CTS Global [CTS 1.00] will IPO this morning at P1.00 per share, with no stability fund, at a time when the market is sinking on low volume and (seemingly) low levels of confidence. CTS is owned by Edward Lee, who is also the founder and owner of COL Financial [COL 3.90 0.26%] and the Caylum Trading Institute.
CTS is Mr. Lee’s proprietary trading firm; the company uses a team of traders to invest in the PSE and select international markets. Traders are paid a base salary, and a cut of profits from trades in their portfolio.
- The deal: CTS is selling 1.375 billion primary common shares at P1.00 per share, for a 31.59% post-IPO public float and a P6.9 billion post-IPO marketcap. The vast majority of the proceeds will be allocated to CTS’s traders for investments in foreign stocks. Edward Lee and the 12 other significant CTS shareholders will have their shares subject to a 1-year mandatory lock-up.
- Is there a stabilization fund? No. CTS and its underwriter, SB Capital, decided against using a stabilization fund. This means that the stock price will not receive any artificial demand support if it dips below the offer price of P1.00. The upper and lower static thresholds will still apply, so that means the price can’t go higher than P1.50/share or lower than P0.70/share.
- CTS Allocation Poll: A total of 117 Barkadans responded to the CTS IPO Allocation Poll, and here are the results: Barkadans requested P18.8 million worth of CTS shares, and were allocated P11.2 million in CTS shares. That’s a 60% allocation rate overall, but the picture is quite different if we separate the requests into two groups: 5-digit requests (P99,999 and below), and 6-digit requests (P100,000 and up). For the 5-digit group, there were 75 Barkadans that requested a total of P1.13 million worth of stock and received P0.98 million, for an allocation rate of 86%. For the 6-digit group, there were 41 Barkadans that requested a total of P17.65 million worth of stock and received P10.25 million, for an allocation rate of 58%.
- Wow, so cheap? It is not a mistake that CTS is listing at P1.00/share. The company did a 10-for-1 stock split two years ago, in contemplation of this IPO, in order to make the shares “more affordable to new investors”. That justification seems pretty weak, though. For 99.9% of investors, the critical metric is how much they’re going to spend/invest, not the arbitrary number of shares they receive in return. For all those that requested 10,000 shares allocation for P10,000, how many would have passed on the offer if it was 1,000 shares for P10,000, as it was before the stock-split? What difference does it make? Realistically, they’re just hoping that you see P1.00/share and think “wow, looks cheap”, even though you know in your heart of hearts that the absolute price of the stock -- by itself -- is meaningless with respect to value. The key is how that price relates to the earnings of the company, on a per-share basis.
- Valuation and comparables: What are analysts saying? Henry Ong’s recent piece in Esquire is possibly informative. In it, Mr. Ong notes that, based on CTS’s 12-month trailing income, CTS’s IPO price represents a price-to-earnings ratio (P/E ratio) of 105 times. As per Mr. Ong, “Even if we assume the company’s net income to double at P130 million next year with the fresh capital from its proceeds, CTS’ PE ratio will still be comparatively high at 52 times.” He then notes that the best comparable on the PSE right now is Vantage [V 0.85], which is only trading at a PE multiple of 6 times its earnings-per-share.
- Is the IPO oversubscribed? Barkadans received 100% of their requested allocations through PSE EASy, but some reported receiving fractional allocations through certain brokers. We haven’t heard anything from CTS or SB Capital on the institutional tranche. It doesn’t look like the entire IPO will reach over-subscription, but it is possible that there has been considerable interest in the institutional tranche (like Medilines Distributors [MEDIC 0.84 1.18%]) that we haven’t heard about yet, and it’s also possible for the brokers’ tranche to have sold out. The PSE EASy tranche looks like it wasn’t fully taken-up.
MB BOTTOM-LINE
So what’s going to happen?
I don’t think anyone has any idea.
On the one hand, you have a stock with a meme price with the potential to generate some big upside, run by an experienced trader with access to an incredible amount of market information.
On the other hand, you have some valuation calculations that show the price is quite expensive relative to certain generous earnings projections, and a company that has an inconsistent profitability rate over the past few years.
The IPO doesn’t look like it’s oversubscribed, and if it is, the over-subscription isn’t coming from the retail / small trader crowd like we saw with the last P1.00 IPO, Solar Philippines NEC [SPNEC 1.79 1.10%].
That said, SPNEC might end up being somewhat instructive in terms of how to mentally prepare for what could happen today, as it was priced similarly and also did not have a stabilization fund.
Remember how SPNEC’s price dipped around 25% in the first part of the trading day, only to close ever so slightly above the IPO offer?
The biggest difference between CTS and SPNEC, from a pure IPO/trading perspective, is the (seeming) relative lack of deep retail interest in CTS.
I don’t know what’s going to happen. Nobody knows what’s going to happen.
But if you bought this stock during the IPO looking to offload it quickly for a profit, or you’re looking to trade this stock today to try and scalp the price movement, just keep an eye on your exit.
Remember your stops.
Think about your risk tolerance. It’s one thing to enter into a trade for the long term based on logic and reason, but it’s another thing entirely to become a long-term holder because you swallowed a big loss on the first day and are just hoping for a recovery.
Again, I’m not saying that’s going to happen today; CTS could ceiling for all I know, I’m just saying that this is a risky stock in a risky environment with no artificial demand if selling pressure starts to hit.
It could pull a SPNEC and just head-fake the floor, but have a great following week.
It could pull a MEDIC and hit the floor, and then just keep smashing through the floor. It could pull an AllDay Marts [ALLDY 0.45 2.20%] and hit the ceiling on the first day, then fade below the offer over the next month.
Or it could just move sideways. Nobody knows what CTS will do, but everyone will be watching! I’ve got my popcorn ready, do you?
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Merkado Barkada's opinions are provided for informational purposes only, and should not be considered a recommendation to buy or sell any particular stock. These daily articles are not updated with new information, so each investor must do his or her own due diligence before trading, as the facts and figures in each particular article may have changed.