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Why I don't buy shares at IPO

Rodney Hobson  |  06 Jul 2018Text size  Decrease  Increase  |  
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Royal Mail caused quite a stir when it IPO'd but then shares were in trouble

An initial public offering is also known as a flotation. But all too often the shares soar briefly and then sink instead. That's why I don't take part. A few British companies offer a cautionary tale. 

Countrywide (CWD), the UK's largest estate agency group, is a case in point. Just over five years ago it floated at 350p and a year later the share price had doubled. That peak was the end of the good times. The shares were already down to 440p in February 2016 when the company described a slowdown in business as "the new normal". Profits fell 16 per cent.

Twelve months on Countrywide was forced to cut the dividend and close branches. By then the shares traded at less than half their float price and a subsequent string of profit warnings has taken them to 55p.

Some form of money raising is now necessary. If, as is likely, it takes the form of a rights issue, one shudders to think how heavily discounted it will have to be. It is not too late for sadder and wiser shareholders to get out before they are asked to throw a hefty chunk of good money after bad.

It worries me that a chain of estate agents cannot succeed at a time of rising house prices and a desperate scramble to get on the housing ladder. If the housing market is finally coming off the boil, as seems to be happening, then how is Countrywide going to cope? It is loaded up with debt, which will be a serious burden now that interest rates are at last rising.

Countrywide shares have admittedly not fallen quite as badly as department store chain Debenhams (DEB), though the latter has had longer to suffer and had a pile of debt from the start. There was a warning sign even as it floated, with the price set at 195p, the bottom of the projected range, in 2006. The shares now languishes at 15p, having lost more than 90 per cent of their value.

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Don’t even think about buying for recovery. The whole High Street is suffering.

Despite catering for the burgeoning older population, Saga (SAGA), the over-50s travel and insurance company, has slipped from its float price of 185p four years ago to around 120p, not a disaster but hardly what we hoped for. The shares were already sliding before a profit warning last December and a subsequent recovery has petered out. Even so, it looks a better prospect than Countrywide or Debenhams at this stage.

It’s true that Royal Mail (RMG) has proved to be a particularly successful investment but only because the shares were grossly under priced at 330p at the float six years ago, about £1 less than they should have been sold at. Well done those who snapped up the opportunity. The shares are now around 500p.

Apart from Royal Mail, where the Government was duped by its own advisers, it’s hard to extract immediate gains from initial public offerings because the pricing mechanism is so much more accurate these days.

The tide may be turning

Outsourcing group Serco (SRP) has had so much bad press that investors may be assuming bed news when it isn't there. The shares slumped 5 per cent on the latest update, yet this was one of the better pronouncements to emanate from the group over the past few years.

Profits are starting to grow and the strong order intake seen last year has continued into 2018. Serco is likely to pick up a few Carillion contracts, which will be a further boost.

The shares slipped as low as 80p earlier this year but have actually remained fairly steady for the past two-and-a-half years. Serco may be turning the corner. The shares are only for the brave, which probably won’t include me, but if you specialise in recovery stocks now is the time to take a look. Any price below 100p may be worth considering.

 

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Rodney Hobson is a columnist for Morningstar.co.uk and author of several investing books, including The Dividend Investor and How to Build a Share Portfolio.

© 2018 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'class service' have been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. Please refer to our Financial Services Guide (FSG) for more information at www.morningstar.com.au/s/fsg.pdf. Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782 ("ASXO"). The article is current as at date of publication.

is a columnist for Morningstar.co.uk and author of several investing books, including The Dividend Investor and How to Build a Share Portfolio.

© 2021 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'regulated financial advice' under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information, refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Morningstar’s full research reports are the source of any Morningstar Ratings and are available from Morningstar or your adviser. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782. The article is current as at date of publication.

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