The Return of the IPO

After a challenging few years for the Australian Initial Public Offer (IPO) market, the December Quarter 2013 (Q4 2013) saw resurgence in IPO activity, as increasing investor confidence sparked a rush of new listings on the Australian Securities Exchange (ASX).

Given the renewed interest in IPO activity from both the market and media, analysis was undertaken by Citadel-MAGNUS to examine the performance of IPOs in 2013 relative to the past 10 years, which might provide a guide to likely IPO activity and performance in the coming year. Further, we have also outlined some simple investor relations and communication tips to assist potential candidates in preparing for a successful IPO.

 

Crunching the Numbers

Citadel-MAGNUS’ analysis identified 53 [1] companies that listed on the ASX via IPO during 2013, raising approximately A$6.8 [2] billion between them; of those companies, more than 50 per cent listed during Q4 2013, highlighting the increasingly positive market sentiment towards the end of 2013 and included high profile IPOs Pact Group Holdings, Cover-More Group, Dick Smith Holdings, Nine Entertainment Co, OzForex Group, Virtus Health and Vocation.

Indeed, four of the top five IPOs for 2013, ranked by total funds raised, occurred in Q4 2013 (as outlined below in Table 1).

 

Table 1: Top five IPOs of 2013 by Total Funds Raised [2]

Table 1: Top five IPOs of 2013 by Total Funds Raised

Source: Bloomberg

As shown below in Table 2, Australian IPO activity has been trending downward since peaking in 2005 (on a funds raised basis) and 2007 (on a number of new listings basis), at the height of the bull market in Australia and globally.

Following the substantial impact of the Global Financial Crisis (GFC) in 2008/2009 the Australian IPO market has failed to maintain a sustained recovery in terms of either the number of new listings or total funds raised, as investor ‘risk off’ sentiment prevailed and access to capital remained tight.

After a particularly lean 2011 and 2012, renewed IPO activity in 2013 has reversed the negative trend of recent years, but still remains significantly off the pre-GFC highs. This has been referred to as the “new normal”.

 

Table 2: Number of IPO’s and Total Funds Raised (2003 – 2013)

Table 2: Number of IPO’s and Total Funds Raised (2003 – 2013)

Source: Bloomberg

Breaking down the previous 10 years’ IPOs by industry sector, there was a divergence from the traditionally dominant Basic Materials sector in 2013 as global sentiment towards resources remains dour in light of declining commodity prices and a tightening of capital expenditure.

Analysis showed that for the first time in 10 years the Basic Materials sector was not the largest for newly listed companies (by number of IPOs), overtaken by the Financial and Non-cyclical Consumer sectors.

 

Table 3: Number of IPO’s as a percentage of total new listings for selected industry sectors [3] (2003 – 2013) 

Table 3: Number of IPO’s as a percentage of total new listings for selected industry sectors (2003 – 2013)

Source: Bloomberg

The top three IPO’s by share price return in 2013 were Indoor Sky Diving Australia Limited (Consumer, Non-cyclical) which finished the year up 200 per cent, Freelancer Limited (Software & Services) up 176 per cent and Fertoz Limited (Basic Materials) up 100 per cent, demonstrating that strong market support for quality companies does exist, no matter the sector.

Despite the renewed interest in IPOs, deeper analysis of first day performance of IPOs listed on the ASX in 2013 is concerning, with only 43 per cent of newly listed companies ending their first day at or above their listing price. While first day performance improved slightly (to 47 per cent) at 31 December 2013 and remembering that being listed is a ‘long-term’ game, it does raise the question as to what went wrong for these companies and why they failed to attract sufficient after-market support?

 

Attracting and Maintaining After-Market Support

Although every IPO is unique and a multitude of factors influence the performance of a new listing, having a clear investor relations and communication strategy during and following an IPO will assist in effectively attracting stakeholder support and ultimately maximising the chance of listing success.

While the over-riding key to a successful IPO is preparation, including making sure that management is suitably trained and fully prepared for life as a listed company, some further investor relations and communication tips include:

  • Keep it simple – Ensure the investment case is easily understood by your audience, whether it’s a potential retail or institutional shareholder. Clearly outlining the investment proposition will assist in generating both pre-IPO and after-market support. Warren Buffett’s famous quote: “Never invest in a business you cannot understand”, is a reminder of why you must ensure your investment story is easily understood.
  • Focus on key messages – Refine key messages so they complement each other and ensure investors receive a clearly articulated investment story that ‘hangs together’. In addition it will ensure that all representatives of the company, including directors, management and advisers, are telling a consistent story.
  • Pre-roadshow / marketing – Management must commit to getting out and telling their story; few investors will buy stock if they don’t know who management are. An adequate balance between market engagement (roadshows), media marketing and geographical diversity will assist in distributing the story.
  • Maintain momentum – A key part of IPO preparation should include planning ahead to ensure effective, relevant news-flow in the critical first three months as a listed company to ensure ongoing market support.
  • Managing continuous disclosure – Life as a public company brings with it increased disclosure obligations and, in turn, increased public scrutiny. Ensuring the company has adequate protocols in place to manage its continuous disclosure requirements will underpin a seamless transition from private to public life.

Looking Forward to 2014

Overall 2013 saw a significant upturn on a funds raised basis for the ASX IPO market after a sustained downward trend in recent years following the GFC. Despite an overall mixed performance from new listings in 2013, the momentum in IPO activity looks likely to continue through 2014 with a number of high profile companies touted for potential listings, including MYOB, Medibank Private, Spotless and Link Market.

A buoyant IPO market is a good indicator of the health of the wider economy and as such everything should be done to bring other companies to IPO. However, for the market to continue to back these companies, IPO performance in general needs to improve.

 


[1] Based on listing date of IPOs.
[2] For the purpose of our analysis we have excluded dual New Zealand Stock Exchange / ASX listings; Mighty River Power, Meridian Energy and Z Energy which accounted for an additional ~$3.8 billion, on the basis that these listings had limited ASX investor exposure.
[3] Analysis includes a selection of 2013 IPO sectors