Despite the buoyancy in the stock market over the past 12 months, we have been surprised to see so few new businesses apply for listing on the Australian Securities Exchange.
Rising markets, maturing term deposits and low cash rates are a good recipe for companies with IPO plans. Investors, who are likely to be more open about putting their hard-earned savings to work, rather than reinvesting them in low yielding term deposits, may be keen to take on a little more by investing in companies that are angling to take the IPO plunge.
On the other side of the fence sit the investment managers. Having watched a rising market lift all the “boats” in their portfolios, they are now finding it much more difficult to generate new ideas, and they would certainly be receptive to new opportunities.
More market entrants
Despite this, few IPOs have measured up to what we consider quality, are of decent size, have bright future prospects, and are being offered at a discount to our estimate of their intrinsic value. The exception to this is Virtus Health Limited (ASX: VRT), the only recent float we have participated in.
This lack of attractive new IPOs may be about to shift. Over the past few weeks, we have been told to prepare for a number of new floats – with an estimated combined value of $11 billion. Many are set to arrive by the end of 2013, and these are summarised below.
For context, so far this calendar year, new floats have totalled approximately $1.1 billion. In 2012, that figure was just $900 million. The last time the market saw an excess of $6 billion in value was just prior to the GFC.
We are actively looking for any opportunities in this list of 28 names. To answer this, let’s start with some speculation.
Firstly, we are inclined to eliminate companies that are involved in exploration activities, given their high risk/high reward dynamics. Explorers are generally capital intensive businesses and our guess as to whether they will find something before their cash runs out is as good as anyone’s.
Of the IPOs remaining, many are very small, and a number are only marked as “possibilities”. That leaves Genworth Australia, ACM Group, OzForex, Pacific Retail, Fife Capital and McAleese Transport.
Whose best interest?
Before we dig a little deeper, it’s worth considering some words of wisdom from Warren Buffett. He expressed his cynicism towards IPOs thus: “It’s almost a mathematical impossibility to imagine that, out of the thousands of things for sale on a given day, the most attractively priced is the one being sold by a knowledgeable seller to a less-knowledgeable buyer.”
We would tend to agree. In our experience, by making a decision to float, a business generally has its own interests at heart, not yours. IPOs for Myer, iSelect and Collins Foods serve as recent warnings to potential investors that while floats can represent good opportunities, some of them can be detrimental to your wealth if you do not understand what you are buying.
The trick is not to get sucked into buying overpriced and over marketed companies that have questionable or less than inspiring growth projections.
By applying these basic principles, we can quickly rule out Genworth Australia, Pacific Retail, Fife Capital and McAleese transport. That leaves ACM Group and OzForex.
When considering ACM Group, it is worth reading an article we recently wrote on Credit Corp Limited here. We prefer to own the market leader if we can, and in terms of Australian debt collection businesses, we would consider ACM Group to be a tier two player.
For this reason, we would be unlikely to add ACM Group to our portfolios. It may lead to portfolio “diworsification”, as by our measures, it would be a lower quality investment opportunity.
The pick of the bunch
It’s clear therefore that OzForex is the standout in this IPO float pack. Many market participants have also marked this company, which focuses on foreign exchange transactions, as of “white hot” interest.
If you have ever converted currencies or transferred money overseas, you may have been shocked to discover how much you were charged by your friendly bank to move your money.
Recently, a friend of mine was preparing to transfer AUD$200,000 overseas. I asked him if he would split the transaction into two lots, in order to try OzForex.
After signing up to their online platform, he transferred AUD$100,000 through one of Australia’s big four banks and the other AUD$100,000 through OzForex.
The resulting conversions after fees were USD$90,500 and USD$93,500, via the bank and OzForex respectively.
That’s a $3,000 or 3% difference for the same simple service. I think I can guess which one my friend will be using next time!
He came away from this experience “thoroughly recommending OzForex for a great rate, ease of use and secure platform”. He wondered why he had not looked beyond the banks for currency conversions previously.
Over time, experiences like this and the resulting word of mouth may put pressure on large financial institutions to revise the exorbitant fees they charge.
OzForex spotted this opportunity back in the late 1990s, and therefore has first mover-advantage. Since then it has grown to employ over 170 staff in Sydney, London, Toronto, San Francisco, Hong Kong, and Auckland, and conducts 460,000 transfers with a combined value of $9.1 billion a year.
This business certainly floats our boat in terms of its quality, brand awareness, size, and exciting growth outlook.
Perhaps the only issue is its pricing. On 21.7 times forecast 2014 earnings per share, it is by all accounts hot. If, however, the business is able to continue growing at 30% (as forecast in its prospectus) this PE multiple will soon look attractive, and it’s certainly one we think worthy of further investigation.
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.
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