Argentine IPO Outlook Turns From Frenzy to Fiasco as Stocks Fade

(Bloomberg) -- The flurry of Argentine initial public offerings that had been anticipated this year is looking more like a flop as volatile markets and stretched valuations have investors looking elsewhere in Latin America.

Gas distributor Distribuidora de Gas del Centro SA's decision this week to postpone its Buenos Aires IPO was the fourth stumble in 2018, and the sixth since November. The trend reflects fading demand for Argentine stocks as traders brace against global market volatility and concern mounts about domestic growth. The Merval benchmark index has slumped more than 11 percent from this year's high on Jan. 25, and the largest exchange-traded fund invested in the country's equities posted a net outflow in February for the first time in five months.

The weakness comes as Argentina continues to battle stubborn double-digit inflation and the worst drought in 30 years has analysts trimming their growth forecasts. And while down off their highs, stocks in the Merval are still trading at an enterprise value around 9 times estimated earnings before interest, taxes, depreciation and amortization, compared with a five-year average of 8.4 times. All this increases the appeal of other markets in the region, including Brazil, where equities are rebounding as the country emerges from its worst recession in a century, and Mexico, where corporate earnings have been coming in ahead of analyst estimates.

“We haven't participated in any of the recent Argentine IPOs,” said Gerardo Zamorano, San Diego-based investment director at Brandes Investment Partners LP, who co-manages $6.5 billion in emerging market assets. “We find better opportunities elsewhere when you take into account the upside potential, the pricing at which they try to come to market and other alternatives. In terms of our incremental exposure, we are prioritizing opportunities in Brazil and Mexico compared to Argentina.”

The year began with a solid pipeline of companies looking to follow a blockbuster year in equity markets, with $3.8 billion raised in 2017, including the largest IPO by an Argentine company in 20 years, cement-maker Loma Negra Cia Industrial Argentina SA. The equities jolt came after President Mauricio Macri's ruling coalition performed better than expected in midterm elections, boosting investor appetite and companies' willingness to raise capital for projects. Power generation company Genneia SA is among those looking to go public this year.

A slew of troublesome IPOs which “were promising but ended up losing steam” have led Argentina to drop off foreign investors' radars and turn to Brazil's growth story, said Federico Perez, a portfolio manager at Buenos Aires-based Axis Inversiones. Investors will now be looking toward the next catalysts for local stocks, including the approval of legislation that promotes the growth of local capital markets or an upgrade by MSCI Inc. to emerging market status. A successful IPO by a quality name could also reverse the sentiment, he said.

The onus will also rest on companies to deliver on the early promises of growth amid high valuations, according to local consulting firm Delphos Investment. That may prove a challenge as analysts cut 2018 growth projections.

“We don't think this signals an end to appetite for Argentine assets, but it does show that the growth expectations for several sectors have been captured by the papers,” Delphos analysts wrote in a note. “We believe that now the ball is on the companies' court, as investors wait for their expectations to materialize.”

Here's a rundown of the recent Argentine equity deals:

• Agribusiness company Molino Canuelas delayed its IPO amid market volatility
• Laboratorios Richmond has fallen 24 percent from its initial public offering price in December.
• Airport operator Corporacion America Airports SA priced its IPO below the intended range and has fallen 28 percent since the IPO.
• Power generator Central Puerto SA priced is IPO below the intended range and halved the amount of shares sold.
• Biotech firm Bioceres postponed its offering for at least a month as U.S. markets swooned.
• Distribuidora de Gas del Centro postponed its initial public offering after downsizing the original size by about a third earlier in the day.

To contact the reporter on this story: Carolina Millan in Buenos Aires at cmillanronch@bloomberg.net.

To contact the editors responsible for this story: Arie Shapira at ashapira3@bloomberg.net, Richard Richtmyer, Christiana Sciaudone

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