As of 29 January the ASX website shows 20 floats slated for 2016 with five having proposed listing dates in place. Four of the five operate in business sectors that could benefit from long term trends – emerging market demand for quality dairy products; demand for better internet security; renewable energy for residential use; and the demand for natural and organic products.
Given the wild volatility and the massive stampede for the exits in global share markets, why would any sane investor consider taking a chance on an IPO?
Accounting firm HLB Mann Judd recently published its annual study of IPO performance, showing that overall, 2015 IPOs on the ASX gained 10% while the ASX was down for the year by 1%. The study reported that 62% of the 2015 class finished the year above their float price.
Even in the best of times climbing aboard an IPO is not for the casual investor. By casual investor we mean one without the time, temperament, or talent to tackle the difficult task of due diligence. What comprises due diligence?
The strict definition of due diligence as a comprehensive appraisal of a business undertaken by a prospective buyer, especially to establish its assets and liabilities and evaluate its commercial potential, seems to be beyond the capabilities of most retail investors. However, the simpler definition of due diligence as research and analysis of a company or organization done in preparation for a business transaction represents a realistic endeavor. In the case of IPO offerings this means reading the IPO Prospectus issued by the listing company.
Considering the size of some of these documents it is reasonable for retail investors to follow some guidelines for evaluating an offering without having to pore over each and every word in the document.
Here are a few:
– How does the company generate revenue?
– What is the market potential for the company’s products or services?
– How will the company use the money generate from the IPO?
– How will the company grow in the future?
– Why is the company going public?
– Who owns the company and what is their stake in the company’s future?
The failure of the Myers IPO and the recent collapse of Dick Smith suggest the most important considerations for evaluating an IPO are the last two. Both these companies were owned by Private Equity firms who took them public to make a profit, not from the future of the company, but from selling out at a price above the issue price. In short, if the present owners of a company have little or no financial interest in the medium to long term future of the company, the other considerations may prove irrelevant.
With that in mind, let’s look at the five upcoming offerings.
Cybercrime is expanding at an alarming rate, even as the Internet usage grows exponentially. Tesserent Limited has a proprietary Managed Security Software Providers (MSSP) platform it sells in 11 countries around the world with 190 customers large and small. The company has been in business for ten years and according to the Prospectus it has grown revenue in each of the last three years and has reported a profit in each of the last three years as well.
The offering closed oversubscribed, indicating positive market sentiment. Of the $7 million raised, $3.3 million will go towards expansion and research and development, with $1.5 million going towards working capital; $1.3 million to reduce debt; and $800k to cover the costs of the offering.
The majority owners are Australia-based Investment firms who will maintain majority status following the IPO. Their shares will be locked in escrow for 24 months before they can be sold. That sounds generous compared to the Myers and Dick Smith offerings, but some experts feel investors here will be looking for escrow periods to be raised to three to five years. However, the oversubscription seems to indicate investors are comfortable with the escrow period.
Skin Elements Limited is currently a niche player, preparing to offer organic sunscreen products through the award winning Soleo brand as well as through the Elizabeth Jane Natural Cosmetics (EJNC) line. The Soleo products are in the final stage of market testing with the proceeds of the IPO to be used for a market launch as well as the continued development of the EJNC cosmetics line.
Consumers are increasingly looking for organic and natural products of all sorts to replace chemically compounded offerings. The company’s business model calls for wholesaling what it makes, an online presence, and social media marketing. The offering includes a Public offering as well as an offer to existing company shareholders. Current ownership is unclear at best, with no information about the five listed private firms readily available. However, the developer of the technology used to create the Soleo line is a member of the current management team and will remain following the offering.
With the exception of $520,000 to go towards the cost of the offer, all the expected funds to be raised will go towards sales and marketing, production, research and development, and working capital.
Funding growth is a solid reason for going public but this company’s murky ownership structure and the fact holding shares in escrow is to be voluntary makes an already speculative investment look even more questionable.
However, another recent ASX IPO stands as potential evidence of the lure of better skincare products. BWX Limited (BWX) makes skin care, hair, and body products with five brands in the market. In the body products line the ingredients used in formulation include things like coffee and sea kelp. The skin care and hair products also feature natural and organic oils and herbs.
