Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 161

Opportunities in new company floats

We continue to see a steady stream of company floats or Initial Public Offers (IPOs) coming to market, although the current IPO cycle appears quite mature. Unlike previous cycles this far advanced, this one is still offering some attractive opportunities for investors.

The typical IPO cycle

The IPO cycle typically starts with the listing of higher quality companies. To overcome investor apprehension, they are often priced quite attractively and accordingly they generally deliver good returns for investors. The success of these IPOs then allows lesser quality companies to come to market, with the quality falling away over the course of the cycle. The IPO cycle will continue for so long as the market remains receptive. Sometimes, it will be a market correction that ends the cycle. This was the case with the GFC, when IPOs stopped dead.

Other times the end comes about as a result of a run of poor performing IPOs or a high profile failure. For example, the last IPO cycle ended with Myer, which floated in late 2009, and whose share price halved within two years (it has halved again since). The IPO cycle lay dormant until around 2013 despite the fact that the market was strong until then. It was at this point that the current IPO upcycle began.

This IPO cycle

True to form, the current IPO cycle came with some early successes, including IPH, Mantra Group, Aconex, and Burson Group. All of these stocks have doubled or tripled since their IPO at the start of the cycle. What has perhaps been different this time is that there has not been the same obvious deterioration in quality over time. Both successes and failures have been spread quite evenly across this IPO cycle. Early in 2013 we had the IPOs of Vocation and Dick Smith, both of which found their fate in administration. And more recently we have had some high quality IPOs that have already delivered decent returns.

One recent example is BWX Limited, which owns the Sukin range of natural skincare creams. It is a quality company, with a strong brand, an astute CEO, and bright growth prospects. The company floated in November 2015 at a share price of $1.50. Since then, it announced strong first half year financial results in February 2016, and it is further down the track in its offshore expansion plans. It’s share price has already tripled since its IPO.

There have been a number of other decent companies that have undertaken IPOs recently with decent success. For example, in April we had the IPOs of Motorcycle Holdings (+38% since listing), Reliance Worldwide Corporation (+22%), and WiseTech Global (+32%). Recent successes like these are allowing this IPO cycle to continue, and while we are conscious that quality may well in fact deteriorate, we are still seeing some attractive opportunities coming our way.

A focus on quality, but IPOs have specific issues

At Bennelong (BAEP), we analyse all new companies coming to market just as we would those already listed. For us, that means focusing on the fundamentals and looking out for high quality, strongly-growing companies that are reasonably priced. However, in our analysis, there are a few peculiarities in the specific case of an IPO:

1. Research timeframe

The research effort for an IPO must be completed in a compressed timeframe and before the drop-dead date to bid for stock. Investors often have less than two weeks to put in bids once a prospectus is released. Fund managers will usually have longer, with broker research released a few weeks prior, and often with the benefit of meetings with management in the previous 6-12 months as part of so-called ‘non-deal roadshows’ (brokers use these to gauge interest for an IPO).

2. Track record

IPOs have limited financials and other important information. The typical prospectus will provide just two to three years of historical financials. Investors generally have little familiarity with the business, including its performance in various business conditions, and little exposure to management and their capabilities.

New investors thus start at a considerable disadvantage vis-à-vis the vendors of the business, who have normally been intimately involved with the company and management for far longer. Vendors have the luxury of choosing the timing of their exit, and this is likely to coincide with when the business is performing well. New investors must assess the sustainability of current earnings and whether forecasts are achievable.

On the other hand, the disclosure of a longer track record will often signify a strong business, not least because the disclosure probably comes because the record is attractive. A recent example is Reliance Worldwide, which is a well-run manufacturer of plumbing supplies and provided 10 years’ history of sales revenue, which had grown at 13% per annum. Of course, even in these cases, it is necessary to consider whether the future will be as bright as it has been in the past. For us at BAEP, this included undertaking a large number of meetings with customers and other industry contacts in the short timeframe we had.

Investors may be familiar with the business because it has been listed before in one form or another. Have things changed for the better? Generally, they have not, with Dick Smith a case in point. This business struggled for decades under Woolworths’ control, with numerous CEOs and strategic reviews before being sold in 2012. The private equity buyers relisted the business the following year at a materially higher valuation, after a very quick ‘turnaround’ that more than doubled profits and supposedly set the company on a more prosperous course. As it turned out, the troubled track record was indicative of the company’s ultimate outcome.

3. Vendor’s motivations

Understanding the vendor’s motivations allows investors to understand the opportunity. An important distinction should be drawn between two scenarios:

a) Existing shareholders selling their shares as part of the IPO, leaving them with no or little remaining interest in the company. Such vendors are effectively cashing out, and are likely to be motivated purely towards maximising the proceeds, with little regard for the company’s success once listed. Extra care is required here, with private equity exits such as Dick Smith and Myer serving up cautionary tales.

b) The company itself raising the money through the issue of new shares. Existing shareholders do not sell shares and remain in. Here, the capital raised goes to the company itself, to be used for its benefit to invest in growing the business. Existing shareholders retain their shares and price maximisation is not the sole motivating factor in setting the IPO price.

