Newcomers to share market investing during their search for “rules of the road” come across conflicting advice regarding the risk/benefit ratio of investing in companies looking to offer shares to the public. This article will try to illuminate the mystery behind the contradictory views, offering some guidelines for investing in IPOs.
What is an IPO?
Australia is filled with privately held companies, with many at some point in their life cycle making the decision to offer ownership shares in their business to the public for the first time.
Companies make this decision for a variety of reasons, with some making the IPO more attractive to investors depending on their own strategies and goals.
Private companies have existing shareholders, ranging from outside investors to company owners and employees. An IPO provides early investors with an opportunity to sell their shares.
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Other companies go public to raise capital, either to pay off debt or to fund existing operations, increase research and development, or grow the business.
Why Invest in an IPO
Earning a return on their investment is the obvious answer, but why choose a company untested by share market forces instead of the many with existing financial and share price performance history?
The answer lies in the siren song of the opportunity to “get in on the ground floor,” with a chance for finding the explosive growth in the elusive “ten baggers” highlighted by legendary US investor Peter Lynch.
Investors with a high tolerance for risk may opt for the ten-bagger, but there are opportunities for more risk adverse investors with IPO companies already generating revenues and even profits.
Finding Upcoming and Recent ASX IPOs
The ASX website maintains a list of upcoming IPOs. Entering “upcoming ASX floats” into your favorite search engine will lead you not only to the ASX website, but also to financial websites specialising in IPOs and general financial websites covering IPOs of special interest.
The financial websites include recent IPOs, allowing investors considering jumping into the IPO market the opportunity to check the price movements of new ASX entries.
How to Invest in an ASX IPO
Many IPOs restrict that fabled opportunity to get in on the ground floor to institutional and high net worth individuals. Opportunities for ordinary retail investors exist, but they are limited.
Some brokerage houses allow investors to waitlist their interest in a specific IPO and hope the brokerage house will let them buy in to the shares allocated to the house.
Limited opportunities to buy selected IPOs can be found on the website Equity Crowdfunding & IPOs | Invest with Impact – OnMarket.
The most common method for retail investors to get in on an IPO is to buy directly after the IPO begins trading on the ASX.
The ASX website remains the definitive source, with an alphabetical listing with links to information on the upcoming IPOs. Clicking on a prospective IPO leads to basics about the company’s business and a direct link to the company’s website for access to the IPO prospectus.
The Prospectus is a “must read” for interested investors. These documents can contain an overwhelming amount of information, but the critical considerations investors need to understand can be found in these sections common to most IPO prospectuses.
- Investment Overview
- Industry Overview
- Company Overview
- Financial Information
- Risks
- Details of the Offer
Key considerations are often woven into each of the overview sections. What retail investors need to know begins with what does the company do to make money. Along with what is the demand for whatever the company is producing or planning to produce. Next comes does the company have competition.
Investors also need to know:
- Why the company is going public.
- How the funds raised from the IPO will be used.
- What are the plans for future growth?
The first upcoming IPO from the ASX website is medical device company Blinklab Limited.
Incorporated on 17 August of 2021, Blinklab’s proposed listing date Is 4 April, with an online application form available. The issue price is $0.20 per share. The company has an “exclusive worldwide agreement to commercialise the intellectual property developed at Princeton University” in the US, with current offices there and in Australia and the Netherlands.
Blinklab has developed an AI (artificial intelligence) based smartphone app to screen for ASD (autism spectrum disorder) and ADHD (attention deficit hyperactivity disorder) in young children backed by an ePlatform for assessment and diagnosis.
The diagnostic market for ASD is expected to reach $5.4 billion by 2036, growing at a compound annual growth rate (CAGR) of 8% to that point. The ASD treatment market is expected to grow an annual CAGR of 43.4%, reaching $45.9 billion dollars by 2032.
Of the cash remaining after expenses from the planned $7,000,000 capital raise, more than 60% will be directed towards software improvement, research and business development, with the biggest chunk going to necessary clinical studies in the US and Europe for regulatory approval.
The clinical study in the US is expected to start in the second half of 2024 with completion coming in mid-2025.
The neurometric tests performed by the app can also aid in the diagnosis of schizophrenia and other neurodevelopmental conditions.
