Author: xReality Group Ltd

Written by Tony Kaye

WHEN online insurance broker iSelect joins the ranks of Australia’s listed companies on Monday, as expected, it will mark an important milestone in the corporate recovery process.

Its initiation into public life – through a $215 million initial public offering – will take the tally of local stockmarket floats for the June quarter to above $1 billion, the best quarter in 2 1/2 years.

The level is still is a far cry from the boom days, pre-global financial crisis, but there are more signs of corporate and investor confidence as more companies venture back to the public boards.

Investor demand for new floats is strengthening, and there’s often good money to be made in the process. A number of the larger floats this year have already delivered strong returns, with their share prices well up since their market debut.

Take fertility service company Virtus Health (VRT), which has gained about 14 per cent since listing this month, while the high-profile law firm Shine Corporate (SHJ) has jumped about 46 per cent. Property trust Arena REIT (ARF) and data facilities owner Asia Pacific Data Centre Group (AJD) have produced returns of 4.5 per cent and 12 per cent respectively.

But the best performing listing this year has its investors jumping for joy. Indoor Skydiving Australia Group (IDZ), a skydiving facilities developer, has more than doubled in value in just five months from its 20c offer price.

Equally, however, there are multiple examples of new listings where investors are significantly out of the money on their initial investment.

IPB Petroleum, for example, offered investors shares at 50c each.

Since listing in late April, its shares have plunged to 25c. Zeus Resources has been the worst float performer to date, issuing its shares at 20c apiece.

Since listing in January, its shares are now trading below 4c.

For investors considering a subscription to a new float, thorough research isessential. And there is even historical evidence that shows the best returns from initial public offerings are often achieved by getting out on the first day. An investor who participated in all 15 IPOs this calendar year, and sold them at the end of the first day of trade, would have made an average return of 2.7 per cent.

Using the same strategy on the last 300 IPOs over the past five years, an investor would have made a 10 per cent average return.

Data also shows new stocks can quickly lose momentum after their market entrance. Only about a third of new stocks actually outperform the ASX All Ordinaries Index in the first six months of their listing.

Eureka Report’s small caps specialist Brendon Lau notes that there are many reasons why a new stock can struggle over the short to medium-term.

“If I had to make a general observation, I would say that new entrants are usually at a disadvantage compared with their more established rivals, which tend to be larger and better understood by the investment community. Only when, and if, the newbie develops a sustained track record will the discount gap close.

“Picking the right IPOs will yield you an average total return that is 52 per cent ahead of the market at the 180-day mark, while the laggards underperform by an average of 33 per cent.”

According to Bell Potter Securities’ head of research, Peter Quinton, in this market environment newly listed companies with reasonably defensive and predictable earnings are “in”, while speculative cyclical stocks are “out”.

“If (the new listing) is from one of those defensive sectors where it has got some protection from slowing economic growth, I think automatically people will look at it very closely,” Mr Quinton said.

“But as a start, IPOs need to be priced at a discount to their peer group; and all things being equal, my rough (estimate) is that the price-earnings will need to be 10 per cent lower and the yield 10 per cent higher (than their peers).”

But valuations are last on Mr Quinton’s checklist as qualitative analysis is more important. The things he looks for first are:

if the vendor is keeping any shares (company founders retaining shares is seen as a positive);

The composition of the shareholdings;

The outlook for the sector over the next two to three years; and

If the company forecasts outlined in the prospectus look reasonable.

He also tends to avoid IPOs where the company has bought a couple of other businesses to appear bigger, as this strategy has produced more failures than successes.

The ASX is listing 12 upcoming floats, including ISelect.

Of those, only four have a set listing time.

The remainder are to be advised, including the $100m float of Domus US Multifamily Real Estate Fund, which was due to list earlier this week but suddenly put its marketebut on hold – perhaps a reaction to the rapidly falling Australian dollar and the impact on its US property purchasing power. There’s no doubt the market remains volatile, and IPOs are still few and far between.

Good returns from small-cap IPOs are also few and far between.

So subscribers to iSelect will no doubt be hoping they’ve ticked all the right boxes when the company lists on Monday.

Written by Christopher Golis and featured on www.evancarmichael.com.au

This was the title of a Executive Education seminar held last Tuesday night in Sydney hosted by UTS and sponsored by PriceWaterhouseCoopers. Based on the opening speech by the Chair, Dr David Band of UTS, the question posed was driven by the lack of venture capital and government support in Australia and the supposed solution requiring the entrepreneur going to Silicon Valley to raise VC.