Special situations

There are a two types of floats that are particularly attractive: privatisations and demergers.

a) Privatisations involve an IPO in which a government is the vendor and it sells a public asset. Governments are minded to give incoming investors, who happen to also be voters, a positive experience, and this often means pricing at a reasonably attractive level. Commonwealth Bank, CSL, Telstra, Aurizon and more recently Medibank are typical examples in which investors have done well.

b) Demergers involve the distribution of shares of a subsidiary company to the shareholders of the parent company. The new demerged company is let free to chart its own course, with management often more focused and incentivised. Except in the unusual case, demergers do not also involve raising new capital. Consequently, there is no need to sell the IPO to any new investors, and unlike most IPOs, there is no special sales effort behind the listing. A recent example of a successful demerger is Clydesdale Bank, which separated from National Australia Bank, and floated in February 2016. The demerger was undertaken because the business was considered non-core, but left alone, it has already prospered and its share price has risen accordingly.

Conclusion

Gaining comfort in a soon-to-be-listed company and its prospects as an investment is generally more difficult than those we’ve been researching for some time. However, the research effort is always worth it, even if only to become familiar with the company with the potential of investing further down the track. Keep an open mind, recognise that IPOs can be attractive, and remember that every company of course was once an IPO.

 

Mark East is Chief Investment Officer of Bennelong Australian Equity Partners (BAEP). This article is general information and does not consider the circumstances of any individual.

 


 

Leave a Comment:

RELATED ARTICLES

Bounce back delivers super second-half for IPOs

IPO a-go-go: the who, why, when and how much of IPO investing

The future has arrived in Australia

banner

Most viewed in recent weeks

Raising the GST to 15%

Treasurer Jim Chalmers aims to tackle tax reform but faces challenges. Previous reviews struggled due to political sensitivities, highlighting the need for comprehensive and politically feasible change.

7 examples of how the new super tax will be calculated

You've no doubt heard about Division 296. These case studies show what people at various levels above the $3 million threshold might need to pay the ATO, with examples ranging from under $500 to more than $35,000.

The revolt against Baby Boomer wealth

The $3m super tax could be put down to the Government needing money and the wealthy being easy targets. It’s deeper than that though and this looks at the factors behind the policy and why more taxes on the wealthy are coming.

Meg on SMSFs: Withdrawing assets ahead of the $3m super tax

The super tax has caused an almighty scuffle, but for SMSFs impacted by the proposed tax, a big question remains: what should they do now? Here are ideas for those wanting to withdraw money from their SMSF.

Are franking credits hurting Australia’s economy?

Business investment and per capita GDP have languished over the past decade and the Labor Government is conducting inquiries to find out why. Franking credits should be part of the debate about our stalling economy.

Here's what should replace the $3 million super tax

With Div. 296 looming, is there a smarter way to tax superannuation? This proposes a fairer, income-linked alternative that respects compounding, ensures predictability, and avoids taxing unrealised capital gains. 

Latest Updates

Investment strategies

9 winning investment strategies

There are many ways to invest in stocks, but some strategies are more effective than others. Here are nine tried and tested investment approaches - choosing one of these can improve your chances of reaching your financial goals.

Planning

Super, death and taxes – time to rethink your estate plans?

The $3 million super tax has many rethinking their super strategies, especially issues of wealth transfer on death. This reviews the taxes on super benefits and offers investment alternatives.

Taxation

Raising the GST to 15%

Treasurer Jim Chalmers aims to tackle tax reform but faces challenges. Previous reviews struggled due to political sensitivities, highlighting the need for comprehensive and politically feasible change.

Shares

The megatrend you simply cannot ignore

Markets are reassessing the impact of AI, with initial euphoria giving way to growing scepticism. This shift is evident in the performance of ASX-listed AI beneficiaries, creating potential opportunities.

Gold

Is this the real reason for gold's surge past $3,000?

Concerns over the US fiscal position seem to have overtaken geopolitics and interest rates as the biggest tailwind for gold prices. Even if a debt crisis doesn't seem likely, there could be more support on the way.

Exchange traded products

Is now the time to invest in small caps?

With further RBA rate cuts forecast this year, small caps may be key beneficiaries. There are quality small cap LICs and LITs trading at discounts to net assets, offering opportunities for astute investors.

Strategy

Welcome to the grey war

Forget speculation about a future US-China conflict - it's already happening. Through cyberwarfare and propaganda, China is waging a grey war designed to weaken democracies without firing a single shot.

Sponsors

Alliances

© 2025 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.