IPO's and PO's: To Buy or not to Buy?

Lately I have been thinking whether it is really worth it investing in Initial Public Offers (IPO’s) and Public Offers (PO’s). The main reasons for my second thoughts are:

1) Partial allotment. Most recent IPO’s and PO’s have been hugely over subscribed leading to partial allotment. The first shocker was the PO of First Bank. As it was the first PO to return huge sums of money in recent times, most of us were caught napping. I only got about 23% of what I applied for. In hindsight I should never have bothered buying.

2) Delay in receiving shares allotted. The second reason is the delay in receiving certificates or receiving credit in CSCS account. I participated in the Access Bank Public Offer in August last year. Nine months after I am still waiting for my certificate to be verified. Consequently, I don’t still have access to my money.

3) Delay in receiving return money. The third reason is the delay in receiving return money in respect of shares not allotted. To date I have not received my return money for PHB, AIICO and Costain. These offers closed in December last year.

While it is difficult to know before hand whether it is worth it to invest in these offers, the following could aid the decision making.

• Amount on offer. How much is the company trying to raise? In my view if the amount is less than twenty billion Naira, I will stay clear of the offer. Recent examples include Dangote Flour, NAHCO, AIICO and Costain. All were for under Naira twenty billion and all were hugely over subscribed. In hindsight, one would have been better off buying in the secondary market all except Dangote Flour (not available at it was an IPO). Although this criteria does not completely eliminate the risk, it reduces it. E.g. Bank PHB.

• The discount. This is only relevant to public offers. If there is a significant discount to the secondary market price (30% or more), I will consider investing. Otherwise I will pass. A recent example is Bank PHB. The discount on offer was 33% and there was a potential gain of 50% to be had. Bank PHB has proved to be a good gamble. However, buying Skye Bank offer was not such a good idea. The discount on offer was only 17%. However, you can now buy Skye bank at Naira 16 compared to the offer price of Naira 14. This means one would have been better off not buying the public offer as the certificate and possible return money are not available three months after the offer closed.

• IPO decision spreadsheet. I found this tool http://nivestors.com/yahoo_site_admin/assets/docs/IPO_Decision_Table.59121612.xls

courtesy of www.nivestors.com. It was brought to my attention in the investors forum of stockmarketnigeria.com. It helps in simplifying and quantifying the decision.

In the future I will definitely use the above criteria in deciding whether I should invest in an IPO or PO.