There were two first-class entrepreneurs on the panel, Kathy Phelan and Richard White. Kathy is the Founder/CEO of Small World Social, a company which has developed an interactive online platform that puts the person back into the equation by explaining products, assisting people with the understanding of old and new technology and guiding them through complex systems. Richard is the Founder/CEO of WiseTech International, which is has developed several world class products including include CargoWise, a global leader in logistics technology solutions; and eHealthWise, a provider of electronic data services for the healthcare industry.

Both were spending a substantial part of the year overseas not however to raise capital but for reasons of marketing and management. Both used Australia to develop and beta test their products and then went overseas to scale their company.

Interestingly both had raised external capital not from VCs but from angels. The message they both gave was that you needed to be self-funding otherwise you would be screwed by either the VCs or angels no matter where they were located.

With regard to government support Richard is in the camp that believes best thing governments can do is get out of the way. Kathy was of a different opinion. First she described how she used the new Innovation Patents to protect her IP. She said that this had become particularly important when dealing with bankers and investors. She then described herself as first class ferret for obtaining government grants and benefits ranging from Comet Commercialisation grants to 457 visas. She had estimated that for the two businesses she had launched she had collected over $6 million in benefits.

While the question posed was never answered I would make the following observations.

The venture capital industry in Australia is effectively moribund. If the Australian Superfunds invest in venture capital they invest in USA venture capital funds. Interestingly USA VCs are now investing in Australian companies. This is a round-about way of getting there but it does seem to be occurring.

However there is has been major rise in angel funding in Australia. In addition the window for IPOs in Australia is beginning to open and this will probably be a major source of capital over the next five years. Indoor Sky Dive has just raised $12 million which 12 months ago would have been impossible.

If you do go to the US to try and raise capital remember it takes an entrepreneur something like 70 pitches to raise the ‘A’ round from Silicon Valley VCs. There are a lot more VCs there so you can make 70 pitches but it takes a considerable effort to do so.

Don’t underestimate the value of patents. Both Cochlear and Resmed had generated pretty hefty patent portfolio before they set out to raise funding. Finally a smart move, given the strength of the Australian dollar, would be to look to take over a US business in a similar industry rather than do a green-fields start-up.

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Written by Nick Evans

The dire state of the capital markets for junior miners is clearly evident if you take a quick scan of this year’s IPOs.

The class of 2013 is, so far, a touch ahead of last year, according to IRESS data – 12 successful floats got away at the close of trading yesterday, as opposed to 10 at the same time last year.

But what’s striking about the list is how few resource companies are among that number.

All 10 of last year’s floats came from the resources sector. There were two oil and gas plays, including last year’s stand-out market star Pura Vida Energy with the remainder being traditional exploration juniors from the mining sector.

This year there have only been six. Oil and gas hopefuls Cott Oil and Gas, Strata-X Energy and Tiou Energy; coal plays Malabar Coal and Perpetual Resources; and Chinese-backed uranium explorer Zeus Resources. At a pinch, labour hire firm Oilfield Workforce Group could probably be added to that list.

The list is rounded out with two investment funds, an outdoor advertising and tech company focusing on the Chinese market (China Integrated Media Corporation), clean tech hopeful Ecosave Holdings, and novelty extreme sport company Indoor Skydive Australia Group.

Compare those figures to the situation two years ago. By this time in 2011, the market had welcomed 33 new floats, with 25 in the resources sector – and it becomes even clearer how complete the exodus from the resources sector has been.

Of the current crop, Indoor Skydive is the stand-out. Although it trades on very thin volumes, the company is up 85 per cent from its 20¢ January float, closing yesterday at 37¢. Ecosave, which also experiences light trading volumes, has been the other big winner, up 69 per cent to ¢1.69 from its $1 January issue price.

At the close of trade yesterday, none of the rest were trading ahead of their listing price. Four were trading at their float price, and the remainder were down.

Zeus has fallen most, down 13.9¢ or 69.5 per cent to close yesterday at 6.1¢. Since listening in mid-January at 20¢, the company has not issued a single release to the market about its uranium exploration activities, and has drifted steadily downwards.

Malabar Coal is down 28 per cent and Cott Oil and Gas is off 22.5 per cent. Overall you would be slightly ahead if you had taken a speculative punt on every float so far this year, even though half your investment would be down.

If you had thrown a speculative $5000 into each of this year’s floats, your $60,000 portfolio would currently be worth $60,885.