IPOs PERFORMANCE

Royal Mail PLC & Graphene Nanochem PLC

London Stock Exchange 2013

FINANCE 6850
INDIVIDUAL PAPER:
CORPORATE FINANCE




SEMESTER: SEM 2 2013/2014
STUDENT: ISHAM SHAFARIN BIN ISHAK (G1128403)

EXAMINER: DR. ROSLILY BT RAMLEE

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TABLE OF CONTENTS
CHAPTER ONE: INTRODUCTION / BACKGROUND.............. ERROR! BOOKMARK NOT DEFINED.
CHAPTER TWO: LITERATURE REVIEW ............................... ERROR! BOOKMARK NOT DEFINED.
CHAPTER THREE: TYPE AND STRUCTURE OF TAKAFUL ...... ERROR! BOOKMARK NOT DEFINED.
CHAPTER FOUR: SHARIAH & FINANCIAL ISSUES OF TAKAFULERROR! BOOKMARK NOT DEFINED.
CHAPTER FIVE: CONCLUSIONS / RECOMMENDATIONS ..... ERROR! BOOKMARK NOT DEFINED.
BIBLIOGRAPHY ................................................................................................................ 15
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2 SELECTION OF STOCK EXHANGES & COMPANIES
According to website World Stock Exchanges (1) London Stock Exchanges is the oldest and
the fourth largest in the world and the largest in Europe in term of market capitalization. Its history
can be traced back to The Royal Exchange (2) which had been founded by Thomas Gresham on the
model of the Antwerp Bourse, as a stock exchange. It was opened by Queen Elizabeth I in 1571.
It is the most international of all the worlds stock exchanges, with around 3,000 companies
from over 70 countries admitted to trading on its markets. The wide availability of information in
English for the companies traded in the stock exchange is also why it is chosen.
In 2011, London Stock Market has a Market Capitalization of USD 3,266 billion, and a trade
value of USD 2,871 billion.
The London Stock Exchange runs several markets for listing, giving an opportunity for
different sized companies to list. For the biggest companies exists the Premium Listed Main Market,
while in terms of smaller SMEs the Stock Exchange operates the Alternative Investment Market and
for international companies that fall outside the EU, it operates the Depository Receipt scheme as a
way of listing and raising capital. A wide range of businesses including early stage, venture capital
backed as well as more established companies join AIM seeking access to growth capital. The AIM
falls within the classification of a Multilateral Trading Facility (MTF) as defined under the MiFID
directive in 2004, and such is a flexible market with a simpler admission process for companies
wanting to be publicly listed.
The largest IPO (Initial Publical Offering) on the Exchange was completed in May 2011 by
Glencore International plc. The company raised $10bn at admission, making it one of the largest IPO
ever. This means that the London Stock Exchange has established itself as one of the worlds premier
stock exchange, able to raised multi billions investment as well as cater for small startups.
To better demonstrate this, the biggest IPO of the year 2013 for London Stock Exchange
which is the UKs Royal Mail and a small nanotechnology company from Malaysia, Graphene
Nanochem is chosen as the subject of study for this assignment.


