KARACHI, May 21: In reducing the number of shares per applicant from 500 to 200 in the initial public offering (IPO) of United Bank Limited, the Privatization Commission has perhaps spread the layer too thin. Of the paid-up capital of UBL, which stands at Rs5,180 million, an amount of Rs518 million comprising 10 per cent of the bank’s capital is to be offered to the general public at a price of Rs50 per share. In case of oversubscription, a green-shoe option of additional five per cent shares (25.9 million) will be exercised. The targeted date for the IPO is June 2 and the subscription books will remain open for four working days.

There is a little doubt that the offer price of the bank’s stock at Rs50 per share makes mathematical sense. The widely acceptable method of valuation of a banking stock is its price-to-book value (p/bv). Following the stock market fiasco in mid-March, prices of listed banks have also dropped, which otherwise stood at the average p/bv of 1.8 times. Taking a mean of 1.5 times and the book value of UBL stock, which according to its latest published balance sheet as on March 31, 2005 works out at Rs33.80, the p/bv for UBL would be Rs45.

On another scale i.e. earning per share, the eps of UBL for FY05 works out at Rs8.1. The weighted average banking sector p/e comes to 7.3x, which translates into the bank’s stock fair value at Rs59. On the subscription price of Rs50, the p/e ratio comes to 6.2x, which is at a discount of 16 per cent to the sector p/e of 7.3x. All of that jargon means that at most the premium on offer price of UBL IPO could be of about Rs10 per share.

It has to be conceded that the government’s programme of “privatization for the people” has brought financial blessings to thousands upon thousands of households, particularly on such mega privatizations as Oil and Gas Development Corporation (OGDC) and Pakistan Petroleum Limited (PPL). But those issues held tremendously large potential profit for the subscribers. The Privatization Commission had offered shares in OGDCL to the general public at Rs32 per share and the stock — in spite of the mid-March turmoil — was still trading at more than three times the offer price at over Rs104 per share; the public had subscribed to each share in PPL at Rs55, and the stock now stood quoted at over three times that price at Rs183.

Those instant gains attracted a growing number of new investors to the equity market and they multiplied from under 50,000 to 1.4 million. The latter number is indicating total applications received by the Privatization Commission to its offer of Kot Addu Power Company (Kapco).

There is a little doubt that substantially larger number of applicants than the 388,500 who can hope to succeed in the UBL IPO of 77.7 million or 15 per cent shares would file applications for the shares. But it would require a great leap of faith to see the applicants outnumber 1.4 million that had applied in the IPO of Kapco. One of the reasons being that the premium in Kapco has narrowed down to just about Rs10 or Rs5,000 on subscription of Rs15,000 for 500 shares. Compared to those in OGDC and PPL, the premium in Kapco is much too small. In case of UBL, the premium shrinks further. With the number of share per lot reduced to 200, the premium could be Rs2,000. That’s not at all bad on an investment of Rs10,000. But looking at it logically, some points need to be given a cool headed thought.

The March fiasco has caused tremendous amount of losses to thousands of new investors in shares who should not have entered trading in the first place. A sizeable number of them are unlikely to return to the market. For all its ‘road shows’, some Allah Baksh in a remote sleepy village is unlikely to be able to understand, much less invest in the IPO. So most of the applicants will again be city dwellers.

A prospective applicant must open an account with a commercial bank; get a computerized ID card and open an investor account with the CDC. The CDC would make a small Rs500 annual fee; in many banks if the deposit falls below Rs5,000, the bank charges two per cent as some kind of handling charges. The applicant must also get hold of the IPO application form; attach an attested photo copy of his ID card; stand for hours in a queue at the bank to submit the form and then sit up praying for success at the ballot. How many applicants would be willing to invest all that time, energy and money and go through that hassle for a prize of Rs2,000? It is not to criticize the Privatization Commission’s noble objective of handing out the ‘greatest good to the greatest number’, but the lot of 200 shares per applicant looks much too small. The CCoP may yet deliberate dispassionately on the issue and consider raising the maximum lot at least to original 500 shares so as to make the upcoming UBL IPO more attractive.