Half the IPOs failed their shareholders

Bangladesh's capital market has come through a very controversial phase over the last decade in terms of quality of the initial public offerings (IPO), as majority observers believe a large number of companies took advantage of their investors by presenting inflated financial figures.

An August 2020 study by a local equity research team reveals that of the 91 company IPOs subscribed between 2011 and early 2020, only 44 generated returns that surpass the popular fixed income alternatives like National Savings Scheme – "Shanchayparta", while 20 yielded losses for primary shareholders and the remaining 27 merely saved the back with a meagre positive annualised average return at single digit.

The securities regulator under its longest serving chairman, Professor M Khairul Hossain, accorded its nod to nearly 100 companies to make their way into the bourses in the period between 2011 and 2020.

Irrespective of company fundamentals, each had enjoyed an overwhelming response from IPO investors as primary shares are popularly perceived as risk-free investments due to market hype for most of the new shares.

However, it takes a few years to see the actual face of the company in terms of sustainability in business growth, dividends and capital gains.

Till August 16 this year, even primary investors lost money in 20 companies that came in the market in the last decade—mostly from textile, hospitality, steel, power generation, paper production, and automobile sectors.

Surprisingly, in more than two-thirds of those money-losing primary investments, the companies had charged premium over the face value for their primary shares.

Companies selling primary shares without premium are dominating the return table, mostly in their initial years after debut.

For instance, Sea Pearl Beach Resort and Spa Limited – the operator of Royal Tulip Hotel at Cox's Bazar – having a moderate debut in the mid 2020 at Tk25 against a face value and IPO issue price of Tk10.

It took only five months up to the novel coronavirus induced shutdown in last March to reach Tk79. And now it has no buyer at that rate set as the emergency floor the securities regulator had put to arrest the pandemic-hit fall in the stock market.

Sea Pearl Beach Resort is still at the top of the IPO investors' return table with a stunning 730% gain in 13 months. But as investors are aware of the heavy discounts the company is offering to hotel guests, and that it posted an annual loss and offered a niggardly 1% cash dividend, the capital gain is not well cemented.

Top 16 spots in the annualised average return table are occupied by face value IPOs who entered the market in the last three years, while their peers who got listed in the previous five to six years show a trend to remain at the bottom of the return table.

This happens mainly because too many IPOs have taken place over the last decade where companies were not strong enough in business, rather promoters and pre-IPO bulk investors, motivated disclosures and secondary market speculation helped them return a lot, believes veteran stockbroker Md Shakil Rizvi, a director of the Dhaka Stock Exchange (DSE).

"Naturally the returns are less sustainable as the mover and shaker shareholders dump their holdings within three years and companies begin to show their actual faces."

Such companies' stocks may be good ones for speculative traders if held in the right season, but they devastate the portfolios of long-term investors who buy and hold stocks for a longer period, opined Rizvi, managing director of brokerage firm Shakil Rizvi Stocks Ltd.

Controversial companies like C&A Textiles, Tung-Hai Knitting and Ring Shine Textile are companies who eroded IPO investors' capital at a double digit rate each year.

Six among the 48 face value IPOs returned negative against 32 beating the popular fixed income alternatives returning at an average annual double digit and 10 companies returned positive but at a single digit, according to the research.

The total return calculation includes cash and stock dividends since debut alongside secondary market gains. And, the annualized average return from companies is a compounding one.

On the other hand, of the 43 companies who charged premium over face value for their primary shares, only 17 justified their premium pricing by giving annualised double-digit returns.

Not all the companies' returns are blessed by inflated disclosures and stock price manipulation, as they are sufficiently focused in doing better business and building a better future for their shareholders, said Md Sayadur Rahman, president of Bangladesh Merchant Bankers' Association.

For example, local power producer United Power Generation and Distribution Company Limited has topped the premium takers' table in terms of benefiting primary shareholders.

Within five years of listing, the company's primary shareholders' actual cost per share went as low as minus Tk8.9 as it paid Tk46.5 in total cash dividends while its issue price of Tk72 turned into stock dividends adjusted price of Tk37.6 before its dividends this year.

Moinuddin Hasan Rashid, managing director of United Power, told The Business Standard, "Business model, skilled management, best internal practices, good governance and, on top of everything, commitment to shareholders are helping us perform well both in business and in the stock market."

His company is a top one in terms of generating higher returns from a limited capital invested and also paying high dividends. Its primary shareholders' annual average returns went as high as 37% on a compounding basis.

Following the listing in 2015, growth-seeking investors demanded further investments of the debt-free company's surplus cash for business expansion and the company merged a number of successful power plants owned by the same entrepreneurs that boosted its revenue, earnings and asset base.

Of the premium takers, telecom sector players ADN and state-owned Submarine Cable Company outperformed others with over 20% annual average total return.

Profitable power generation business helped Doreen Power, Shahjibazar Power and Paramount Textile to make the list. While Premier Cement, BSRM, KDS Accessories, Global Heavy Chemical also returned high over years. The list also contains Aman Feed despite its recent bad news on unpaid bank loans.

Despite having a positive attitude, some companies might suffer deterioration in business if their industry as a whole suffers, if they face any unavoidable challenges beyond their control, said BMBA President Sayadur Rahman.

Esquire Knit Composite, Bashundhara Paper Mills, Aman Cotton Fibrous, Regent Textile Mills, Appollo Ispat Complex, Runner Automobiles, Tosrifa Industries, Zahintex Industries, Hamid Fabrics, Peninsula Chittagong, GBB Power, Unique Hotel & Resorts, Far East Knitting & Dyeing, Western Marine Shipyard primary shareholders were still counting losses last August. 

BMBA Vice President Md Muniruzzaman CFA, the managing director of IDLC Investments, said his institution as a research-based investor often prefers to skip initial public offerings if the company seems unreliable in terms of authenticity of disclosures, governance, and also potential in business.

Also asset manager Shahidul Islam, formers president of CFA Society Bangladesh, said how much a company is asking for its primary shares is not that important a question if the company's management and disclosed numbers are not trustworthy.

For sustainable return form stocks he also suggests looking into a company's potential business growth and capacity to pay high dividends.