The usual end-of-year IPO rush is an investment threat and an opportunity. A threat because IPO “fatigue” sets in and some deals are abandoned, repriced or deferred. An opportunity because high-quality floats can go unnoticed by the mainstream investment community.
This year’s IPO gorilla – the $5.7 billion Medibank Private offer – cast a huge shadow over the float market. So much so that some floats promoted at the same time struggled for sufficient airplay among fund managers, or had less coverage after listing.
Overall, the 2014 IPO market has been a cracker. It should set capital-raising records; the diversity of floats has been terrific; and bigger IPOs such as Healthscope, Spotless Group Holdings, Asaleo Care and Genworth Mortgage Insurance Australia have delivered for investors.
Professional investors have paid a premium for industrial IPOs with stronger growth prospects. Such floats have greater appeal in a lacklustre economy, and in a market where resource stocks are out of favour and banks have regulatory risk from the Financial System Inquiry,
Below are four IPOs that caught my attention this year. I wrote about two previously for The Bull: Genworth Mortgage Insurance Australia and iSentia Group. Both rallied sharply on listing and are best bought on price weakness over the next few months. Another, Ashley Services Group, makes the list after recent share-price falls.
Often, the best IPO opportunities emerge six to 12 months after listing when the hype subsides. These stocks suit experienced investors comfortable with small and mid-cap IPOs.
1. IPH Ltd
The intellectual property law firm had one of this year’s better ASX debuts. It raised $169 million in an IPO at $2.10 a share and listed in November, quickly rallying to $3.30.
This column has favoured listed legal stocks such as Slater & Gordon, Shine Corporate and IMF Bentham in the past year. Slater & Gordon has a total shareholder return (including dividends) of 30 per cent over one year to December 4. Leading litigation funder IMF Bentham has returned 27 per cent over that period and fast-growing Queensland law firm Shine Corporate has delivered a 58 per cent return. This column identified Shine in early January 2014 for The Bull, describing it as “one of the top-five IPOs from 2013”.
IPH is another high-quality listing. It wholly owns Spruson & Ferguson, a leading intellectual property services firm with operations in 25 countries. The Sydney-based firm was established in 1887, employs about 300, and serves more than 3,000 clients. It’s a fantastic business.
The problem, of course, is valuation. IPH came to market on a forecast FY15 Price/Earnings multiple of 13.9 times – low for a business of its quality. At $3.30, the PE has leapt to 22 times – too rich for my liking given Slater & Gordon, which has much more history as a listed company, is on a forecast PE of 17 times FY 15 earnings, according to consensus analyst forecasts.
If IPH can get back to a similar valuation multiple once some heat comes out of its share price, it would be a worthy addition for long-term investors. Its terrific offshore growth prospects and demand for intellectual property services will surely rise as more Australian companies enter Asia.
Chart 1: IPH
2. Ashley Services Group
The labour-hire firm sought up to $100 million and listed in August at $1.66 a share. After peaking at $1.94, Ashley has retreated to $1.49.
The $224 million company is one of Australia’s largest vocational education and training providers and a leading labour-hire firm in the warehouse and logistics industry. Combining training and labour hire is an important point of differentiation.
This column has been bullish on vocational education providers (too favourable on Vocation, sadly), believing they will continue to grow strongly as universities come under more financial pressure. Ashley has a long history, a good record, and solid growth prospects. It looks a more substantial business than many other vocational education providers.
Ashley forecasts pro forma earnings per share of 13 cents in FY15. At $1.49 share, the implied forward PE is 11.5 times – reasonable for a well-established business in an attractive industry. A 6 per cent implied dividend yield is another attraction.
3. Genworth Mortgage Insurance Australia
Genworth listed on ASX in May 2014 raising $583 million, becoming the financial year’s seventh-largest float by capital raised. Genworth’s $2.65 issued shares opened at $2.91 on debut.
I wrote about Genworth in June for The Bull when it traded at $3.06. The shares peaked at $3.90 before easing to $3.41. Nothing in that investment thesis has changed: the company should benefit from continued strength in the housing market, amid record low interest rates, and reasonable mortgage default levels. Another interest-rate cut next year, possibly two, should keep housing bubbling along.
Genworth’s big risk is sharply higher unemployment leading to more mortgage defaults. It would be an awful stock to own amid a property bust, but low rates, manageable unemployment and a high consumer savings rate bodes well for mortgage insurance and loan default rates.
Chart 3: Genworth
4. iSentia Group
The media-monitoring software company listed on ASX in June 2014 through an IPO, after raising $284 million at $2.04 a share. iSentia now trades at $2.84 and is among the more interesting floats in recent years. This column outlined an investment case for iSentia in late November.
Chart 4: iSentia
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 December 4, 2014.