23 November 2019
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IPOs the big winners of 2017

Andrew Main
13 February 2018

If you’re still hiding under the table with a coal scuttle on your head after the recent global share market lurch, it’s quite understandable.

You may not be in the mood to hear a bullish tale about the Australian share market, but try this:

The 113 new floats that came into the market in 2017 managed an average end-of-year return of 61.6 per cent. 

If you look at the smaller IPOs valued below $50 million, the number was even higher at 69.8 per cent.

Meaning, if you bought them when they were issued and held them until the end of the year, that is how far ahead you would be.

Those stats come from the OnMarket group, which is involved in around one third of new floats in Australia, but keeps records for all of them.

By comparison, the ASX 200 index was up seven per cent over 2017, and we won’t bother discussing what’s been happening to it in the last few days. If you’d been on a roller coaster you would have hurt your nose and your neck.

Of course, most new floats don’t pay dividends like the blue chips do, so we’re not comparing apples with apples, but that giant differential in price performance cannot be ignored.

So, what’s going on? In very simple terms, the high franked dividend paying stocks in Australia have become what the professionals call a crowded trade, whereas the smaller end of the market is doing exactly what it is meant to do: raise capital to allow companies to expand.

Because we haven’t seen a big raft of giant floats in the last few years, the Initial Public Offering (IPO) market in Australia hasn’t garnered the attention that it perhaps deserves.

In 2017, there was only one seriously big float, the Magellan Global Trust, which soaked up $1.5 billion in October.

Indeed, it wasn’t a big year for floats in value terms, raising a total of $6 billion versus $8.3 billion in 2016, and a similar number in 2015.

Back in 2016 there were 96 new floats whose end of year equivalent return was 25.4 per cent.

That number grew slightly to 113 last year, so it’s the dramatic lift in returns to 61.6 per cent that really grabs the attention, coming in more than twice as strong.

There are of course a number of issues you need to face if you are looking at trying to get anything like that return.

One is that it’s hard to get set in the full range of floats, so there’s a theoretical element to it. This is not meant to be a plug for OnMarket but they facilitate access to new floats and as I said, they get access to about a third of them.

Two, small cap stocks are less liquid than large cap stocks, meaning they are hard to get into and out of. And if there’s a major bust such as 1987 they tend to get even less liquid. In trader talk they become “seller, no buyer’.

Their prices can also suffer from volatility. If you’ve got 100,000 of a small stock to sell and there’s only 20,000 on the buy side, you are going to have to drop your price.

It’s also true that there are more duds at the small end of the market.

But that 61.6 per cent figure takes all of that into consideration.

Which sector did best? Possibly not the ones you would expect.

Consumer staples did best with an average end of year return of 106 per cent, followed closely by materials (that’s mining to you and me)which moved ahead by 97.8 per cent.

Admittedly the staples represented less than one per cent of the total funds raised, and the materials category was only worth 4 per cent of that total.

The lion’s share of the money raised went to financial issues, which picked up 68.7 per cent of if, and meanwhile they had the least inspiring average end of year return at 17.8 per cent.

That said, 17.8 per cent is still more than twice the ASX200, even after allowing for dividends.

One of the secrets of the “scattergun” approach to new floats is that while a successful one can grow your investment several times over, you can only lose 100 per cent of your original investment.

An example from the winners is Ardea Resources Ltd, a cobalt play that listed at 20c in February and ran up to around $2 late last year. It’s slipped back to around $1.30 in recent weeks but if you’d got in at the float, that’s six times your in price.

Medicinal cannabis was almost as popular as cobalt. Two of the top 10 listings in 2017 were medicinal cannabis stocks, Cann Group Ltd and The Hydroponics Co Ltd, both managing an end of year return of just over 8 times, while infant formula group Wattle Health Ltd enjoyed a similar return.

Most have of course lost ground in the recent market reverse, but for instance Wattle Health is now around $2.30 after peaking at $2.50 a couple of weeks ago. It was below $2 for most of January so it’s by no means been a collective slide.

It’s clear that being trendy helps a great deal, but this reinforces the point that while you can only lose your original investment, you can make several times that amount on the best performers.

The next point is that to get a good average outcome, you do have spread your bets.

Ben Bucknell, a principal of OnMarket, notes that there is an inherent premium of about 25 per cent if a stock is listed, compared with it being unlisted.

“It’s called the liquidity premium,” he says.

Another potential positive at listing time is that issuers of new floats also have to leave enough on the table, in terms of potential upside, to make it worthwhile for investors to subscribe.

“Having a successful float also has the benefit of attracting the same investors back for a future float,” he says.

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