12min read
PREVIOUS ARTICLE Investor Signposts: Week Begin... NEXT ARTICLE The Biggest Issues On The Mind...

On 30 January of 2015 a hi-tech data collection and analysis company developing artificial intelligence and machine learning applications listed on the ASX through an initial public offering (IPO). The company was Appen Limited (APX). The opening trading price for APX was $0.50, closing at $0.56. In less than five years the stock price is up more than 4,000%. From yahoo finance Australia:

Some serious investors question their investing compatriots who fail to heed the advice of many market commentators, experts, and analysts to stay away from IPOs. In a classic example validating the bromide that a picture is worth a thousand words, one look at the Appen price chart says all that needs to be said in defense of retail investors willing and eager to take a chance on an IPO. The lure of searching for the next Appen is ever-present.

Some of the best stocks on the ASX such as CSL and Cochlear began as IPOs and have rewarded investors handsomely. However, any investor who spends significant time following the markets would be hard pressed not to come across the battered and bloodied companies whose IPO hype failed to deliver.

Business Insider Australia generally features a Top Ten IPO list at the end of each year. Here is their list for 2016.

Of the ten, only two fell below their issue price and have continued down and down some more, all the way to early June of 2019. However, only three have gained over their first day of trading. The rest started hot and failed; some quickly and some over time.

The best performer of 2016, Aurora Labs (A3D) remained red hot into 2017 before collapsing, with the second-best performer CFOAM Limited (CFO) and third place finisher Abundant Produce (ABT) turning cold quickly and getting colder and colder.

There is an abundance of advice on how to invest in IPOs, with the vast majority including warnings that perhaps it might be best to stay away. Yet the frequency with which “how to” articles on navigating the IPO market appear suggest the authors are well-aware of the seductive lure of bagging the latest Appen Limited.

Back in 2004 a study on IPO investing recommended investors stick with companies generating a minimum of $50 million in revenues in the 12 months preceding entry into the stock market. A New York Times article by financial analyst and publisher of an investing newsletter — Marc Hulbert — reinforced the study with its title – If the Revenue Column Says Zero, Avoid the I.P.O.

Appen generated $53.6 million in revenue and $4 million in net profit in FY 2014. The follow the revenue advice is not cited often these days and much of what is cited is ignored in favor of investors following their own preferred investing approaches and strategies. Investors preferring the “hot sector” approach might have been attracted to healthcare or information technology.

Neither of the two healthcare stocks of that year – Neurotech International (NTI) and Noxopharm Limited (NOX) – listed with a history of revenue behind them, yet Noxopharm has performed well.

The other two IPOs of 2016 that performed well include one of the market’s current darlings – AfterPay Holdings (APT) – which along with fellow IT entry Wisetech Global (WTC) have rewarded those willing to take the risk handsomely.

While common sense suggests sticking with revenue generating prospects reduces IPO risk, it is, like all stock market strategies, not a guarantee. AfterPay did not meet the $50 million in revenue criterion prior to listing but did begin increasing revenue quickly following introduction of its software app, while Wisetech Global had revenues of $79.6 million and a net profit of $10.4 million.

Although not foolproof, revenue is still a reasonable standard since it tells investors there are customers willing to buy whatever it is the IPO company has been selling.

Current investors have a decided advantage over their counterparts a decade ago. OnMarket Bookbuilds has opened the doorway to the IPO world, once the exclusive province of institutional and high net worth investors. For select IPOs, an ordinary retail investor can go to onmarket.com.au and bid on the right to buy an IPO before it begins trading on the ASX.

There are three current IPOs available, with two of the three having a history of some revenue generation, although far from the $50 million standard, and all three focusing on a market with substantial tailwinds at its back. The soon to be ASX stocks are in agriculture-related businesses – seafood, fertiliser, and health and nutrition.

The first is New Zealand Coastal Seafoods (NZA). This one is not following the traditional IPO path but rather is coming on after a reverse merger with XTV Networks Limited (XTV), with the prospectus coming from XTV with the intent of renaming the resultant entity New Zealand Coastal Foods.

The company processes and distributes premium seafood products in Australia, New Zealand, and Asia through multiple distribution channels. New Zealand Coastal Foods is new, beginning operations in 2016 and is looking to raise capital through its IPO listing for what many believe to be the soundest reason for going public – it cannot meet the demand for its products with current resources. The company is already profitable, As of 31 December of 2018 New Zealand Coastal posted revenues of $NZD1,538,961 and a profit of $NZD113,440.

Backed by New Zealand’s stellar reputation for “clean and green” products, the company charges premium prices for its ling fish maw, sea cucumbers, and related soft and hard boned fish products. New Zealand Coastal products are primarily dried, with the company producing its own line of fish maw soups. The company sources its fish exclusively from New Zealand and maintains its own processing facilities.

Proceeds from the IPO are to go to a move to an expanded facility with new equipment, to increase raw fish purchases, and to add sales staff. The company has a clearly defined growth strategy, including plans for constructing a new plant and expanding its product line into high-margin offerings as well as expanding its markets into China, Hong Kong, Malaysia, Singapore, Indonesia and Vietnam. The offer price listed on OnMarket is $0.025. The OnMarket website also features the following graph on seafood demand.

Australian Nutrition & Sports Ltd (AN1) is about to join the already crowded field of infant formula producers, all placing their corporate bulls’ eyes squarely on the Chinese market. Investors unfamiliar with the history behind the burgeoning Chinese demand for safe infant formula and the roller coaster rides investors of ASX stocks in that market have endured should probably stay away from this one.

The current market darling, having supplanted the once kingly Bellamy’s Australia (BAL), is New Zealand’s A2 Milk Company (A2M). Bellamy’s has recovered from the dismal days when the Chinese government flexed its regulatory muscles over the exploding infant formula market there.

New licensing regulations are a hurdle for new entries and many promising ASX entries have seen their glory days fade away. Wattle Health (WHA) and the less than one- year old Keytone Dairy (KTD) both got off to solid starts, faded, and came back.

In the first week of June the Chinese government once again stuck its fingers into the pie, with a new set of regulations reportedly designed to further the interests of Chinese domestic producers, according to the Australian Financial Review.

Although Australian Nutrition and Sports offers a range of health and nutrition products for adults, it is the company’s focus on the infant formula market in China that is generating the pre-IPO buzz. Given the instability of the Chinese infant formula market and the country’s entire economy considering the ongoing trade war with China, risk averse investors may want to adopt a wait and see posture towards AN1. The issue price is $0.20.

Trigg Mining Limited (TMG) is developing two projects for mining Sulphate of Potash (SOP), or Potassium Sulphate, in Western Australia – Lake Rason and Lake Throssell.
There are two forms of potash fertiliser – SOP and Muriate of Potash – with muriate being more commonly used but SOP being a superior product can demand a higher price. SOP contains both potassium and sulfur and not only improves both the quality and yield of high value crops, but also makes plants more resistant to drought, frost, and insects.

The demand for SOP is solid and Trigg Mining will increase its 80% ownership of its projects to 100% following the completion of its IPO.

The issue price is $0.20, and the proceeds will go towards project development, including drilling, geophysics, and laboratory and test work. Trigg’s projects are close to needed infrastructure and produce SOP using a natural extraction from brine mining process. Given the importance of agriculture here in Australia it is a bit of a surprise that we rely exclusively on imported SOP, some of which is produced from a more costly chemical processing method.

If successful, Trigg Mining would be Australia’s first and only supplier of SOP, but the company is a long way from production.