A spotlight on IPO's

Tapan Verma is a partner of IPO services in the mergers and acquisitions department of Deloitte and he is talking about their six monthly survey of IPOs and how they performed. This year they didn’t perform very well so if you got into all the IPOs in the past six months on the day they floated or in the IPO then you’ve lost money which is unusual because mostly they do okay. 

Here's Tapan Verma who’s the partner of IPO services at Deloitte. 

Tapan, you’ve done another survey of IPOs for the six months to June, what did you find this time and did that differ from what you’ve done in the past?

Alan, yeah thanks.  We’ve been publishing our IPO report, Alan, for a good four and a half to five years now as soon as the equity capital markets opened in about 2013.  This is probably the first publication in the last four and a half years where we’re going with quite a muted message.  It’s been an interesting half.  I think the financial year started quite strong with a lot of growth from the ASX towards the back end of last year and a number of companies lifting at the back end and November/December in particular were more busy than any year that we’ve had in the last few years.  The start of this year has been extremely muted, I’d say more losers than winners in this market which has been interesting with the backdrop of strong global economic performance, US markets in particular have been shooting the lights out.  It’s been the strongest year for US IPO markets since probably the global financial crisis but the Australian markets strangely enough haven’t done much at all, the ASX200 is up about 2% since the start of the year and even though it’s reaching probably its highs for the last seven to eight years they’re still below where they were when the GFC hit.

Just explain to us, if you wouldn’t mind, Tapan, explain to us exactly what you do with your IPO survey, what exactly takes place?

Absolutely, Alan.  We go through every single listing on the ASX, we’ve collected the data for the last five to seven years.  For this half’s report what you see is every listing on the ASX for the last six months we tracked the performance of the listings from the dates of their listing to 30^th of June in this case and that would be a comparison of the issue price, the price at which the stocks get issued to the market to where they closed at 30^th of June.

Right, what did you find, what was the average performance of IPOs.  If someone bought into every IPO in that six months how would they have performed?

So the average performance for the 40 listings in the first half of this year is a -1.5% which is highly unusual and diverges from any previous year.

Is that weighted?

That is a weighted average indeed, Alan, it’s weighted by the market capitalisation of the stocks.

Was it dragged down by any big ones doing badly?

I wouldn’t say any particular big ones in this case, it’s an interesting one with out of the 40 stocks there were only 10 stocks that had a market cap in excess of $75 million and, Alan, the largest ones this half year appear to have been more listed investment funds and as we all know when they first list they trade fairly close to their net asset value so you don’t expect a lot of growth in those stocks immediately.  The other stocks, what we call the emerging companies which are the smaller caps, some tech companies, some resource companies, they haven’t performed terribly well and I can’t give you any big names here, some of the names that come to mind are Jupiter Mines was one of the larger stocks.  Performance was okay and it wouldn’t be particularly reflective of IPO markets previously.

My impression is possibly wrong, that generally it’s not a good idea to buy into IPOs because the stocks generally fall on average.  Obviously, there are some exceptions but the stocks tend to fall after the IPO when they come onto the market but you seem to be saying that that’s not the case, that in most years apart from this year the average has been good performance or at least a positive performance after the IPO, is that correct?

Absolutely, Alan.  We looked at the performance of stocks since 2014 as I was saying.  If I look at the 2017 stocks at the moment to date the 2017 stocks the larger ones are performing on average 20% above their issue and the smaller stocks are nearly 40% up since their issue date.  If we look at aftermarket performance since day one on average, and looking at 2014 to 2017, on average on day one these stocks shoot up roughly in the 10% to 15% range.  From an investor’s perspective, from an institution’s perspective, that’s the sort of return they are targeting for day one stocks.  On average those stocks are now up roughly 30% so there’s still a lot of growth that comes through from the IPO stocks and you definitely do want to leave some value on the table for new investors to come in.

You’re saying that on average the IPO stocks that you’ve studied over the past five years are up 30%, is that right?

That’s right, and that’s taking into account some of the stocks that have delisted, the IPOs that didn’t go terribly well and taking into account stocks that have gone private since.

You would say based on the data then that it is a good idea for investors to get in on a float wherever possible?

Wherever possible is arguable.  I’d say certainly IPOs on average…

On average, that’s the thing.

Yes, it certainly exceeds the indices and definitely on the quality assets that come to market stocks in growth sectors which over the last few years have been dominated by technology stocks, healthcare, financials as well although the current backdrop of the Royal Commission and some of the inquiries coming through from the regulator, financial stocks are not much of a stock market darling at the moment.

It also sounds like you’re saying that if you don’t manage to get into the IPO for whatever reason, because you don’t know the broker well enough or whatever, that it’s still a good idea to buy once it’s listed in the couple of days afterwards.

Certainly.  We’ve seen quite a few companies over the last few years, Alan, where obviously there is a lot of excitement in the days leading up to listing and subsequent to listing, and you do see that strong aftermarket performance.  As these companies start to demonstrate to the market the growth potential they have, and there’s headlines every day about the likes of BWX, Afterpay Touch, there’s numerous others.  There’s a lot of confidence that there’s certainly scope for growth in share price and the IPO stocks continue to demonstrate this.

Do you think about or study the extent to which that pricing, the performance of these IPOs, is due to mispricing in the float, that is to say they’ve kind of got the pricing wrong?  I mean obviously they have to guess at the pricing, what the market is going to accept and sometimes they get it wrong.  To what extent do you think that’s the case?

That’s a very interesting question, Alan, and frankly we haven’t studied it from that aspect.  It would certainly be an interesting study for our 24 workers.  In our view definitely for companies that have a good track record and have been profitable, and perhaps potentially owned by private equity or by private investors but with a solid foundation, they tend to be priced fairly well.  The investors in these stocks, as you know a large part of the investment comes in from institutions who are all fairly sophisticated and good at pricing these.  It’s more the growth stocks, Alan, that I’ve alluded to so technology in growth stocks where they do a smaller capital raise where the owners are still trying to control the business and not divest it to another player.  They’ll get in on the IPO and then that’s where it’s more challenging to price those stocks.  Some of it is potentially mispricing although I’d say it’s just challenging to value some of the stocks.  You’ve seen the likes of Croswell which was valued at in excess of $500 million as the start-up/rogue stock and certainly the market sees the value in that, I guess it’s anyone’s guess as to how that valuation comes about.

You also found some differences between sectors, take us through those.

Absolutely.  In this half of the year, as I said Alan, backdrop of the Royal Commission and ASIC inquiries into stocks so financial services, as the index shows, has not performed well and so financial services stocks have been down 7% on average this half year.  On the contrary you’ve got your staples, your consumer goods and services stocks that were up on average 36% since their listing date, quite an interesting one in that mix was a cannabis stock, Elixinol Global, they have quite a strong nutraceuticals business in the U.S. and they’re looking to capitalise on the growth of the medicinal cannabis space in Australia.  They also have a hemp goods business in northern New South Wales and that’s before the IPO so that’s performed extremely well on the back of a number of cannabis listings in 2016/2017.  There’s also been a number of tech companies that have listed in the first half of 2018, on average they were up 22% and the 2017 stocks tend to demonstrate similar trends.

I think I’ll leave it there, Tapan, thank you very much.

It’s a pleasure, Alan.

That was Tapan Verma who is the partner of IPO services at Deloitte.