MIDLAND Realty needs to be placed on corporate governance watch after the shares went ballistic on the completion of a placement in the week. The real estate agency, since listing last June, has risen 72 per cent to Friday, representing an annualised return, according to Bloomberg, of 28,417 per cent. On the week the stock was up 16 per cent representing an annualised return of 237,017 per cent. A significant reason for the weird annualised return computations was yesterday's surge in Midland's stock. The shares rose 16 per cent or 45 cents to $3.25 in $49 million of turnover. The group was listed on a 3.34 historic earnings multiple and a 10 per cent dividend yield. On the basis of the pro forma earnings per share figure shown in the listing prospectus, yesterday's close represented an earnings multiple of nine times. Investors regard the company as being well positioned for the turnaround in the residential property sector. A big surge in profit appears unlikely, year-on-year in the year-end figures for December 31, 1995, however. According to the prospectus, the profit for the three months to the end of March was $22.63 million. At the interim stage, for the half year to June 30, profit slumped more than 20 per cent to $35.3 million against $45.48 million. Should there have been a recovery in the revenues and profits in the second half the 1995 profit figure is unlikely to be massively ahead of the full year 1994 figure of $57.4 million. On flat growth the current earnings multiple would be 8.55 times. On a 20 per cent rise in profit the earnings multiple slides to seven times. For a small company with an untested track record while a listed company, this remains a relatively demanding earnings multiple. The reason for the concern regarding the company and corporate governance is linked to the anomalous trading and additionally because of the sell-down in the company's shares by the controlling investors. In the week the company announced a $116.6 million placement involving the issue of 24 million new shares from Midland Realty and 20 million existing shares from two major shareholders - chairman Freddie Wong Kin-yip and managing director Fung Yui-sum. The price is $2.65 per share, representing a discount of 6.2 per cent from the closing price of $2.825 a share on January 29. The 24 million new shares represent about 12 per cent of the company's existing issued share capital. This kind of sell-down so near the time of listing should be frowned on by investors. The company has not broken any rules, however. Sell-downs by controlling shareholders are prohibited at newly listed companies in the first six months of trading. Midland Realty was listed eight months ago. In the next six months, controlling shareholders are prohibited from selling down control of their company. Under the placement and sell-down in the week, Midland Realty controlling shareholders maintained control of the company. In the formal statement linked to the placement, the company said its proceeds would be used for capital for expansion and as general working capital. Later in the week it turned out the company wanted the money to buy a small to medium-sized firm specialising in valuations and consultancy work. Investment bankers warn investors should not automatically think the worst of the controlling shareholders in a placement like the one done by Midland. As a company with an extensive and expanding branch network in real estate, just ahead of a recovery in residential property, investors are going to be keen to get a slice of the action. The company is small and being newly listed is not as liquid as some investors require. The placement in the week will help liquidity. For the investment bankers there is nothing wrong with this kind of placement. The regulators are not too worried about it either. Investors do need to be very cautious. After all, they have only eight months ago produced cash to invest in this company. Now they find they are being diluted and the controlling shareholders are benefiting out of the process. There are plenty of examples of small companies who do placement after placement, from one investment bank to another, until their reputation is ruined. Investors might be able to take this if the controlling shareholders do not follow up this recent transaction with lots more. Having listed the company, the controlling shareholders need to allow the minority shareholders time to get the opportunity to benefit from their investment. What investors do not want to see is their earnings per share being constantly diluted by placements and other types of equity issue.