Korean shipping company STX Pan Ocean, priced its IPO on Friday (July 8) in what can only be described as awful conditions. The first Korean company to list in Singapore not only faced poor sentiment on the sector and falling shipping rates, but also the impact of the London terrorist bombings, which all but erased European demand. In the event, the deal was priced some way through the bottom of the range (S$0.96) at S$0.90.
This was always going to be a tough deal to do. Investors had watched as China Cosco's IPO priced at the bottom end of its range and then declined 10% on its first day of trading. During STX's roadshow period, China Cosco ceased to recover, with ever more analysts forecasting that excess new shipping capacity next year will downwardly impact shipping rates.
Nevertheless, at the outset lead manager Goldman Sachs believed conditions might improve. When STX began its roadshow process the key shipping rate indicator, the Baltic Dry Index, had bounced off its lows, and traded up from 2,510 on June 21 to 2,621 on June 28. The company hoped this would mirror lasty year's trend, when shipping rates declined, then turned upwards from the middle of the year.
Unfortunately, that proved not to be the case. During the roadshow, the Baltic Dry Index fell 6.5%, going down every business day the roadshow took place. This was bad enough, but the terrorist attack in London was the sort of event that would have wrecked even a deal with a good wind in its sails.
At this point, the lead cut the price to buffer the order book and ty to ensure a decent aftermarket performance. At S$0.90, the deal was 1.6 times covered on the institutional side, and allocated to 42 accounts. These accounts were heavily skewed towards Asia: indeed 77% were in Asia, 21% in the US and only 2% in Europe. Indeed, this may be the poorest response to an Asian IPO from European investors ever.
The institutional component of the deal was 95% and the remainder was a Singapore retail tranche, which was 2.56 times subscribed. The deal represented 35% of STX Pan Ocean's outstanding stock and raised $318 million (or $366 million if the greenshoe is allocated).
At this price, the company will pay a handsome annualized dividend yield for 2005 of 22% - a return that was always one of the deal's key selling points. It has been priced at a price earnings ratio of 2.8 times forward earnings, which compares favourably with China Cosco (three times) and comparables such as Precious Shipping (3.2 times) and Pacific Basin (4.2 times).
The company had the option to postpone the deal, and based on events in London that is hardly a surprise. However, part of the reason for the IPO is the company needs S$119 million to buy new tankers, and the company took the view that even if it postponed till September conditions may not be any better in the shipping sector and the equity markets.
The company's business is very closely linked to the commodity cycle. About 91% of its revenues come from dry bulk shipping - commodities such as grain, steel, wood, coal and sugar. The remaining 9% comes from tankers, containers and car carriers.
On listing it will have a market capitalization of close to $1 billion and be the largest dry bulk shipper listed on any Asian exchange. It currently owns 57 vessels and charters a further 200.
The Korean company was founded in 1966, and has a somewhat complicated history. It got into trouble in the 1980s when government policy forced it to merge with weaker, non-profitable companies, which resulted in its final bankruptcy. KDB then auctioned the company off, with fellow Korean company, STX being the eventual winner.
Three STX Group companies took shareholdings: STX Engineering, STX Shipping and POS Ship Management. These businesses variously own shipyards and other ancillary nautical services such as provide crews. After the auction, the STX Group ended up with 78.5% of the business - a stake which it felt was too high. Another purpose of the IPO is to get its stake down to a level it feels more comfortable with. In this case, should the deal's greenshoe be used, STX's stake would be reduced to 40.8%.
The company is due to start trading on July 14.
