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Deloitte Australia released its mid-year 2015 review of IPO performance on 4 September with some surprising findings.  Although there are more IPO’s that came on the ASX compared to the 1st Half of 2014 (30 versus 22), they raised less money ($2.5 billion versus $4.6 billion) but still outperformed the ASX 200 XJO Index.  The report highlighted 21 floats with market caps greater than $75 million that have returned an average 7.2% share price increase as of 21 August, compared to a 4.1% drop for the XJO. 

When you include the smaller IPO’s the performance is even more surprising, with this year’s 1st Half Class returning 19.1% compared to 7.3% last year.  Clearly new listings are attracting investors despite the dismal trading environment.  The following graph lists the percentage increase or decrease of the 21 largest IPO’s. 

Most of these shares have dropped in price in the recent downturn, perhaps making them more attractive at this point.  However, given the extreme uncertainty in global economic growth today and the extreme uncertainty in equity markets, it seems to make sense to cull the list to look for prospects in attractive sectors.

For example, investing in a technology stock with some promise seems a better bet than investing in mortgage related stocks like Pepper Group Limited (PEP) and Australian Finance Group (AFG); or specialty retailers like XPD Soccer Group (XPD) or home furnishing operator Adairs (ADH).  Agriculture, telecommunications, and senior residential property also seem less risky plays.  So we narrowed the list to include new floats from those sectors.  The following table presents the eight candidates along with the IPO issue price, opening day trading price, current share price, and percentage increase to date from the issue price and from the opening day trading price.  Here is the table.

Company

(CODE)

Sector

Issue Price

Opening Day Trading Price

Current Share Price

% Increase from Issue Price

% Increase from Opening Price

Superloop

(SLC)

Telco

$1.00

$2.00

$2.10

+110

+5%

Future Fibre Technologies

(FFT)

Technology

(Hardware)

$0.70

$0.90

$0.95

+36%

+6%

Mitula Group

(MUA)

Technology

(Internet Information Provider)

$0.75

$0.85

$0.92

+23%

+8.2%

Touchcorp

(TCH)

Technology

(Software)

$1.40

$1.60

$1.73

+24%

+8%

Amaysim Australia

(AYS)

Technology

(Wireless)

$1.80

$1.75

$2.22

+23%

+27%

Gateway

(GTY)

Real Estate

(Senior Living)

$2.00

$2.10

$2.33

+17%

+11%

Costa Group

(CGC)

Agriculture

(Fruits & Vegetables)

$2.25

$2.24

$2.08

-7.5%

-7%

MG Unit Trust

(MGC)

Agriculture

(Dairy)

$2.10

$2.18

$1.98

-6%

-9%

 

Newcomers to retail investing can be misled by the impressive returns on some IPO’s touted in the financial press.  The problem with those returns is they use the issue price as the baseline and it is rare for retail investors to get into an IPO at the issue price.  The first real buying opportunity is the opening price on the first day of trading.  We feel strongly it is more accurate to consider the percentage gain or loss from the first day of trading rather than the issue price.  Consider that institutions and high net worth investors able to purchase shares of SLC at the issue price saw a 100% increase in their investment at the opening bell of trading!

With the exception of the two agriculture stocks, MG Unit Trust (MGC) and Costa Group Holdings (CGC) all these companies have seen their share price remain above both the issue price and the opening day trading price.  The hottest stocks going into the correction that began around 19 August were Superloop Limited (SLC) and Future Fibres Technologies (FFT).  Both have dropped close to 15% over the past month.  Here is a one month price movement chart.

While there is no denying the growth potential of fibre optic connectivity in the telecommunications space, the field is crowded enough to make an outside observer wonder why the excitement over newcomer Superloop.  If quality of management is on the top of your “must have” list for investment prospects, few companies have a leader with the pedigree of Bevin Slattery at Superloop.  He co-founded Pipe Networks, acquired by TPG Telecomm (TPM) in a deal that launched that company into the top tier, and also founded data storage company NextDC (NDC). 

The company has existing networks in Melbourne, Sydney, and Brisbane as well as in Singapore.  In addition, Superloop operates data centres in its markets to provide cloud based services to its customers, primarily businesses and other network providers, who rent space and capacity from SLC.   The company has exclusive rights of use to a 120 kilometre fibre optic network in Australia and a 130 kilometre underground network in Singapore.  Superloop is going after the Asia-Pacific market and recently announced its entry into the Hong Kong market.  Although competition seems like a major risk for SLC investors, the company has a tight business model with recurring revenue streams from large scale customers in primarily urban markets.

Finally, unlike some IPO’s where the prior owners exit company operations, Bevin Slattery still holds close to 67% of SLC’s shares.

Future Fibre Technologies (FFT) is a high tech security company, using fibre optics to provide perimeter protection systems against intrusion.  FFT systems protect oil and gas pipelines, data communication cables, and infrastructure assets of any kind contained within a perimeter.  The company already operates in 55 countries and claims it has 4% market share of the world’s PIDS (perimeter intrusion detection systems.)  Security in the modern world is becoming an increasing concern as witnessed by the rise in terrorist threats to infrastructure assets and the rise in information hacking, which includes directly accessing data cables.  Industrial, military and government organisations everywhere are looking to protect themselves from these threats.  Security consciousness is a trend likely to continue long into the future.  Since listing on the ASX on 11 May the company has announced two new major contracts; one for an LNG facility here in Queensland and another for oil pipelines in Mexico.

Google revolutionised the search engine and now there is growing evidence of a potentially seismic shift in internet search – the vertical search engine.  Google, Yahoo, and Bing are general search, or “core” engines that return a broad array of websites matching the query of the searcher.  The traditional search process had searchers moving to more specific searches from the general results found on a core site.

