Harsh dose of reality for Dick Smith investors
Investors that rolled the dice on the Dick Smith float needed to answer just one real question. Can this company make two different sets of investors rich in just over a year?
The Anchorage private equiteers that bought this electronics retailer for a song 15 months ago have already made 300 per cent. Have they left enough in the pot for another set of investors to make a fortune?
Unfortunately the stockmarket debut hasn't given us much guidance. The overall Australian market was, for the third day this week, soft - as it took its cues from interpreting the nuances of US bond tapering statements rather than focusing on local stocks.
It was the first of the big brand floats for the year - and a taste for whether another of the big names, Nine Entertainment, can ignite the punters when it joins the boards on Friday.
Dick Smith shares traded ever so briefly 12¢ higher than the issue price of $2.20 - all things considered it was not a chunky stag, just a reasonable start.
But short lived. Within hours the speculators that wanted the uber quick turn had taken their 3.5 per cent profit.
Had the equities market been in a more positive frame Dick Smith shares could easily have made $2.50.
Instead the rot set in for the afternoon and the shares drifted backwards before settling back at the issue price of $2.20.
As such, Dick Smith's debut underperformed many of this year's recent IPOs - not the least of which was the investor darling OzForex.
Nine has been a bit canny about managing the after market for its stock. Despite being able to fill demand at higher levels, the sellers have kept their powder dry and picked the bottom of the pricing range at $2.05. It has lined up five of the major institutions who are all in with about 2-3 per cent of the stock, which combined with the existing hedge fund owners will account for about 50 per cent of the register.
But pricing the float at the bottom end of the range has its risks - the most obvious of which is the smell of need. Its debut may be less of a fizzer but again that depends on the market on the day.
Meanwhile, how the Dick Smith share price plays out over the next weeks to months will be all about the Australian index. How it moves beyond that will come back to the original point - have sufficient scraps been left by Anchorage, whose whirlwind corporate turnaround was so quick as to be unseemly.
You have to hand it to the Anchorage team (including the astute Phil Cave) for picking their mark. They saw the opportunity presented by the inability of Woolworths to make the most out of a business, and recognised that the supermarket giant would virtually hand it over in order to put it behind them.
And make no mistake, the Anchorage team wasted no time opening the textbook on how to improve a business that had been undermanaged and malnourished.
Get the supply chain right, cut better deals with suppliers and marketers, overhaul logistics, spend more on promotion, screw landlords and of course, cut out costly levels of middle management. In the lexicon of management consultant speak they call it low-hanging fruit. The surprising part is that there was so much of it in Dick Smith and it was such easy pickings.
As such, it is probably fair to assume that the forecasts made in the company's prospectus for 2014 should be reached. But for those investors that are in the stock to make money out of sustainable growth in earnings, this business needs to build on the momentum and that won't be easy. Quite a few planets need to align.
Retailing electrical products is not an innovative endeavour, quite the opposite. It is a mature business that has been structurally and cyclically challenged. The prices of most of the goods Dick Smith retails have been under deflationary pressure for years.
Getting some medium-term growth is all about one building new sales through growing stores and online sales, which is the basis of the strategy, and convincing consumers to pay more.
Nine Entertainment is similarly challenged. Another mature business without a natural dose of commercial steroids, the media group is on a quest to take market share from Seven and Ten.
Nine is already talking about expanding its media activities. Ultimately, Dick Smith and Nine shareholders will be banking on general improvement in the domestic economy for a boost to earnings and share price.