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ROYAL MAIL IPO
Royal Mails IPO is the biggest UK government flotation for two decades as the 60pc
of its ownership was sold. It is the biggest and most intensely watched IPO in 2003 from
London Stock Exchange. The IPO has successfully raised 2billion for the government of UK
as the original owner of the shares. A total of 6b of Ordinary Shares are offered to the
institutions, private investors and staff at a price of 3.30each. It also brings a lot of
question of stock underpricing to the government of the day for UK since the stock has
raised by more than 60% on the first day of trading and has managed to sustain its pricing 6
months after IPO.
Royal Mail is a postal service company in the United Kingdom of Great Britain and
Northern Ireland. It was established in 1516. (3) The company's subsidiary, Royal Mail
Group Limited, operates the brands Royal Mail (letters) and Parcelforce Worldwide
(parcels). General Logistics Systems, an international logistics company, is a wholly owned
subsidiary of Royal Mail Group. The company is responsible for mail collection and delivery
throughout the UK.
For most of its history, Royal Mail has been a public service, operating as a
government department or public corporation. However, following the Postal Services Act
2011, a majority of the shares in Royal Mail were floated on the London Stock Exchange on
15 October 2013 and the company became a constituent of the FTSE 100 Index on 23
December 2013. The UK Government continues to hold a 30% stake in Royal Mail through
Postal Services Holding Company Limited. The same holding company is also the parent of
Post Office Ltd, which was separated from Royal Mail on 1 April 2012 and remains state-
owned.
Graphene Nanochem PLC
Graphene Nanochem was established after a reverse takeover of Biofutures
International Group by Platinum Nanochem Group. Biofutures International was
incorporated in February 2006, and was listed in London Stock Exchange in May 2006. The
company then acquired Zurex, which produce biodiesel from Palm Oil in Lahad Datu, Sabah.
Platinum NanoChem is a Malaysian based company whose business model is to design,
formulate, manufacture and market a range of IP (Intellectual Property)-backed speciality
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chemicals and advanced materials including Graphene from waste feedstocks. Following
the completion of this acquisition, the Graphene Nanochem PLC is now a trading company
involved in the design, formulation, and manufacturing of intermediate and performance
chemicals and advanced nanomaterial.
Graphene is a new wonder material that is prophesized to change human life in the
21
st
century with its many applications. According to
http://www.graphene.manchester.ac.uk/, Graphene is a two dimensional material
consisting of a single layer of carbon atoms arranged in a honeycomb or chicken wire
structure. It is the thinnest material known and yet is also one of the strongest. It conducts
electricity as efficiently as copper and outperforms all other materials as a conductor of
heat.
It was first isolated by Andre Geim and Kostya Novoselov at the University of Manchester in
2003, both of them became a Nobel Price winner in 2010 for their breakthrough research.
Graphene Nanochem placed huge bet into Graphene will be a huge business opportunity. They are
able to internally produce graphene nanomaterials on commercial scale to enable the development
of graphene-enhanced products portfolio for high performance industry applications. They has
established alliances with applications R&D labs in Shanghai, China and Camarillo, United States.
Their first graphene-enhanced chemical, PlatDrillTM is a high performance biodegradable drilling
fluids which already received orders from Exxon and Shell.

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2.1 METHODOLOGY
As the subject of the assignment is to assess the IPO Performance, we split the
assessment into two major parts, before and after the IPO. Assessment before the IPO is to
assess the IPO pricing rationality and whether its a Good Buy or not. Assessment after IPO is
mainly to see whether the IPO price is justified by the market and whether its performance is
sustained in a medium term.
IPO Price Assessment
Assessment before IPO is depending the information contained in the IPO Prospectus or
the last annual statement. We will concentrate on the Income Statement and the Balance Sheet
of the company to assess the company profitability and any business info that it shared. Based
on the information, we will try to calculate the Earning per Share (EPS) and eventually the Price
/ Earning Ratio (PER) which is a good indication of whether the IPO is overpriced or
underpriced.
How to calculate the EPS Ratio
Earnings per share is calculated by taking a company's net income over the last four quarters,
subtracting any dividends, and then dividing the rest by the number of shares outstanding:

PER Ratio for the IPO is calculated using the following formula




2.2 ASSESSMENT AFTER IPO
2.2.1 Short Term Performance of IPOs (Day One of Trading)
For IPO which is underprice especially, day one of the trading will shows a drastic change of
price with a huge volume of shares traded. Those shareholder who want to make a quick profit will
sell their shares quickly, and those medium and long term investors who want to invest in the
company will try to buy the share before the price goes ever higher.
The methodology that is used is based on Aggarwal, Leal and Hernandez. The total return for
stock I at the end of the first day trading is calculated as
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Where

is the closing price o the stock I at the first trading day, and

is its offering
price and

is the total first days return on the stock. The return on the market index during
the same time period is :-

