16min read
PREVIOUS ARTICLE Heed Fraser's warning on Austr... NEXT ARTICLE South32, the biggest demerger ...

Initial Public Offerings (IPOs) have long been seen by retail investors as a kind of holy grail in share markets, providing the opportunity to get in on the ground floor of what could be the next big thing.

The hype surrounding highly touted IPOs can be overwhelming, however. Investors looking for a quick buck may jump in without doing their research. Shocked investors sometimes watch in dismay as their “ground floor” investment sinks into the sub-basement.

To date, such has been the case with a true market darling of the past few years, Freelancer.com (FLN).  The trend towards hiring outside help to perform tasks formerly done in-house is not new, and as the self-styled world’s largest provider of freelancing, outsourcing, and crowdsourcing, the company seemed to many to be a sure thing.  

The IPO price was a mere $0.50 and the stock shot up as high as $2.60 in its first day of trading, falling to $1.60 at the close. The all-time high for the share price remains at $2.60. It currently trades at $0.92.

Freelancer remains attractive as evidenced by a recent research note from Canaccord Genuity reiterating a Buy rating on FLN with a price target of $1.46.  Freelancer is not the only “hot” IPO to turn cold in the short run, however, but apparently that did not dampen investor enthusiasm for IPO’s.  FLN went public in November 2013.  A recent report from Deloitte Australia entitled Surf’s up: 2015 IPO Report, pointed out that the total value of capital raised in 2014 initial public offerings topped the dollar amount raised for the prior three years combined.  In addition, the report stated the average 2014 year-end IPO return was 17%, crushing the year end return of 1.1% for the S&P/ASX 200.  The Deloitte Report remains bullish on IPO prospects in 2015, especially growth stocks in technology and finance.

So how can you guard against investing in a stock that rises strongly on listing day only to retreat thereafter?

In truth, investing in an IPO is similar to investing in any stock – you pay your money and you take your chances.  One strategy for tipping the odds in your favor is to look for stocks that could benefit from long term trends.

In the case of Freelancer, outsourcing as a trend is comparatively mature, having been around since the early 1990’s.  Here are some other key long terms of more recent vintage:

•    Ageing populations living longer

•    Expansion of mobile communications technology

•    Emerging market demand for better food

The baby boomer retirement wave is just beginning and living to 100 years old is no longer a newsworthy feat.  It is hard to imagine a world without smartphones, yet the revolutionary iPhone burst on the world stage about eight years ago.  While the trend toward better, healthier food is global in scope, the most explosive growth will come from emerging middle class populations in countries like India and China.

It is a rare occurrence for four companies to go public on the ASX on the same day.  Rarer still is to see all four with operations poised to benefit from long term trends.  Here are the companies, debuting on 31 March, 2015.

•    A2 Milk Company Limited (A2M)

•    Touchcorp Limited (TCH)

•    Genetic Signatures Limited (GSS)

•    OtherLevels Holdings Limited (OLV)

Considering the fact these stocks have been trading less than a month, numbers seem somewhat pointless.  However, let’s take a look at the issue price of each and the trading history to date.  Here is the table.

Company

(CODE)

Market Cap

Issue Price

1st Day Trading (31 March)

Opening Price

1st Day Trading

(31 March)

Closing Price

10 April Share Price

(Intraday)

The A2 Milk Company

(A2M)

$339m

(Dual Listed on NZE)

$0.56

$0.56

$0.54

Touchcorp Limited

(TCH)

$198m

$1.40

$1.60

$1.55

$1.73

Genetic Signatures Limited

(GSS)

$31m

$0.40

$0.48

$0.49

$0.46

Otherlevels Holdings Limited

 (OLV)

$18m

$0.20

$0.28

$0.23

$0.20

 

Strictly speaking, The a2Milk Company (A2M) is not an initial public offering as it trades on the New Zealand Stock Exchange.  The company does substantial business in Australia and it has an important characteristic not found in all IPO’s – it was making money prior to listing on the ASX.  The company was formed in 2000 when its founder discovered a way to make healthier milk, trademarked as a2Milk, free of the A1 protein found in regular milk.

The a2Milk Company has not been consistently profitable, suffering from unfavorable currency exchange rates and investments in business expansion.  A2M now has about 9% market share in Australia; is operating in the UK and is ready to launch its healthier milk in natural food stores in the US state of California.  In addition, the company’s infant formula products are now being sold in China and began exporting liquid milk there in mid-2014.

The company’s products are premium priced.  While demand for better food may be highest in emerging market countries, one could easily add a long term trend of global craving for healthier foods of all kinds in developed countries as well.  The state of California has long been known for a fondness for all things natural and healthy, which bodes well for the future of A2M in the US.

