Saturday, July 22, 2006

Crash stock: Ipco 1 comments

(P.S: Sorry for any disturbances the advertisements above may have caused you)
Ipco is probably one of the more colourful stocks on the SGX. However, it is also one of the greatest destroyers of shareholder value over the last ten years. A shareholder buying in at $5/share in 1993 before the start of the 1994 bull surge would be left with <$0.10/share today (assuming he had not exercised a rights issue in 1997) --- a reverse 50-bagger over 13 years excluding opportunity costs.

The evolution of Ipco since its listing in 1993 may be divided into three stages: from 1993-99, 1999-2004, and finally 2004-now. The shareholding structure of the company, and its main business operations, underwent major changes through each of these stages.

The company was founded in the 1970s and at time of listing, its major shareholders were an Australian-listed group, Leighton group, and Malaysia-based Promet, an infrastructure, maritime engineering and construction group which was a stock market darling during its time --- veteran investors would be familiar with it. Ipco was involved in infrastructure, construction and oilfield services/equipment, and given its linkages with Promet it quickly became a hot stock during the bull run in late 1993-94, hitting a peak of $10 or ~25X trailing PE. However, a normalisation of market sentiment drove the price downwards to around $2 by 1996. The company was still profitable in its core operations, deriving S$7M profit on nearly S$300M revenue in 1996, although earnings growth was patchy.

The 1997 Asian financial crisis hit the company badly, a blow from which I believe it was never able to recover since. Most construction companies were hit, given that the heavily-leveraged property developers across Southeast-Asia bore the brunt of the currency shock. Over 1997-1999 Ipco accummulated losses of over S$100M. Promet itself was troubled due to its property commitments and in 1999 pared down its Ipco stake from >70% to <10%. Ipco's share price had dived to 60-70 cents by 1999, albeit having had an 8-for-10 rights issue in late 1997 (which apparently sparked a huge short-term spike to >S$3).

The second stage began with an Indonesian businessman Purwadi taking charge, and the landmark event being an amazing share issue of 650 million new shares valued at US$0.20 a share (existing share capital had been 70 million shares) for the purchase of a toll operator Spring Sun International which owned a stake in two China toll roads. Today it would be known as a reverse takeover. However, the seller appeared not exactly keen to hold on to the Ipco shares, as there was a subsidiary agreement to sell back the shares to Purwadi in stages subsequently. It appeared to be a way for Purwadi to gradually consolidate shareholding control over Ipco, except that he couldn't: according to "regulations" he was unable to hold more than 25% at any time, which of course meant he would probably place these shares out to the market eventually. Strangely, a steady flow of market news and imminent deals cultivates the speculative instincts in traders, and Ipco's share price surged from $1 to $4 within the space of one month in April 2000 (a move contrary to the market trend, given that the dot-com bubble burst in that month), then retreated even more quickly back to $1 within the next few weeks. There is reason to believe the stock had been cornered.

The deal eventually went through but Purwadi had rescinded his offer to buy back the shares. He was lucky, for Ipco languished at ~10-20 cents, way below the original issue price of US$0.20. Anyway, the SSI seller, Hi-Way Investments, probably eventually offloaded its huge stake in mid-2002 at a loss. But it had also, in turn, probably screwed Ipco in its own way: operating losses were actually incurred on the toll roads over the next two years, and eventually Ipco sold off its SSI stake at a S$80M loss, a 40% loss on its initial investment (which admittedly cost no money, but destroyed shareholder value through massive dilution). Ipco had somehow managed to contrive a deal where all parties were made to feel that they had lost big-time.

In-between, there were so many miscellaneous deals here, there, everywhere that the minority shareholder must have been bedazzled. There were oil-and-gas deals in Thailand which ended in litigation, new share placement deals (again!) to acquire an explosives company (never went through), and attempted listing of a subsidiary Insitu (also never went through). Finally, under new management in 2004, Ipco decided enough was enough, and restructured yet again, selling off all its core infrastructure and construction assets and acquiring yet another set of assets, comprising stakes in companies doing electronics , property, oil and gas, gas supply, located in Malaysia, China, USA, Singapore (confusing, but in alignment with the company's "culture"). This is the third stage. It is still evolving, and I shall not go into it further because I have already covered it in a Hotstocksnot article on Ipco recently.

One thing cannot be denied, and that is the speculative nature of the stock, which has made it a traders' favourite. It is interesting to note that starting 1994 when Ipco had its first price spike, it had had one every 3 years, in 1997, then in 2000. Since then, it has not had any real price surges of note. Traders, however, still believe in it.

But for what? It is a prime example of a management being distracted by too much dealflow and attempting to capitalise opportunistically on the stock market to grow the firm (through new share placements to finance acquisitions), but instead losing focus and missing the forest for the trees. Most importantly, it continually compromised the minority shareholders. This was especially apparent in the SSI deal. Those who believe they can still ride on the stock when it recovers might end up being trampled by the vagaries of its management.

(1) Various issues of "Shares Investment"




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