Business News

The best performing sector in the 2016 sharemarket: IPOs

The first half of the year shows new floats are flying and large caps are struggling.

In particular, new company floats in Australia enjoyed an average price increase of almost 34 per cent in the second quarter of 2016, according to new research from the initial public offering (IPO) access portal OnMarket.

The new “OnMarket Second Quarter IPO Report” reveals that the 33.5 per cent gain in IPO securities compares with a mere 3 per cent rise in Australia‘s main sharemarket barometer, the S&P/ASX 200 Index.

The new IPO performance numbers also represent a sharp jump up from the first quarter, which saw IPOs up 1.3 per cent over a period when the overall market index was down by 5.4 per cent.

In simple terms, IPOs at the moment are by far the best performing sector in the sharemarket.

For this reason, SMSFs would be wise to look at the IPO sector and the opportunities.

Total SMSF assets stood at $589.9 billion during the March quarter and most of that was invested in cash and Australian shares, especially large-cap stocks.

To put total SMSF assets into perspective, an average of $40 billion of new equity is issued by Australian companies every year via IPOs and capital raisings conducted by listed companies.

It means that just 7 per cent of SMSF balances could fund Australian companies’ entire annual new equity capital requirements.

Or put another way: today’s SMSFs could fund the equity capital requirements of ASX-listed companies for the next 14.8 years.

So, what’s the IPO secret?

While not every IPO goes up on day one (for example Kogan, dropping 15 per cent on the first day because it coincided with worries about Brexit and our election), there are at least two elements of a new float’s pricing that are positive.

One, in order to attract investors, the vendors and their agents have to make sure the offering is priced at a level where informed investors will see more upside than downside.

And two, listing shares means they become liquid, going from being untradeable to tradeable. That inevitably makes them more attractive to investors.

Other factors? It could be that there’s a turbo effect on the upside insofar as investors are chasing new floats because previous ones have gone well.

And there’s a bias to information technology (IT) floats. Over the first half of this year, the IT sector accounted for 12 IPOs, easily the most active sector accounting for company floats, with returns at 3.3 per cent, outperforming the broader share market.

There’s a positive nuance in the fact that people who buy into new floats at the moment and who hold onto their shares do better than “stags” who flip their share allocation on listing day In this case, it’s 33.5 per cent over the second quarter against 24.5 per cent first-day gains.

Moreover, contrary to recent criticisms that many companies coming to the market are not developed enough to stand the listing process, the current crop of offers are tending to list at a premium then rise from there.

So what are the probabilities of getting ahead?

Of the 21 companies that came onto the boards in the second quarter of 2016, only five came on below their issue price. They are good odds.

Among larger IPOs, software company WiseTech had jumped 32.2 per cent by June 30 after listing on April 11 and plumbing manufacturer Reliance Worldwide Corporation was up 23.6 per cent by June 30 following an April 29 listing.

Meanwhile, there were a few bolters on the upside.

Abundant Produce, which produces vegetable seeds bred specially to survive in hostile environments, had a subscription price of 20 cents, came on at almost 60 cents and at last glance was at 90 cents. That’s a 350 per cent lift for original buyers.

That’s not to say your next investment will net you 350 per cent. But the so-called “window” for IPOs, the period when it makes economic sense for vendors to come to the market, shows no sign of closing any time soon.

What’s perhaps best about the crop of figures from this year is that there haven’t been any whopping big IPOs to skew the results and dominate the headlines.

That’s the problem with the perception of IPOs: one bad big one such as Myer or Dick Smith gets a massive amount of negative publicity, leaving investors wondering why they should go near a new float even though the actual returns are far more inviting, if less sensational.

There are at least 11 new offerings waiting in the wings, seeking anything from $5 million to $77 million, and unless there’s a dramatic change in the market mood, there will be worthwhile profits coming the way of both institutional and retail investors prepared to put their money to work.

Copyright © SMS Magazine 2024

ABN 43 564 725 109

Benchmark Media

Site design Red Cloud Digital