LAST Friday, waste management company 800 Super Holdings made a strong trading debut, rising 43 per cent above its offer price to close at 31.5 cents per share.
But investors should not assume that the same will happen for Indonesian financial services group Malacca Trust Ltd, which on Monday launched its initial public offering (IPO) on Catalist at an identical offer price of 22 cents.
For one, investors generally do not favour IPOs where most of the funds raised are used to pay off debt, rather than for expansion purposes.
And this is one notable difference between Super and Malacca Trust.
While 800 Super is devoting 49.3 per cent of its gross proceeds to concrete expansion plans - such as the expansion of its existing fleet of vehicles and equipment - 85.6 per cent of Malacca Trust's gross proceeds is going to the repayment of bank borrowings.
Malacca Trust CEO Rudy Johansen told BT: 'None of the proceeds will be used for any expansion plans . . . ($16 million, or 95.8 per cent of net proceeds) are going to paying off bank borrowings.'
Although $4 million of this relates to a loan used to finance the acquisition of shares in PT Asuransi Wuwungan (an insurance company the group is looking to acquire), the fact remains that the bulk of the IPO proceeds is still going to the repayment of Malacca Trust's existing bank debt.
No compelling case
To be fair, this may not be such a major factor, if investors are convinced by a compelling investment case. But looking at Malacca Trust's prospectus, that may not be a conclusion many investors will reach.
Malacca Trust operates in the consumer financing, asset management and securities brokerage sectors in Indonesia. According to the group, its prospects are rosy, since Indonesia's central bank recently raised its 2011 economic growth forecast to as much as 6.5 per cent. As such, the company expects the consumer automobile financing, asset management and securities brokerage sectors in Indonesia to remain buoyant.
But in the four pages in which Malacca Trust talked about its prospects, it offered no specifics on its business strategies and future plans.
The risks, however, are clearer. The group's operations are subject to credit, liquidity, market, interest rate and exchange rate risks - discussed over 16 pages in its offer document.
For example, its consumer financing business faces the credit risk of non-performing loans due to customer default, while its margin financing services make the company particularly vulnerable to stock price volatility and the liquidity of those securities which are pledged as security.
Risk environment
In addition, an increase in interest rates will lower the marked-to-market value of its debt securities portfolios, potentially decreasing Malacca Trust's operating income. With net interest income representing approximately 34.9 per cent of the group's total operating income for FY2010, this risk is not to be taken lightly. Malacca Trust said risk management measures are in place, but investors should be fully aware of the risk environment it operates in.
Indeed, it is true that in a favourable economic climate, the increase in consumer spending and demand for investment opportunities will likely see an increase in demand for Malacca Trust's services.
But equally true is the converse - where adverse changes in the economy may bring a decrease in demand for its services, and an increase in default rates by its customers.
Moreover, there is country risk. Some social, political and economic policy and developments in Indonesia were unpredictable in the past, and this constitutes a certain level of political risk that investors should not ignore.
Given the more favourable reception to Catalist IPOs as a whole in recent weeks, it will be interesting to see if investors are buying on general sentiment, or are still staying very stock-selective - as they should. The response to Malacca Trust's IPO, and its performance on its first day of trading next Tuesday, will certainly be telling.
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