18th March 2010, Simon Keane, Shares
With the floats market set to re-open with a big bang Simon Keane and Shares team survey the opportunities ahead and show investors how to pick winners – and avoid the duds.
It is not a case of if flotations – new market listings – come back but when and Shares believes it will happen a lot quicker than many in the market expect. Our research shows had you automatically bought the first flush of floats during the last bull market, and held them for six months, you would have made an average 20% return. In light of this we suggest investors should be getting ready now to participate in the coming wave of initial public offerings (IPOs).
Of the 11 companies planning to list we have picked out our favourite eight and recommend buying these ones in particular on day one. They are miners African Barrick Gold and Bellzone Mining, a pair of real estate plays being Metric Property and Squarestone Brasil, CSF Group and Teliti International which look good prospects on the strong growth story that is Malaysian data centres, retailer SuperGroup and healthcare software business EMIS Group. We recommend you move quickly since two of these business, CSF and Squarestone, are due to start their first day of trading on Monday (March 22). We have also had a look down the list of the rumoured floats, and having researched their respective industries chosen four that should be snapped up the minute they go public. They are gambling exchange Betfair, designer of antivirus software Sophos, discount retailer Poundland and miner Ferrous Resources.
Ride the wave
There have already been ten floats since the start of 2010. This represents a huge uptick on 2009 when only 22 new companies came to Aim and Main Market during the whole year. The business pages of the popular press have concentrated on the failure of three high profile private-equity backed IPOs, namely Travelport, Merlin Entertainments and New Look Retailers, which pulled their floats within days of each other following last month’s volatile markets in the wake of the Dubai debt crisis.
But equity markets have found their stride again and 11 companies have confirmed they will be coming to the market (see table, right and commentary). When the flow of the floats really does start to rise, it could easily accelerate rapidly and take on a momentum all of itself. This was the case in March 2004, exactly the same point in the last bull market as where we are today – one year on from the bottom with the FTSE 100 making slower-but-steady progress after a huge rally. In that month no fewer than 32 firms took the plunge and listed, against just five new entrants in February 2004. Shares has picked up on talk of 16 companies preparing to float but that number could easily balloon once confidence returns (see table, and analysis).
Unfortunately it is far from easy for private investors to get in at the issue price, as newly-issued stock tends to be reserved for the biggest buyers of the paper, the institutional money managers and hedge funds. You will mostly be restricted to buying in the market on day one, although SuperGroup has stated it wants a strong retail investor presence on its share register. But our analysis shows how had you blindly bought all the companies that floated between March 2004 and September 2004 and held for 180 days the strategy would have returned an average profit of 20% (see Automatically buying 2004 floats on day one made money). This indicates significant scope for the ‘trader’ to make gains from new floats and represents a healthy tailwind to get long-term investors on their way.
This average return compares favourably to the performance from the FTSE All-Share. Between 1 March 2004 and 29 March 2005, those being the respective dates of the first ‘purchase’ in our study period and the last ‘sale’, the index rose a respectable 9.0%. Returns from automatically buying and holding new floats over 90 and 30 days, at 10.8% and 8.6% respectively, were also good. The historic 5.5% return from buying on the first day of trading and selling on the second – a technique known as ‘stagging’ – should certainly tweak the interest of the day trader tempted to lever up through a contract for difference on spread bet.
Best and worst
The variation in performance of those 2004 floats was quite wide. The best performer was Imperial Energy (subsequently taken out) which put on 368% from an opening mid-price of 28.8p on the first day of trading (5 Apr 04) to a closing mid-price of 134.7p 180 days later (1 Oct 04). Better still, Imperial Energy was eventually taken out in 2009 at £12.50 a share by India’s ONGC. The worst showing came from Multimedia TV (since left the market), which fell by 69%, having opened at 14.5p on 11 June 2004 and closed at 4.5p six months later on 8 December 2004. To compound its sins, trading Multimedia TV was suspended in October 2006 at 0.38p and the stock subsequently delisted in 2008.
Despite such setbacks, the number of gainers comfortably outweighed the losers, by 99 to 66. On average the winners went up more than twice the amount (48.9%) the turkeys fell (-21.3%). This massive outperformance of the winning trades held across all four time periods highlighted above.
