Jumpstarting market with an IPO?

Last week, the issue of the crazy cheap valuations was tackled. One of the key issues is weak investor sentiment, which, frankly, can be fickle.

Let us face it, some market participants can have the attention span of an untrained puppy. Bullish today, bearish tomorrow.

In these cases, the market needs something to jog its memory and spur investors into action. One factor can be a humungous initial public offering (IPO).

Yes, that is right, and it only means one thing — GCash. The e-wallet has been touted as possibly the biggest local IPO with valuation estimates at $5 billion to $9 billion (around P300 billion to P520 billion market cap).

If the company does list, that means an estimated $1 billion to $1.5 billion worth of GCash shares will be introduced into the market. However, its management reportedly raised the current lack of liquidity in the stock market as a concern over the IPO plan.

This week, the Philippine Stock Exchange (PSE) granted exemptive relief, a special accommodation, to IPOs over P5 billion, like GCash, that would allow them to list with a minimum free float of 15 percent; provided they will do a follow-on offering or placement over the next three years, that would bring it to the required minimum of 20 percent. The PSE decision is stoking the possibility that the IPO is coming.

The GCash IPO, if it happens, has the potential to be the catalyst for a strong and sustained market recovery.

More than the size alone, it has a strong narrative that would resonate with foreign investors who are looking for unicorns, artificial intelligence (AI), and financial technology plays.

GCash is so deeply entrenched in the Philippine consumer behavior that it is almost (locally) ubiquitous to digital money as Colgate is to toothpaste.

Given the potential size of the IPO, this can remind more seasoned investors, of the IPO of Petron in 1994.

This is the IPO that everyone wanted to get their hands on. Privatization was a key theme back then and Petron was privatized with the sale of 40 percent to Saudi Aramco, and 20 percent to the public. Petron may have had the most diverse shareholder base with over 500,000 shareholders, according to the company.

Back then, however, the sentiment was very positive. President Fidel V. Ramos was leading the charge towards a tiger economy and foreign investors were seeking super-charged returns from the emerging markets. Quite a different environment from today.

Another example that may be more apt was the SM Investments Corp. IPO in 2005. Back then liquidity was similar to today and the investor sentiment was neutral.

Congress had just passed the Expanded VAT (a good thing) but our debt-to-GDP ratio was over 70 percent (a bad thing).

IPOs were sparse… until SM listed in March 2005. The company raised P26.5 billion, which dwarfed the P9 billion generated by Petron’s IPO.

What is important, however, is that after SM, there was a flurry of IPOs, which included First Generation, COL Financial, and Aboitiz Power. This rush of IPOs amazingly were happening as the Global Financial Crisis was unfolding.

The key point is that investors in the Philippine stock market respond positively to a good story and market participants should not worry about liquidity too much. We have been there before, and liquidity begets liquidity.

An IPO like GCash may just be what the market needs to get the PSEi back to 9,000. But an IPO with the potential size of GCash cannot do it alone in jumpstarting the market and like everything else, the how we jumpstart the market is equally important. This will be the subject for next week.