Are we missing opportunities to buy gold at the price of an iron? Comparative study of over-subscribed SCB’s FPO and under-subscribed NMB’s FPO

We are in the second year of bearish market. As of today, investors are threatened by their own fear that market will never return back to bullish trend.

Back in 2015’s earthquake, the prices of real estate went down because people were not eager to own buildings. The continuous tremor over the long period of time often forces us to believe even on the rumors. As a result of negative sentiment created by earthquake, many people sold their property at lower cost and currently the prices of those properties are booming. Those who bought property at that time do understood its worth.

The Nepalese stock market is in the same pace today. Investors have lost hope of a bullish market. We often hear lots of negative news and react on such news. On the irony, often even if the news is positive; we don’t react when we are in a bearish market. There is no specific period that will end bearish market but yet this time is regarded as the best time for buying.

It is not just us, every fundamental analyst recommend buying during the bear market. The most common financials they use are Return on Asset, P/E ratio, Net worth, Profit, Graham’s ratio etc. There are other things to consider such as how company is earning?,company's history, background, operation, board, management team, etc.

Here in this article, we facilitate the readers by comparing the over-subscribed SCB FPO and under-subscribed NMB Bank’s FPO

First let us understand, what is FPO?

FPO is further public offerings issued by the company. It is usually issued when company is in the need of funds for supporting new projects. It is issued after the initial public offering has been floated to meet the capital needs.

Let us compare the last three year’s financials of both the bank.

SCB issued FPO from 14^th to 17^th March 2017 at Rs 1,290. SCB was supposed to collect Rs 3.30 arba from FPO and incredibly got application for the amount of Rs 38.18 arba which was over-subscribed by 11.57 times in four days.

Major Financial indicators of SCB at the time of FPO.

We can see from above data profit, net worth per share and RoA of SCB had decreased compared to previous years. From Graham’s number it is clear that SCB FPO is hugely over-priced.

NMB issued FPO from 14^th June 2018 at Rs 333 per share. Total worth of issued FPO was Rs 3.8 arba and till the fifth day it collected only Rs 1.88 arba.  Its more than 50% worth FPO is still pending. In case if FPO gets undersubscribed, it wouldn’t be a problem for NMB bank because bank will collect its required funds from the under-writer.

The general public is waiting to buy it when its market price gets lower than the FPO price but no one knows when market will change the trend. In 2015, Nepal’s GDP had grown by the lowest figure comparing to last one decade. Did anyone expect Nepal stock market’s boom in 2015-16 when Nepal was passing through one of the worst economic crisis?  No one can predict accurately what will happen to NMB price or any other stock price in future but the long history of stock market says that the companies with sound financials always performed well.

The Major Financials of NMB bank till 3^rd quarter of 2074/2075 is given below.

From the above table it is clear that, NMB bank is a growing company and its FPO price is comparatively very cheap. SCB had grown negatively but still its FPO got over-subscribed whereas NMB had achieved outstanding growth in last two years but still its FPO gets under-subscribed.

In the bullish market investors don’t really care about the prices. They are ready to buy stock at any price. On the other hand, in the bearish market even very cheap stocks are considered expensive. One of the features of bearish market is that it sells gold at the price of iron while the bullish market sells iron at the price of gold. In bear market, public usually miss great opportunity.

Now, let’s discuss on the FPO price. SCB’s FPO issued at Rs 1,290, whose net-worth then stood at Rs 220.   So, investors paid more than 5.86 times of its book value. If bank liquidated at that point, then investors would had been paid Rs 220 against Rs 1,290. So we can say that SCB FPO was highly overpriced than the NMB’s FPO.

NMB FPO price is 1.76 times of its net worth and its Graham’s number stands at 25.69 at market price. Considering FPO price, P/E ratio will stands at 10.92 times and Graham’s number stand at 19.21 which simply says NMB’s FPO is comparatively cheaper than most of the traded commercial bank.  NMB Bank had generated consistent profit year after year and had distributed dividends continuously since the fiscal year 2069/2070. The bank is generating consistent profit that means company can stabilize its net worth per share and most probably stock price won’t go beyond its net worth.

The closed price of SCB on the date of FPO approved by SEBON was Rs 1,800 on 12^th Feb 2017. This means, the company floated FPO at the discount of 28.33% and as the market was bullish, its price had increased making FPO more attractive. NMB’s FPO was approved on 1st June, where its LTP stood at Rs 405. NMB floated FPO at the discount of 17.77 % but as the trend was negative, NMB’s stock price had fallen regularly making its FPO unattractive. Investors assume buying expensive stock at large discount is intelligence but it is important to understand the worth of the stock that you are buying.

Why SCB’s FPO got over-subscribed even at the very expensive price?

At that time there was a big charm of bonus and right share and by the issuance of SCB’s FPO investors observed the possibility of distributing large bonus and that upsurge its market price.  Investors got mesmerized when they found FPO was issued at comparatively low price. The discounted price and dividend distribution possibilities had attracted investors but not the worth of SCB. If we consider FPO price of SCB at that time then it won’t worth paying Rs 1,290. Now NMB bank’s FPO got approved when price was Rs 405 and the falling NMB price is not appreciable among the investors.

After the issuance of FPO, any company can distribute bonus shares but that concept in no more attractive in bear market in Nepal. Here in Nepal, investors only care about the discounted price and ignore its worth. They want stock price to go down and at the same time they want market to go up.

Is it fair to complain about bearish trend when we don’t enter market even in the positive information? Who do we think can change bearish market to bullish one?

If investors don’t react on the positive information then market’s bearish trend will get stronger and will take more time to reverse. For the change of downward market, we need to enter the market when it gives opportunity.

NEPSE index is in the second year of bearish trend. We cannot say exactly when this trend will change or if the index is at the bottom or when will the trend end. But we can definitely say that bearish trend will change and strong bullish market will start.  It is not only about the FPO of NMB bank; other companies FPOs are worth buying if their financials, past performance, dividend history is fine. Not only FPO, even the shares that’s above mentioned figures is fine then it worth buying. Market always moves in bear & bull trend and that is not a matter of concern . The most important notion is to buy stock at its worth.