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I’ve searched through IPOs from 2017 – a quiet year for floats – to identify three high-quality companies that can reward investors. But before you invest you need to understand the risks.
Years of covering Initial Public Offerings (IPO) have made me more sceptical than most with new listings. Too many floats are overhyped and overpromoted.
Stock in the best IPOs is rarely available in large quantities to small investors and the seller knows far more about the IPO asset than buyers. Smaller floats are also harder to value. Many do not include earnings forecasts or have no direct listed peer for comparison. Or the forecasts rely on the seller’s assumptions, which may be stretched to achieve the highest valuation.
A higher margin of safety (the difference between the IPO’s market valuation and your assessment of its real value) is needed in this part of the market. Often, the best strategy is to buy IPOs when they have more history as a listed company, depending on their price.
First, one gets a better sense of the company’s performance when it is subject to continuous disclosure rules as a listed company. Second, many IPOs get dumped on listing if they do not perform and take months or years to recover. That creates opportunity. Third, buying an IPO a year or two after listing can take advantage of escrow dates when ASX allows restricted securities to be sold. Early investors itching to take profits sometimes dump their stock on escrow anniversaries – a date IPO investors should watch.
Risks aside, here are three companies to put on your watchlists:
The second-largest private provider of death-care services in Australia and New Zealand has had a good start after seeking $131 million through an IPO in November. Propel’s $2.70-issued shares rallied to $3.45 and the stock is attracting broker interest.
Propel has a valuable market position: 80 locations in the Trans-Tasman, including 19 crematoria and five cemeteries. Propel has expanded quickly since its foundation in 2012 through acquisitions and organic growth, and has a good board for a company of its size.
The $1.1-billion death-care industry in Australia has solid growth prospects. An expanding and ageing population means rising demand for death-care services. The industry remains fragmented with more than 1,200 providers, many of which lack scale.
The much-larger InvoCare, the leading provider of death-care services, has an annualised total return of almost 15% over five years. Invocare is marginally overvalued at $15.64, based on the consensus of eight broking firms that have an average price target of $14.50.
Invocare is on a forecast Price Earnings (PE) multiple of 28 times. Propel was sold on a PE of 25.5 times at the issue price, now about 32 times at the current price. That’s high for a small-cap with limited trading history, even one as established as Propel.
Investors are betting that Propel can grow faster than the market expects and beat its prospectus forecast. It has the balance sheet and executive team to ramp up acquisitions.
I’d prefer to watch and wait for better value as some steam inevitably comes off Propel’s valuation. The stock deserves a price spot on portfolio watchlists: the funeral industry is defensive and will benefit in the long run from Australia’s expected population growth.
The integrated building-services group listed on the ASX through a $95-million IPO in October 2017. Its $1-issued shares have rallied to $1.32, aided by a positive trading update in December.
Johns Lyng rebuilds and restores property and contents after damage by insurable events, such as fire. Established in 1953, the company is one of Australia’s largest insurance builders. It completed more than 23,000 jobs in FY17 to restore damaged property and contents.
Johns Lyng has an interesting business model. The group comprises 48 individual business units that provide equity ownership at the business level and in Johns Lyng Group. Done well, these models can incentivise key personnel to keep growing the business.
The company can increase the volume of work from insurance brokers, expand geographically and add more services. The possibility of extreme weather events amid global warming, and thus property damage, could boost demand for its services.
Johns Lyng’s trading update in December was underpinned by demand for property-restoration services after Cyclone Debbie in Queensland. Longer term, the Federal Government estimates disaster costs will reach $39 billion a year by 2050.
The company’s scale is an advantage over smaller rivals. As it grows, Johns Lyng will develop economies of scale that enable it to provide more competitive building-restoration offerings. That’s critical in a price-driven market that is determined by insurance companies.
Johns Lyng should be included on other panels for this work in coming years, and deepen its relationship with insurance firms across more states. One can envisage large insurers increasingly favouring larger, specialist building-restoration service providers.
The company’s IPO was pitched on a forecast PE multiple of 18.4 times earnings. After recent price gains, that rises to about 24 times. As with Propel Funeral Partners, the market is betting that the prospectus forecasts are conservative and will be beaten, thus justifying a higher valuation.
Also like Propel, Johns Lyng deserves a spot on portfolio watchlists in anticipation of better value this year. It has solid prospects in a long-term growth market.
The fintech company has an emerging position in the booming Self-Managed Superannuation Fund (SMSF) market. SelfWealth’s social-networking platform allows SMSF trustees to compare their portfolio and its performance to other members.
Since its launch in late 2011, SelfWealth has attracted 30,000 members with more than $10 billion of combined assets.
The business changed direction in early 2016 with the launch of a flat-fee broking solution – an initiative that took SelfWealth from purely a social-networking site for SMSFs to a transaction provider that allowed members to trade shares for a flat $9.50 fee.
SelfWealth sought $7.5 million through its IPO in late 2017. The 20-cent issued shares have consistently traded below their issue price, hitting 12 cents earlier this month, despite the company announcing good monthly gains in November. The shares are now 14 cents.
The micro-cap stock suits experienced speculators who are comfortable with thinly-traded stocks. Risks are high. SelfWealth faces formidable competition in online broking and rivals with deeper pockets.
But the company’s platform is popular with SMSF trustees and is based on a clever design that helps the trustees help each other through social networking. Growth in its active traders – and trades – through the site is strong, albeit off a small base.
SelfWealth will be worth much more in the next five years if it can rapidly grow its SMSF community and provide more transaction-based products and services to members.
Washington H. Soul Pattinson Company and Brickworks emerged as substantial shareholders in SelfWealth in the past few months. They must see considerable upside in applying fintech concepts to the lucrative $701 billion SMSF sector.