IPO activity up, but prices down

This year has been a boom year for initial public offerings despite the US sub-prime crisis denting confidence and causing plenty of market volatility since August.

The 68 floats (excluding resources, compliance and backdoor listings) so far this year have raised $7.8 billion, compared to the 52 IPOs that raised $5 billion in 2006.

Investor demand for quality IPOs in Australia has been sustained by a relatively healthy economic outlook, strong corporate earnings and the continued weight of institutional and retail fund flows.

But a closer look at the ASX figures analysed by PricewaterhouseCoopers and released yesterday shows that not all floats this year – particularly the small caps (less than $100 million) – have performed well.

PricewaterhouseCoopers corporate finance partner Greg Keys says: “Despite great caution in the market, 2007 has not been a particularly ‘happy haven’ for investors, except those who have invested in large cap floats.”

PwC’s analysis shows that 69% of large cap floats are trading at a premium, averaging close to 49% above their issue price.

In contrast, only just over 30% of small cap floats are trading above their issue price.

Keys says: “On average, pricing for small cap floats based on ‘year one’ forecast P/Es has increased by over 20%, up from 8.4 to 10.2 times. The improvement in pricing has exceeded overall market performance, with the ASX300 Industrials Index up 5.4% in the 11 months year-to-date.”

The increased prices for small cap floats has come despite four months of US-led volatility since August, and has reduced the significant gap with large cap pricing.

“[But] the recent market volatility has caused forecast P/Es for large cap floats to drop slightly from 14.5 to 13. The drop reflects the growing importance of pricing certainty to get the IPO away.”

PwC’s Keys says that 2007 “is likely to be remembered as the year the US led credit crisis awakened the market from its aggressive pricing of risk. Risk premiums have been inadequate and globally, we are not out of the woods yet.

“Close to $US450 billion worth of sub-prime mortgages will be coming out of a honeymoon period over the next 10 months and are likely to be reset at higher interest rates,” he says.

PwC says the year is likely to finish strongly. In line with past years, December 2007 is showing all the signs of being a strong month for IPOs – 32 companies are scheduled to list in December.

“The largest of the December 2007 listings is expected to be the agri-investment company Prime Ag Australia, which is seeking to raise $300 million.”

The Investment and Financial Services sector has seen the strongest activity to date in the number of IPOs, with 14 floats raising $2.7 billion. The Industrials sector follows closely with 12 floats raising $3.3 billion.

PwC expects the demand for IPOs in the Investment and Financial Services sector to continue, with more than 34% of the total number of December 2007 listings anticipated to come from this sector. The largest of these is anticipated to be BT Investment Management, which is seeking to raise in excess of $290 million.

Sectors to watch in 2008 include:

  • Healthcare, including biotechnology, pharmaceuticals and medical supplies – because of new investment in these areas.
  • Investment and Financial Services sector – super law changes have boosted funds management companies growth.
  • Renewable energy sector – because of the new Government’s policies.

Keys says: “At this early stage, 2008 looks capable of delivering reasonable gains to investors as markets remain relatively unfazed with the current level of volatility in the US debt and equity markets.”




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