When companies list on the share market, there can be successes and failures, writes Mark Devcich. But the upshot is, a healthy share market needs new listings.

When companies first offer shares to investors on the share market, it’s called an Initial Public Offering (IPO). An IPO is also known as ‘listing’ on the share market, or a ‘float’.

These firms could be newer companies needing capital to help them grow, or big privately owned companies, from which the owners want to realise a portion of their investment.

The IPO market is very much feast and famine, depending on market sentiment. So the frequency of IPOs is a good barometer of the health of the equity markets.

It’s extremely difficult for companies to float when the share market is performing poorly, because the valuations they receive in that environment are relatively unattractive. Conversely, when investor sentiment is strong, many companies are listing, often at high valuations.

The IPO process starts with a roadshow to market the company to the investment community. This can mean both a pre-IPO roadshow, which usually happens a few months before the company lists on the share market, and then an IPO roadshow, which is normally in the month before the listing.

Relatively few listings in New Zealand

The number of companies listing in Australia far exceeds IPOs in New Zealand. This is likely for a few reasons: Australia’s compulsory superannuation provides a deep pool of capital, much of which makes its way into the share market; the greater desire of business owners to list their businesses on the share market; and a plethora of brokers who are willing to help with the listing process.

In 2017, more than 70 companies have listed in Australia, compared to just one listing in New Zealand. A significant number of ‘reverse listings’ have also occurred in Australia, where companies use an existing listed ‘shell’ company (from a non-operating business) to purchase an operating business. A reverse listing is typically used by smaller businesses, because it’s a cheaper way to get onto the share market than a full IPO.

IPOs for investors

As an investor, it’s difficult to make a lot of money from IPOs. Typically, they’ve been well marketed, and if they’re priced cheaply, there’s likely to be a lot demand for shares. So the allocations investors receive from the brokers will be slim.

Companies that do not raise much capital at the IPO stage, or have a small selldown by the existing shareholders, will have less shares available to be traded (free float). This can create an imbalance between supply and demand. And if there’s strong demand, it’s likely to push the share price higher.

Underperformers

Wynyard is an example of a recent IPO that underperformed in the New Zealand share market. It raised NZ$65 million at NZ$1.15 a share in August 2013, and reached a high of more than NZ$3, but subsequently fell into administration in October 2016.

With IPOs, you’re often buying from a seller who is more sophisticated and knowledgeable than you are.

For example, private-equity firms often use the IPO process to reduce their holdings in companies. This can often involve a quick turnaround from buying a private business, to listing. A case in point is Australian technology-and-appliance retailer Dick Smith.

In November 2012, Anchorage Capital bought Dick Smith from Woolworths for AU$94 million. A year later, in December 2013, Dick Smith was floated with market capitalisation of AU$520 million.

Anchorage sold 80 per cent of its shareholding in Dick Smith in that IPO, and then sold its remaining 20 per cent shareholding in September 2014.

After a series of profit downgrades, on 5 January 2016, Dick Smith announced that receivers and administrators had been appointed.

Standouts

However, not all private-equity IPOs have treated investors poorly. And some private-equity firms view their reputation among public market investors as critically important.

Direct Capital, a New Zealand firm, has listed two companies recently that have both performed well: Scales Corporation and New Zealand King Salmon.

Scales was trading at NZ$3.80 on 31 October 2017, well above its offer price of NZ$1.60 per share, and it has delivered a series of healthy dividends.

And New Zealand King Salmon was trading at NZ$2.35 a share in October 2017, versus its offer price of NZ$1.12 per share.

Other successful IPOs include CBL Corporation and Vista Group. CBL listed in October 2015 at NZ$1.55 per share and made investors happy by trading two years later at NZ$2.92.

Vista Group listed in August 2014 at NZ$2.35. If you had bought it then, you’d be delighted that it was trading at NZ$5.20 a bit over three years later.

Both these firms had significant equity interest by founders, who continued to run the businesses and only sold down a portion of their holding.

In my view, the New Zealand market is in real need of more IPOs. A significant amount of money is entering the market from KiwiSaver investments, which is pushing up the prices of listed companies on the New Zealand Stock Exchange (NZX).

In October, valuations on the NZX were trading at the highest level seen in the last 10 years, which is a symptom of more money chasing a small set of investment options.

Definitions:

Selldown: Mass selling of shares

By Mark Devcich

First published February 2018

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