Lotte Chemical Titan wrapped up its Malaysia initial public offering two days later than scheduled on Tuesday, as price sensitivity among investors forced the petrochemical group to offer fewer shares than intended, at a cost below the bottom end of its initial target.
The Southeast Asian unit of Seoul-listed Lotte Chemical raised M$3.8 billion ($877 million) on Tuesday after extending bookbuilding by a day on Monday. It had set out with a target of some M$5.923 billion in pre-marketing last month, meaning its final deal was worth some 36% less.
The deal was eventually priced at M$6.5 per share, some 14% lower than the bottom end of the initial M$7.6 to M$8 price guidance. At the same time, the group cut the number of shares on offer by 22% to 580 million, as it hoped a smaller deal would be easier for the market to digest and hence ensure a better post-IPO performance. The revised deal has a free float of 25%, against the planned 30%.
Lotte Chemical Titan's difficulties offer a timely reminder of the need to gauge investor interest more closely at a time of soaring stock prices. The petrochemical group might have been confident of hitting a rich valuation on the back of a 7.5% gain in Malaysian stocks this year, but investors clearly didn't share those positive vibes.
For their part, syndicate analysts had faced a challenge to come up with a fair valuation, given the large discrepancies between petrochemical producers in the region. For instance, LG Chemical trades at 11.2 times earnings on a rolling twelve-month basis, while Petronas Chemical trades at 15.5 times. Meanwhile Japan’s Mitsui Chemical trades at only 9.5 times earnings.
At the first attempt, Lotte Chemical Titan pitched its deal at around 12 times 2018 earnings, implying it had sought a valuation north of most of its peers.
Some potential investors might have been hesitant at that price because it suggest Lotte Chemical Titan’s value had grown much more quickly than that of its parent since it was taken private by Lotte Group in 2010. Its projected market value of M$15 billion is more than four times larger than six years ago, while Lotte Chemical's shares had risen only 80% in that time.
It also did not help when Lotte Chemical is trading at a much lower price-to-earnings multiple of five times on a forward basis, indicating that the company is selling the stake in its Southeast Asian unit at a valuation of more than double its market price.
In any case, the group was able to bring in higher quality investors with the revised deal. One source familiar with the situation said the incremental demand included several large orders from foreign long-only funds, including one government-linked fund in the region.
In the end, around 90% of shares ended up in the hands of long-only investors. As with other Malaysian IPOs, the Lotte Chemical Titan deal was well supported by local institutions, with 78% of shares going to local funds.
One attraction to local funds is Lotte Chemical Titan’s likely inclusion in the MSCI Malaysia Index. Meanwhile, the company’s projected dividend yield of 4.4% is also high by Malaysia standards – only five of the 30 constituents of the benchmark Kuala Lumpur Composite Index yield more than that.
Smaller proceeds from the downsized deal should have limited impact on Lotte Chemical’s existing business since the company is still in a net cash position.
Despite the smaller deal size, Lotte Chemical Titan still stands as the seventh biggest IPO in Malaysia history and the largest deal in nearly five years since Astro Malaysia’s $1.5 billion floatation in October 2012.
Joint global co-ordinators for Lotte Chemical Titan’s IPO were Maybank, Credit Suisse and JP Morgan, while CIMB, HSBC and Nomura were joint bookrunners.