Within the last several years vertical or specialty sites focusing on single topic areas have popped up.  Data analytics firm comScore Inc. reported that for 2013 core searches declined by 3% while vertical searches rose 8%.  This is a trend that is almost certain to continue.  Google itself reported back in 2013 that internet web addresses had ballooned from 1 trillion to 30 trillion. 

Mitula Group (MUA) is a Spanish based provider of vertical search engines, with 50 websites spanning 38 countries available in 14 different languages.  The sites let searchers access listings from multiple segments including real estate, automotive, employment, and holiday rentals in select countries.   Revenue is generated from Cost per Clicks (CPC), where Mitula is paid each time a searcher clicks on one of the advertised sites returned by the search engine, and when a searcher clicks on a Google AdSense ad featured on a Mitula site.

If you are wondering why a company based in Spain chose to go public in Australia the answer is the CEO, Simon Baker, who was a driving force in the rise of REA Group (REA) before being sacked in 2008. Mitula began operating in 2009 and has been profitable ever since.  The company is planning an aggressive acquisition strategy as well as pursuing organic growth through its branded sites, Mitula and the recently acquired Nestorian. 

Touchcorp Limited (TCH) built and holds the property rights to a software platform called the Touch System that allows Touchcorp’s customer base to connect with their customers to provide a variety of products and services.  Products are non-physical, such as calling cards, entertainment tickets, phone recharges, calling and gaming cards, and iTunes.  Access and payment can be done from mobile devices or at in-store kiosks. 

The IPO was highly touted, with the founder brother duo retaining control of the company, erasing the question of vested interest of the prior owners.  On 27 August the company announced its first Half Year results as a public company.  Revenue was up 69% and net profit after tax (NPAT) rose 10%, excluding the cost of capital raising.  The share price had been dropping with the mid-August downturn but rallied a bit on the results release, before continuing a downward slide.  Here is a one month chart for TCH, compared to the only stock in the table to stay positive in the last month – wireless operator Amaysim Australia Limited (AYS).

There is an interesting twist to the Amaysim story as an article appearing in the Sydney Morning Herald back on 15 June reported that “key fund managers” were doubting the company was worth the $400 million dollar valuation claimed by its owners – private equity funds and entrepreneurial founders.  There were other concerns as well, including the size of the float – 75% of company shares – including 50% of the share of the company’s founders with the remaining interest “locked up” to ensure the vaunted “skin in the game” absent from many IPO’s. 

Amaysim is strictly a mobile wireless provider, using the Optus network for the low-cost voice and data no-contract plans it offers its customers.  In addition, the article goes on to say some fund managers are voicing concern about the big players like Telstra, Vodaphone Hutchinson, and even Optus moving to offer competitively priced bundles. 

So much for fund manager concerns as the company’s current market cap stands at $397 million, and the share price continues to rise.   Here is a price movement chart for AYS since it began trading on the ASX.

Gateway Lifestyle Group (GTY) offers affordable living communities to people over the age of 55.  Residents purchase the home, a Manufactured Home Estate (MHE), but rent the land on which it sits, making Gateway homes a more cost-effective living option.  The company website lists 6,000 current residents in 40 lifestyle communities.  Lifestyle also owns and operates 31 holiday parks for all ages along the eastern seaboard. 

Stocks that benefit from long term trends are a favorite of many investors and the aging population qualifies as a trend with a long way to run.  After a streaking start out of the gate, the share price cooled as the 19 August correction/collapse/downturn crushed markets everywhere.  Then Gateway reported its Full Year 2015 Results and handily beat most of the financial metrics set out in the PDS (Product Disclosure Statement) portion of its IPO Prospectus.  In addition, the company reaffirmed its guidance for FY 2016.  Gateway has an analyst consensus Buy rating.

The only other stock in our table with a consensus Buy rating is fruit and vegetable provider Costa Group Holdings (CGC).  The company grows, packages, and sells a variety of fruits and vegetables in Australia and exports to North America, Europe, and Asia.  Costa maintains partnerships with other growers to complement the offerings from company farms.  In addition, the company provides logistics and supply chain management assistance to companies with their own distribution centres.

Given the fact another long term trend being touted by analysts and experts alike is the demand for higher quality foods from middle class growth in emerging countries; it is somewhat surprising that Costa and the only other agricultural stock in the table – MG Unit Trust (MGC) – have seen lackluster share price performance.  Here is a price movement chart comparing the two since they debuted on the ASX.

Costa got a bump from its recently released financials, which beat IPO forecasts across the board.  MGC reported Full Year Results on 31 August, showing decreases in both revenue and profit.  Given the purported demand increase for quality dairy and produce in China, both companies may be suffering from the concerns over China’s economic slowdown.  MGC has another issue, which is the structure of the company and its IPO.

The underlying company is Devondale Murray Goulburn, a co-operative of Australian dairy farmers who collectively are our largest provider of dairy products.  As a co-op, the farmers own shares.  The IPO issued units in a trust without the benefits of stock ownership, such as voting rights.  However, unit trust owners do share in the profits and the capital raised from the IPO is earmarked for expansion of the company’s farms and infrastructure, as well as to drive international growth. 

MGC may have gotten off to a rocky start but the company’s plans to increase their cheese and other non-milk dairy products should spark memories of the bidding war for Warrnambool Cheese and Butter (WCB).  Food and agribusiness specialist bank, Rabobank, issued a report entitled Magnetic milk – the lure of dairy investment down under back on 2 March. 

The bank’s senior dairy analyst had this to say:

•    Between 2014 and 2020 we expect China and South East Asia combined to account for almost one third of the increase in global dairy imports … Australia must grow its milk pool to fully capitalise on the trade opportunity across Asia.

The following chart makes a strong case for at least placing MGC on a watch list.

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