If the dismal size of Australia’s 2012 IPO market wasn’t disappointing enough for investors, just one third of the companies that did float this calendar year are trading above their issue price.
The narrow field of new listings was dominated by small mining companies in a year described by investment bankers as a virtual deal desert.
The largest float for the year was shale gas company Armour Energy at just $75 million. Its current share price is half the 50¢ issue price of April.
Of the 40 initial public offerings that this year raised about $500?million combined, as of last week two-thirds are trading below their issue price.
Some of the best performers are Boadicea Resources, whose shares have risen 230 per cent since its October listing and Pura Vida Energy, up 250 per cent since listing in February.
But it is the lack of IPOs above the $50 million mark that has been most notable for the industry.
“Australia is a market that has always had an appetite for small raisings. Investors seem to understand these but what has been missing in recent years are the midcap deals of $50 million to $100?million,” says Ernst & Young partner in the Transactions Advisory Services team Anne-Maree Keane.
“There hasn’t been a lot of confidence in the equity market. Investors have tended to stay away and there has been great concern from companies looking to raise equity about price and how it is going to perform in the after market.”
Keane says that investors in the smaller companies are not looking for the same immediate share price returns as they do from the big floats. “Smaller companies trade on different fundamentals with people looking for returns down the track when the company can commercialise the resource. But for good businesses with good fundamentals and good growth prospects the after market matters and that is what is a bit thin on the ground,” Keane says.
TWO YEARS SINCE LAST MAJOR IPO The last major IPO was the multibillion-dollar float of QR National in 2010.
IPOs have historically been a barometer for investor confidence, says Deloitte Partner and Head of Transaction Services Ian Hunter.
In times of high confidence, the ASX has seen high volumes and high-value floats.
“The current climate, however, reflects the negative sentiment in the market. The disappointment out there really reflects investors’ general disappointment in the stockmarket,” he says, adding that the main reason for the continued lack of floats remains price.
“Current IPO pricing means that private equity companies looking to exit their investments and private businesses seeking capital are looking for alternative options or are simply happy to wait for conditions and trading multiples to improve. This year has again been littered with examples of deferred IPO processes as owners see little value in floating in the current markets,” Hunter says.
A recent trend has been in listed companies being taken private, with examples this year including Gerard Lighting, Spotless, Talent 2 and Customers. But with signs of investor confidence returning to equity markets, investment bankers are hoping a couple of larger IPOs already under way will set the tone for a strong 2013 with a number of potential candidates waiting in the wings.
“The first step is investors moving away from cash and into fixed-interest investments like hybrid securities, which we have seen in 2012 with retail investors supporting record issuance from companies and banks. If they have a good experience with these then we expect they will look at new floats,” says Citi’s head of capital markets origination John McLean. “People can only sit on cash for so long and the market is performing quite strongly.”
Two large hopeful capital raisings for this year are Woolworths’ Shopping Centres Australasia Property Group, a real estate investment trust created from some of its existing shopping centre assets, and dairy giant Fonterra’s Trading Among Farmers vehicle.
Both involve capital raisings of about $500 million each. According to ASX data, there are also another 12 mostly small resource companies proposing to list in November or December and another 10 yet to decide on a date.
POSITIVE SENTIMENT CRITICAL Notwithstanding the initial negative reaction to the United States election result and uncertainty over the outcome of China’s transition, there is some feeling that financial markets could start to settle and corporate activity pick up.
McLean says positive sentiment is critical to IPO activity. “If the macro-environment settles and investors have good experiences with Fonterra and Shopping Centres Australasia that will be good for the IPO market next year,” he says.
Four deals worth a combined $5?billion which were lined up to float in 2012 are slated for 2013, including the float of Coates Hire, Genworth, TRUenergy and McAleese Transport. There is also speculation around what global private equity firm KKR & Co might do with mining services and logistics business Bis Industries.
Apart from the obvious business major IPOs generate for the myriad firms that get involved, IPOs help to regenerate and reinvigorate the market. “Companies are regularly lost from the market through M&A activity. Our sectors are already narrow to investors, with two to three companies dominating some sectors. New floats mean new companies, new management and new opportunities for investors,” McLean says.
UBS co-head of equity markets Simon Cox says well-priced new product is important to bring diversification to investor portfolios.
UBS, which topped the investment bank league tables for IPOs this year, is continuing to work with vendors to make deals as user-friendly as possible in challenging conditions, he says.
One source of IPOs is the sale of government assets but in the current environment the appetite for these big assets was more likely to be for a sale than an IPO. “The reason for that is that superannuation and pension funds are happy with lower returns for less risk – 8 per cent is the new 16 per cent,” Cox says.
With private equity sell-downs, Cox says the days of offloading 100?per cent of a company in one go are over, as are over-optimistic business forecasts by the vendors.
“If someone has to sell something 15 per cent cheaper than they might have they would rather sell less of it now. Investors would get used to the company as a listed entity, and then down the track the vendor might sell more of the company but for less of a discount,” Cox says.
“IPOs from private equity firms may come with smaller sell-downs and the issue of new shares to pay down debt. There is also an expectation amongst new investors that because the vendor has a bigger slice of the business the forecasts may be more conservative.”
Prescott Securities senior equity analyst and financial adviser Travis Adams says he looks cautiously at private equity firms coming to the market with an IPO. “It is different to a normal company looking to raise equity. We judge stocks on price, the earnings and making sure they are not too highly geared,” he says.
Adams says that, with capital preservation still high on the investor agenda, much of the market is waiting for quality companies to list. “There is not a lot of buzz around the IPO market now,” he says. “People are still keeping their cash in the most conservative place they can.”
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