The tragic collapse of Top Frontier Investment Holdings Inc. (TFHI) during its initial listing last week highlighted one important stock trading lesson that most investors are still not aware of. That is, a stock’s Initial Public Offering (IPO) or introductory listing does not automatically translate to instant gains.
Most newbie stock investors have this notion that IPOs — or in the case of TFHI, initial listing on the Philippine Stock Exchange (PSE) by way of introduction — always result to profits.
With TFHI’s stock price dropping 44% on its first trading day and 58% total drop in just week — we now see that IPOs and initial listings may not necessarily be good investments.
TFHI’s free falling stock price
Top Frontier’s initial price was pegged at P178 per share, translating to a market capitalization of P87 billion. Even before the stock listed on the exchange, rumors were ripe that the stock was overpriced, factoring in severe cross-ownership issues with San Miguel Corporation (SMC) and lack of solid operations and profits from its subsidiary, Clariden Holdings.
On its first trading day on January 13, TFHI opened at P81.00, already a big price cut from its initial valuation of P178 per share as computed by independent accounting firm Punongbayan & Araullo.
The stock closed at P98.95 that day, losing 44% of its value in just one day.
TFHI did reach a high of P104.90 but was battered heavily in succeeding days. On Friday, January 17, the stock closed its first trading week at P74.90 apiece — a steep 58% drop in just five days.
Imagine how much money you would have lost had you bought the stock during its peak.
SMC cross-ownership and Clariden issues
One issue that weighed down TFHI was its close affinity with the conglomerate San Miguel Corporation (SMC). There was cross-ownership between the two, with Top Frontier being SMC’s biggest shareholder bloc and SMC, the other way around.
TFHI owns 66% of the conglomerate, while prior to the introductory listing, SMC was Top Frontier’s majority shareholder as well, claiming 49% stake in TFHI.
In October 2013, SMC unloaded all its TFHI’s shares by declaring them as property dividends to SMC shareholders as a way of addressing cross-ownership. Stockholders holding 10 shares of SMC were entitled to one share of TFHI. The distribution of property dividends ultimately paved the way for TFHI’s listing by way of introduction.
SMC, for its part, has been struggling for months now to sustain its stock price. From a 52-week high of P125.00 the stock currently trades at P57.55 per share — a 54% decline from peak.
TFHI’s other subsidiary, Clariden Holdings, holds several mining exploration rights in various areas in the Philippines but no solid record of operations and profits.
What’s our key takeaway then?
Next time you plan to invest in an IPO or introductory listings, make sure you do your research, conduct due diligence and understand the prospects of the company. Never be fooled by rumors or advertisements that tend to hype stocks.
We’ve witnessed the tragic price free-fall of TFHI in just one week and the scary part is, we don’t know how low it will go.
Image source: Bloomberg
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