IPO surge seen as thumbs-up

In a turnaround from the drought of two or three years ago, we seem to have found ourselves smack in the middle of a flood of initial public offerings (IPOs). Craigs Investment Partners broker Chris Timms explains to Business editor Dene Mackenzie how to avoid IPO fever.

The many new companies coming to the market is a vote of confidence in the New Zealand economy and the financial sector, according to Craigs Investment Partners broker Chris Timms.

The market was still small and investors would welcome a broader range of investment opportunities.''

We also need this to be a viable source of capital for growing companies, otherwise they will look offshore for funding or be swallowed up by larger players - rather than listing locally and sharing the growth with New Zealand investors.''

Then again, investors were right to be cautious, he said. It was no coincidence the surge in IPO activity came at a time when the market had performed well and the economy was probably close to peaking in terms of pace or growth.

Last year was the best year for IPO activity for some time, with nearly $5 billion raised - 10 times the previous year. That was before the sell-downs from large investors were considered, including News Ltd selling $800 million of Sky Television shares and EBOS raising nearly $250 million to fund a large acquisition, Mr Timms said.

However, $3.6 billion could be attributed to the Government's partial sell-down of state-owned energy companies.''

This is one reason why the floodgates have opened since Genesis Energy listed in April. With the prospect of these electricity behemoths set to swamp investor demand and dominate the business pages, many IPOs were put on ice until the path was clear.''

There remained a significant amount of cash available for the right investment, he said. Despite $7.5 billion of new capital having been poured into the local market in 2013 for those new companies and sell-downs of existing companies, there was still a significant amount of money sitting on the sidelines.

At the end of 2012, there was more than $115 billion sitting on deposit with registered banks. As at the end of March this year, that had increased to nearly $127 billion.''

This suggests there is still likely to be an appetite out there for future IPOs, as long as the company in question stacks up as a good-quality investment.''

If our economy remains in good health over the coming period, we are likely to see the IPO pipeline remain strong.''

For investors, that presented opportunities at a time when the rest of the market looked highly priced, it having risen 35% over the past two years, excluding dividends, Mr Timms said.

It would also add some much needed diversity to the local market, which had been dominated for years by infrastructure and utility companies with a domestic focus and only moderate growth prospects.

Participating in IPOs could be an important part of an investment strategy, offering new opportunities at attractive entry points. But it could also be fraught with risk, especially during periods of high market sentiment and where there was a lot of hype surrounding new offerings.

Investors had had a ''decent run'' with the 22 listings seen since 2009, he said. Most had performed well, with 73% of them now above their listing prices and an average return of 19.5% on their IPO prices. Summerset had more than doubled since its 2011 listing, while Z Energy and Meridian Energy had respectively returned 17% and 25% on their IPO prices.

Not all IPOs had been kind to investors. Mighty River Power had been the most high-profile underperformer, although when dividends were included, it was down only 5.6%. The worst performers were the very small, early stage companies. Energy Mad was down 74% and Moa Brewing down 67%.


Points for investors
• The characteristics to look for when considering IPOs were similar to those applying when looking at companies already listed. A robust balance sheet, a strong market position with a competitive advantage, growth prospects and high cash generation were all qualities helping point to a good business.
• As always, leadership was crucial. The experience and track record of the management team needed to be considered, as did the quality of the board to ensure a thorough level of corporate governance.
• One sensible question to ask was who the vendors were and why they were bringing the company to market. If the company wanted to expand, the current owners might want to raise new capital to do so and they might not be selling at all. It was always a good sign when current owners were keen to hang on to as much of the business as they could.
• If the current owners were looking to exit, it did not mean the company was one to avoid, but more scrutiny was required.
• Private equity sellers were often accused of taking that approach and many investors immediately became cautious when hearing a new IPO was coming from a private equity sell-down. Sometimes the cynicism was appropriate.
• Not all private IPOs ended badly. Ryman Healthcare was listed in 1999 as part of a private equity sell-down by Direct Capital. The shares were priced at 27c and they now trade at about $8.40.
• Another consideration was the way a new company might fit into a portfolio. There might be a need to reduce other holdings to make room for it, particularly if there were existing investments in a similar industry.
• Investors also needed to ensure they had the right balance of large, established companies and smaller, higher-growth opportunities, while taking into account the latter carried greater risk.


- dene.mackenzie@odt.co.nz

 

 

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