Is IPO the best route for your SME?

Edgar “Injap” Sia II at the listing of MerryMart last year, which raised the curtain for the IPO market this pandemic. —CONTRIBUTED PHOTO

Going public through an initial public offering (IPO) is one of the many options to take your company to the next level. It’s a bunch of work that comes with pros and cons. To make it worthwhile, there should be deeper reasons beyond ourselves.

IPO listing is more for growth while real estate investment trust (REIT) listing is more for yield as well as long-term capital preservation and appreciation. That’s the reason why the portfolio of DDMP REIT Inc. includes perpetual ownership of the land where several buildings sit on, because it’s meant to be pamana or something with solid value that one could own. Office or commercial tenancy sentiments change over time, but over the long-term, that won’t matter if the titled land and buildings were perpetually owned, as these assets could literally be handed down to the grandchildren of your grandchildren.

For the IPO listing route—like that taken by DoubleDragon Properties Corp. (DD) and MerryMart Consumer Corp. (MM), which both started on the small, medium and emerging (SME) board of the Philippine Stock Exchange—the key is growth prospect.

Five-point test

Let me share with you five fundamental questions to ask before deciding to pursue an IPO.

1) Is this specific industry a sunrise sector and can the business concept exponentially grow in the next 10 years?

2) After a deep analysis, from the time of listing as an SME issuer, is the chance to grow the company 50 times in 10 years highly possible?

3) Is there a hidden transition somewhere happening in that specific space and industry that you can anchor to boost your way in? A hidden transition is something that can’t be captured by simply looking at the present or even the past 10 years.

4) Am I fully determined to lead the team toward achieving the set goals? The first five to 10 years will be full of challenges but one needs to be fully determined to adjust, calibrate in real-time while executing the business plan. As it’s not perfect all the time, one must be willing to really stick to the set goals no matter what, but be open to course-correct, if needed.

5) Do I have my grit and stamina prepared to tackle all the obstacles, both natural and man-made that will come our way during the hyper-growth years?

If you checked all five, it’s a go for next step. If not, can you imagine doing an IPO today as a small company, seeing your share price soar in five or seven years, while corporate fundamentals remain stagnant? That’s a permanent disaster!

But if you have painstakingly worked on the building blocks to grow the company significantly, then it doesn’t matter where the share price is now. If it’s above fair value, the fundamentals will just follow. If it’s the other way around, it’s temporary as once growth goals are met, market price will just align upwards. So the key is really to follow your fundamental goal no matter what.

Along the hyper-growth journey, just keep wearing your imaginary telescope and keep your sharp focus toward your goal. Before you know it, you will be surprised that you’re already there.

As an example, when we conducted DD’s IPO in 2014, the equity was only close to P600 million. As of June 30, 2021, the total equity had grown 102 times to P60.3 billion. Now, our team is aiming for P120 billion by 2030. You may ask: why use equity as a goal measure for DD? It’s because in real estate space, your equity value is generally similar to your net asset value.

I was also glad that in 2014, our partner Dr. Tony Tan Caktiong was cool to list DD even when it was still small and debuting initially on the SME board. After a year, DD moved up to the main board of the PSE.

For MM, it’s the same goal formula that we aim for: grow the revenue by over 50 times to P120 billion by 2030. Why use revenue as a goal measure for MM? It’s simply because in the branded business to consumer space, revenue turnover is generally similar to valuation at certain multiple.

Opportunity in crisis

The habit of not making your plan based on past years is very important. Peeling off the superficial layer—what you can see when you look at the “now” and the past five or 10 years—is important because it ‘s actually on the deeper layer where the real exponential opportunity is.

For SME founders, you may also ask, is it good to conduct or prepare for an IPO even if we’re still in the middle of a COVID-19 pandemic? Many of the most successful businesses around the world either started during a crisis, or deepened their market grip during the crisis period.

During highly challenging periods like where we are now, huge size suddenly becomes a disadvantage. Along with the major crisis comes the repositioning of elements, such as a major change of customer behavior. Suddenly, there are issues that a pile of money alone can not solve. What’s most important in times like this is to have a relevant and well-innovated business model. Your team must be quick and nimble enough to adjust and calibrate simultaneously so that as the dust settles, you will emerge stronger than ever, and move forward in an even better market position.

This is the reason why we conducted an IPO during this pandemic, even when MM is still small. This is such a rare window to compete well, a rare chance for a new player to scale up in a much shorter span of time than during the good times.

Mindset is very important. Although we are now in this crisis, both DD and MM team have a reverse mindset guided by the old saying “there’s opportunity in any crisis.” With that in our mind everyday, DD and MM completed our largest series of equity fund-raising ever: bringing in a total of P20.2 billion of new equity during the pandemic, which strengthened our balance sheets significantly.

As long as you plan very well, and you have carefully identified your growth path, don’t be afraid to bring your business to the next level and tap various capital market tools that in the past only big businesses employed.

Just make sure you really study your industry very well. Don’t base your decisions on the obvious meters in the dashboard. Peel off the superficial layers to craft your plan well, and execute passionately toward your set goals.I believe the success of any business is really a team effort. You need a really good set of team, partners, bankers and advisers around you to really polish and acid-test every important strategic decision, thereby significantly reducing the risk of erring.

Go create jobs. GROW the business to a scale that will have a meaningful impact to nation-building, and eventually GLOW to inspire other small budding entrepreneurs. It is my hope to see many new companies comprise the Philippine big business scene by 2030.

Other countries have many new unicorns every year, but sadly not in the Philippines. It’s indeed about time for that to change. —CONTRIBUTED INQ

(Editor’s note: This is based on Sia’s presentation at the PSE’s 2021 IPO forum for SMEs. He is the poster boy for SME listing as both DoubleDragon and MerryMart successfully debuted on the SME board.)