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5 IPO investing tips amid slow but steady start for new listings

Anthony Fensom  |  24 Apr 2019Text size  Decrease  Increase  |  
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Initial public offerings on the ASX posted a mixed year in 2018, and though 2019 has shown early signs of promise, will it be better or worse than last year?

“Last year’s IPOs were pretty ordinary, there weren’t many winners,” says Morningstar’s head of equities research, Peter Warnes.

“But the winners were pretty good if you got onto them and that’s difficult, as they’re usually all gone before retail investors get a look in. You just have to be very diligent – be very picky and don’t take their statements as gospel.

“The man in the street is potentially cannon fodder…if you get an allocation, it might not be much good, particularly if you get all you asked for”.

Last year’s 93 new listings raised some $8.4 billion from investors, more than double the prior year’s approximately $4 billion.

However, the three largest listings raised nearly two-thirds of the total funds, and the materials sector scored the most listings overall.

Only 20 IPOs ended the year above their issue price, with an average share price decline of 18 per cent, lower than the ASX 200’s 7 per cent fall for calendar 2018, according to HLB Mann Judd.

Small cap IPOs win big

While the bulk of last year’s IPOs are still trading below their issue price, the biggest winners – all small caps – have proved lucrative.

The following IPOs were the top three for calendar year 2018:

However, the year’s $1 billion-plus listings all lost ground. Fuel company Viva Energy (ASX:VEA) is down by 5.6 per cent, Coronado Global Resources (ASX:CRN), the largest coal float in ASX history, down 34 per cent and L1 Long Short Fund (ASX:LSF) 23 per cent lower.

At the opposite end of the spectrum, investors in telecommunications company Vonex and South Africa-focused Frontier Diamonds (ASX:FDX) have lost nearly all their capital. The above company's share prices are down 90 per cent and 88 per cent, respectively compared to their issue prices.

Dampening investor sentiment, only 72 per cent of last year’s new listings met their prospectus targets, compared to 79 per cent in 2017 and 83 per cent in 2016.

“Overall the pipeline appears to be soft and reflects the performance of IPOs and the wider market. This was evidenced in the final quarter of 2018 with sentiment perhaps being an important factor,” said HLB Mann Judd partner Marcus Ohm.

“Companies considering listing will need to clearly articulate their offerings and provide sound investor communication.”

Signs of promise but slow start

Given last year’s headwinds, will 2019 be a better year for IPOs?

This year’s market debutants have made a promising start, albeit based on only a small number of listings, with seven of nine IPOs trading above their issue price.

Top of the list so far in 2019 is international payments business Splitit Payments (ASX:SPT), which as at 18 April was up by 442.5 per cent compared to its issue price. This was followed by hemp company Ecofibre (ASX:EOF), up 122 per cent and telecommunications provider Uniti Wireless (ASX:UWL), up 112 per cent.

Conversely, shares in bottom-ranked U.S.-focused confectionary company Candy Club Holdings (ASX:CLB) had dropped by 40 per cent following its 19 February listing.

Looking ahead, the ASX currently lists a number of upcoming IPOs, including private equity firm Teaminvest Private (ASX:TIP), listed investment trust MCP Income Opportunities Trust (ASX:MOT) and Pengana Private Equity Trust (ASX:PE1), all due to list in April.

Others scheduled comprise location-sharing app owner Life360 (ASX:360), listed investment trust Perpetual Credit Income Trust (ASX:PCI) and Western Australia-focused gold explorers Mont Royal Resources (ASX:MRZ) and Gold Tiger Resources (ASX:GRA), among others listed.

Others touted for listings this year according to the Australian Financial Review include garnet miner Australian Industrial Minerals, education provider Education Centre of Australia, small business lender Prospa, retail franchisor Retail Zoo, trustee company Sargon and solar power company Wirsol.

Nevertheless, the relatively few number of listings scheduled and the small capital raisings (Pengana stands out, with its $1 billion IPO) suggest a weak investor appetite.

5 IPO investing tips

Analysts suggest investing in an IPO is high risk, since any such stock lacks a track record as a listed company.

Companies that fail to meet their targets are quickly sold down, while small cap listings can suffer from a lack of liquidity and institutional support.

However, for those willing to accept the risks, some tips for IPO investing include:

  • Do not invest more than 10 per cent of your total portfolio in the IPO, and have rules in place on when to take profits or when to cut your losses
  • Do your research – read the prospectus, talk to your stockbroker and check market chatter, such as via the media or investor forums;
  • Check the board and management – do they have a track record in the industry? What are their financial incentives? Is the IPO raising money for expansion or simply funding an exit by the founders?
  • Do you understand it? Warren Buffett famously will not invest in anything he does not understand, so make sure you understand the company’s business model, earnings drivers and risks;
  • Did you get your full allocation? As Morningstar’s Peter Warnes suggests, this can be indicative that there is a lack of demand for the stock and it will struggle after listing. Conversely, “hot” IPOs that are keenly sought by investors can be expected to benefit from post-listing support.

 

 

is a Morningstar contributor.

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