This year’s Initial Public Offering (IPO) market has been solid rather than spectacular. Fifty-five companies collectively raised $4.4 billion through IPOs and listed on ASX in the calendar year to August 31, Switzer Super Report analysis shows.
At this rate, the 2015 IPO market will be well down on last year, and thankfully so. Last year’s IPO market broke records as $18.6 billion was raised through 81 listings. A rising share market, the blockbuster Medibank Private offer, and strong IPO sentiment drove capital raisings.
This year’s IPO market was expected to slow. No multi-billion-dollar household-name IPOs were slated, float fatigue started to creep in, and the share market correction in August and September made vendors nervous about rushing to market.
The Link Administration Holdings IPO, covered by Paul Rickard on Monday, will test investor appetite for floats. Seeking $946.5 million, the float has been mooted for several years. It will be this year’s largest IPO, eclipsing MYOB’s $739 million raising.
A successful listing could spark an end-of-year float rush. The fourth quarter is typically strongest for IPO volumes as vendors race to close their offers before Christmas. Better share market conditions in October and November would buoy vendors. Baby Bunting Group’s listing this week, up 31% on debut, will also boost confidence.
As to share-price gains, the 2015 IPO crop (to August 31) has had a median gain of 2% over the issue price, our analysis shows. In relative terms, that’s an okay result given share market falls this year, and within that there have been several strong performances from tech floats.
Future Fibre Technologies, Superloop, Appen and Reffined headline the list of IPO performers so far this year. They reinforce investor interest in emerging information technology and telecommunication companies, but come with higher risk.
Look for the laggards
Like a house on auction, IPOs are often overhyped and dressed up to get the best price. Investors scramble for stock in the float, miss out on all or some of their allocation, and give up on it in the aftermarket if the share price disappoints. They judge the company’s quality by its share-price performance against the issue price – a sure-fire way to lose money.
The best value often emerges in the aftermarket when an IPO falls for no good reason, its stock is readily available, and there is more history as a listed entity. Having analysed hundreds of IPOs in the past decade, I’m cynical about what is often reported in prospectuses.
Other factors are complicating IPOs. Escrow anniversary dates can lead to stock being dumped by early investors when their restricted securities are allowed to be sold. Keep a close eye on floats during one- or two-year escrow dates if they have a high proportion of restricted stock. Excessive selling can create opportunity.
Hedge funds are also changing the IPO aftermarket. Algorithmic trading programs are selling stock that drops below the issue price on its debut trading day. A leading small-cap fund manager I know sells any float that dips below the issue price within days of listing.
These dynamics create opportunities for long-term value investors, who can watch and wait for better value in IPOs, instead of chasing them in the offer period or in the early aftermarket. Some floats, of course, warrant early buying. But the days of an easy 5-10% “stag gain” on the first day of trading for floats, collectively, are long gone.
These three recently listed companies trade below their issue price and are worth watching.
1. Costa Group Holdings (CGC)
Yes, it is harsh to call Costa a laggard when it is trading just below its $2.25 issue price at $2.21. Australia’s largest grower and marketer of fruit and vegetables raised $551 million through an IPO and listed on ASX in July – just before the share market correction quickened.
Costa was $1.77 in early September and has steadily tracked back to its issue price. It’s another example of why it pays to watch floats in the aftermarket and buy them when they are cheaper. It is a quality company in a sector with excellent long-term prospects.
Agribusiness stocks have stood out this year. Organic food provider Bellamy’s Australia, almond producer Select Harvest, feed supplier Ridley Corp, Elders and Farm Pride Foods have rallied. Chemical supplier Nufarm and Incitec Pivot are improving.
The lower Australian dollar is helping export sales, amid rising demand from Asia for Australian food. Free-trade agreements, while usually taking years to affect corporate earnings, have boosted sentiment towards agribusiness, and operational restructures across the sector in the past few years are paying off.
Costa is superbly positioned to capitalise on the “dining boom” as middle-class consumption in Asia takes off in the next 15 years and diets include more protein. The company is not well covered by analysts, but those who follow it have buy recommendations and a median price target of $2.79, suggesting reasonable upside from the current price.
Costa’s first reported full-year revenue and underlying earnings slightly exceeded prospectus forecasts. The return of El Nino conditions and less rainfall in Eastern Australia this summer is a concern, but it looks like one of the higher-quality agribusiness companies on ASX.
Costa Group Holdings
Source: Yahoo!7 Finance, 15 October 2015
2. Argo Global Listed Infrastructure (ALI)
The Argo infrastructure fund listed on ASX in July after raising $286 million at $2 a share. Apart from brief gains in September, the listed investment company has mostly traded below the issue price and was $1.95 this week.
The fund provides exposure to a portfolio of global infrastructure stocks and is yet another LIC IPO that has come to market in the past two years.
It is trading just below its latest stated net tangible asset (NTA) value of $1.96, although the issue of options at $2, assuming they are exercised in due course, could dilute the NTA, meaning Argo could trade at a premium to its asset backing.
I like the look of this fund. Argo is one of the market’s best-regarded investment managers and its flagship LIC, Argo Investments, typically trades at a premium to NTA.
Global infrastructure is an interesting asset class given many emerging and developing countries badly need to upgrade roads, rail, ports, and electricity assets as the population grows. Historical underinvestment in infrastructure and continued privatisation of government-owned assets overseas are other sector tailwinds. As is a lower Australian dollar in the next 12 months, given the Argo fund is expected to be mostly unhedged.
Global infrastructure suits SMSFs that want exposure to this more defensive asset class. With many Australian LICs trading at significant premiums to NTA – and best avoided at current prices – the Argo infrastructure fund has appeal.
Argo Global Infrastructure Fund
Source: Yahoo!7 Finance, 15 October 2015
3. MYOB Group (MYO)
The market’s largest IPO so far, MYOB Group, has been an early disappointment. The accounting software provider raised $739 million at $3.65 a share and listed in May. It has mostly traded below the issue price and was $3.30 this week.
MYOB is approaching value territory. Its first-half result was slightly ahead of prospectus forecasts and management reiterated full-year guidance. It rallied on the news, but remains well down on the 52-week high of $3.92.
MYOB has a strong position in lucrative accounting software markets in Australia and New Zealand. Recurring revenue makes up most of its sales. Accounting software is a lucrative business and has a beautiful business model when it works.
Of five broking firms that cover MYOB, two have a buy recommendation and three have a hold. Analysts are starting to upgrade recommendations and a median price target of $3.68 suggests MYOB is a touch undervalued and offers a reasonable margin of safety at the current price.
MYOB looks well positioned as more small and medium-size enterprises migrate to the cloud and use its software. Its rival, Xero, is making inroads but accounting software is highly “sticky” once companies get used to using it. It is hard to swap providers.
MYOB trades on a PE of about 20 times 2015-16 forecast earnings. That does not seem excessive for a well-run company that deserves a valuation premium given its industry position.
My sense is MYOB came to market a touch too expensive and has suffered from general market volatility. It would look more interesting closer to $3, but appeals at current prices.
MYOB Group
Source: Yahoo!7 Finance, 15 October 2015
Tony Featherstone is a former managing editor of BRW and Shares magazines. All prices and analysis at October 14, 2014.
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