As market confidence ebbed the new issues for 2009 sank to just 22, compared to a peak of 425 in 2005. Experienced market watchers will remember a similar sharp decline in new floats during the last bear market, since 2003 saw just 89 new companies make it to the market. But once the floats market picked up a head of steam in March 2004 there was no stopping it (see chart). By the end of the end of 2004, 295 new companies had joined the market.
As in 2004 the first two months of this year were very quiet with just one IPO in January, eight in February and one so far this month, although Promethean World, was due to join the market yesterday as Shares went to press (17 Mar) and will add to that count. Confidence is starting to return following last month’s abandoned new issues and fears the primary market would seize up altogether are now receding rapidly. There is even talk Merlin Entertainments, after very strong results, is considering having a second go.
The chatter room from the broking community is there a long list of companies waiting to float (Sector Report, Shares, 15 Oct 09). These encouraging noises are supported by the man who will have a better feel than most of the primary market, namely London Stock Exchange (LSE) chief executive officer Xavier Rolet. At last Thursday’s (11 Mar) UK plc Awards dinner, he stood up and said: ‘The IPO market was dormant in 2009 but there are really excellent signs activity is going to resume in 2010’.
The decent reception given to activist investor Sherborne Investors (SIAG), up 2% from opening at 102.5p on admission to Aim (9 Mar) to 104.5p at the time of writing, is a far cry from last December when Gartmore (GRT) proceeded to drop like a stone from the second trading began. Having opened at 215p (16 Dec) shares in the fund manager plumbed a closing low of 184p earlier this month. Even the institutions were losers having subscribed at 220p. From the outset the deal was problematic given the initial ‘indicative’ price range touted by its corporate advisers of 250p to 330p proved way too optimistic. This was hugely embarrassing for the brokers who have to be exceptionally careful with pricing given reputations – as well as money – are at stake. (see How to price an IPO).
How to get involved
Private investors can sometimes participate at the offer price alongside the institutions, as is the case with SuperGroup. But our calculations for the historic 2004 performance are based on buying in the market at the open price. Achieving this is best done by leaving an order with your broker out of hours. TD Waterhouse investor centre representative James Daly explains: ‘Clients can leave ‘at best’ or ‘fill or kill’ order to take effect when the market opens’. Although he cautions: ‘These sometimes take a few minutes to work through especially over the weekend, but if the stock is supported by our retail service provider then the deals will be done electronically and will be done comparatively quickly’. As ever traders need to spend as much time thinking about the execution as the bigger picture.
Our preferred picks of the up and coming floats should do even better than the generally favourable performance achievable from automatically buying floats. There are many pitfalls of investing in what is still the lightly-regulated Aim arena. Aim is where the bulk of new issues have historically been. This trend is likely to continue simply because it is a lot cheaper and quicker to get a quotation on the so-called junior market. The very patchy long-term performance of best ten performing 2004 floats is witness to the risks posed by Aim. Automatically buying floats for their initial out performance should be set against the knowledge short-term momentum, by which traders make their crust, can sometimes turn into long-term misery for investors.
Of the ten best performing 2004 floats long-term investors will have eventually made losses on seven (see table) although Imperial was taken out for that stunning 4,243.3% return on the price which it traded on day one. This neatly encapsulates the potential of investing in small companies, and by extension floats as the bulk of IPOs tend to be small businesses looking to Aim for growth capital. By contrast York Pharma eventually ended up in administration while other six losers are 79% down on the day one opening price. The fact five of these ten companies have changed their names tells a story in itself. Vert-Eco is now HydroDec (HYR:AIM), Asia Energy is Global Coal Management (GCM:AIM), Skiddaw Capital is Crosby Capital Partners (CSB:AIM), Felix has become Crawshaw (CRAW:AIM) and Roshni Investments turned into Spiritel (STP:AIM). While not always the case, a name change is often associated with a troubled past and, as any sailor knows, often brings bad luck anyway.
