|Summary: The number of initial public offerings to hit the Australian stockmarket is a far cry from the boom days pre-GFC, but signs of corporate and investor confidence are increasing as more companies venture back to the public boards. There’s money to be made by investing in IPOs, and history shows that the best way is usually by selling out very early.|
|Key take-out: Investors who participated in all 15 IPOs this calendar year and sold them at the end of the first day of trade would have made 2.7%.|
|Key beneficiaries: General investors. Category: Shares.|
This is shaping up to be the best quarter in 2½ years for new floats, as the most trumpeted new listings of the year have generated enviable returns for investors.
If online health insurance broker iSelect (ISU) enters public life next Monday as scheduled, its $215 million float would take the total value of new initial public offers (IPOs) to just over $1 billion for the June quarter, which would mark a record amount since the final quarter of 2010.
While that may not be saying much given that the IPO market is coming off a low base and the market volatility is clouding the outlook for new listings, there is clearly good investor appetite for these stocks as the largest floats this year have surged since their market debut.
Fertility service Virtus Health (VRT), which is the biggest with a market capitalisation of $500 million, is up 14% from its IPO offer price; while law firm Shine Corporate (SHJ), property trust Arena REIT (ARF) and data facilities owner Asia Pacific Data Centre Group (AJD) have produced returns of 46%, 4.5% and 12%, respectively.
But the best performing listing this year is Indoor Skydiving Australia Group (IDZ). The skydiving facilities developer has thrilled investors, as they have seen their investment double in value in just five months from the 20 cent offer price.
The question now is whether you should take the leap into the next IPO, and if making money from new stocks is as easy as these examples might lead you to believe.
Since new listings mostly fall into the small caps arena, I thought I would try to answer these questions by looking at past IPOs, and the findings could hold important lessons for both long- and short-term investors.
Making a profit from “stagging” an IPO (applying for a new stock and selling it on the first day of listing) isn’t an urban myth that should only be pursued by risk-tolerant investors, if history is any guide.
Interestingly, stagging could be the lower-risk strategy for those looking to buy into an IPO.
If you blindly participated in all 15 IPOs this calendar year and sold them at the end of the first day of trade, you would have made 2.7%. That may sound a little skinny, but considering your capital is only tied up for a couple of weeks (between the time you apply for the stock and when it debuts), your annualised return is probably well north of 30%.
If you used the same strategy on the last 300 IPOs over the past five years, you should have made a more handsome 10% average return, and you don’t need to annualise that to make it look impressive.
However, history would further suggest that you do not want to be holding on to new stocks for more than a day or two, as the average performance deteriorates quickly. After a week, new stocks would lag the broader market by an average of 0.1%, and by the six month mark, they would be behind the market by 2.6%.
There are many reasons why a new stock could struggle over the short- to medium-term, and finding common drivers to explain this is difficult. But if I had to make a general observation, I would say that new entrants are usually at a disadvantage compared with their more established rivals, which tend to be larger and better understood by the investment community. Only when, and if, the newbie develops a sustained track record will the discount gap close.
But this isn’t to say that longer-term investors should shun all new listings. It sounds obvious, but the key point here is to do your homework. This is particularly important for IPOs, because only around a third of new stocks actually outperform the ASX All Ordinaries Index in the first six months of their listing.
However, when these stocks get it right, they really get it right. Picking the right IPOs will yield you an average total return that is 52% ahead of the market at the 180-day mark, while the laggards underperform by an average of 33%.
This brings us to the question of what makes a good IPO? In this turbulent environment, newly listed companies with reasonably defensive and predictable earnings are “in”, while speculative cyclical stocks are “out”, according to Bell Potter Securities’ head of research, Peter Quinton.
“If [the new listing] is from one of those defensive sectors where it has got some protection from slowing economic growth, I think automatically people will look at it very closely,” said Quinton.
“But as a start, IPOs need to be priced at a discount to their peer group; and all things being equal, my rough [estimate] is that the price-earnings [P/E] will need to be 10% lower and the yield 10% higher [than their peers].”
But valuations are last on Quinton’s checklist as qualitative analysis is more important. The things he looks for first are:
- If the vendor is keeping any shares (company founders keeping some skin in the game is seen as a positive);
- The composition of the shareholdings;
- The outlook for the sector over the next two to three years, and
- If the company forecasts outlined in the prospectus look reasonable.
