Manny Pohl

Barrack Street Investments Limited (BST) has successfully raised $16 million through its Initial Public Offer and is scheduled to list on the ASX on 14 August 2014. The listed investment company to be managed by boutique Australian equities manager ECP Asset Management (ECPAM), headed by Dr Manny Pohl will invest in a portfolio of quality small and mid-cap ASX listed companies.

Pohl’s Barrack St LIC aims to achieve medium to long-term capital growth and income through fully franked dividends with an objective of exceeding a benchmark return of 8%pa.

A particular target of the Barrack Street Investments LIC capital raising was small super funds with fewer than five members.

“It’s widely acknowledged that SMSFs are heavily weighted to ASX top 50 companies and cash,” said Pohl.

“We are delighted that our message of diversification beyond the top 50 ASX stocks resonated with the SMSF sector and others.”

Dr Pohl has achieved outstanding results in the small and mid-cap segment during his 30 years of investment experience. In the period from its inception in July 2013 to March 2014, ECPAM has returned 24.8% against a benchmark return of 5.3%, and the ASX Small Ordinaries Accumulation Index which has seen a modest return of 5.4%.

The offer was priced at $1.00 per share and investors in the IPO will receive a free 24-month option for every share subscribed for, exercisable at $1.00. Morgans Corporate was Lead Manager to the Offer, which closed on 31 July 2014.

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Chris Batchelor

Stock research application house, Skaffold, has warned investors to remain cautious and stay focused on value, when considering IPOs.  According to Skaffold, Investors who believed the 2013 resurgence of IPOs would deliver them above-average returns for their portfolios have received a rude awakening.

CEO of Skaffold, Chris Batchelor, said Skaffold had run the ruler over 29 of the new listings in 2013 and only four have achieved its highest ratings of A1 and A2.   These are Nine Entertainment, the online foreign exchange group Ozforex, Sino Australia, providing oil recovery services for companies operating in China and the listed law firm Shine Corporate.

“Although 2014 is shaping up to be another huge year for IPOs, investor appetite for them has been given an overdue reality check. Many of 2013’s IPO stocks have underperformed for various reasons, none the least being they were overpriced and over spruiked companies in uninspiring sectors. Our opinion is that most IPOs have been best left alone”, he said.

Adding to growing investor skepticism for floats were recent warnings by the Australian Securities and Investment Commission (ASIC) over the quality of some offerings. The regulator found that around a third of float prospectuses misled investors

Mr Batchelor said of the four stocks that get the Skaffold tick of approval, Oxforex and Nine are trading well above value at around 50%, and Shine is trading at an 8% premium.

“Although Sino is trading at a discount, there aren’t any analysts providing forecasts so its value is based upon past performance. All four companies will release their latest results in February.”

Mr Batchelor said that Lifehealthcare Group, a distributor of medical devices that listed in early December, was an interesting stock.

“Like many IPO’s this is a new, largely unresearched stock and therefore, difficult to measure accurately.  However, by our methodology it is rated B2 and its value is forecast to rise around 30% a year over the next two years. Although the company does have a large amount of debt, at its last report there was enough cash in the bank to cover its interest bill three times.

Among other companies rated by Skaffold, the online labor marketplace group Freelancer.com is rated C3, Virtus Health (the first IVF business in the world to become a listed company) is rated B4, and iSelect, offering an online comparison service for a range of services, is rated A4.

Although there had been some good success stories in 2013, Bloomberg data reveals that just under half of the 40-odd companies that listed on the ASX in 2013 are trading at share prices lower than their float price.

“This should warn value investors, and newcomers to shares alike, that buying into floats for ‘stag’ profits is a risky strategy.

“Unsurprisingly, with institutional investor appetite for floats also becoming a little jaded, several IPOs have been cancelled. Mine-site logistics business, Bis Industries, recently pulled its $1 billion-plus float amid unfavourable sentiment over new project numbers at decade lows.

Mr Batchelor cited four steps for reviewing IPOs and prospectus documents:

1. Stick to your value investing principals

Look for companies with consistently above-average return on equity (ROE), with little debt and not too much goodwill on the balance sheet. On the flipside, steer clear of buying into floats where the net tangible assets (NTA) or net worth (pre-IPO) is negative.

2. In whose best interests?

Think carefully about buying into a float where the people responsible for turning the company around are planning to exit relatively quickly.

3. Focus on the fundamentals

As a value investor, you should be more interested in investing in an IPO for the long term than selling immediately for a quick profit.

4. Do your homework

It’s equally important to investigate previous financial statements of companies planning to float and find out whether the money raised is being earmarked to fund expansion or repay debt, and the amount to be paid to existing owners.

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However, according to Australian equities fund manager Hyperion Asset Management, the low number of initial public offerings (IPOs) need not translate to serious slumps in portfolio performance. 

In Hyperion’s view, the key is to view IPOs and capital markets activity as the exception, rather than the rule. But the IPO habit is one that many, whose fortunes grew with the ‘big deals bubble’ of pre-2008, are finding difficult to break.

“In the last five calendar years IPOs have been running at less than 25 per cent of the average in the five years prior to the GFC,” said Jason Orthman, one of Hyperion’s Portfolio Managers. “And in terms of industrial IPOs, where Hyperion’s interest really lies, the figures are closer to 15 per cent over the same time period.”

Mr Orthman went on to explain that this habit or expectation around IPO-related returns is due to many investors’ experience of boom markets. A boom market can foster ‘hot’ IPOs that deliver short term high returns, often in the first day after listing. He cited examples including the tech boom of the 1990s and the resources boom immediately prior to the GFC.

