This Commodity Based IPO Could Be Worse Than Facebook

Wyatt Investment Research

By now, most U.S. investors are aware that the Facebook (FB) IPO was an outright disaster. After unprecedented hype leading up to the initial public offering, Facebook fell flat on its face shortly after raising a near-record $16 billion in its IPO. It’s been less than a month since the stock began public trading, and Facebook has already fallen 24% below its IPO price.

There were a number of reasons for Facebook’s spectacular failure. But the main catalyst driving shares of the social network down was that the stock was grossly overvalued from the get-go, opening with a valuation that was an unsustainable 104 times earnings.

In a matter of days, Facebook became a cautionary tale for all other privately-held U.S. companies. Not a single U.S. company has dared to go public since Facebook’s face-plant.

Apparently they didn’t get the memo in Malaysia. Felda Global Ventures Holdings, a Malaysian palm oil giant, is putting the finishing touches on what will be the second-largest initial public offering of 2012 behind Facebook. Felda Global will raise $3.12 billion U.S. dollars by selling 2.19 billion shares at 4.55 Malay ringgit (or $1.43) per share. The 4.55 ringgit IPO price is at the end of the company’s expected 4.00-4.65 ringgit range.

The stock is slated to begin trading on the Kuala Lumpur Stock Exchange on June 28.

On the surface, Felda Global’s ambitious IPO isn’t outrageous. The company is the third-largest palm oil distributor in the world, selling palm fruit and crude palm oil to third parties for sale on the global market.

Palm oil is a versatile natural resource found in products such as margarine, cereal, soaps, lipsticks and biodiesel fuels. It’s often referred to as “vegetable oil” on product labels.

But here’s the problem: palm oil is cheaper than it has been in nearly two years. Crude palm oil futures have fallen off a cliff since the beginning of May, declining 14% to $893 per metric ton – the lowest level since September 2010.

So the timing for Felda Global’s IPO isn’t ideal. The company is growing and profitable – but so was Facebook. Initial public offerings are almost always a crapshoot, and any negative news can lead to a sell-off after the stock goes public. Plummeting palm oil prices for a company that strictly sells palm oil would qualify as negative news.

Does that mean Felda Global is sure to tank after its IPO? No. But this appears to be another case of pre-IPO hype driving a stock to become overvalued once it goes public.

As U.S. investors learned from Facebook, IPO investing is rarely worth the risk. And that’s especially the case when it comes to a company that specializes in a commodity that’s as volatile as palm oil.



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