Normally, a company with a good historical track record in terms of finance and operations – such as having a strong customer base, a strong management team, quality assets, as well as being involved in the right business – will be able to price its IPO shares higher.
Before we begin, let’s understand the process flow of determining the IPO price:

• The merchant bank will advise the company to be listed on setting the IPO price.

• Once the indicative IPO price is determined, the merchant bank will submit the IPO proposal to the SC for approval.

• The SC will review the IPO proposal before giving its approval to ensure the proper procedures were followed, but the SC will not interfere or be involved in the process of determining the IPO price (refer earlier article on Disclosure Based Regulation (DBR)

To determine whether an IPO is fairly priced, the following are some tips(source:Malaysian Investors,SC)

• Read the prospectus

Things to look out for in the prospectus are–

• company background
• nature of its company’s business
• proposed utilisation of proceeds raised from the IPO and future business plans of the company
• business opportunities and threats, as well as potential risks and returns of the company.

• Compare the price

Always compare the IPO share price of the company with those of other companies within the same industry to ensure the IPO shares are not overvalued or overpriced.

• compare the company’s financial performance by analysing its financial statements in the prospectus or annual report. Essentially, the analysis requires investors to compare the relationship between items within the financial statement. For example, they need to find out whether the company has more assets than its liabilities or whether it has enough income to meets its business obligations. To be able to do this, investors must spend some time to learn basic financial analysis.
  
• In addition, an investor should also make comparisons with other companies in the same line of business. For example, if the company that an investor wants to invest in is in plantation sector, he should compare it with another plantation company. The comparisons should cover the IPO price, financial performance and background on operations.
  
• Investors may also want to keep an eye on the company’s non-financial or qualitative information, such as its management team, board of directors and brand recognition. Besides, analyst and newspaper reports can also help investors to determine an IPO’s fair price.
• investors must take into consideration not only the financial (quantitative) information but also the non-financial (qualitative) information in order to determine the fair price of an IPO and avoid buying overpriced IPO share issues. Above all, investors should avoid making decisions based on non-credible sources like rumours.

• Seek advice

Always seek advice from your investment adviser if you face any difficulties in determining the fair price or when you need help in making investment decisions.

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