Fundamentals key to small cap IPO opportunities

Small cap companies looking to carry out an initial public offering (IPO) in the market need to refocus on the fundamentals of the business if they want to receive a positive response from investors, according to the authors of HLB Mann Judd’s Small Cap IPO report.

Companies need to be better prepared to meet the scrutiny of more demanding investors in the coming year, the report said.

Simon James, director of HLB Mann Judd and one of the authors of the report, said one of the business fundamentals that companies needed to focus on was making sure they did not take too much debt to market.

“The best performing post-IPO companies have got the strongest balance sheets going in,” he said.

“If you’ve got strength and the financial discipline when you go to market, obviously the message you’re giving to investors is that you know what we’re doing, we know how to run the business,” James said.

James also warned that companies needed to look beyond the current environment of government incentives for further indicators of growth.

Government incentives were a one-off occurrence, and companies needed to strip that out of their earnings forecast, he said.

James said companies needed to investigate the accuracy of the forecasting process and lead indicators on the revenue line to understand what results they were going to get beyond the next month.

Marcus Ohm, a partner at HLB Mann Judd, said finding the appropriate time to list was crucial, as was making sure enough investors were available to take up shares.

Geoff Webster, head of HLB Mann Judd Corporate Finance, said he expected to see a sharp turnaround in public offerings during 2010, thanks to a number of small companies that suspended plans to list in 2009.

There was a sharp resurgence in listings in the last two months of 2009, suggesting companies were starting to see value in an IPO. Small cap companies contributed 92 per cent of new public offerings to the market in 2009, the report said.