People may be wondering how portfolio investments have grown tremendously this year when in fact there was only one major initial public offering (that of First Gen Corp.). If we take a closer look, the answer lies on a new mode of capital raising called follow-on offering. This method enables already listed firms to offer both primary and secondary shares in a public offering.
Close to P48 billion worth of follow-on offerings have been completed. These include those done by Universal Robina Corp., Ayala Corp., Robinsons Land, Metrobank, Megaworld Corp., Chinabank and Banco de Oro.
The data excludes the P5.8 billion preferred share offer by Ayala Corporation and the $115 million worth of gross depositary receipts issued by Banco de Oro.
In light of this new phenomenon, the number or size of pure IPO is no longer the sole benchmark in reckoning the market’s ability to raise new capital. In our case, the amount raised through follow-on offering is more than five times the P8.8 billion generated through the three IPOs this year. More importantly, this mode for raising capital is not exclusive to big companies. Even small companies are already planning to take a similar route.
The introduction of follow-on issues is a boon to the local stock market. Aside from providing already listed companies the venue to further raise capital, it also serves to expand the liquidity of their shares. It is for this reason that BPI, which conducted a P7.2 billion follow-on offer in the past, has become one of the most liquid bank stocks in the local market.
We are expecting a similar picture next year if we go by market fundamentals. With the country reaping the benefits of recent reforms, most foreign brokerage houses have remained bullish on the economic prospects next year. Good economics spell good market conditions and this is conducive for more public offerings. This raises the likelihood of more follow-on offerings that would enable companies to raise funds for their expansion or strengthen their balance sheets.
The likely candidates are sequestered and government-owed shares in major companies which the government is reportedly planning to privatize. These include the government-held stakes in San Miguel Corp., Manila Electric Co. and PLDT (through the Philippine Telecommunications Investment Corp.). There is also room for the government and Aramco to do a follow-own issue and still maintain their veto power. Each own 40 percent in Petron and offering at least five percent each from their stakes can easily boost the stock’s public float to 30 percent from the current 20 percent. In terms of IPOs, companies like GMA Network and oil companies Shell and Caltex are touted to be the big-ticket items next year.
The expected favorable market conditions will also provide smaller companies the opportunity to gain access to the capital markets. This can further help strengthen the economy’s foundations, with the smaller companies given the chance to expand and transform into larger companies thereby providing employment and income.
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Some have remained to be skeptical even if the peso has strengthened beyond the P50 level and the PSE index breaching the 2,600 level (the highest in seven years). On our part, we chose to take a positive view amid this skepticism and hesitancy by others. We recognize that the country’s reform efforts have been noticed by foreign investors that is why they are now more confident in pouring capital into the country. It is not only the IPOs and follow-on issues that they have gobbled up. They have also positively received the other hybrid capital offering by banks and the bond issues by both the Land Bank of the Philippines and the Development Bank of the Philippines. Our decision to take an optimistic stance on the economy has indeed paid off. For this year alone, the Philequity Fund’s net asset value has gained 36.9 percent as of last Friday.
For comments, you can email us at gime10000@yahoo.com or research@philequity.net.