He also tends to avoid IPOs where the company has bought a couple of other businesses to appear bigger, as this strategy has produced more failures than successes.
Looking at the much anticipated iSelect float, the IPO ticks most of the boxes but there are small cracks in the story that leads me to suspect that investors will be better off stagging the IPO and looking for a better entry price down the track.
“When they first priced the IPO, I thought it was quite attractive,” said Prime Value Asset Management’s portfolio manager, ST Wong.
“But what has happened post the lodgement of the prospectus was that the listed internet companies suffered a sharp dip.”
For instance, shares in Trade Me Group (TME) and Carsales.com (CRZ) have fallen over 10% in the past month and are trading on a 2013-14 P/E of around 21 times and yield of 3.7% each.
At the offer price of $1.85, iSelect is around the same multiple and the company is not planning on paying a dividend for the next couple of years as it focuses on growth.
Further, Wong commented that the quality of iSelect’s balance sheet and cash flow is not as good as established online stocks, and Medibank (our largest health insurance provider) does not provide cover through the iSelect website.
Prime Value is participating in iSelect’s IPO. Maybe what the market really needs is a comparison website for new share issues as IPOs aren’t only for the stags.
Brendon Lau does not hold any of the stocks mentioned in this article.
The Uncapped 100
|Code||Name||Rationale||Market cap ($m)||Total return 1-year (%)||Sector (GICS)|
|MMS||McMillan Shakespeare||One of the best performers since the GFC, but doesn't get much press or analyst coverage. Good management team.||1,194,619,263||43.85||Industrials|
|MTU||M2 Telecommunications Group||Amazing growth story and well run company. High free float and strong insto support.||1,011,077,759||78.3||Telecommunication Services|
|BRG||Breville Group||Well covered but good candidate for core holding due to good track record.||964,006,287||78.59||Consumer Discretionary|
|NHF||NIB Holdings /Australia||Only listed health insurer. Widely held. Good performer.||921,908,752||43.7||Financials|
|ARP||ARB Corp||Well covered but good candidate for core holding due to quality management.||829,910,889||32.54||Consumer Discretionary|
|MRM||Mermaid Marine Australia||Its strategically located facility on WA coast gives it a key advantage over competition in servicing Gorgon & Pluto projects.||791,736,816||29.45||Industrials|
|SRX||Sirtex Medical||A shining star in the biotech space and one of the best performing stocks in 2012. Great product (liver cancer treatment) and bright outlook.||691,524,902||108.76||Health Care|
|GEM||G8 Education||Only listed childcare operator. Acquisition strategy paying off with stock delivering solid gains.||677,657,532||186.56||Consumer Discretionary|
|AAD||Ardent Leisure Group||Widely held stock. Earnings more defensive than anticipated. Good yield. Potential core holding||668,310,669||38.79||Consumer Discretionary|
|AUB||Austbrokers Holdings||The insurance broker is a strong performer. Widely held and well liked by small cap investors.||636,149,841||65.27||Financials|
|ACR||Acrux||One of the most successful Australian biotechs in recent history. Widely held by instos.||601,143,372||-20.06||Health Care|
|SGN||STW Communications Group||One of few companies able to benefit from online shift. Widely held and good insto support.||579,493,896||63.67||Consumer Discretionary|
|BDR||Beadell Resources||Will be a very big FY14 for miner as it has to prove it aims to produce 200,000 ounces of gold a year.||507,277,832||-4.44||Materials|
|RFG||Retail Food Group||Owns a number of well know franchise brands. Widely followed by instos.||485,936,401||52.95||Consumer Discretionary|
|NXT||NEXTDC||The cloud computing company is an IT sector darling. Fairly widely held and followed.||478,576,263||49.17||Telecommunication Services|
|TOX||Tox Free Solutions||Widely held stock in the waste solutions business. Its unique because it operates in a defensive-growth niche.||453,217,926||50.26||Industrials|
|AMM||Amcom Telecommunications||Well covered junior telco but good candidate for core holding.||441,425,568||72.94||Telecommunication Services|
|CCV||Cash Converters International||Strong performance is attracting investors. It's Australia's only listed pawn shop and pay day lender.||440,815,460||80.09||Consumer Discretionary|