The Prospectus includes a comparison chart of Blinklab and its medical device competitors. As is the case with non-revenue producing IPOs, funding is Blinklab’s biggest risk.
The company listed on the ASX on 2 April, opening at a share price of $0.301 per share. By 8 April, the share price had dropped to $0.23 per share.
Oil and gas explorer D3 Energy Limited is expected to list on 26 April. The company refers to itself as a “pure play gas and helium explorer.” D3 Energy was incorporated in Western Australia on 7 April of 2021. On 28 October of 2022, the company acquired a majority interest (86.77%) in South Africa’s Motuoane Energy, with an agreement to take 100% ownership by July of 2024.
Exploration permits for the Motuoane Energy holdings – now called the D3 Project – are in place, comprising four target areas adjacent to an existing operational gas field owned by Renergen Limited (ASX: RLT). The company has independent certification of Contingent and Prospective Resources at D3 based on recent exploration work. Gas samples from one of the fields indicated the presence of helium. D3 exploration targets lie within an “energy scarce” area of South Africa.
The IPO issue price is $0.20, with a goal of raising $10,000,000 dollars, with 65% of the funds allocated for exploration and feasibility costs.
Tasmea Limited is the largest IPO on the ASX right now, with a target of $59 million dollars and an issue price of $1.56 per share. The company has been in business since 1999, providing skilled labor services to mining and resource companies, oil, gas, waste and water companies, power and renewable energy companies, and defense and infrastructure companies through eighteen subsidiaries.
The Financial Information section of the Prospectus shows the company increasing both revenue and net profit after tax in each of the last three fiscal years, with an increase forecasted for FY 2024.
Oxford Economics projects that in FY24, Tasmea’s total addressable market will be $21.4 billion dollars, with forecasted CAGR of 1.1% through 2028. Tasmea generates most of its revenue from contractual arrangements with recurring customers.
The company made special arrangements for existing shareholders to sell shares rolled into the offer, with an entity created for the process called SaleCo. Of the $59 million to be raised, $33 million will go to the company while $26 million will go to SaleCo. Of the $33 million, 36.7% will go towards leverage reduction; 15.2% will go towards future growth working capital, and 30.3% will go towards future acquisitions.
Mineral Exploration company Far Northern Resources had a to be announced (TBA) classification on the ASX website. The company had previously announced an IPO in August of 2023, with an expected listing in September. The company website shows the offer as closed with no access to the prospectus and no information about resurrecting the public offer. However, the ASX website now lists 12 April as the listing date.
The company is exploring for gold and copper with three projects – Rocks Reef and Empire in Queensland, and Bridge Creek in the Northern Territory.
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Two other mining explorers withdrew their IPO applications in late March, – Fuse Minerals and Maverick Minerals.
Fuse minerals withdrew on 28 March and as yet there is no indication of the company’s next move. The IPO had already been pushed back twice. Founded in 2021 the company has three prospect areas targeting multiple commodities.
IPOs have minimum requirements causing some companies to withdraw their applications if the minimum is not met. Although the original prospectus remains on the company website, there is no explanation for the withdrawal.
On 1 March Maverick Minerals, already once delayed, issues a Supplementary Prospectus foreshadowing its ultimate withdrawal of its IPO application. An unresolved issue with IILUAs (indigenous land use agreements) casted doubt on the company’s ability to convert the ILUAs into mining licenses. A 5 March article appearing on the IPO Society website claimed the “company has struggled to garner significant interest from retail investors.”
The IPO market is extremely sensitive to “wall of worry” issues in times with challenging macroeconomic conditions. While 2023 was not a good year for ASX IPOs, as 2023 drew to a close, some analysts predicted a rebound in 2024. The paucity of listings on the ASX and the multiple withdrawals suggest the rebound is not to be. Companies thinking of going public are reluctant to do so when the macroeconomic odds are against them.
Initial Public Offerings do present an opportunity to get in on the ground floor, but in most cases that opportunity is restricted to institutional and high net worth investors. Retail investors can apply for access, sometimes directly with the listing company but more often with a brokerage house that has an allotment of shares.
Upcoming floats can be found on the ASX website, and some websites dedicated to the IPO market. Each listing comes with an Investment Prospectus, which is the company’s case for investing. Sections in the prospectus can answer investor questions about what the company does or is planning to do, product demand, competition, financial history, and risks.