Where

is the closing market inde value at the first trading day, and

is the closing
market inde value on the offering day of the appropiate stock, while

is the first days

comparable market return.
Using these two returns, the market-adjusted abnormal return for the IPO on the first day of
trading is computed as:

is the sample mean abnormal return for the first trading day and may be viewed as
a Performance index which reflects the return, in excess of the market return, on an investment.
2.3 MEDIUM TERM PERFORMANCE OF THE IPOS
Similarly, the Medium Term Performance for a stock is is estimated by computing market
adjusted buy and hold returns (MABHR) for the periods of t months after the IPO. The following
formula is applied,:

In which

is the stock price and

is the market index price. The price and market

price is compared to the price of the closing of the first day of the IPO. Due to limited time after
the IPOs, the t chosen for the study is 3,6,9, and 12 months after IPO depending on the
availability of data.
3 IPO PRICE ASSESSMENT
3.1 ROYAL MAIL ASSESSMENT
Based on the IPO Prospectus, starting in 2008 and still continue until now, Royal Mail is
undergoing a massive transformation program to convert a legacy public service enterprise with
historic under investment and working practices into a 21
st
Century business able to thrive in a de-
regulated market without losing public service commitment. (5) The transformation program has
improved the financial bottom line of the company, change the culture of public servant into the
dynamic private company and has improved the customer service to be on par with the best of
private companies. The overall productivity and effectiveness of the Royal Mail has been improved
significantly and now well positioned to benefit further from growth in UK parcel market and at the
same time, to deliver high levels of service.
Also mentioned quite prominently in the IPO Prospectus is the uneasy relationship of the
company with its unions. the Communications Workers Union (CWU) which represents 250,000
people in postal, telecommunications and financial services industries in the UK and Communication
Managers' Association (CMA). The CWU represent frontline employees including postmen and
postwomen. CMA represent 40% of the groups junior and middle managers. Both unions are
opposing the privatization very strongly and have been identified as one of the major threat to the
performance of the public listed company. Disagreements or disputes between the Group and its
trade unions could result in widespread localised or national industrial action. This would result in an
immediate and significant loss of revenue for the group.
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Figure 1 Summary of Key Financial and Operating Measures for the Group

The operating margin of 4.7% shown in the year 2013 shows a very positive figure. The
statement shows a healthy operating profit with a steady growth of income (EBITDA) of
approximately 30% in the last three years. It showed that the transformation program that Royal
Mail has undergone is very successful and has prepared it to face the privatization exercise.

Figure 2 Selected key pro forma financial information
The balance sheet also shows a healthy company with a Net Assets of over 1.3billion
which is an accumulation of previous earnings.
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According to the IPO Prospectus, In respect of FYE 2014, in the absence of unforeseen
circumstances, the Directors intend to propose a final dividend only, to be paid in July 2014, of 133
million. This amount is approximately two-thirds of the notional full-year dividend of 200 million
that the Directors believe they would have proposed if the Company had been listed throughout FYE
2014. This translates to an expected dividend yield 6.1pc to 7.7pc.
3.1.1 EPS & P/E RATIO FOR ROYAL MAIL
From the financial statement, we have the net income for the full 4 quarters in 2013. Thus
based on the formula and a tax rate of 23% for a company listed in UK, we calculated an earnings
per share of 50.4p. Based on the selling price of 3.30, this translated to a P/E Ratio of 6.55 times,
which shows a very good value for money for the IPO shares. For comparison, the average P/E ratio
of FTE100 companies is 15.
3.2 GRAPHENE NANOCHEM ASSESSMENT

Figure 3 Profit and Lost Statement in the Graphene Nanochem Annual Report 2013

From here, it shows that the company is not currently making profit, and solely dependent
on the success of Graphene as its one and only source of making future profit.
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PER ratio cannot be used to estimate the IPO price for Graphene case since the company is
not making profit at the point of IPO.
Balance Sheet in the Graphene Nanochem Annual Report 2013

