It is easy to become too cynical and miss investment opportunities. The Initial Public Offerings (IPO) market is a good example: several fund managers have lamented the quality and pricing on floats this year. Yet most IPOs have closed and some have been stellar investments so far.
The lesson, of course, is to treat each investment on its merits rather apply blanket rules. Many IPOs are rubbish and best avoided. And others – about one in every 10, in my experience – are terrific investments for those who get stock or have the foresight to buy after listing.
I have been cautiously bullish on the current IPO crop for a few reasons. First, better-quality IPOs typically come to market earlier in the cycle, when the market is less forgiving. As the bull market peaks – still a long way off – vendors offload lower-quality and higher-priced assets to capitalise on investor exuberance.
Second, this IPO market has had a longer gestation than previous cycles. An IPO window that was mostly shut after the 2008 GFC meant assets typically remained longer in private ownership. Some were in better shape when they finally made it to market as IPOs. They were also more conservatively priced, given market resistance to private-equity-vended floats and over-the-top valuations.
Moreover, the diversity of this IPO cycle has impressed. From in vitro fertilisation (IVF) providers to insurance brokers and cruise companies, this float cycle has brought new types of companies to market, giving investors scope for new portfolio exposures and diversification.
Again, I stress that not all floats have these characteristics and that investors need to remain as wary as ever about IPOs. For every good investment, several others are duds. But there have been some great opportunities – and still are – for those prepared to dig through dozens of floats in 2013-2014.
Several I favour have already been mentioned in this column: Genworth Mortgage Insurance Australia, National Storage REIT, LifeHealthcare Group, Monash IVF Group and Japara Healthcare, for example. Having completed my analysis of 63 floats from 2013-2014 for The Bull, I add another three IPOs that have caught my eye.
As with all small- and mid-cap IPOs, they suit experienced investors comfortable with higher risks. Always remember that newly listed companies are a different proposition to their established listed peers, and should have a valuation discount, to compensate for higher risk.
1. Pioneer Credit (PNC)
Chart: Share price since listing versus ASX200 (XJO)
The financial services group listed in May 2014 with little fanfare, raising $40 million at $1.60 a share. After spiking to $1.66, Pioneer has eased to $1.58 on low volume.
Pioneer specialises in acquiring and servicing unsecured retail debt portfolios. It buys debt that is more than 180 days overdue and seeks to recoup part of that debt over time. Pioneer’s closest listed peers are Credit Corp Group and Collection House. Both have performed well over three years.
This column has written favourably about receivable management stock, such as FSA Group, in the past two years. FSA is up 61 per cent over one year to June 9, 2014.
With the household sector under growing pressure, more debt should become available for purchase, at a reasonably price, and sophisticated collection techniques are helping these companies recoup a higher proportion of outstanding bills. Pioneer bought $27 million of debt (about 8 per cent of debt available for purchase) in FY13, according to its prospectus.
Pioneer has a good record, an excellent board for its size, and a strong IPO adviser in Evans & Partners. Forecast earnings per share of 15 cents in FY15 put Pioneer on a prospective Price Earnings (PE) ratio of 10.5 times – an appropriate discount to Credit Corp and Collection House.
2. Burson Group (BAP)
Chart: Share price since listing
The car-parts distributors listed in April 2014 after raising $220 million in one of the more anticipated floats. Its $1.82 issued shares rallied to $2.18 before easing a few cents.
The $352 million company is Australia’s largest trade-focused automotive-parts distributors, distributing to more than 30,000 workshops and customers. The Victoria-based company has built a huge network of suppliers, distribution centres and 114 parts stores that is hard for rivals to copy.
This scale creates an interesting market position and a valuable sustainable competitive advantage. A selling point is Burson’s ability to supply parts faster, enabling workshops to service cars on a same-day basis. Smaller parts suppliers struggle to match its speed and parts range.
At $2.17, Burson trades on a forecast PE of 16.5 times for FY15, based on its expected earnings per share of 13 cents. A forecast 4.8 per cent dividend yield in FY15 (based on the issue price), expected to be franked, is another attraction. It is not the cheapest IPO, but a strong, established position warrants a premium.
Watch Burson beat market expectations on earnings and lift its return on equity over the next three years, with the share price to follow the company’s intrinsic value higher.
3. Beacon Lighting Group
Chart: Share price since listing
Buying high-quality companies exposed to Australia’s strengthening housing cycle has been a recurring column theme in the past 18 months. Beacon Lighting Group fits the bill.
After raising $64 million and listing in April 2014, Beacon’s 66 cent issued share soared to $1.05 on debut, making it among the best-performing floats in recent years. From a $1.10 peak, Beacon has eased to $1.03 on reasonably low volume this month.
Like other companies mentioned in this column, Beacon has a strong market position and good a record. As Australia’s largest retail lighting specialist, it has attractive growth prospects from its store-rollout program, optimising existing stores, and adding new lighting products and other technology.
I also like how Beacon offers later-cycle exposure to housing, as consumers typically buy its products when new houses are nearing completion, or for established homes. With interest rates most likely on hold until well into 2015 – possibly even heading lower – the housing cycle should continue to strengthen, creating more demand for Beacon and other providers of housing fixtures and furnishing.
But Beacon looks fully valued for now. At $1.03, it is on a forecast FY15 PE multiple of 19.4 times, based on an expected 5.3 cents earnings per share. That is high for a newly listed retailer, and a similar valuation to well-established listed companies such as GWA Group and DuluxGroup that also offer later-cycle exposure to housing and the renovation markets.
I would add Beacon to my watchlist on any price weakness that takes it below 90 cents.
Tony Featherstone is a former managing editor of BRW and Shares magazines. This column does not imply stock recommendations. Readers should do further research of their own or talk to their adviser before acting on themes in this article. All prices and analysis at July 9, 2014.
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