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IPOs gain momentum with commodity boom

Nicki Bourlioufas  |  15 Jun 2021Text size  Decrease  Increase  |  
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The second half of 2021 will be a busy time for companies listing on the ASX after a drop in initial public offerings in 2020, with soaring commodity prices lifting the number of resources companies going public.

According to Marcus Ohm, partner, corporate and audit services at HLB Mann Judd, IPO activity for the first five months of 2021 has been high, with 47 companies having floated to the end of May, a big jump on activity for the same period in 2020. Over half of the listings are resources listings and predominantly from the small cap sector, which represents over 75 per cent of the listings for the YTD.

Total funds raised for the year to date are $3.4 billion, with amounts raised boosted by some larger listings including Pepper Money, pathology company Australian Clinical Labs and Latitude Financial.

“IPO activity has been strong so far in the Australian IPO market, with the year continuing on from the strong final quarter of 2020,” says Ohm.

“Capital market conditions have been very supportive of IPOs within the resources sector with both economic fundamentals and investor sentiment helping to underpin a highly active market. Rising [commodity] prices have assisted as well as generally positive forecast prices across base metals supported by increased demand as the global economy recovers,” says Ohm.

Adds Morningstar resources analyst Mathew Hodge, “It shouldn’t surprise that when commodity prices are high, new capital is attracted to those opportunities and it’s easier for new companies to form, raise money and list.”

Alex Shevelev, a senior analyst with Forager Funds Management, says investor confidence is buoying the IPO market, against the backdrop of an overall strong equities market and rising commodity prices and low interest rates.

“From miners to lenders the IPO market is back in full swing. And so it should be. Equity prices are high and equity investors are opening their wallets in search of the next big success story.

“Resource prices have rallied strongly over the past year. And plenty of junior resource companies are raising fresh capital by listing. For many explorers, the funds will go straight into drilling out their deposits. The soon-to-list copper miner 29Metals will be a rarity—the company is actually producing copper,” says Shevelev.

“Finance companies have also filled up the boards over the past six months. Major non-bank lenders Latitude (ASX: LFS), Liberty Financial (ASX: LFG) and Pepper Money (ASX: PPM) have expanded the ranks of financial companies available to stock market investors. Borrowers are paying promptly, lower interest rates have meant lower costs of funding, and major banks are seceding ground to the upstarts.”

However, while more companies have listed on the ASX in 2021 compared to 2020, the number of IPOs is well below the levels of 2018 or 2019, says senior equities analyst with Morningstar, Gareth James.

“Also, the value of IPO capital raised this year is pretty much in-line with previous years, but below FY2019 which included the Coles demerger from Wesfarmers … The Endeavour IPO will be pretty big this month and PEXA will also list, but I don’t believe there has been a structural increase in the flow of IPOs onto the ASX,” says James.

Number of companies listed on the ASX

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A graph showing the number of companies listed on the ASX

Source: ASX, Morningstar

In terms of share price performance, the outcome has been mixed for IPOs. According to Ohm, the average gain in IPOs since their listing date to June 7 has been 14 per cent. Strong individual performers included Firebird Metals (ASX: FRB) (up 250 per cent), telco Pentanet (ASX: 5GG) (230 per cent) and Lithium Energy (ASX: LEL) (up 115 per cent).

However, a little over half of companies have experienced a fall in share price since listing, most notably Keypath Education (ASX: KED), which dropped 20 per cent since its listing on 2 June to 7 June 2021.

Macquarie’s Nuix (ASX: NXL) has been the most publicised poor performer. “It is trading at half the IPO price and is down more than 75 per cent from lofty January peaks. It won’t be the last private equity selldown that stings investors,” says Forager Funds’ Shevelev.

Nuix investors have seen almost $3 billion wiped from the company from the January peak, after the data analytics company issued two earnings downgrades. ASIC is reviewing disclosures in the prospectus in the lead-up to IPO by Macquarie Group, which held over its 76 per cent owned in Nuix.

This highlights a point that some financial advisers make: the IPO process can be exploited by vendors and corporate advisers who use the IPO process to generate lucrative fees and capital through listing companies at unsustainably high valuations, to assist existing shareholders (whether institutional investors or private equity firms).

is a Morningstar contributor.

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