According to the report, there is an impairment loss of 10million (Note 13 in the Balance
Sheet) due to write-off due to net value of asset acquired, related to the license to manufacture
palm oil biodiesel and the refinery license. This is a worrying finding and does not portray the
current management team in a good light.
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4 SHARE PRICE PERFORMANCE AFTER IPO
4.1 ROYAL MAIL
Date Adj Close* in
Pounds
FTSE Index Description
IPO Price = 350 6,430.39
11-Oct-13 455 6,487.19 Day 1
14-Oct-13 502.5 6,507.65
21-Oct-13 555 6,654.20
28-Oct-13 574 6,725.82
04-Nov-13 569 6,763.62
11-Nov-13 560 6,728.37 Month 1
18-Nov-13 539 6,723.46
25-Nov-13 555 6,636.22
02-Dec-13 594.5 6,595.33
09-Dec-13 589.5 6,559.48
16-Dec-13 591 6,522.20 Month 2
23-Dec-13 580 6,678.61
30-Dec-13 580 6,731.27
06-Jan-14 583 6,730.73
13-Jan-14 604.5 6,757.15 Month 3
20-Jan-14 572.5 6,836.73
27-Jan-14 598 6,550.66
03-Feb-14 589 6,465.66
10-Feb-14 594.5 6,591.55 Month 4
17-Feb-14 600 6,736
24-Feb-14 600 6,865.86
03-Mar-14 587 6,708.35
10-Mar-14 566 6,689.45 Month 5
17-Mar-14 581.5 6,568.35
24-Mar-14 564 6,520.39
31-Mar-14 549.5 6,598.37
07-Apr-14 495 6,622.84
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14-Apr-14 509 6,583.76 Month 6
21-Apr-14 519.5 6,681.76
28-Apr-14 511.5 6,700.16



Figure 4 Royal Mail's Stock Price After Day 1 from UK Yahoo Finance
For Royal Mail, here is its weekly stock price from its IPO in 11
th
October 2013. FTSE 100
Index is chosen as the market index.
Royal Mails market-adjusted abnormal return on the first day of trading as computed as the
formula

is a staggering 3396% or 33.96 above the market return
for that day!.
For the third month and six month performance compared to the performance of the 1
st
day of
trading, the stock achieved a respectable 790% (7.9 times) and 797% (7.97 times) above the
market return.
Table 1 Royal Mail Medium Term Performance After IPO
Time after IPO MABHR
3
rd
month 790%
14
6
th
month 797%

Based on these findings, it is very obvious that the stock is underpriced for the IPO.


Graphene Nanochems market-adjusted abnormal return on the first day of trading as computed
as the formula

is a 4.62% or 0.0462 above the market return for
that day.
For the long term performance, we have used the previous formula,

, in which we compared the normalised 3
rd
months onwards
stock price with the price at the end of the 1
st
day trading. The available data enable us to
do analysis until the 12
th
month after IPO. We have put the result in the following table

Table 2 Graphene Nanochem Medium Term Performance after IPO
Time after IPO MABHR
3
rd
month 9.74%
6
th
month -14.56%
0
20
40
60
80
100
120
140
160
P
R
I
C
E

I
N

P
E
N
C
E

TIME
Graphene Nanochem Stock Price after IPO
15
9
th
month -0.91%
12
th
month -1.9%

Initially, we find there is a slight underpricing for IPO in which on the 1
st
day of trading, the
share price has risen 4.62% and this is sustained up until the the 3
rd
month in which the
price is risen further to 9.74% above the AIM index. But due to other factors, this trend is
not sustained in the 6
th
month onwards in which the price has fallen in comparison to the
AIM Index to -14.56%, -0.91% and finally at -1.9% on the 12
th
month after IP.
5 BIBLIOGRAPHY
1. http://www.world-stock-exchanges.net/top10.html
2. http://en.wikipedia.org/wiki/London_Stock_Exchange
3. http://www.theguardian.com/uk-news/2013/oct/07/royal-mail-ipo-shares-floatation
4. http://en.wikipedia.org/wiki/Royal_Mail
5. http://www.apm.org.uk/news/achieving-transformational-change-royal-mail-
experience#.U14Nj_mSwsY
6. Graphene Nanochem Annual Report 2012.
7. http://www.wealthdaily.com/articles/graphene-nanochem-aimgrph-bets-big-on-oil-
market/4113
8. http://www.investopedia.com/articles/financial-theory/11/how-an-ipo-is-valued.asp