With the end of the financial year approaching I decided to have a look back at all the new companies that listed on the ASX last year. By my count there were 111 new floats on the ASX so far this year (not including backdoor listings and including re-listings and demergers). So let’s have a quick look at some of the best and worst offerings and discuss potential strategies for the next financial year.
Overall it was a good year for IPOs (Initial Public Offerings). You might remember hearing about some of the big flops such as Wellard (ASX:WLD), Temple & Webster (ASX:TPW), McGrath Limited (ASX:MEA) and Integral Diagnostics (ASX:IDX), but overall there were actually more winners than losers. As of writing, there were 58 stocks in positive territory and 48 in negative territory (and 5 haven’t moved).
The biggest return was from Abundant Produce Limited (ASX:ABT) who have risen 330% from $0.20 to $0.86 since listing at the end of May. Abundant Produce develops and breeds new varieties of cucumbers and tomatoes to try and create the best strain for commercial production. You might be forgiven for missing this one, since it was only a tiny $3.5m float. The market valued the company at IPO at $9.3m and has continued growing to over $14m market capitalisation.
Class Limited, a provider of cloud-based administration software for Self-Managed Super Funds, was the next best performer, with shareholder returns of 226% at time of writing. This is noteworthy since they floated with a market cap of around $116m (not $3.5m). Farnam was fortunate in receiving stock in the IPO and continue to hold it.
The worst performing stock was the aforementioned homewares and furniture retailer Temple & Webster. After a hefty profit downgrade mere months after listing, management reshuffles, and a change in company plan, the stock has fallen 86% from its IPO price of $1.10 to $0.145 in 6 months. If you look at the financials in the prospectus, TPW had not turned a profit in the last 3 years and were not planning to in 2016. So any slip from management was bound to be magnified.
Temple & Webster seems to have been another victim of the curse of the 10th of December (a fake curse I just made up). The other two stocks that listed on that day – Wellard and Real Estate Investar Group (ASX:REV) – were two more of the worst performing stocks of the year (4th and 6th worst) – down 65% and 70% respectively at time of writing. (Note: Farnam no longer holds Wellard in its portfolios).
It is also interesting to look at the sector representation of this financial year’s IPOs. Financials was the most popular sector, being 25% of all companies listed, and information technology followed close behind with 20%. Interestingly, there were only 7 companies (6%) in the materials sector, which is a further indication that Australia is well and truly moving away from the resources boom of the last decade and moving into services and technology.
So what can we learn from looking at these IPOs with 20:20 hindsight? What should we have done? Apart from the obvious and unlikely strategy of only buy the good companies and sell them at their peak, it actually wouldn’t have been a bad strategy to invest in every IPO and hold them until now. If you had bought $100 worth of shares in each of the 111 companies, that $11,100 outlay would now be worth $13,013 – a 17.2% return. That’s not bad by any measure.
Compare this with the strategy of selling each stock after a month of being on the market. With this strategy your shares would be worth $12,923 – a 16.4% gain, which is still a reasonable annual return.
Of course, it would be impossible to invest in every stock that listed this year – and $100 is too small an amount to even invest in a single stock – but with a bit of work (and having the right broker connections) you should be able to avoid some of the worst ones and pick some of the best. Although, it’s important to note that as an individual investor you will likely only have one broker and realistically will only have access to the IPOs that broker brings to market.
The best strategy is always to evaluate each company individually on its merits, invest in the ones that meet your criteria and you have the best chance of outperforming the market.
Things to look for in IPOs are much the same as investing in companies already listed:
- A strong management team with a proven track record of producing high returns on equity;
- Profits and earnings per share growing year-on-year;
- Good capital management including manageable debt levels;
- And a reasonable price to earnings valuation;
These are just a few things to look for in any preliminary evaluation of an IPO. For a complete list of what we look for at Farnam, click here to read our Ultimate Value Investing Checklist.
This document has been prepared by Farnam Investment Management Pty Ltd (Farnam) ABN 15 149 971 808 AFS Licence 430574. While every care has been taken in the preparation of this document it does not contain any recommendations to buy or sell any particular stock(s) noted. Farnam makes no representation or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. The information in this document is general information only and is not based on the objectives, financial situation and needs of any particular investor. An investor should, before making any investment decisions, consider the appropriateness of the information in this document, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. Past performance is not a reliable indicator of future performance. The information provided in the document is current as the time of publication.