CONFIRMED FLOATS – BUY THESE ON DAY ONE
Float date: Late March/early April
Market Value: $400 - $600 million
Iron ore prices have more than doubled in the past year upon a market recovery and prices could keep rising. Bellzone owns the decent-sized Kalia iron ore project in Guinea (2.4 billion tonne resource) and hopes to start production in 2014. It plans to raise $100 million at admission to fund more drilling as only four kilometres out of a 19-kilometre prospect area have so far been explored. The proceeds will also help to complete a bankable feasibility study by April 2011, providing a clear idea of how much it will cost to build the mine, currently estimated at $4.5 billion. (DC)
Float date: 22 March
Market Value: £85 million
CSF, the Malaysian data centre group, is ideally positioned to benefit as demand outstrips supply in Asia-Pacific data centre market. Demand is expected to grow by 14% this year and 16% next year, according to research from Frost & Sullivan. The company was founded 19 years ago, and has built two new centres in the past 10 years to service domestic and international business clients. In the year to March 2010 CSF forecast to report £17.8 million in revenues, representing £8.2 million in pre-tax profits. The group is expected to start paying dividends by 2011. (JF)
Float date: 29 March
Market Value: £200 million
The hotly anticipated EMIS float presents a new opportunity to tap into the strongly growing arena of healthcare software. The Yorkshire group has a 50% share supplying software to GPs, and should see continued uptake of its product which ensures speedy and cost-saving interaction up the care chain. The company is looking to raise £50 million, mostly to be spent buying out the founders, and is seeking a market introduction to add transparency as it competes for the bigger NHS contracts. Last year revenues grew around 10% to £58 million, generating £15.8 million of operating profits. (JF)
Float date: 24 March
Market Value: £150 million
Destination: Main Market
Metric will pick up cheap retail property assets as indebted owners are encouraged to raise cash ahead of a spate of refinancings due in 2012. Property yields are still high and values depressed by historic standards, especially on out of town shopping centres, where the initial focus will be. Metric will be structured as a Real Estate Investment Trust (Reit) from the start. This means no external management fees for shareholders, making this the pick of the recent property floats. The management team, headed by chief executive officer Andrew Jones, has experience of running Pillar’s, and then British Land’s (BLND) retail portfolios. (IM)
Float date: 22 March
Market Value: £150 - £250 million
A play on the Brazil’s growth and in particular on the rise of the middle class consumer. Investors will be getting in at 100% of net asset value (NAV), while the existing two main mall owners trade at around 130% and 170% premia. Squarestone aims to bring Western standards to Brazilian shopping, improving the experience and attracting more international brands. Shareholders will implicitly pay the recently introduced 2% tax on foreign investments into Brazil, and management will take 25% of any increase in NAV above 15% per annum. The latter reduces the attractions, but is fairly standard, and should be set against the Brazilian opportunity. (IM)
Float date: 24 March
Market Value: £395 million
Destination: Main Market
The shares are attractive. The issue has been priced to encourage a small initial premium. More importantly, the company is coming to the market on the back of strong sales momentum and a clear strategy. Same-store revenue grew by 29% over Christmas. SuperGroup, which will be debt free, plans to grow from 40 stores to 150 in the UK and will increase its overseas franchise arrangements. The shares are more likely to mirror Dunelm (DNLM) which has more than doubled since its 2006 float, rather than the terrible performance from Debenhams (DEB), the latter being a study in the dangers of buying from private equity owners. (JM)
Float date: first half of 2010
Market Value: £35 – £40 million
The firm is expected to benefit from same rapid growth in Malaysian data centres as CSF Group. Teliti intends to build what will be the one of the largest data centres in the region with the £12 million raised from the float. This should ensure further growth for Teliti, which was founded 13 years ago and specialises in applications from SAP, the leading business management software group. Clients include government agencies, government-linked companies and financial institutions in Malaysia. The group intends to branch out further in to Asia and in to the Middle East. Teliti is expected to report 25% revenue growth this year. (JF)
African Barrick Gold
Float date: Late March/early April
Market Value: $3.9 billion
Destination: Main Market
