To market, to market by year's end

The race is on to get a large number of new listings into the pre-Christmas chute, reflecting the view that the current favourable market conditions should continue for the remainder of the calendar year.
By · 15 Oct 2013
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15 Oct 2013
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The race is on to get a large number of new listings into the pre-Christmas chute, reflecting the view that the current favourable market conditions should continue for the remainder of the calendar year.

There is plenty of pushing and shoving to get the new listings - some of which have been sitting in a backlog for years - to market in the hope that they will capitalise on a desire by investors to escape the poor interest-rate yield on bonds and deposits.

Others are sprinting to the line while conditions are ripe because there is no certainty about what 2014 might look like.

But make no mistake, there is another wave building up for next year if conditions remain favourable.

But contained in this flood of IPO hopefuls are plenty of companies whose offerings are less attractive than their marketing gloss.

This group covers the bigger and better known - such as Nine Entertainment and Dick Smith - whose appeal will depend on pricing, and other less-established businesses from across a range of industries.

It even includes Mark Rowsthorn's McAleese transport group, which intends to go ahead with a $155 million public listing, despite a fatal crash and the grounding of 41 vehicles from its Cootes Transport division by authorities in NSW and Victoria.

Meanwhile, the news from recent sharemarket entrant iSelect should serve as a cautionary reminder to investors. iSelect will be a contender for this year's IPO wooden spoon. It may not be the worst share price performer, but it will be the one with the highest profile.

Thanks to its enormous advertising budget, iSelect is a household name in consumer land, and one that would have given retail investors some (false) comfort.

A big brand name often attracts small investors. But the mum and dad shareholders were not alone in being lured by the iSelect sparkle. Plenty of professional fund managers (many of whom have subsequently offloaded their shares) came in on the initial offer.

iSelect should have set off some warning bells. While some investors heard them, others were beguiled by the company's potential to join the list of what have become known as the disrupter stocks.

These stocks boast the likes of and Seek - the digital start-up Davids that took market share from incumbent Goliaths such as News Corp and Fairfax.

Their business models are, by their digital nature, relatively new and relatively low cost, with plenty of growth potential. They have few, if any, barriers to entry and the trick for investors is picking the right one.

In the case of Seek and, James Packer and Lachlan Murdoch threw their weight behind the companies and, in doing so, defined them as the two within their markets that would not die from cash bleed before establishing a winning market share.

Now both of these digital classified operators have critical mass.

Over the next couple of years we will see financial services disrupter start-ups looking to take on the banks. OzForex, the foreign exchange transfer portal that will begin trading next week, has been operating for 10 years with a strategy and a track record that impressed investors. But popularity comes at a cost - the float has been priced for success.

But iSelect is a disrupter stock that still has competitors and its market share relies on intense (and expensive) advertising. In effect, it's an online sales agent whose market is a limited number of insurance and utility companies who provide upfront fees and trailing commissions.

In its four-month life as a listed stock, it has already been buffeted by a series of issues. Monday's announcement that its chief executive, Matt McCann, had left the company and that its recently minted sales forecasts would not be met was just the latest.

The Australian Securities and Investments Commission had already queried its 2013 revenue and earnings forecasts, suggesting they were potentially misleading.

One of its large pre-float shareholders sold out immediately on listing, thus cementing it in investors' minds as a float for opportunistic sellers rather than an opportunity for new investors.

All of this served to focus attention on whether iSelect had engaged in bait and switch accounting. Booking revenue from trailing commissions means money is accounted for before it's received, and there is always a risk that the revenue won't materialise.

The company said "attrition and premium rate movements during the [second half of financial year 2013] influenced the rates we are now using to calculate the present value of sales made under trail agreements".

It talked about a range of issues affecting the business, from marketing and regulatory to the departure of its chief executive as the result of a disagreement with the board.

It is an explanation that will affirm sceptics' view that a company whose accounting treatment is questionable should be avoided.
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