Since the start of 2023, the Colombo Stock Exchange (CSE) has seen about seven delistings, while only three Initial Public Offerings (IPOs) have taken place.
Listing and delisting is a standard process seen in every equity market, but the recent decisions of multinationals such as Nestlé and Expolanka have captured the attention of the public, which is now questioning their impact on the market and whether others will follow suit.
The Sunday Morning decided to look into the possibility of such an impact and what the future holds for the Colombo bourse, amidst expectations for Sri Lanka to demonstrate economic growth in 2024 after two years.
Delisting could be a strategic decision
Speaking to The Sunday Morning, Softlogic Stockbrokers Co-Head of Research Raynal Wickremeratne said that one or two companies delisting from the stock market could not be taken as a sign that other companies would delist, since multinational companies typically delisted in order to align with their global strategy.
Pointing to the delisting of Nestlé as an example, he noted that its subsidiaries in different countries had all opted for delisting, while Expolanka could have delisted following a strategic decision taken at the level of the holding company.
He said that these changes could be due to such strategic moves, as opposed to a real trend in the market: “The market will have IPOs, listings, and delistings, which are just part of the process.”
Moreover, addressing how it would impact those who were currently involved in Expolanka as company shareholders, he said that they would not have liquidity naturally as they were not trading it on the stock exchange.
Wickremeratne said that going forward, the performance of the economy, political stability, and external debt restructuring would be decided by the major companies remaining in the market.
He noted that the Business Condition Index of the Central Bank has improved to its highest point in the last two years. Accordingly, this index stood at 93 in Q4 2023 – the highest rank it achieved since the start of 2022 – and was mainly driven by the improved sentiments in the services sector.
Further, Wickremeratne said that in terms of access to finance and the input-output cost, the latter had been reducing on a regular basis for the past few months while access to finance had started to increase.
Therefore, he said that such indications demonstrated that the economy was starting to grow again, which would be the main driver of market growth as opposed to the actions of one or two listed companies.
He further noted that investors who were used to trading shares like Expolanka would experience a slight reduction in liquidity the day after it was delisted, but that it would be a short-term development.
“Investors typically look for different counters they can trade on or invest in, and if Expolanka is not there, they will eventually find another counter,” he said.
Conditions suitable for IPOs
Wickremeratne said that companies initiated IPOs since they could raise funds for their business or otherwise recognise the value of the company and sell a portion of its stake. He however noted that companies that wanted to go public should either have an excellent track record or an outlook on the company’s prospective performance.
He added that the outlook had to be accepted by all, since when a company initiated an IPO, everyone had to believe its story.
“If you are functioning under conditions where the economy is unstable or there is a lot of uncertainty, it is difficult for anyone to agree with the argument of a company’s performance,” he said, adding that under these conditions, the market may not see many IPOs.
According to Wickremeratne, the market saw an influx of IPOs during 2018-2019 and 2021, given the favourable economic conditions and tax concessions which encouraged companies to go public. “But now there is no major incentive for IPOs,” he said.
About 10 IPOs entered the market from 2018 to 2019, while in 2021, with the 50% tax concession on companies going public, about 13 IPOs made an entry. “If we get more economic, political, and overall stability, you will definitely see another wave of IPOs in an attempt to capitalise on this,” Wickremeratne said.
No significant impact
Speaking to The Sunday Morning, Capital Alliance Limited (CAL) Chief Strategist Udeeshan Jonas said that while there would be no significant impact on the market with the departure of multinationals, the money would circle back to the market through other stocks.
“The founders might take the money out, but others might recircle the money into the market,” he said, adding that the lack of quality companies coming into the market was a concern caused by the economic conditions.
He added that if the market were to move up suddenly, there would be a pipeline of pending IPOs, although they would not be of the same size as Expolanka. Moreover, he said that the main index would adjust accordingly after the delisting of Expolanka, although this would not have an impact on the index.
Jonas said that delisting Expolanka would reduce one liquid counter from the market, which was a concern, especially for foreigners: “It’s one less liquid counter but the money might still rotate within other companies in the market. The public float component might move towards another stock as people typically hold equity money to invest in equity,” he added.
IPOs after 2-3 months
Regarding market valuations and IPOs, Jonas said that valuations would now start to take place as the interest rates were at the right position, since the equity market would rise gradually with the rates starting to fall.
CAL expects the ASPI to reach 13,500 with the valuations picking up. Jonas expressed expectations that it would be a decent run due to the low interest rates, noting that the influx of Expolanka money, better corporate earnings, and election cycles would be positive for equities.