|CCP||Credit Corp Group||Strong price run attracted good investor interest. Leveraged to any rise in loan defaults. Not well covered by press.||429,472,626||65.71||Industrials|
|HZN||Horizon Oil||One of better regarded small energy stocks that doesn't receive much media attention.||425,724,945||33.93||Energy|
|BGA||Bega Cheese||Corporate interest in Australian food companies makes the cheese maker worth following.||403,963,715||72.5||Consumer Staples|
|SEA||Sundance Energy Australia||Analysts have a favorable take on the oil & gas explorer, but stock is still under radar of most. Sundance provides exposure to prospective Eagle Ford shale.||396,275,116||52.21||Energy|
|SLX||Silex Systems||Its uranium enrichment technology could become one of Australia's best innovations given its potential to change the nuclear power industry.||377,953,125||-33.33||Information Technology|
|MYS||MyState||Well regarded and could make good alternative to bank stocks. Has good yield and earnings growth over past few years.||370,400,452||50.42||Financials|
|CWP||Cedar Woods Properties||Property developer with good ROE and earnings growth track record.||364,596,954||48.25||Financials|
|BRU||Buru Energy||Substantial size but not often covered by press. Widely held with good insto support.||358,987,701||-59.06||Energy|
|FGE||Forge Group||One of the better performers in its industry. Good track record and potential core holding.||352,431,274||-12.78||Industrials|
|RKN||Reckon||Fierce competition for cloud base accounting software puts it in firing line.||313,360,992||21.41||Information Technology|
|TGA||Thorn Group||One of few retail stocks that is performing well. The Radio Rentals chain owner is also well supported by instos.||308,719,727||49.45||Consumer Discretionary|
|UXC||UXC||Company has turned corner and enjoyed re-rating. What's next?||307,262,604||84.86||Information Technology|
|UNS||Unilife Corp||The developer of one-use prefilled syringes is close to an inflection point as the market is expecting the company to announce a major contract with a pharmaceutical giant in the coming weeks.||306,530,853||-29.56||Health Care|
|RCR||RCR Tomlinson||Good first half FY13 result and outlook, but will its fortunes change this year with the mining capex slowdown?||284,727,234||34.76||Industrials|
|MOC||Mortgage Choice||Has a good track record and is leveraged to any housing recovery. The stock is also liquid with good insto support.||274,017,456||83.06||Financials|
|NWH||NRW Holdings||One of the better regarded mining & civil contractors with good track record in delivering on projects.||257,971,405||-66.17||Industrials|
|AEU||Australian Education Trust||Well performing childcare centre property owner. Good yield story and outlook.||257,056,824||55.11||Financials|
|MYX||Mayne Pharma Group||Sizeable generic drug maker with interesting board members.||242,071,289||67.53||Health Care|
|IMF||IMF Australia||Litigation funder is unique stock. Stock not liquid but its outlook appears promising given the number of potential class action lawsuits.||241,475,372||52.86||Financials|
|SPL||Starpharma Holdings||Noteworthy for its good pipeline of innovations. Well run, widely followed.||226,932,755||-39.85||Health Care|
|RIC||Ridley Corp||High corporate interest in the sector and the shrinking pool of agri listed stocks make Ridley worth following.||226,245,575||-22.72||Consumer Staples|
|AJA||Astro Japan Property Group||Strong leverage to Japanese economy makes this an interesting stock to watch.||219,110,306||18.19||Materials|
|WBB||Wide Bay Australia||The building society is trying to turn its fortunes around. Also worth watching for its exposure to Queensland housing market, particularly around major resource projects.||215,982,056||10.72||Financials|
|PFL||Patties Foods||Illiquid stock but has suite of well recognised consumer brands. Defensive yield.||211,379,776||-1.83||Consumer Staples|
|NWT||Newsat||Potential large cap if it can launch its own satellite in 2015.||202,341,934||-45.65||Telecommunication Services|
|SIV||Silver Chef||Strong jump in the share price of the equipment financing group has attracted a good following.||201,339,218||126.4||Industrials|
|MXI||MaxiTRANS Industries||Transport equipment maker posted good interim result. Has appealing yield and growth.||200,552,811||88.1||Industrials|
