IPO Pricing, Anchor Demand and Allocation on the Pakistan Stock Exchange
You are leading the IPO of a Lahore-based textile exporter on the Pakistan Stock Exchange. The company has 200 million pre-IPO shares and FY24 net income of PKR 1.20 billion, implying EPS of PKR 6.00. Listed textile peers trade at 9.0x-11.0x forward earnings, but they are larger and more liquid. The company will issue 50 million new shares (25% post-issue) to fund a PKR 2.50 billion capacity expansion expected to earn an 18% pre-tax return; the tax rate is 29%. The lead anchor investor has indicated demand for 15 million shares but only at a 20% discount to the midpoint of the marketed range. Retail demand is concentrated at the low end. The issuer wants the highest price that still leaves aftermarket support.
1. Derive a defensible price range using peer P/E and a 10%-15% IPO discount. Calculate post-issue EPS and P/E at the midpoint.
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Peer-implied value per share = EPS PKR 6.00 × 9.0-11.0x = PKR 54.00-66.00. Applying a 10%-15% IPO discount for size and liquidity gives a range of about PKR 46-59. A tighter, more defensible range is PKR 50-54, with a midpoint of PKR 52.
At PKR 52, gross proceeds = 50m × 52 = PKR 2.60bn. Incremental net income from the expansion = 2.60 × 18% × (1 − 0.29) = PKR 0.333bn. Pro forma net income = 1.20 + 0.333 = PKR 1.533bn. Post-issue shares = 250m. Pro forma EPS = PKR 6.13.
Post-issue P/E at PKR 52 = 52/6.13 = 8.5x. That is below the peer median of 10x, leaving some aftermarket upside, but not so low that the issuer leaves excessive money on the table. At the top of the range, PKR 54, proceeds are PKR 2.70bn, pro forma EPS is about PKR 6.15 and P/E is 8.8x. At PKR 50, P/E is about 8.2x.
2. The anchor wants 15 million shares at a 20% discount to the midpoint. Should you accept, reject or counter? Show the implied valuation.
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Midpoint = PKR 52. A 20% discount means PKR 41.60 per share. That is 6.8x pro forma EPS of PKR 6.13, versus a peer range of 9-11x and an IPO range of 8.2-8.8x. The anchor is asking for a valuation that assumes the IPO is distressed.
For 15 million shares, the anchor would pay PKR 624m versus PKR 780m at the midpoint, a PKR 156m transfer from existing shareholders. It would also set a visible reference price below the marketed range, pressuring retail and other institutions.
Do not accept the 20% discount. Counter with a smaller allocation, say 8-10 million shares, at the low end of the range (PKR 50) or at a maximum 5% discount to the midpoint. If the anchor refuses, rely on the institutional book, which is oversubscribed at PKR 50. A cornerstone investor is useful, but not at the cost of destroying price discovery. If the anchor brings strategic value, offer a standby underwriting fee rather than a deep discount.
3. The book shows institutional demand of 2.5x at PKR 50, 1.2x at PKR 55 and 0.6x at PKR 58; retail demand is 1.5x at PKR 50. What clearing price and allocation should you recommend?
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At PKR 58, institutional demand is only 0.6x, so the offer would be undersubscribed and aftermarket support weak. At PKR 55, institutional demand is 1.2x, but retail demand is concentrated at PKR 50 and would likely fall away; the book is thin. At PKR 50, institutional demand is 2.5x and retail 1.5x, giving a combined oversubscription and a cushion for stabilization.
Recommend a clearing price of PKR 50. It is within the peer-discounted range and leaves post-issue P/E at about 8.2x, below peers. The issuer raises PKR 2.50bn, enough for the stated expansion.
Allocation: retain the 25% retail portion, but apply a clawback if retail is more than 2x subscribed. Allocate the institutional tranche pro rata, with a modest bias to long-only accounts and domestic institutions that did not flip the last IPO. Do not allocate the full anchor request at a discount; if the anchor bids at PKR 50, cap it at 10-12% of the offer. A 15-20% free float is thin, so the underwriter should commit to a 30-day stabilization bid at PKR 50 using the greenshoe or an over-allotment option.