Investor eyes on Durdans’ IPO opening on Friday

Brokers and analysts were in two minds on how the Ceylon Hospitals Limited IPO opening on Friday will move but inclined to be upbeat in the context of the currently heated stock market and phenomenal success of other recent IPOs, notably Hemas which attracted nearly Rs. 7 billion in share applications.

"Many investors will see immediate appreciation of the share price in the secondary market and may seek short term profits by investing in the issue," one broker said. "However, the voting share priced at Rs. 25 will be more attractive than the non-voting share at the 20-rupee price."

This is because of the gap in the secondary market between the voting and the non-voting share price of all quoted companies having these two categories of shares.

However, the issuers have stipulated that applicants for a combination of voting and non-voting shares will be given priority in allotment.

"The DFCC Bank and the Commercial Bank have underwritten the voting shares while the non-voting shares are not underwritten. The prospectus indicates that in the event of the non-voting shares not being subscribed in full, the company will obtain debt financing to raise the required funds.

Durdans which has been in existence since 1945 is a strong and well known brand in Sri Lanka’s hospital sector owning over one acre of prime Kollupitiya property at Alfred Place, Colombo 3. This property is presently mortgaged to the DFCC Bank and carries a value of Rs. 182 million in the company’s books.

The prospectus reveals that prior to the IPO the company had two rights issues in 2000/01 and 2002/03 increasing its issued share capital from 637,997 ordinary shares to 1,275,993 ten-rupee shares. A bonus issue increasing the issued share capital to 15 million ordinary voting shares had also been concluded on September 15.

"This is normal in that existing shareholders want to take full value for their company’s assets before inviting public subscription for the shares and many companies have done this," one analyst said.

In a presentation on the IPO by the Commercial Bank and the DFCC Bank, joint managers to the IPO, have pointed out that the issue price is at a 36% discount to Asiri Hospitals Limited, the most profitable quoted players in the healthcare sector.

Brokers also argue that the recent history of IPOs in this market (like the Seylan Bank’s non-voting share issue), signals short-term profit for investors and this may move market punters to invest in the share.

The prospectus also indicates that according to a management agreement valid till March 31, 2007, 0.75% of the monthly turnover of the hospital will be paid as management fees to Durdans Management Services Limited (DMSL), the leading shareholder of the company.

DMSL owned 83% of the company prior to the IPO and this holding will be diluted to 48% after the IPO. The 220 original holders of the company who owned 17% would be diluted to 10% after the IPO. The public float, both for voting and non- voting shares will be 42% if the IPO is fully subscribed.

DMSL is controlled by the Tudawe and Wijegoonewardena families.

The company expects to utilize the Rs. 240 million zero cost cash targeted by the IPO for the expansion of infrastructure facilities (Rs. 77.5 million), settlement of finances obtained for capital expenditure (Rs. 83 million), retirement of debt obtained to purchase medical equipment (Rs. 38.5 million), purchase of new medical equipment (Rs. 28 million) and development of communication and information management infrastructure (Rs. 13 million).