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Coronavirus infects IPO numbers

Nicki Bourlioufas  |  09 Mar 2020Text size  Decrease  Increase  |  
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The number of initial public offerings on the ASX has dropped given the share market correction triggered by the coronavirus outbreak. 

But that is unlikely to threaten the profitability of the ASX, with the company benefiting from a big jump in trading volumes amidst high levels of volatility.

Over the financial year to 29 February 2020, the number of IPOs on the ASX stood at 69, compared to 82 the same period a year earlier. 

According to Marcus Ohm, Partner, Corporate and Audit Services at HLB Mann Judd, IPO activity is likely to remain subdued this year as investment in equities falls generally given very high levels of uncertainty and volatility.

“With respect to IPOs specifically, we saw a soft pipeline to the start of 2020 and that has continued through to the end of February with only seven IPOs currently being in the ASX pipeline. I don’t expect this to change significantly in the next few months until some of those uncertainties are resolved,” says Ohm.

Morningstar senior analyst Gareth James says investors are reluctant to commit capital to new companies, which are riskier than established listed businesses, making it harder for businesses to raise capital.

The ASX’s webpage for “Upcoming floats and listings” indicates that three IPOs has been ”withdrawn” so far this year amid the market volatility. Share prices have dropped, and so has demand for IPOs.

Listings and upcoming floats

Upcoming floats and listings

Source: ASX. 
*ASX codes are proposed only and are subject to change without notice. You may not rely on this information in any way.
** Listing dates are proposed dates for first quotation of securities set out in the entity's prospectus or information memorandum. You may not rely on this information in any way. *** Listing dates are anticipated dates for first quotation of securities set by ASX following completion of admission procedures. However, they are subject to change without notice and you may not rely on this information in any way.

However, the fall in IPO activity won’t materially affect the ASX’s earnings. Higher trading levels will give additional revenue to the ASX, helping to offset any fall from fewer IPOs and lower interest rates, says James.

“The ASX has diverse revenue streams, so a drop in IPOs won’t materially affect their revenue or profitability. The ASX makes money from charging listed companies an annual listing fee, which it will keep on charging the 2214 companies that were listed in February,” said James. 

Revenue from initial listing fees account for about 2 per cent of the ASX’s revenue, compared to about 11 per cent for annual listings fees and about 20 per cent for trading revenue, says James.

“The ASX will also be generating revenue from greater trading volumes. Whenever you see an increase in market volatility, it is usually associated with higher levels of trading and there is a lot more trading due to the coronavirus.

“The ASX is a monopoly and has very stable earnings growth of around 5 per cent. It’s like a piece of infrastructure.”

While the ASX would not comment on the impact on its revenue from fewer IPOs, it said in its most recent first-half results to 31 December, there were 55 new listings in the first half to 31 December 2019, down from 72 in the first half of 2019, or 23.6 per cent.

The market capitalisation of new listings was just $9.1 billion, down from $32.1 billion, a drop of 71.7 per cent. Despite that, revenue from the ASX’s Listings business, which includes revenue from secondary capital raisings, which are typically bigger than IPOs, was $86.8 million, up from $85 million in the prior first half.

IPOs to remain subdued, but some gold miners proceed

The capital markets in general saw reduced activity particularly in the resources space in 2019 compared to the 2018 calendar year, with resources sector experiencing the brunt of the fall. “The resources sector appeared to be negatively impacted by overall sentiment within the small-cap resource space despite a strong gold price,” says HLB’s Ohm.

Along with domestic capital raisings, foreigners too are less likely to list on the local exchange this year. “While the ASX has favourable listing requirements compared to other exchanges, it may be that overseas companies adopt a wait-and-see approach in line with domestic companies until the market uncertainties are resolved,” says Ohm.

Locally, some gold companies are proceeding with listings despite the huge market uncertainty. Junior gold explorer Kaiser Reef (ASX: KAU) has taken advantage of the ongoing positive gold sentiment with a very strong ASX debut at the end of February.

The small-cap company recently listed its shares at $0.20 but has since shot as high as $0.35 cents. On Monday 9 March, however, it has fallen by almost 20 per cent.

Another gold miner set to list on the ASX is Metal Hawk. While the company hasn’t set a firm date for its IPO, the rising gold price could be a strong draw for a near-term listings and investors are factoring defensive investments such as gold, as well as cash and government bonds.

Rising prices for gold have helped to buoy gold miners generally. The S&P/ASX All Ordinaries Gold Index was up 22 per cent over the year to 9 March, well ahead of the S&P/ASX 200 at just 0.6 per cent.

Gold prices fluctuated more than 1 per cent on Friday, sliding from a seven-year high as investors sold the precious metal to cover margin calls as the rapid spread of the coronavirus hammered equity markets.

Spot gold fell 0.5 per cent to $US1,662.75 per ounce on Friday. US gold futures slipped 0.3 per cent to $US1663.60.

 

 

 

 

 

is a Morningstar contributor.

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