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KARACHI: The strike price of Rs95 for the share of Rs10 worked out under the book-building of Al Shaheer Corporation Limited, a meat company in the process of listing at the Karachi Stock Exchange is at the heart of a heated debate at the market.

The question is whether the strike price is fair or foul? A week ago, Al Shaheer offered 18.75 million shares via book-building to institutional and high net worth individuals (HNWI) at a floor price of Rs43 per share.

The book runners proudly proclaimed that against the floor price of Rs43, the strike price worked out at Rs95 per share. The entity is expected to offer 6.25m shares through an initial public offering to the general public in a couple of weeks from now. There are concerns that the small investor who might subscribe to the issue at Rs95 per share would be left holding dirty end of the stick.

The book-building was previously used to sell equities in foreign market; it has seeped into the offerings in local bourse as well. But critics argue that unless a transparent mechanism is evolved, it was possible to manipulate the strike price.

Was there something less than fair in book building that put the strike price at what most believe to be phenomenal high Rs95 a share in the Al Shaheer Corporation book-building process?

The matters that intrigue market is the removal of ‘upper cap’ on the strike price by the Securities and Exchange Commission of Pakistan; the ‘upper cap’, which apart from the preceding offer of Dolman City REIT, was applicable on all new offerings in book-binding.

For Al Shaheer, the ‘upper cap’ was Rs59.50. It has set the tongues wagging. Some suggest that institutions called quits at that price in the book-building while HNWI, described as those who could invest Rs1 million or more, jacked up the price to Rs95.

“When the offer of 6.25m shares is made to the public, the stock could climb a bit to instill confidence in small shareholders, but the sponsors and HNWI might surreptitiously offload their stake and seek an exit, before the stock adjusts downwards to its true worth,” said a detractor.

Those who side with the theory of a high strike price have their reasons: Established in 2008, Al Shaheer is a relatively new player in the meat industry. Its exports as well as sells its ‘Meat One’ and ‘Khaas’ brands through outlets in major cities of Pakistan.

In the budget 2015-16, the government has allowed a tax holiday of four years to new ‘Halal’ meat producers who set up their facilities and acquire ‘Halal certificates’ by December 2016.

The company shall be hard pressed to compete with Fauji Fertiliser Bin Qasim Ltd’s (FFBL) meat subsidiary when it becomes operational and enjoys the tax holiday benefit of budget FY16, not available to Al Shaheer.

And competition is likely to grow in the export segment, where 14 players currently occupy the market.

Conversely the company does enjoy certain tax benefits applicable to ‘Halal’ meat exports.

During FY14, the company’s profit-after-tax amounted to Rs73m, which translated into earnings-per-share of Rs2.80 and placed the strike price at multiple of 33.

Some analysts contend that 33 times is the food sector multiple at the KSE at the moment. But others counter that a company that entered the business only seven years ago with just the meat in its portfolio can scarcely be compared with decades old corporates with wide spectrum of products, such as ketchup, jam, jellies, soft drinks, milk, ice cream, juices, uncountable brands of masalas and other fast moving food products.

All said and done, it will only be after the company makes to the ready board of the stock market and perhaps in a month after the stock starts trading that the price discovery would be clearer.

The former chairman of SECP Muhammad Ali is on the Al Shaheer board of directors and although an ex-regulator, he could be expected to regulate his company and overturn any alleged wrong-doing in the matter of strike price.

Published in Dawn, June 21st, 2015

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