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The father of value investing, Benjamin Graham, advised against investing in IPOs. His advice was based on his belief that the initial investment in an IPO left little or no opportunity for buying a stock at a discounted price; the cornerstone of value investing.   Companies choose to go public for a variety of reasons, chief among them raising capital to grow the business or the opportunity for company founders to cash in on their efforts.  These reasons virtually guarantee the initial pricing will look for maximum cash generation.  Graham argues that overpriced IPO market entrants are more susceptible to wild price swings at the slightest sign of weakness in the business.  As a result, in Graham’s view investors impressed with the potential of an IPO stock would be better off waiting to get a discounted entry point. 
Ignoring such advice is not surprising when you consider IPO performance against the broader market.  In calendar year 2017 IPO stocks outperformed the ASX 200 by 54%, an improvement over the 2016 outperformance at 25%. Small and micro-cap IPO’s outperformed larger IPOs, according to the website stockhead.com.au.

The rate of return trumpeted in charts like the above and the outperformance statistics found on many websites can present a distorted picture.  The baseline measure is the IPO offering price, in the clear majority cases lower than the market price on the first day of trading.  Historically, few retail investors had the opportunity to truly “get in on the ground floor” at the issue price.  For these investors the rate of return would likely be lower than the dramatic gains touted on financial websites.
Since 2013 retail investors have had that coveted “ground floor opportunity” via a new online platform created by OnMarket Bookbuilds.  With its digital bidding platform and mobile app, it offers companies going public the opportunity to expand their reach beyond the traditional sources of institutional and high net worth investors to include retail investors.
Although OnMarket does not offer all upcoming ASX floats, it provides retail investors another significant advantage for the IPOs available on its platform – readily available research.  While market experts without exception state no one should invest in an IPO without reading the prospectus, how many retail investors have the time and temperament to plod through documents often 100 pages or more in length?
With each IPO on the site OnMarket includes a succinct review of the major points of the offer.  If you have searched the Internet for advice on what to look for in an IPO prospectus, you probably have found lists of questions like these:
1. What does the company do to make money/What will the company do to make money?
2. How many customers need what the company provides?
3. What other companies provide the same or comparable products or services?
4. Why is the company choosing to go public?
5. How will the funds raised from the IPO be used?
6. Who stands to benefit from the IPO?
7. How will the company grow in the future?
8. What could go wrong?
Although not a substitute for a more thorough reading of the actual Prospectus, the OnMarket site covers many of these questions with a helpful shorthand review for each of its offerings, as well as general guidebooks for retail investors considering an IPO investment.
Checking the current list of upcoming IPOs available on asx.com.au shows a majority are mining stocks.  Despite the solid performance of some miners’ year to date (BHP is up 14% while Rio Tinto is up 6%), recent history suggests many retail investors are attracted to companies operating in “hot” sectors or companies with innovative technologies.
One IPO currently open on the OnMarket site – 1414 Degrees Limited (14D) – certainly qualifies, with its innovative energy storage technology.  Bloomberg New Energy Finance (BNEF) released a report in November of 2017 with the expectation the global market for energy storage will attract $103 billion in capital investment through 2030, with capacity “doubling six times” over that period. The following chart shows the expansion in Gigawatt hours (GWh) by country.

The company’s name reflects the melting degree of silicon, with molten silicon being the key ingredient in its TESS (Thermal Energy Storage Systems).  The system stores electricity from generating sources (renewables or the traditional electrical grid) as heat in molten silicon enclosed in insulated containers for later retrieval for both electrical and heating usage.
As much as the technology might set the hearts of investors palpitating, 1414 Degrees exemplifies one of the often-underestimated risks in IPO investing – revenue and profit generation.  Some IPOs have a history of revenue and in some cases profit.  Others are in various stages of the business life-cycle.
1414 Degrees is in the very early stages of development, with only a “commercial demonstrator” in place, along with designs for four TESS systems to meet a variety of needs, from large scale energy generation demand to smaller scale applications including residential and small business heat and electricity needs.  For waste management plants 1414 Degrees has a design of a TESS-Gas device to capture and store biogas for later release as electricity. 
Despite the potential of TESS and a multitude of financial websites covering the announcement of the upcoming IPO as well as expressed interest from a variety of potential customers based on its working prototype, 1414 Degrees failed to meet the minimum subscription amounts the company set out in its initial IPO Prospectus.  Two supplementary prospectuses have been issued, with the first pushing back the closing date for the offer and the second lowering the minimum subscription funding amount to be raised.  The initial target date for listing of 2 July has been pushed back to the end of August.  Minimum funding required was lowered from $30 million to $12.5 million.

In the latest prospectus release the company revised its operational plans for moving from prototype to commercial testing, as follows:
“The conceptual design of the TESS-GRID and its 1/15th scale test cell will commence following the close of the Offer. Assessment of commercial sites for construction of the 200MWh TESS-GRID device will continue. If the Company achieves the Maximum Subscription as a result of the Offer, the Company will proceed to finalise the designs, build and test the 1/15th scale test cell before proceeding with construction of a 200MWh TESS-GRID device (noting that the Company will require further funding for the construction phase of the 200MWh TESS-GRID device). The Company’s business plan contemplates commercialisation of the TESS-GRID within three years of the Offer.”
Calix International (CLX) is expected to list on the ASX on 20 July.  The company has an innovative calcination process with impressive applications, including waste water treatment and phosphate removal, improving food production from aquaculture and agriculture, and CO2 capture.
The company’s somewhat mystical technology begins in a patented kiln, dubbed the Calix Flash Calciner or CFC, where ground magnesium and other minerals are first flash heated and then snap frozen to produce a porous mineral structure resembling a honeycomb.  
Calcination is essentially a purification process, resulting in the honeycomb material then used for further purification.  Calix’ claims its proprietary mineral honeycomb magnesium oxide is a “novel, nano-active material” that is already demonstrating “remarkable results in sewer and waste water, biogas, and aquaculture applications.”
While the technology involved may be too complex for a layperson to understand, its applications are not. The company already has four products in use. 
ACTI-Mag™ reduces odor in waste water management applications and improves efficiencies in biogas production and phosphate removal.
PROTECTA-Mag™ can coat concrete sewer linings without the need to shut down the sewer.
AQUA-CAL™ is a water conditioner that improves aquaculture yield production while reducing disease and pollution.  The company has distribution networks in place for these three products.
BOOSTER-Mag™ is a foliar fertiliser for improving yield while controlling diseases and pests. 
The Calix International IPO Prospectus includes an estimate from Sydney based global research and consulting firm Frost & Sullivan that the addressable global market opportunity is approximately A$62 billion for Calix’s commercialised product portfolio, approximately A$11 billion for the pre-commercial products, and in excess of A$20 billion for its advanced R&D projects.
The company is generating revenue, with revenue CAGR (compound annual growth rate) for its core products of 41.8% between 2015 and 2017. For the Half Year 2017 the company’s revenue growth was 34.2%.  While gross profit has more than doubled between FY 2015 and FY 2017, operating expenses have kept the company from posting its first profit.
In contrast to 1414 Degrees, Calix is a company with products generating revenue in the market along with a substantial pipeline of new possibilities based on its technology, including novel medicines, batteries, and 3D printing materials.  While 1414 Degrees has attractive growth possibilities with the potential to reward investors handsomely, it lags behind Calix in the business life cycle, still in the development phase while Calix is beyond the product launch phase.
Calix is looking to raise $8 million for operational improvements as well as new market and product pipeline development.

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