiples (over private placement pricing and IPO pricing) wasn’t substantial but the very outperformance of Expolanka results within the nine months of FY11 should expose the true underlying value of the IPO price and the stock’s earnings potential in the medium to long-term.
In the private market the Expolanka shares obtained during the sell down at Rs. 6 were trading three times above and a high as Rs. 23 levels reinforcing the appetite within discerning investors looking for long term value. In that context claims by some that those who subscribed to the sell down dumping the stock in the secondary market has little credence.
Acuity Stockbrokers CEO Deva Ellapola said that Expolanka is recommended for “investors” and not “gamblers” or those who are looking for quick gain. “Listing of Expolanka is the best recent thing that could have happened to the market. Given the fact it was family controlled for 30 years and is eventually going public is an eye opener for all other family concerns,” he opined adding that these bigger significances had got sidestepped in the debate over the differences of opinion on valuations.
Leading brokers JKSB and CT Smith though linked respectively to the Lead managers JK Capital and joint managers CT Capital have recommended the IPO whilst Heraymila Securities had done the same though noting sell down pricing was a sore point. Asia Securities/Asia Wealth too has recommended the IPO as ‘Buy’. NDB Stockbrokers will release its report today whilst a few brokers have only provided an analysis of Expolanka performances etc. though not recommending buy or not.
The IPO of 172 million shares at Rs. 14 each will officially open tomorrow whilst unofficially indications are that it has been oversubscribed at least by two times.
Director of Bartleet Mallory Stockbrokers Angelo Ranasinghe who nodded ‘yes’ when asked about recommendation stated, “We are confident in the management and is interested in the well diversified company with good business both here and abroad. We are also confident in areas of business Expo Lanka has diversified into. It would bring good long term to medium term benefits.” Ranasinghe also commented that people should be confident on both John Keells and CT Capital who are managers to the issue and hold respected positions in the market.
Director and CEO of SC Securities Harsha Fernando agreeing with Ranasinghe stated that such a large company on an IPO is important for the country. “We have had quite a bit of listing during the past year and a half; however the majority were smaller listings. The size of the company and its diversified business will lead the way for other such large companies to follow,” Fernando said.
“This is great and is a good opportunity for our investors.” Director and General Manager of Ceylinco Stockbrokers Sriyan Gurusinghe also stated that it is a good stock and yes, they will be recommending it.
CEO of DNH Financials Seedantha Kulathilake stated that on a medium to long term base, the IPO will be recommended to the clients while CEO of Taprobane Securities Dinal Wijemanna agreed.
CEO of Richard Peiris Securities Jayantha Perera meanwhile expressed that the company will take a neutral view in the stance. “We have advised the client with all the information we know and left it to the client to decide rather than taking a major call on this. The company is a sound one and we are positives on the outcome.” He also agreed that though short term may not be the answer, medium and long term outcome will be much better.
Asha Philips CEO and Director Dimuthu Abeysekara said Expolanka IPO is recommended on a medium to long-term basis.
A stockbroker who wished to remain anonymous however added that with all the rumours involved and the shares offered at Rs.6 in a sell-down people are hesitant in placing their confidence on the IPO.
Heraymila Securities in a research report said: “We recommend investors subscribe to the EXPO IPO. It is an exposure to a well-managed, geographically diversified and growing logistics business. The issue price of Rs. 14 offers upside to our intrinsic valuation of Rs. 17.” This recommendation was despite tactical sore point on pre IPO price.
CT Smith Stockbrokers said at the IPO price of Rs.14, Expolanka trades at PER multiples of 15.1X FY12E and 11.2X FY13E, offering strong recurring EPS Growth of 42% in FY12E and 35% FY13E, whilst also providing attractive ROE’s of 28% in FY12E and 27% in FY13E. The Group also has a comparatively attractive PEG ratio of 0.4X in FY12E. “With high growth expectations, strong regional presence, a recognised brand name and capable management team, we expect Expolanka to outperform the market in the medium to longer term. We thus recommend, SUBSCRIBE,” it said in its research report.
John Keells Stock Brokers said in its research report concluded as saying: “With an asset light business model that consistently delivers high ROEs the counter should trade at a significant premium to the current market FY12E multiple of 15x. At Rs. 14 the company is trading at 18.2x FY11E earnings and at 13.6x FY12E compared to the market which is trading at 18.4x FY11E and 15.0x FY12E. With a four year earnings CAGR of 26% as well as ROEs between 24-25% we feel that the counter should trade at multiples of 20x in line with the Diversified sector. We recommend SUBSCRIBE.”
source - www.ft.lk
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