Walton likely to be a supply-locked IPO

Everyone in the capital market appreciates that Walton Hi-Tech Industries Limited, with its phenomenal rise story, is in its way to be listed in the local stock exchanges.

Institutional investors are bidding to secure their stake at the growth star through an initial public offering (IPO) under book building method.

But questions remain over how much of their fortune the Walton entrepreneurs are going to share with public.

Because the post-IPO number of shares in minority shareholders' hands is likely to be extremely low, that creates a scarcity of free-floating shares followed by low liquidity and risk of abnormal overpricing, said market professionals.

Walton Hi-Tech Industries, the local giant in refrigerator, electric home appliances and nowadays consumer electronics, is going to raise Tk100 crore from IPO.

The math of scarcity

Eligible institutional investors (EII) began bidding for Walton shares from Monday evening. They can offer the agreed primary price for each share until Thursday evening.

Sources within a wide range of EII firms informed The Business Standard that they are prepared to bid at as low as Tk250 and as high as over Tk500 per share.

Their calculations suggest, if the average cut-off price -- at which the allocated supply for EIIs will exhaust -- is Tk300 per share, the company will end up with a 1.1 percent post-IPO free floating shares.

Free floating shares are minority shareholders' stakes within a listed company which can be traded without prior announcement.

If Walton's each primary share costs Tk350, minority shareholders will only have 0.9 percent stake at the company.

If the rate is Tk400 per share, the ultimate free float will be 0.8 percent.

The higher the cut-off price, the fewer shares the company will have to issue to collect the declared Tk100 crore.

In case of Tk700 and Tk1,000 cut-off prices, the free float after listing will stand at 0.5 percent and 0.3 percent respectively.

Why scarcity is a problem?

Bangladesh Services Limited, the state-owned hotel infrastructure owner, is at the bottom in the table of listed companies in terms of free float shares' percentage— 0.32 percent only.

As the controlling shares are not instantly tradable, and there are almost no shares for public market trading, there had been no trade of BD Services shares in the Dhaka Stock Exchange in a decade.

Questions mounting in the street - is Walton Hi-Tech going to be the next BD Services at the DSE? And, is scarcity going to push the secondary market price abnormally higher?

The speculation is going wild as there are rumours of further growth in the company's profit in first half of the current fiscal year, following questionable growth figures in sales and profit in the last year.

The manufacturing company sells its products to a sister concern which is a reseller. Accounting experts are curiously observing whether the posted sales growth is organic or a manipulative attempt to depict a rosy picture before the IPO.

However, sources informed The Business Standard that Walton Hi-Tech Industries has recorded a highest ever profit for the first half of the current fiscal year.

The company posted record earnings per share of Tk45.87 in the last fiscal year, while weighted average EPS for last five years was above Tk28.

Net asset value per share was Tk138.53, which increased to Tk243 after revaluation of assets.

Complied with Public Issue Rules

Being asked about the likely low float, Walton company secretariat said that they have complied with all the criteria for IPO.

According to the Public Issue Rules - updated in September 2019- for book building IPOs, a company must have at least Tk30 crore of paid-up capital before the IPO. And, it has to collect at least Tk75 crore from public offer.

A company has to apply for book building method if it seeks a deserving premium over face value.

On the other hand, for IPOs at fixed price of Tk10 for each share, a company's pre-IPO paid-up capital must be at least Tk15 crore. And it has to raise at least Tk30 crore and the minimum post-IPO paid-up capital must not be less than Tk50 crore.

For the fixed price IPOs, the company must offer 10 percent of its shares to public, but there is no such obligation to ensure the free float at a rational level for book building.

Abul Bashar, the chief financial officer of Walton Hi-Tech Industries told The Business Standard, "We applied for the IPO mainly to opt into the disciplines as a listed company, which is more regulated."

Md Obaydur Rahman, managing director of the issue management firm AAA Finance Ltd, told The Business Standard, "As issue managers, we cannot insist a company to collect more capital than it needs or wants. I feel, Walton Hi-Tech Industries is being listed mainly for a value discovery, not for the sum of Tk100 crore."

His firm, before the latest amendment in public issue rules last year, had written to Bangladesh Securities and Exchange Commission (BSEC) to make floating of at least 5 percent shares in IPOs of book building method to overcome low float crisis, but it was not addressed.