The curious case of Golden Haven

AN INITIAL public offering (IPOs) is a company’s way to raise money in order to finance further growth and boost profitability. In terms of the stock market’s health, it is taken as a reassuring sign indicative of a vibrant and strong market.

A bold move at a time of instability is the Villar group’s Golden Haven Memorial Park IPO, which is offering shares equivalent to 74.1 million, representing 15 percent of its total issued and outstanding common shares, at P10.50 apiece. The offer period started last June 16 and would be ending on June 22.

Small investors have been making their way to the bourse to subscribe, catching many market insiders by surprise. The latter doubted the public offering’s success because of the market’s continuing erratic behavior.

The underwriters had previously planned an offer price of P10.62 per share based on certain market assumptions that were considered “quite optimistic.” It was lowered to P10.50 to sweeten the deal and to conform to popular requests. This disappointed most market insiders, however. They still felt the price drop was too small.

Prior to the stock offering, Golden Haven had a total of 420 million issued and outstanding common shares. After the stock offering, it would have a total of 494.2 million issued and outstanding capital stock.

Golden Haven has an authorized capital stock of P1 billion shares divided into 996,000,000 common shares, each with a par value of P1.00. It also has 400 million preferred shares, with a par value of P0.01 each.

Trying to look for a rationale for the surprisingly good public response on the equity issue, a security guard of the exchange offered an explanation. He claimed “the public is expecting a dramatic rise in deaths—most likely among drug lords, kidnap for ransom criminals, terrorists and even ordinary criminals.”

The new government of President-elect Rodrigo Duterte was starting next week. According to our dutiful security guard, Duterte had promised during the campaign his “administration is going to be bloody.”

Major driving factors

Kidding aside, it looks like the market’s performance will continue to be influenced by local politics with strong implications on the country’s economy.  The market’s movement is fanned by trading activities anchored on the thought that the term of Duterte was set to begin.

Notice the pattern of foreign investors’ trading transactions last week. They were observably net sellers from Monday to Wednesday. By Thursday, they shifted to becoming net buyers.  They stepped up their net buying activity on Friday, accounting for 66.63 percent of total market transactions.

If one will remember, foreign investors have previously been more of sellers than buyers.  This stance drove the market and total market transactions to go down.

But with their recent aggressive trading activities as net buyers, foreign investors enabled the market to make a big weekly gain of 112.13 points or 1.49 percent.

By Friday, the market was again only 170.27 points or 2.23 percent shy from breaking its year high of 7,792.34 hit on June 8.

I can’t explain this trading behavior from foreign investors last week except, probably, they were thinking to stabilize their positions in anticipation of a market rally inspired by the Duterte euphoria.

The incoming administration’s plan to increase the value-added tax (VAT) to 15 percent from the current 12 percent may also rally the market further.

The full tax on sales is currently being used in Europe, Japan and all 34 countries belonging to the Organization for Economic Cooperation and Development. At present, only the United States continues to use sales tax instead of value-added tax. The sales tax is applied to the difference between the seller-purchased price and the resale price.

To proponents, the VAT is considered “the most promising way to raise revenue, reduce the [government’s] deficit and make the tax system more efficient.”

This was seen during ex-President Gloria Arroyo’s administration.  Her government was able to raise, to a large extent, the needed money to fund the country’s liquidity requirements and growth projects.  The VAT also enabled President Aquino to pursue the government’s development projects.

VAT is actually considered the same as sales tax.  VAT only differs from the sales tax in that “with the sales tax, the tax is collected and remitted to the government only once, at the point of purchase by the end consumer, while with the VAT, collections, remittances to the government, and credits for taxes that are already paid occur each time a business in the supply chain purchases products.”

Bottom line spin

Over and above these factors that may trigger a strong market rally very soon is the impact of a remarkable restoration of peace and order in the land, as promised by the incoming administration.

But the market could just as well run in the opposite direction if these promises remain unfulfilled. Time to place your bets!

(You may reach the Market Rider at [email protected], [email protected] or at www.kapitaltek.com.)