|Summary: When it comes to stockmarket floats it’s always a case of buyer beware. Moreover, it’s not always possible to get pre-IPO stock. But anyone can buy post-IPO stock on the open market … today we examine three recently listed companies.|
|Key take-out: Recent IPOs have bucked a longer-term trend of losing money for most investors, with a number of 2014’s floats worth a second look.|
|Key beneficiaries: General investors. Category: Shares.|
At Eureka Report we are seriously sceptical about IPOs – most of them ultimately lose money. But in 2013 a wave of popular IPOs (Initial Public Offerings) hit the ASX as the broader market finally awakened fully from a post-GFC torpor.
As John Abernethy of Clime recently highlighted, it is often difficult to find value among new share offers, especially iconic well-known brands that appeal to a wide variety of investors such as the poorly performing Nine Entertainment Co (NEC) IPO.
What’s more, as I highlighted in the article Making money from small cap IPOs in June, investors are generally better off “stagging” a new listing. Stagging, which means selling out on the first day of trade, would net you an average of 10%, assuming you bought into all IPOs over the past five-years.
Those who hang on to new stocks have historically seen their investment lag the market by an average of 2.6% in the first six months of the company’s public life.
But 2014 was different. Unusually, the year’s crop of new floats have fared better than many might have expected : Of the 20 IPOs that have started trading since the start of the current financial year, 14 of them are trading at or above their offer price.
Performance of new floats since July 1
|Code||Issuer Name||Offer Price ($)||Offer to open(%)*||Last price ($)||Offer to dt (%)**||Listing Date||Industry|
|VED||Veda Group||1.25||39.20||1.78||42.40||5-Dec-13||Commercial Serv-Finance|
|SLK||Sealink Travel Group||1.10||37.27||1.55||40.91||16-Oct-13||Diversified Operations|
|OFX||Ozforex Group||2.00||29.50||2.71||35.50||11-Oct-13||Finance-Other Services|
|AFJ||Affinity Education Group||1.00||8.50||1.09||9.00||9-Dec-13||Schools-Day Care|
|AQU||Aquaint Capital Holdings||0.60||8.33||0.55||-8.33||11-Nov-13||Real Estate Oper/Develop|
|ANI||Australian Industrial REIT||2.00||5.00||1.99||-0.50||21-Oct-13||REITS-Warehouse/Industr|
|BOP||Birch and Prestige Investment||0.40||5.00||0.41||2.50||19-Aug-13||Housewares|
|LHC||LifeHealthcare Group||2.00||4.00||1.80||-10.00||5-Dec-13||Medical Instruments|
|DSH||Dick Smith Holdings||2.20||3.64||2.23||1.36||4-Dec-13||Retail-Consumer Electron|
|HPI||Hotel Property Investments||2.10||-0.95||2.04||-2.86||10-Dec-13||Real Estate Oper/Develop|
|NEC||Nine Entertainment Co Holdings||2.05||-1.46||1.90||-7.32||6-Dec-13||Multimedia|
|IDR||Industria REIT Fund||2.00||-5.00||1.83||-8.50||3-Dec-13||REITS-Office Property|
|*IPO offer price to opening price on first day of trade **IPO offer price to last traded price|
|Source: Eureka Report, Bloomberg|
Moreover, among the dozens of floats that hit the boards in recent times fund managers have been trawling the numbers to see if there is opportunities in companies that remain freshly listed.
As the chief investment officer for Celeste Funds Management, Frank Villante explains: “Quality might be a question from here, because those in the IPO pipeline with better quality have already come out.”
Fund managers and seasoned retail investors trawl the post-IPO market because the imperfect pricing of IPOs and indeed the often volatile trading patterns of recently listed floats can sometimes offer long term opportunities.
A good example would be Retail Food Group (RFG). The owner of franchise brands like Donut King, Brumby’s Bakeries and Michel’s Patisserie, had a dismal start to public life. The stock started trading 4% below its June 2006 IPO price of $1 and lagged the market by 14% in the first 90-days of trade before staging a turnaround to finish the year close to 30% ahead of the ASX All Ordinaries.
The stock last traded at $4.26 and we recommended investors buy the stock in October as it embarks on its next phase of expansion into gourmet pizza. Chris Garrard has also written about the group’s good growth potential today.
With these factors in mind I asked some leading fund managers to pick their favourites from the latest crop of floats.
Vocational education and training services company Vocation (VET) jumped 10% on its first trade on Monday and is holding close to its issue price of $1.89 a share.
Fund managers are tipping Vocation to be one of the better-performing new stocks in 2014 for a number of reasons, although there is no denying it is a stock only suited for the risk tolerant.
“Its business is affected by government funding and we [may] see government pull back funding for the sector,” says Prime Value Asset Management portfolio manager, ST Wong.
One only needs to look at McMillan Shakespeare (MMS) to see how much of a risk governments can pose to a business. (See John Abernethy’s article today, McMillan Shakespeare well on recovery road).
However, Wong notes that demand for vocational training is very strong, particularly in Victoria, and he anticipates a ramp-up in demand from the other states as well as they are looking to adopt similar policies to Victoria.
But that isn’t the only risk investors should be wary of. There is also integration risk as Vocation is made up of three different businesses.
