Initial public offerings (IPOs) are the first victims of the global credit crisis and the severe correction on the Bulgarian stock market. Once the pride of the market, now new listings face postponements or only attract negligible interest and capital from the market.
Nearly 60 companies have expressed their intentions to become publicly listed this year but, so far, only three have shown enough courage to move to the end of the process – all were disappointments. The best performing IPO attracted only a quarter of the desired capital, the other two were far from successful. The public offerings from the last quarter of 2007 also showed the ongoing liquidity problems. Zarneni Hrani, the largest offering on the exchange so far, attracted almost 100 million euro but the price showed some weakness during the first day of trading. Smaller IPOs like retail chain CBA Asset Management and agricultural Agria Group were barely oversubscribed. They also began their secondary trading with losses and thin volumes.
Last year managed to create the deceptive perception that the IPO market was the successful formula for 30 per cent gains in 30 days, something that should not have been taken for granted. This attracted not only speculators and long-term investors but also the majority owners of many companies. Among those 60 intentions for listing or capital increases through the stock exchange were companies that are too small to fulfil the minimum requirements for liquid secondary trading. Most companies were attracted by the unreasonably higher valuation on the primary market. IPOs easily achieved prices 20 or 30 times current net profits. The same happened to the capital raised by companies already listed on the exchange. Although capital expenditures were the prerequisite for strong growth of sales and profits, IPO stocks were placed on the back of very optimistic expectations.
The first signs of liquidity problems sent prices tumbling by 30 to 50 per cent over several weeks. The most interesting IPO deals of 2007 also faced downward pressure. Most shares tested their IPO prices and some of the largest companies, including First Investment Bank, fell significantly below during the last phase of the correction because of their higher liquidity. Even the record over-subscription of infrastructure company Trace Group was unable to provide any support for the bunch of speculators that tried to exit the position.
Of course, it is easy to blame the overoptimistic market or the desire of majority owners to achieve higher prices for their companies. The mortgage crisis in the US and the risk aversion of many investors are too large to be ignored. On the contrary, they are significant and will continue to be at least during the next quarter, if not longer. The fundamental support for shares was ignored by speculators that faced margin calls on their repo operations or foreign investors that decreased their holding in emerging markets. The Bulgarian economy is performing well and the GDP growth is less vulnerable to external shocks than previous years as the domestic demand and investments are the primary sources of growth.
The future of the IPO market will depend mainly on general market conditions. Speculators must remember that an IPO is not always a synonym of quick and painless gains but also a process that needs deep analysis and price targets. The current price to earnings (P/E) ratios of Bulgarian blue chips are between 15 and 20, which is a strong improvement from the average level of 30 months ago. This leaves the recently attractive IPO prices at P/E of 20-25 far behind the leading shares. New stocks should be listed with a premium as new companies need to prove themselves as transparent and lucrative investments.
The long-term perspectives remain positive for both Bulgarian private companies and the economy. The low corporate tax rate and the absence of any tax for capital gains should attract decent interest. Public offerings should remain the jewel of the stock market as they are still the cheapest way to attract capital and create the market value of the company. The combination of attractive valuation during the IPO and solid growth of sales and profits should result in less dramatic price movements and strong support from the investment community for shares during corrections. The perfect example is the car battery producer Monbat, whose shares outperformed the broad market despite their higher liquidity.
Public offerings absorbed huge capitals last year and also increased the volatility on the stock exchange as investors participated on the primary market at all costs. This strategy proved to be too costly as shares of new companies rarely outperformed the market over a longer period. Moreover, the withdrawal of capital did not provide the much needed support for shares during the correction and even deepened the problems of the primary and the secondary markets. The IPO process should wait for better times but the old fame is not easy to forget.