Touchcorp Limited (TCH) built and holds the property rights to a software platform called the Touch System.  It has multiple applications through multiple channels.  The company operates in three sectors – Retail, Health and Government, and Mobility.  The platform allows electronic delivery of non-physical products, with access points from mobile devices, internet via laptops and desktops, and in store or in office terminals.

Non-Physical products range from entertainment tickets, calling cards, smartphone recharges, iTunes, gaming cards, and even fishing licenses.  Purchase and payment is available through in-store devices as well as personal mobile devices.  

The Health and Government system enables filing, processing, and payment of health claims via point of service terminals or practice management systems at the provider location.  Touchcorp generates recurring revenue through transaction fees and integration fees for businesses and agencies starting out with the Touch System.  The System has multiple modules customers can add, for another integration fee.

You can find the company’s IPO prospectus in the ASX News section in the Data Centre here on thebull.com.  Checking this company’ impressive pre-IPO performance, you will find Touchcorp has grown both revenue and profit by more than 10% in each year for the last three.  The 2015 Forecast calls for more than 15% increases in revenue and profit.  

The company’s customer base is impressive, with its three largest customers in Australia being 7-Eleven and Optus, and Valora Schweiz in Europe.  Management points out in the Risk Section of the Prospectus, there is a downside should the company lose one of those key customers.  Although the Prospectus contains no specific information, company management did state Touchcorp is looking to begin offering its services in the US market.  

The other tech company debuting was OtherLevels Holdings Limited (OLV), a developer of mobile marketing platforms for businesses.  Client companies use the cloud-based platform to communicate instantly with customers and potential customers via emails, texts, and alerts directly to a mobile device.  Companies can tailor communications and track consumer behavior to test effective marketing strategies.  

Otherlevels is in its infancy as a company, starting up in 2012.  The company has its headquarters in the US, with additional offices in Brisbane and London.  Although yet to show a profit, Otherlevels did increase revenue by more than 100% in the second half of 2014.  Currently the company’s clients are in mobile gaming and wagering, and membership and loyalty programs.  

The far-reaching potential applications for the Otherlevels platform are enticing, but a review of the Risks Section of the Prospectus is a must for any potential investor.  This is a speculative stock with very high risks, ranging from hacking to low barriers to entry.  Automated mobile content marketing is “hot”, with Otherlevels Management citing 20 current competitors already in the marketplace.  If you believe in following the smart money, Shark Tank Australia’s Steve Baxter is an investor and a Non-Executive Director of Otherlevels.

The final stock is provider of healthcare diagnostic testing services, Genetic Signatures Limited (GSS).  This is a high-tech biotechnology company whose offerings can be difficult for the average investor to fully understand.  In short, the company markets a variety of tests for diagnosing the presence of infectious viruses or bacteria (pathogens.)  The diagnostic tests are marketed directly to hospitals and pathology labs under the trademarked EasyScreen brand.  The tests are grounded in the company’s proprietary 3Base™technology, a molecular diagnostic technique using DNA and RNA sequences.

This sounds exciting and many investors may be intrigued by the phenomenal success of another healthcare IPO in the diagnostic sector, Healthscope Limited (HSO).  Here is a price performance chart for HSO since it began trading on the ASX.

While Healthscope does provide pathology testing internationally and here in Australia, the company also operates private hospitals and medical centres.  The starkest comparison, however, can be found in the financial performance of each company.

Healthscope recently released its Half Year 2015 Results, showing a 6% revenue increase compared to the first Half of 2014.  Net profit swung from a loss of $27 million to a gain of $58 million.  

For GSS we must turn to the Financial Section of the Prospectus.  There you will learn this company more than doubled its revenue between FY 2013 and FY 2014 – from $259 thousand to $684 thousand and yet posted a loss of $1.7 million.    

The company began selling here in 2010 and has begun the process of distributing its products both in the EU (2013) and the US (2014).  The technology allows for quick results turnaround and has been in use in five large Australian hospitals and other pathology laboratories for the past four years.  

Genetic Systems may bear watching, considering the reported advantages of its technology and its success here.  However, given its financial performance and the lack of any 2015 guidance in its Prospectus, it may be wise to Wait and See progress in the EU and the US. 

>> BACK TO THE NEWSLETTER: Click here to read other articles from this week’s newsletter

 

 

Please note that TheBull.com.au simply publishes broker recommendations on this page. The publication of these recommendations does not in any way constitute a recommendation on the part of TheBull.com.au. You should seek professional advice before making any investment decisions.