Double what it was this time last year, the pipeline of IPOs promises to give investors’ a veritable smorgasbord to choose from in 2011. In an attempt to push through a backlog of larger IPOs, equity experts expect share market floats – worth a projected $8 billion this year - to track back towards the record 215 that floated in 2007.
According to figures from HLB Mann Judd, almost 90 percent of last year’s 96 IPOs were resources companies, and all but a couple of the 30-plus entities currently waiting to IPO are from non-related sectors.
The removal of post-GFC uncertainty also means a growing appetite for IPOs with market caps of $100 million plus, which only accounted for around 10 per cent of all IPOs in 2010. However, a strong mid-term outlook for commodity prices, plus increased private equity participation – has made market conditions even more favourable for small caps to commit to capital raisings via IPO.
Small caps – which on average raised $9 million each - accounted for 88 per cent of new listings to the market in 2010. But the monster float of the year, QR National (QRN) alone accounted for 67 percent of total funds raised.
The recent faith investors placed in share floats hasn’t gone unrewarded, with the average IPO in 2010 finishing the year 32 per cent above its issue price, while the wider market - S&P ASX200 - slipped 2.57 per cent. The energy sector was the standout performer, adding a premium of 62 per cent on issue price, with materials adding 37 per cent.
Overall, the top three performing companies in terms of year-end premiums were: Doray Minerals, Hunnu Coal, and Forge Resources returning 595, 570 and 340 per cent respectively. While 13 other companies more than doubled their issue price by year end, only one was not a resources company.
Since listing last month, IPOs Kidman Resources, Glory Resources and Cove Resources are up 58, 43 and 23 per cent respectively. Early February an IPO by uranium hopeful Alligator Energy opened at 23c, handing investors an initial 15 per cent gain, while Centius Gold opened at a similar premium following its listing late January.
But the more investors distance themselves from small cap IPOs with a resources flavour, the less bankable the premium to issue price tends to be. Two cases in point include Water Resources Group (WRG) – down 48 per cent on its 25 cps issue price, and marine safety minnow Mobilarm Ltd (MBO) over 60 per cent down on its issue price of 20 cps.
Brokers are understandably uncomfortable commenting on IPOs until they go live and prospectuses are issued, but they’ve provided some insights into what investors should be looking for this year.
Elio D'Amato CEO of research house Lincoln Indicators says investors should be looking for IPOs of companies that have consistently been able to deliver above average return on equity (ROE) from quality underlying earnings, will little debt and minimal amounts of goodwill on the balance sheet. Equally important, he says avoid buying into floats where net tangible assets (NTA) pre-IPO is negative.
D'Amato also suggests finding out how the money being raised will be used. Will it fund expansion, pay back existing debt and equally revealing - how much of it will go to existing owners? “The two drivers of short-term ‘stagging’ – which provided investors with an average first day gain of 14 percent last year – include sentiment towards the sector and the stock’s perceived exclusivity,” says D’Amato.
With lingering uncertainty around Australia’s new resources tax, Marcus Ohm partner of HLM Mann Judd says IPOs exposed to precious or base metals within offshore markets where sovereign-risk has recently improved – like Mongolia - should attract investors’ attention.
Because of their need to go to the market to raise money to keep going, he expects to see a lot of junior explorers and mining services companies within the pipeline of IPOs in 2011. “With high gold prices expected to hold up well, there are a lot more opportunities for these sorts of projects to get off the ground,” says Omh.
But Instead of trying to ride the momentum of share market bubble surrounding junior resources – notably in the base metals, coal and oil spaces - Roger Leaning research head with RBS Morgans warns investors to focus more on long-term fundamentals when backing IPOs. “Fundamentals will eventually win out, investors need to be nimble and that also means knowing when to get out,” says Leaning. “There’s a strong argument for putting last year’s small cap profits back into larger cap miners with more predictable earnings.”
With 95 per cent of ‘would-be’ mines never making it to production, he says investors need to take a view on the micro influences, the track record and quality of management/sponsor, the quality of the geography and underlying project, and development programme. “It comes down to a team approach, including the quality of financial and technical expertise within their mix,” says Leaning.
Other floats flagged to hit the IPO market
• Primo smallgoods: Australia's largest producer of ham, bacon and small¬goods. Being brought to market late in 2011 by Macquarie Capital, Primo’s IPO could be valued at up $800 million.
• Rebel Group: Private equity firm Archer Capital is expected to revive plans for an IPO of shares in sports retailer Rebel Group which could be valued at up to $800 million.
• Hoyts Group: Private equity firm Pacific Equity Partners is expected to proceed with the float of Hoyts Group that it scrapped last year when market conditions weakened.
• Brookfield: Canadian company Brookfield Multiplex is expected to rekindle the prospect of floating its commercial property assets into an office trust.
• Western Manganese: The Indonesian-focused explorer is raising up to $3 million to develop projects in West Timor.
• CellarMasters: Another Archer Capital asset mooted for a future float.
• Bilfinger AG: German engineering company Bilfinger Berger is expected to rethink the $1.3 billion float of its Australian construction arm that it shelved last year.
• Nine Entertainment Group: Nine Entertainment Company’s private equity owner, CVC Asia Pacific, is expected to make a call on a $5 billion share market listing of the television, magazine and digital group later this month.
• Relevare Aust: The pain management company is gearing up for An ASX listing around March. Plans to raise at least $20 million will bring its market cap to around $50 million.
• Yancoal Australia: An IPO during 2H 2011 would satisfy its requirement to re-list following their acquisition of Felix. Between 30-50 percent of this $4 billion-plus company is expected to be in free-float.
• Mt Isa Metals (ASX: MET): Is looking to benefit from the sustained high gold price and the under-explored nature of West Africa, by raising A$1.8 million in seed capital to create Harmattan Gold Pty Ltd.
• Resourcehouse: Is expected to announce a $3 billion-plus listing in Hong Kong later this month.
• Intrepid Travel: May look to float its strong brand later this year.
• Link Market Services KKR's Seven Media Group: Best estimates suggest this may not eventuate until 2012 or beyond.
Tuesday, 8 February 2011
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