As painful as they are, sharemarket sell-offs can create much needed value in high-quality companies. I can’t see the market bouncing back as quickly from this pullback as it has previously, but some stocks have clearly been oversold.
An interesting source of opportunity is the initial public offerings market. Several of the better IPOs in the last 12 months took off after listing, making them too dear to buy. The market sell-off, and the prospect of escrow provisions expiring – meaning early investors can sell restricted shares – could create some bargains in IPOs that have been listed for more than a year.
I rate these three IPOs from the past 12 months. The first two are in value territory and will be more attractive if the current sell-off continues.
1. Oz Forex Group
The online international foreign-exchange service provider listed on ASX in October 2013 after raising $439 million. It shed almost a quarter of its value in late May after announcing lower-than-expected growth in customer acquisitions, and higher costs. At $2.44, it is still up on its $2 issue price.
OzForex looks undervalued after falling from a 52-week high of $3.50. It has a highly disruptive business model, as online financial-services providers increasingly threaten traditional companies in coming years. This gives OzForex significant strategic appeal to a larger global financial-services or travel provider. It looks like a company that is easier to buy than build, and longer term it could be a takeover target for a predator.
Shorter term, currency volatility is good news for OzForex for it encourages small enterprises and travellers to lock in currency rates, rather than do nothing because our currency has been reasonably stable. OzForex’s excellent growth prospects in the US are another attraction.
Chart 1: OxForex Group
2. National Storage REIT
National Storage is Australia’s first listed self-storage REIT. It raised $183 million through an IPO in December at 98 cents per stapled security. Those securities rallied to $1.23 and some newspapers were quick to label the IPO a “runaway success”.
National Storage is in an attractive industry. The self-storage market has grown steadily in the past five years as more people have relocated for work or study purposes, and because of a lack of substitute self-storage services. Those who wanted to store personal belongings, furniture, white goods or cars for later use had little choice but to turn to self-storage providers.
The market is highly fragmented, with 879 self-storage providers in FY14, according to IBISWorld. Big players such as National Storage have scope to consolidate the industry, grow by acquisition, and create much stronger economies of scale that reduce costs and lift operating margins.
National Storage is not super cheap. But after falling from a 52-week high of $1.44 to $1.32, it looks like reasonable value for long-term investors who want exposure to the trend of more urbanised, congested cities in coming years, and greater demand for self-storage space as more people live in units.
Chart 2: National Storage REIT
3. Genworth Mortgage Insurance Australia
Australia’s largest mortgage insurer has been one of this year’s best floats; its $2.65 issued shares have raced to $3.48, after peaking at $3.90 when the market got ahead of itself.
Low interest rates, bigger house loans, higher house prices, and low loan defaults have created a sweet spot. Genworth raised 2014 profit guidance to $231-$250 million, above the prospectus forecast of $231 million. A first-half profit of $133 million has it on track to meet expectations.
Genworth dominates its market with a 44 percent share of lenders mortgage insurance, but would be a terrible stock in a property downturn. Still, a 3.8 per cent yield, 5.4 per cent after franking on Morningstar’s number, and exposure to the strengthening property market, is attractive.
After such strong share-price gains, Genworth is due for a bigger pause and would look better value below $3. But it offers reasonable medium-term value, provided any housing slowdown is orderly rather than abrupt, and mortgage defaults are manageable.
Chart 3: Genworth Mortgage Insurance Australia
– Tony Featherstone is a former managing editor of BRW and Shares magazines. The column does not imply any 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 October 2, 2014.