“However, in the current environment of low credit growth, moderating commodity prices and weak investor sentiment, both economic and capital activity will be subdued. What investors should be looking for is a quality portfolio of stocks that can grind out earnings and dividend growth well above GDP.”

While Hyperion has never relied on capital market activity to generate returns and rarely participates in IPOs, it does monitor the market closely and will occasionally take a stake in growing companies that are evolving into a model that will deliver sustainable long term success.

“Two IPOs we have participated in since 2008 are carsales.com in 2009 and Trade Me Group in 2011. Both are online companies that we understand well through our existing holdings in this space,” Mr Orthman explained.

“We regard IPO investment as the exception, rather than the rule. We think better gains are to be made from early identification of listed stocks whose track record suggests they can grow into ASX300 or even ASX100 companies.”

By way of example, he cites Domino’s Pizza Enterprises, an existing small cap holding with a market capitalization of around $740M that first entered the our portfolios in September 2011 as an ex-ASX300 holding at around $7.00. The stock has since appreciated 52 per cent to $10.65, with the company growing earnings-per-share (EPS) 25 per cent in FY12 and recently announcing a $30M capital return.

Another is Navitas, a mid-cap holding with a market capitalisation around $1.5 billion that is also forecast by Hyperion to produce high double digit EPS growth over the next five years. Its EPS growth in FY12 was -10 percent due to the high Australian dollar, weak overseas enrolments and the acquisition of SAE delivering below expectations. However, with a proven model, global leadership and an improving domestic regulatory environment, earnings are expected to rebound strongly over the medium term.

“Inclusion of stocks that meet our rigorous selection criteria which aims for long term sustainable growth and performance has led to continued strong performance forecasts from our Hyperion Small Growth Companies and Australian Growth Companies Funds. We are unaffected by the IPO drought because our focus is very much on the broader game.”

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However the funds raised were down on previous years, according to the latest HLB Mann Judd Small Cap IPO Watch – click here  to read the report.

A total of 92 small cap companies listed over the 2011 year, up 10 percent on 2010 and 156 percent on 2009.  Small cap listings represented 88 percent of all IPOs during the year (2010: 88 percent, 2009: 92 percent, 2008: 93 percent).

However the total amount raised by small cap companies was down 17 percent on 2010, and the average level of funds raised by small caps was the lowest for five years, even at the height of the global financial crisis.  Small cap companies raised an average of just $6.84 million in 2011, compared to $9.07 million in 2010; $7.47 million in 2009; $7.45 million in 2008 and $8.75 million in 2007.

Mr Geoff Webster, author of the report and corporate finance director at HLB Mann Judd Melbourne, said that the decline in funds raised is a worrying sign of the ongoing challenges for listed companies and for corporate fund-raising generally.

“Coupled with the fact that 29 percent of 2011’s issues were undersubscribed, compared with 22 percent in 2010, it is concerning that the IPO market continues to struggle so badly.

“It is a further example of the difficulties businesses face in raising corporate finance and additional evidence of the challenging operating environment.

He also said that the start of 2012 looks set to continue the lack-lustre performance of the December 2011 quarter.

“The pipeline of upcoming IPOs is down from the same time last year, with only 26 ASX applications lodged seeking to raise a combined $122.2 million, compared to 34 companies seeking $321 million in January 2011.  Significantly, only five companies have a proposed listing date.

“On the other hand, the Australian sharemarket has started 2012 positively, and if this continues it seems likely that more companies will consider an IPO later in the year,” Mr Webster said.

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Some of Europe and America’s most prestigious companies are shunning the well-established financial centres of London and New York and looking to Asia as a place to list and sell their shares, as well as their handbags.

Italian fashion house Prada has applied to list on the Hong Kong stock exchange in the next few weeks. US leather goods maker Coach may also list shares there, while luggage firm Samsonite and Italian motorcycle maker Ducati are also reported to be planning Hong Kong share listings.

They follow the footsteps of French skin care firm L’Occitane, which raised about A$700 million selling shares to investors in an initial public offering (IPO) in Hong Kong late last year, becoming the first French company to be listed in Hong Kong.

These foreign companies listing in the region are doing so because they expect a substantial part of their sales to come from the region. Selling shares in Hong Kong acts as a great marketing tool, as well as an effective way to raise funds for expansion.

Greater China now makes up around 15% of global luxury sales. With increasing incomes this figure is expected to grow to 44% by 2020. Over the next decade, China itself is expected to become the world’s single largest market for luxury goods, worth A$100 billion, up from $12 billion in 2010, according to a recent report by Asia-focused research firm CLSA. One reason is that luxury handbags, clothing, watches and jewellery are a favoured way for Chinese to display their increasing wealth – wealth that has risen due to their fast growing economy.

Prada already generates more than a third of its sales in Asia and has 14 stores in nine Chinese cities and a further eight outlets in Hong Kong; while Coach has 58 stores in China, Hong Kong and Macau.

Such high profile listings have transformed Hong Kong into the world’s biggest IPO market. It has been the world’s biggest market for IPOs for the past two years, eclipsing other major financial centres that have suffered in the aftermath of the global financial crisis.

Hong Kong has long been the place to list for Chinese firms seeking to raise funds from overseas, but it is only recently that companies from elsewhere have come to those with the money.
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While the number of IPOs in Asia is strong, the number of them has dropped off slightly from the record amount raised late last year. This is because Asian investors are quick learners and realise that not every stock continues to rise after its listing. Investors are, rightly so, becoming more selective.
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Higher wage growth over recent years, coupled with Asian governments increasing the social safety net, has resulted in the rise of the Asian investor. More investors are looking towards capital markets to park their money. For China in particular, we expect to see further developments in RMB-denominated IPOs.

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