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The 1 Secret About IPOs The Finance Industry Will Never Tell You

A close friend of mine recently asked me a brilliant question, “Are most initial public offerings (IPOs) in Singapore underpriced?” It was something I had never thought about. So, the question prompted me to investigate.

I decided to utilise data provider S&P Capital IQ to find the number of shares in Singapore which currently have lower prices as compared to their closing price as of their first day of trading on the public market.

But before I reveal the answer, which really shocked me and my colleagues, here are a few caveats about the data I have:

  1. Shares which were delisted from the market prior to 11 December 2014 are not included in the study;
  2. Shares which have been listed prior to January 1992 would see their “first trading day” as 2 January 1992;
  3. There are 823 securities listed in Singapore according to S&P Capital IQ. But after filtering out depository receipts, preferred shares, exchange-traded funds, closed-end funds etc., I’m left with 752 shares;
  4. Returns from dividends were not included

So as you can see, my data set is definitely not exhaustive, and my study is certainly not meant to be an authoritative voice on local investors’ experience with IPOs (for instance, using the closing price of each share’s first day of trading can be unfair as their listing prices might be lower than the closing price). But, it’s still useful enough to get a general feel for the answer to my friend’s question.

And as it turns out, of the 752 shares that I looked at, some 497 were currently at prices lower than where they were at the close of  their very first day of trading. In other words, roughly two-thirds of local shares are now likely lower than their IPO prices.

Looking at the result of my study, it would appear that the answer to my friend’s question would be a “No” – it’s more likely that IPOs in Singapore are not underpriced. And, that’s the secret about IPOs that the finance industry will never tell you.

This result might scare off some investors from investing in Singapore’s market. But it shouldn’t. Amid the IPO-losers were also big winners. Shares like luxury tea and massage chair purveyor OSIM International Ltd. (SGX: O23), diamond manufacturing equipment maker Sarine Technologies Ltd (SGX: U77), healthcare services provider Raffles Medical Group Ltd. (SGX: R01), and food & beverage retail outfit BreadTalk Group Limited (SGX: 5DA), have all been great winners since their close on their first day of trading.

IPO share price table

Source: S&P Capital IQ

Finding more of such shares like the aforementioned quartet can help to make up for mistakes elsewhere. In addition, a share could also represent a great investing opportunity any time after its IPO if it so happens that its market price falls significantly below its real business value.

In short, having a large bunch of IPOs in Singapore with poor long-term performance does not mean that the alert investor would be short of investing opportunities.

A Fool’s take

Billionaire investor Warren Buffett once said on CNN that “The idea that something come out… that’s being offered with significant commissions, all kinds of publicity, the seller electing the time to sell, is going to be the best single investment that I can make in the world among thousands of choices is mathematically impossible.”

His words are meant for the U.S. market. But when you look back at how IPOs in Singapore have performed in general, Buffett’s words fit right in at home too.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Chong Ser Jing owns shares in Sarine Technologies and Raffles Medical Group.