BWX debuted on the ASX in November of 2015 with an opening day closing price of $2.26. Here is how the stock has performed since.
Trac Group Holdings designs, manufactures, and distributes innovative roofing solutions. The companies interlocking roofing tiles can add solar mounted roofing panels designed to integrate with the tiles and generate electricity for both heating and hot water. The company’s Tractile™ Roofing System is patented and awaiting the IPO funds to launch the system first in Australia and then internationally. Development expenses have left the company with losses in excess of $3 million as of June 2015. Trac Group claims to have a total of three patents filed or granted in “multiple” countries.
In the past year the company has begun sales and installation of roofing systems on a limited basis. Trac Group expects a maximum subscription of $6.5 million, with all but $755k to pay for the offer going towards launch activities. In addition, the company states future profits will be invested in growing the business.
The Tractile™ System gives the company significant competitive advantages, including resistance to weather damage, ease of installation, integration with solar energy, and the company’s multiple technology awards.
N1 Holdings started as a traditional mortgage broker and expanded to include car and commercial loans and personal insurance and investment with online comparisons as well as offline locations. Some experts predict a rough year for the property market but N1 Holdings has something else going for it that makes it an IPO to consider. The company has specialized in working with immigrants and foreign investors. On 15 March 2015 the company launched the first mortgage comparison website in Mandarin. The site is meant for Chinese investors living in Australia and offers comparison of mortgage products from more than 30 lenders, including the Big Four Banks.
The Prospectus notes that although the company has seen continued revenue growth since FY 2011 N1 Holdings posted a loss of $37k in FY 2015. Funds from the offer will go towards growth initiatives, including potential acquisitions.
The final offering is China-based China Dairy Company, seeking to raise the highest amount of any IPO in the table – $20 million. Despite the growing demand for milk in China, investors have as yet to flock to the offer, causing the company to extend the closing date since the minimum capital raise requirements for ASX listing had not been met.
China Dairy is one of the largest operators in China. According to the company’s CEO China Dairy is one of the fastest growing dairy operations and reportedly enjoys favored status with the country’s Ministry of Agriculture, making it one of the best.
What may be troubling investors is the 2008 milk and infant formula scandal in China. It seems some milk producers were watering down the milk and then adding melamine, a chemical used in the production of plastic, to boost the measured protein content. Powdered milk products from this spiked milk found their way into infant formula, leading to the deaths of at least six children. Chinese consumers lost confidence in their own providers and those who could afford it switched en masse to Australian and New Zealand imports.
China Dairy hopes to partner with or acquire an Australian dairy processing operation for technical assistance as well as to add dairy products like cheese and yogurt produced in Australia to its product line.
Although Aussie investors appear skeptical regarding the claim China Dairy was not tainted by the 2008 scandal, the company has seen both revenue and profit increase in each of the last three years.
The final issue that may be souring the appetite for this company’s offering is the wildly convoluted ownership path. The China Dairy Prospectus states that China Modern Agricultural Information Inc. (CMCI), listed in the US on the OTC, is the majority shareholder through that company’s subsidiary, Hope Diary Holdings Ltd. with a 60% interest.
On 13 October CMCI filed its annual financial report, listing the history of who acquired who back to 2005. The players include a company incorporated in the British Virgin Islands called Value Holdings, Jiasheng Consulting in China, Zhongxian Information (the company that morphed into China Dairy), and finally, Hope Diary Holdings. In order to enable the China Diary ASX listing, CMCI was restructured, resulting in a $50 million dollar transaction loss reported on 23 November, which sent the share price spiraling downward.
It is unclear what is left of CMCI but Aussie investors researching China Dairy surely looked at the price action of the once upon a time parent company. Complex ownership structures are not unique to China Dairy, but in the absence of clarity it can appear that the drop in the CMCI share price is a reflection of operations of China Dairy. However, considering the size of the Chinese market, China Dairy bears watching, with an acquisition or partnership arrangement with an Australian dairy processor a likely positive catalyst.