More glitter in IPOs than gold
Some people may be forgiven for regarding new floats as a licence to print money.
Some people may be forgiven for regarding new floats as a licence to print money.
The reality, it appears, is rather different.
Those lucky enough to get shares in accounting software producer Mind Your Own Business before its Australian Stock Exchange debut must be smiling.
The shares were issued at $2. They closed at $4.40 on the first day of trade and were changing hands at around $6.30 recently.
With stories like this, it is no wonder that some financial planners say they are bombarded with inquiries about new listings. Have cli-ents been hanging around the sports club or dinner table too long, or are they onto a modern day gold rush?
There's certainly been a killing to be made lately by bailing out of some of the new floats soon after they listed, that's if you can get your hands on the shares in the first place.
But, despite heightened expectations, not all the glitter has turned to gold. For example, investors also bought Aquacarotene, a WA-based grower of natural betacarotene, at an issue price of $1, watched it open at 75c and then fall further.
Those who jumped into companies like Cabonne, Housewares, TVSN, Tin Australia, Globe Securities, Medica Holdings and the Wine Investment Fund may be forgiven for being somewhat disappointed.
Even some of the companies that made spectacular debuts have not kept their sparkle. Shares in Internet group Reckon, for instance, were issued to retail investors at $1.05. They opened at $2.80, went as high as $2.90 and have been languishing at around $1.37.
Likewise, internet-design company Spike was trading at 69c last week, well below its $1.45 pre-float offer price and the $1.69 it reached on its first day.
When it comes to IPOs (initial public offerings), certain sectors have performed better than others. Mining companies and oil stocks have, for example, lagged while technology and telecommunications stocks have become the market's sweethearts.
Macquarie Investment Management's small companies analyst Mark Mullen says many of these sweethearts have come to the market accompanied by much hype and at substantial premiums, their prices pushed sky high by surging demand and limited scrip.
Some debutants have asked for the smallest amounts of capital. Pra-com, for example, came to the market looking for $1.5 million while Amlink was after $1.9 million.
One problem, it seems, is that the small size of some issues, com-bined with dramatic oversubscription rates, have meant that fund man-agers holdings have been scaled back to a point where they see no reason for retaining them. They are no longer willing to build these and sometimes bail out rather quickly.
Traditionally, the floats of large cap companies have done better than those of small caps.
According to PricewaterhouseCoopers's ninth Survey of Sharemarket Floats, large public floats outperformed the ASX All Industrials In-dex by more than 32 per cent in calendar 1998. A key reason was the market's volatility.
"Australian investors sought comfort in large cap floats due to their higher levels of liquidity, more experienced and established manage-ment teams and earnings track records," says Greg Keys, a partner in PricewaterhouseCoopers' corporate finance and investment banking di-vision.
A survey by Tom Harris, a quantitative analyst with Ord Minnett, yielded similar findings: IPOs over $1billion out-performed the All Ords by 35 per cent between October 1987 and December 1998 while those with market caps of under $30 million underperformed.
Smaller companies also generated the lowest average stag profits - 12.9 per cent compared to 20.2 per cent for medium companies (market caps of $30-$100 million) and 14.3 per cent for large caps.
When dealing with IPOs, it seems the safest bet is to treat them just as you would any other share.
"There's nothing magical about new floats," says Godfrey Pembroke head of research Janice Sengupta.
"They should be considered on a case by case basis. Floats require selectivity, just like any other stocks," she says, noting that at-tention, as always, should focus on fundamentals like management quality, strategy and market potential.
RetireInvest equities manager Bob Birchall says: "There is certainly money to be made on new floats. But I've been around a long time, and I get a little scared about what I am seeing.
"There tends to be a bit of a mindless approach to it at the moment. Some of the companies on offer lack substance. They have grandiose plans, but nothing else in place.
"Some are only worth a short-term run - and they should only be con-sidered by clients with the right risk profile and those who can get out quickly."
"I've done well out of floats, but I have done even better over the long term by putting together a structured portfolio," Birchall adds.
Keys believes it will take a while for investors to become more dis-cerning about newcomers. "I think that at the moment anything that has a dot.com after it is seen as a licence to print money," he says.
Godfrey Pembroke broking investment services head Glen Castensen adds: "You should not be overexposed to the hi-tech stocks, but you cannot afford not to be exposed to them. The key is to buy a spread because some will succeed and others will not.
"It is better to diversify instead of taking huge once-off bets. Somewhere along the line you are bound to get caught out."
He warns that hi-tech companies can also be high risk investments and can, as witnessed of late, be knocked by falls on the Nasdaq and swings in market sentiment.
"One is moving into an area where valuation techniques are in their infancy. For example, when its comes to Internet stocks, there are valuation risks as well as risks in the underlying company," Casten-sen says.
To reduce risk, he recommends combining a managed hi-tech fund with a direct holding of, say, five individual stocks.
No doubt there will be plenty to choose from. The rush of IPOs is not expected to abate, as long as the Australian and US share markets continue to power ahead.
"There is certainly a lot of activity out there, I can confirm," Keys says.
The long list includes Telstra 2, NRMA and Australia's first "pink" float: the Satellite Group's gay and lesbian focused media and prop-erty company.
On the hi-tech side, look out for West Australian internet software developer HarvestRoad, Commercial Dynamics, which owns Trading Post classified ad papers, and John Fairfax's e-business.
A SNAPSHOT OF HOW SOME IPOs HAVE DONE:
TABLE
Company price (cents) issue opening 24/08 last sale
Amlink 35 43 67
Aquacarotene 100 75 58
Austar 470 563 470
Bourse Data 50 95 69
Cabonne 100 90 78
eBet 50 50 48.5
eCorp 120c 197 206
Globe Securities 20 21 12.5
Housewares 100 94 80
Hutchison 200 270 262
HWW 50 50 48
Medica Holdings 70 75 60
Pracom 20 40 137
Queste 20 20 40
Reckon 105 280 137
Telco 20 40 39
Tin Australia 26 22 5
TVSN 120 87.4 89
Wine Inv Fund 50 50 43
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