|DWS||DWS||Will be a big beneficiary if governments start spending on IT again.||191,264,206||10.02||Information Technology|
|SHV||Select Harvests||Noteworthy for turbulent past and exposure to soft commodity market.||180,433,365||154.91||Consumer Staples|
|GXL||Greencross||Acquisitive vetinary group. Good profit growth and share price performance, but gets little press.||177,656,738||119.71||Health Care|
|GXY||Galaxy Resources||Good upside potential if it can get its problem-prone Jiangsu plant back on track. Won't be easy to right this ship.||177,430,000||n.a.||Materials|
|MLB||Melbourne IT||A perennial underperformer could be interesting turnaround story as management is in midst of restructuring the business.||175,732,178||33.69||Information Technology|
|VOC||Vocus Communications||Telecom stocks are in favour but Vocus is one of the least covered||174,358,551||12.37||Telecommunication Services|
|GID||GI Dynamics Inc||Largely forgotten by investors but could attract attention this year as it looks to gain US approval to use its intestinal shealth on diabetics.||171,796,188||-31.82||Health Care|
|DTL||Data#3||Well respected IT company that receives little press coverage||167,832,703||8.82||Information Technology|
|CLH||Collection House||In similar space as Credit Corp. Strong stock performance has attracted a following and the stock appears to be well placed to run further||167,366,608||96.05||Industrials|
|SFH||Specialty Fashion Group||In early stages of turnaround. Can the women's apparel retailer sustain the momentum?||160,517,151||60.75||Consumer Discretionary|
|CKF||Collins Foods||One of the few food franchise listed companies.||156,240,005||68.3||Consumer Discretionary|
|NAN||Nanosonics||A successful medical tech story. Should be close to turning in maiden profit with its disinfection device.||150,643,509||16.16||Health Care|
|BNO||Bionomics||One of the larger cancer treatment developers in this market.||150,035,080||16.55||Health Care|
|HSN||Hansen Technologies||Operates in a high potential/growth industry but is not covered by press or brokers.||146,065,659||7.76||Information Technology|
|IMD||Imdex||Drilling company is well supported by instos and should benefit from any rebound in exploration activity.||143,121,765||-61.59||Materials|
|TGS||Tiger Resources||Future lies in its Kipoi copper mine expansion in the Congo but miner is fully funded with DRC govt holding 40% stake in tenement. Next 12mths will be interesting.||141,701,752||-22.22||Materials|
|RCG||RCG Corp||The footwear retailer is one of the best performing consumer stocks as online competition is not a big threat. Company has a good yield as well.||138,348,770||74.6||Consumer Discretionary|
|IFM||Infomedia||Interesting tech play in the car parts market. Strong share price gain but gets little air play.||138,127,472||142.83||Information Technology|
|POH||Phosphagenics||Sizable biotech with a game changing FY14 year ahead. Good insto following.||137,762,909||-15.63||Health Care|
|REX||Regional Express Holdings||Well run airline that is overshadowed by Virgin and Qantas.||137,018,036||14.17||Industrials|
|IPP||iProperty Group||Worth watching as it is trying to be the REA Group of Asia.||131,372,177||-22.87||Information Technology|
|MCP||McPherson's||The personal care and household products supplier had been relatively insulated from volatile discretionary spend and online threat, but its latest profit warning shows it's not immune.||129,476,593||-10.27||Consumer Discretionary|
|TFC||TFS Corp||The sandalwood products company offers exposure to both the agri and cosmetics industry. It will start commercial harvest this year.||116,043,060||-7.78||Materials|
|UBI||Universal Biosensors Inc||Well regarded biotech and one of few that's successfully manufacturing in Australia. Struck deal with a few global medical companies.||110,066,933||12.5||Health Care|
|NEA||Nearmap||A stellar performer with an Interesting business that offers high quality ariel maps to companies & government.||106,608,521||633.33||Information Technology|
|CLV||Clover Corp||One of the star performers in 2012. Operates in growing but relatively stable niche.||102,412,651||74.49||Health Care|
|ACL||Alchemia /Australia||One of the few biotechs with revenue stream. Good pipeline of oncology treatments.||98,833,366||-32.22||Health Care|
|ESV||Eservglobal||Mobile money transfer company that has been gaining traction. Widely held by instos but low press coverage||98,373,169||75.56||Information Technology|
