IPOs PERFORMANCERoyal 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

TABLE OF CONTENTS

CHAPTER ONE: INTRODUCTION / BACKGROUND.................................................................3

CHAPTER TWO: LITERATURE REVIEW...................................................................................5

CHAPTER THREE: TYPE AND STRUCTURE OF TAKAFUL..........................................................8

CHAPTER FOUR: SHARI’AH & FINANCIAL ISSUES OF TAKAFUL............................................12

CHAPTER FIVE: CONCLUSIONS / RECOMMENDATIONS.......................................................20

BIBLIOGRAPHY..................................................................................................................22

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2

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 world’s 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 SME’s 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 world’s 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 UK’s 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 Mail’s 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

21st 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 it’s 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

PER= IPO PriceEPSRatio

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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Ri1=Pi1Pi0

−1

Where Pi1 is the closing price o the stock I at the first trading day, and Pi0 is its offering price

and Ri1 is the total first day’s return on the stock. The return on the market index during the

same time period is :-

Rm1=Pm1Pm0

−1

Where Pm1 is the closing market inde value at the first trading day, and Pm0 is the closing

market inde value on the offering day of the appropiate stock, while Rm1 is the first day’s

comparable market return.

Using these two returns, the market-adjusted abnormal return for the IPO on the first day of

trading is computed as:

MAARi1=100(Ri1Rm1

)

MAAR 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,:

Ri1+t=Pi1+tPi1

−1

Rm1+t=Pm1+tPm1

−1

MABHR i1=100(Ri1+tRm1+t

)

In which Pi1 is the stock price and Pm1 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

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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 ASSESSMENTBased 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 21st 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 group’s 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 MAILFrom 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 11th October 2013. FTSE 100

Index is chosen as the market index.

Royal Mail’s market-adjusted abnormal return on the first day of trading as computed as the

formula MAARi1=100(Ri1Rm1

) 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

3rd month 790%

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6th month 797%

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

26/Mar/

13

13/Apr/13

1/May/13

19/May/13

6/Jun/13

24/Jun/13

12/Jul/13

30/Jul/13

17/Aug/13

4/Sep/13

22/Sep/13

10/Oct/13

28/Oct/13

15/Nov/13

3/Dec/13

21/Dec/13

8/Jan/14

26/Jan/14

13/Feb/14

3/Mar/

14

21/Mar/

14

8/Apr/14

0

20

40

60

80

100

120

140

160

Graphene Nanochem Stock Price after IPO

time

Pri

ce in

Pen

ce

Graphene Nanochem’s market-adjusted abnormal return on the first day of trading as computed

as the formula MAARi1=100(Ri1Rm1

) 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, MABHR i1=100(Ri1+tRm1+t

) , in

which we compared the normalised 3rd months onwards stock price with the price at the

end of the 1st day trading. The available data enable us to do analysis until the 12th 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

3rd month 9.74%

6th month -14.56%

9th month -0.91%

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12th 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 6th 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 12th 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

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