Recent years have seen the emergence of a new army of Irish private investors largely through the mass marketing of privatisation issues and the demutualisation of former building societies. Events in recent weeks affected two more recent issues - First Active and Eircom. They are providing investors with some salutary lessons on the risks associated with stock-market investing.
The share-price performance of both companies has been extremely disappointing since their initial public offerings (IPOs). In the case of First Active, the decline in the share price has been partly driven by the overall weakness of the financial sector. However, the sudden injection of competition as a result of the entry of the Bank of Scotland into the Irish mortgage market has led to a collapse in the company's profitability.
Unlike the Irish Permanent, First Active still relies almost entirely on the domestic mortgage market and in its current weakened state, diversification has become more difficult than before. As well as the tougher external environment, the apparent disarray within the board of the company has further weakened the share price. The failure to conclude the mooted merger with Anglo Irish Bank will serve to generate even greater uncertainty concerning the company's future prospects.
In the case of Eircom, the absolute performance of the share price has been nothing like as bad as that of First Active. For much of the past year Eircom's share price has remained above its issue price.
However, this has been primarily due to the overall buoyant conditions experienced by telecom stocks and in fact Eircom has sharply under-performed its peer group. For example, many Irish investors who took part in the placing of Deutsche Telekom shares last summer are still sitting on healthy profits. At the time of Eircom's IPO, there was a strong view in several quarters that the Government pitched the price at too high a level. On the standard valuation yardsticks the shares were priced at about a 20 per cent premium to the average ratings of the sector at that time. Even then it was clear that the issue price left little room for disappointment and this has been borne out by subsequent events.
The news that KPN is to place its stake in the company to institutional and retail investors worldwide has led to a further sharp fall in an already weakened share price. The size of this secondary placing means that the placing price will almost certainly be at a significant discount to the then prevailing market price.
Despite the decline in Eircom's share price, it is still one of the most expensive stocks quoted on the Irish Stock Exchange. Increased investment expenditure on new technologies and the costs of an accelerated redundancy programme mean profits in the short term will be lower than previously anticipated. This means that despite recent declines the shares are still trading on a lofty price-earnings ratio of 35.
This is somewhat lower than several of its European peers, but it is higher than a number of companies such as Portugal Telecom and notably British Telecom. This is because the overall sector in Europe has suffered a sharp sell-off resulting in more attractive valuations. The vast majority of Irish retail investors have retained their Eircom shares and in the current market environment have little alternative but grimly to hold on for the long term.
Whether it is worth contemplating investing further in the secondary placing will depend on the price at which the shares are placed. In view of the disappointing performance since flotation, the enthusiasm of private investors for more Eircom shares is likely to be limited.