We are bullish on gold and therefore also optimistic about the profit margins of miners. African Barrick Gold is an ideal purchase upon its imminent London float and likely inclusion in the FTSE 100. It is being spun out of Barrick, the world’s largest gold producer, which will retain between 65% - 75% of the business. Mining costs are high at $533 per ounce of gold, but it hopes to increase annual production by 40% to one million ounces by 2014 and for economies of scale to help bring down costs. It will become the second largest UK-quoted gold miner after Rangold Resources (RRS). (DC)
RUMOURED FLOATS – BUY THESE ON DAY ONE
Float date: Autumn 2010
Market Value: £1.5 billion
Destination: Main Market
Eagerly awaited by investors seeking to buy into a growth story and an alternative to the traditional bookmakers and online gambling firms. There are high expectations Betfair would thrive in the US should a ban be lifted on online gambling. A listing would provide the opportunity to raise funds to buy up gambling companies and expand geographical coverage. The betting exchange allows customers to punt directly against each other on the outcome of sporting events, with Betfair taking a commission. It also runs casino games, poker and financial markets betting. Revenue growth is understood to have been particularly strong over the past few years. (DC)
Float date: May
Market Value: £2.5 – £3 billion
Destination: Main Market
Another company likely to attract immediate investor attention amid rising iron ore prices. Ferrous is a firm buy on day one should rumours prove correct it will soon list in London, possibly in May. The Brazilian iron ore miner is likely to become an investor’s favourite given significant growth potential and close proximity of projects to Vale, the world’s biggest iron ore producer. It owns five pre-production iron ore projects and would list to create shareholder liquidity rather than raise funds, which it previously did in 2008 ahead of previous plans to float. (DC)
Float date: 2010
Market Value: -
Oxford-based Sophos has a growth profile which compares favourably to larger competitors such as Symantec, making it an interesting IT security play. Sophos reported a 49% increase in revenue, to £125.3 million, at last August’s finals, and enjoys strong cash generation. Backed by US private equity group TA Associates, Sophos abandoned a 2007 listing attempt when valuations fell below expectations. This float would have given the group a market value of around £325 million. There is a danger the group may opt for a NASDAQ flotation over a London IPO, or be taken over – peers Symantec and McAfee have made several acquisitions in the past year. (JF)
Float date: -
Market Value: -
Poundland, which was founded 20 years ago, has been a major beneficiary of the recession. It has a simple mantra – nothing is priced above £1. It has grasped the opportunity posed by the demise of Woolworths and others to open new stores. Last Christmas underlying sales grew by 4.4% but turnover, reflecting additional space, grew by 34.8%. Its success mirrors that of their discounters such as Primark and Peacocks. If the market remains firm the group could float later this year. An issue would be well received as the dynamics of the market place are favourable. There is also scope for further physical expansion of the group owned by private equity firm Advent International. (JM)
How to price an IPO
Nick Owen, Brewin Dolphin
The experience of Gartmore (GRT) highlights the risks when it comes to pricing an initial public offer (IPO), as the 220p issue price fell well below the indicative 250p to 330p range at which its brokers BofA Merrill Lynch, Morgan Stanley and UBS said they could place the stock with institutions. Worse still, the shares then preceded to fall the minute they began trading.
Nick Owen, head of corporate broking at Brewin Dolphin Investment Banking, the corporate advisory arm of Brewin Dolphin (BRW) says the broker has always met its indicative pricing range once it has launched a float. He says Brewin will ‘typically guide clients towards a 5% to 15% valuation discount relative to the peer group. This is in part reflects the fact that business has no quoted track record and helps to ensure there is a viable aftermarket’.
Leaving upside for the investor is important, explains Owen, to ‘deliver a blue-chip share register’ of backers willing to support the company going forward. He admits pricing can sometimes be a ‘black art’ in situations where you have a ‘high quality company with few peers’. Owen says Brewin is highly selective and only takes on companies that meet its criteria of strong growth and high quality management.
Ahead of yesterday’s (17 Mar) first day of trading from Promethean World the signs are certainly encouraging. It looks as if the brokers are managing the deal got their numbers spot on as the 200p issue price lay comfortably within the 180p to 225p indicative range set during the management’s presentation roadshow. (SK)