“We might see IPOs towards the next two to three months. If the market starts moving, we might have two or three IPOs pending,” he said, adding that the current bull run could be expected to continue until the elections and end or continue depending on the outcome of the polls.
Jonas therefore said that the ongoing bull run may ideally encourage new IPOs as bank deposits were now getting repriced.
Investments after Expo exit
A market analyst who wished to remain anonymous told The Sunday Morning that if investors of Expolanka accepted the share buyback offer and moved out of the company, there would be a sizeable inflow into the stock market.
He said that most of the investors had proceeded to invest in stocks without any in-depth knowledge, merely because they happened to see a headline on investing and heard that it was a rising stock, which was what had happened with Expolanka.
“These people will now be looking at taking a step back, doing a little more analysis, and trying to figure out what they need in order to invest strategically as opposed to investing merely because they have a stock market account,” he added.
Multinationals feeling undervalued
Speaking to The Sunday Morning, a former investment banker and an active investor at the CSE who wished to remain anonymous said that multinational companies delisted when they believed that their shares were not fairly valued by investors in the market.
He said that although these same multinational companies were trading at a high Price-Earnings Ratio (PER) in different markets, they were trading at a very low PER in Sri Lanka.
According to him, multinationals list on a stock market in order to display how many markets they are listed on, thereby building their reputations, rather than due to a need for funds from shareholders.
Moreover, he said that many regulations came into play in Sri Lanka concerning company management, which also had an impact on the listing as they had to be followed by all listed companies. “Multinationals will argue as to why they should spend time on regulations because the public holdings of most of these multinationals are less than 20%,” he added.
The former investment banker said that in Sri Lanka, about 90% of the stakes were held by companies like Ceylon Tobacco Company (CTC) or Nestlé, while in other countries, multinationals only sold shares when they were receiving a fair value.
“When the market is not valuing the stock properly, the multinationals can dilute their shares in the market whenever needed. However, they’re not listing the company in Sri Lanka for that reason, but to sell the shares to the market when the right value comes,” he said.
Investors hesitant
He also said that the delisting of Expolanka would set a bad precedent to many companies – not only to multinationals but also to local establishments – as listed companies may buy back their shares and delist themselves whenever they felt their stake was not fairly valued.
Since multinational counters were dividend counters and they were paying a high dividend yield for those counters, being in the S&P Index, he said that investors would now be losing those counters due to the delisting of multinationals. He noted that investors would be hesitant to buy those dividend counter shares in future, should the companies decide to delist without providing fair value.
Citing the CTC as an example, whose share price trades at Rs. 1,200 with very low net assets, he said: “If a buyback does not get the right value, people are not going to be happy.”
Further, he said that when the multinationals were moving out of the market, it would play a major role in the market capitalisation since they were generating a good profit.
“When the market cap is reduced and the earnings are taken out as well, the market PER will give a very different number,” he said, adding that should a company such as Expolanka, with its huge market capitalisation, delisted, it would be a significant blow to the overall market capitalisation of the stock exchange, which would also reduce the market PER by a considerable amount as it was a loss-making company. According to him, the PER might drop eightfold or less following the delisting of Expolanka.
CAL expects the market PER to decline by 8.1 times from the current 10.2 times in 2024, standing below the five-year average of 9.9 times while the market earnings are expected to improve by 15% Year-on-Year (YoY) during the year.
CSE expects 20 IPOs in 2024
Speaking to The Sunday Morning, CSE Chairman Dilshan Wirasekara said that there were ongoing plans to attract new IPOs, which had not changed. “We have three different boards and we are focusing a little on the Small and Medium-sized Enterprises (SME) Board, for which we only have about five listings so far,” he said.
He said that although the CSE had tried to encourage new IPOs, the economy not being conducive was the main cause of reduced listings. However, he added that with decreasing interest rates and the ongoing educational programmes, the CSE would be able to attract new IPOs this year.
Wirasekara said that the CSE was running about 10-15 regional programmes, educating even sole proprietorships and SMEs on how to raise capital: “We are targeting about 20 new listings for the year. This is the target given to the secretariat, although I can’t say whether it will achieve that number.”
Moreover, he said that the CSE was not only promoting equity listing but also debt listing.
Further, he added that no new regulations would be added to the market this year for the new products coming in – such as sustainable bonds, green bonds, blue bonds, infrastructure bonds, and Islamic finance products – to help companies raise capital.