|BGL||BigAir Group||The wireless microcap has gained strong following over past year or two but is often overlooked by investors and the press.||95,923,065||66.15||Telecommunication Services|
|SAR||Saracen Mineral Holdings||Emerging gold producer that is widely held by instos. Hitting milestones and looks cheap. Key asset is close to gold majors, which makes it a potential takeover target.||95,242,111||-72.65||Materials|
|AMA||AMA Group||Good turnaround story but under the automotive services group is radar of most.||92,802,856||114.22||Consumer Discretionary|
|LCM||LogiCamms||Strong price performance and reasonable valuation attracting interest.||88,972,725||22.8||Industrials|
|AOH||Altona Mining||Noteworthy copper play with Xstrata pullout of Roseby project in Australia and the good ramp up of its Finnish project.||84,638,832||-39.62||Materials|
|AZZ||Antares Energy||Liquid with good insto support. Already in production with exploration upside in Texas.||84,150,002||-20.48||Energy|
|PEN||Peninsula Energy||Widely held by instos and large free float. It's the only uranium miner on the list.||76,842,873||-25.71||Materials|
|CUV||Clinuvel Pharmaceuticals||Interesting skin disorder treatment developer that has done reasonably well over past year||76,242,989||20.91||Health Care|
|CAA||Capral||An aluminium manufacturer that is actually holding up relatively well given that manufacturing is on the nose.||73,030,281||32.14||Materials|
|RUL||RungePincockMinarco||IT company to resource industry. Turnaround potential under new CEO.||70,672,607||37.84||Industrials|
|DRM||Doray Minerals||Widely held by instos. One of the more favored gold explorers by brokers.||69,514,717||-46.69||Materials|
|TAN||Tandou||The only direct equity exposure to cotton prices. Also trades water rights and receives little press.||60,128,788||5.21||Consumer Staples|
|JIN||Jumbo Interactive||Innovative small cap facing off industry dominated by giants. Worth watching to see if it can carve out a profitable global business.||59,449,245||14.62||Consumer Discretionary|
|CKL||Colorpak||The small cap packaging company has grown via acquisitions over past few years.||57,076,004||21.5||Materials|
|UML||Unity Mining||Growing Tassie gold producer with high free float. Valuation looks compelling too.||54,053,829||-38.4||Materials|
|LGD||Legend Corp||Electronic parts supplier to utilities and other industries. Stable earnings with good yield. Often overlooked.||53,777,561||-18.25||Information Technology|
|WDS||WDS||Widely held with strong insto support. Engineering contractor diversified across mining, energy and infrastructure.||53,554,028||-15.93||Industrials|
|BOL||Boom Logistics||Crane hire group is riding out the downturn in construction. It's widely held by instos and is very liquid.||51,765,842||-51.11||Industrials|
|KOV||Korvest||The construction products and services supplier has been hit by project delays and deferrals. But its relatively high yield could give it some support.||50,685,452||35.36||Industrials|
|YTC||YTC Resources||Next 12-mths will be eventful after YTC secured funding for its projects from Glencore.||45,870,007||-33.96||Materials|
|ISS||ISS Group||Good turnaround story from 2012 but the resource industry software developer under the radar of most. ISS has received a takeover offer after its inclusion in the Uncapped 100.||43,568,275||97.88||Information Technology|
|TSM||ThinkSmart||Potential turnaround story worth keeping eye on.||41,408,577||13.04||Financials|
|NTC||NetComm Wireless||Under appreciated small IT hardware maker that is punching above its weight. Hardly covered by press.||31,589,054||92.59||Information Technology|
|OTH||Onthehouse Holdings||Alternative small cap to online property leader REA Group. It is trying to use more timely housing data as a compeitive edge against REA.||28,761,225||-14.92||Consumer Discretionary|
|EBT||eBet||Potential alternative to star performer Ainsworth Tech. Has exclusive deal with US poker machine maker WMS.||19,921,261||106.35||Consumer Discretionary|
|MBO||Mobilarm||Unique product that could change global maritime safety practices with its man-overboard location beacon.||12,581,549||#N/A N/A||Information Technology|
|PGC||Paragon Care||Emerging hospital equipment supplier that has been ignored by market.||10,583,667||29.55||Health Care|
|Source:Eureka Report, Bloomberg|