“Normally I wouldn’t buy into it until I’ve seen the first-half result as there is a fair bit of risk in putting all these businesses together, and I’d like to see how management executes that,” says the investment director of DMP Asset Management, Julian Mitchell.
“But I like the business and I am sufficiently encouraged from what I’ve seen on the first day of trading to think that the stock is going up from here.”
What has caught Mitchell’s eye is the 48.5 million shares that changed hands on Vocation’s market debut, which is more than a third of the shares offered to the public. Despite the heavy turnover, the stock still managed to stay comfortably above its IPO price.
This seldom happens and is one of the key things Mitchell looks for when deciding whether to buy a newly traded stock.
But the main catalyst for the stock is its interim result in February next year as it will give the first clue as to whether management can meet its ambitious full-year growth target for 2013-14.
Vocation is forecasting pro forma revenue to double to $118.3 million and net profit to increase more than fivefold to $19.6 million for the current financial year.
The stock started trading for the first time today and it opened 3 cents above its 40 cent issue price.
While dorsaVi (DVL) closed flat, the stock could redeem itself in the coming months as its technology has wide and promising applications.
The company has developed a wireless motion device that can help users correct motion and posture. While the technology is applicable to physiotherapy and occupational health and safety, a fund manager who didn’t want to be identified told Eureka Report that it’s the opportunity in professional sports that is most exciting.
The device has been credited with reducing the number of soft tissue injuries in the Richmond Football Club (which competes in the Australian Football League) by 27% in 2012 season. Further, the top three players in the DosaVi test at the start of the 2011 season went on to play every game that year, while the bottom eight missed an average of eight games due to soft tissue injuries.
The system’s ability to improve an athlete’s onfield performance will be welcomed by just about any professional sport, while companies (like those in the trucking and mining sectors) might also be keen to use the product to help avoid worker injuries when using equipment.
“I am sceptical about the physio opportunity as I am not sure who would pay for the system,” says the fund manager. “But I expect to make many times my investment on the sports opportunity alone.”
Ozforex Group (OFX)
The international online payment transfer company is one of the better IPO performers this fiscal year, with the stock trading 36% above its offer price of $2 a share.
While Ozforex Group (OFX) is arguably trading at full value currently, given that it is on a 2013-14 price-earnings of 34 times based on the prospectus forecast, Villante believes the stock will continue to outperform the market over the next year or two.
“There aren’t many businesses in Australia that have IP [intellectual property] which works globally, especially when there is some track record of that business performing globally,” explains Villante.
“Finding an Australian growth stock that can grow not only domestically but globally is pretty unique, and hence people are willing to pay a big price for it.”
The market is expecting robust growth for Ozforex, which makes the stock look better value over the longer term. The company is tipped to post average earnings per share growth of 33% over the next three years.
This ramp-up in earnings is driven by the belief that Ozforex is well placed to grow market share as it provides customers with a more cost-effective and secure international payments solution than what is offered by major banks.
Further, it’s difficult for new entrants to compete with Ozforex because of significant regulatory and technological barriers to entry, adds Villante.
But watch out for the pre-Christmas floats this year, as there is a danger you will get run over in the rush. There are at least 10 new stocks lined up for their ASX debut in the next two weeks.
Company floats should add to the festive cheer, as market watchers say these are a positive sentiment indicator because it shows a growing appetite for risk. But small cap investors shouldn’t necessarily welcome this development with open arms, as there are reasons why the flood of floats isn’t always a good thing for retail investors.
Upcoming IPOs on the ASX
|Code||Issuer Name||Offer Size ($m)||Offer Price ($)||Industry||Expected listing date|
|PGH||Pact Group Holdings||648.8||3.80||Containers-Paper/Plastic||17-Dec-13|
|GDI||GDI Property Group||567.6||1.00||Real Estate Oper/Develop||17-Dec-13|
|SNC||Sandon Capital Investments||100.0||1.00||Invest Mgmnt/Advis Serv||19-Dec-13|
|ELR||Elsmore Resources||7.0||0.20||Tin & gem stones mining||19-Dec-13|
|VXL||Valence Industries||10.1||0.20||Diversified Minerals||20-Dec-13|
|HUA||Huayi Resources||2.5||0.20||Diversified Minerals||20-Dec-13|
|CVO||Cover-More Group||521.2||2.00||Insurance Brokers||23-Dec-13|
|NSR||National Storage REIT||240.0||0.98||REITS-Diversified||23-Dec-13|
|RLE||Real Energy Corp||10.0||0.25||Oil Comp-Explor&Prodtn||TBA|
|n.a.||Greenline Energy||2.0||0.15||Energy-Alternate Sources||TBA|
|Source: Eureka Report, ASX, Bloomberg|
The first is that IPOs can suck oxygen from their listed peers and weaken overall market performance. This is particularly true for emerging stocks, and new floats announced in the current financial year started July 1 have already channelled close to $5 billion away from incumbents.
There is also a danger that these new stocks will start to lag the market, and that would hurt overall sentiment towards equities at a time when confidence among retail investors is fragile.
As I highlighted in the article Making money from small cap IPOs in June, investors are generally better off “stagging” a new listing. Stagging, which means selling out on the first day of trade, would net you an average of 10%, assuming you bought into all IPOs over the past five-years.