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Five recent floats to consider in 2020

Five floats that have either become better value than they were at IPO stage, or arguably not yet been fully noticed by the market.

1. Prospa (PGL:ASX)

Market capitalisation: $291 million
Analysts’ consensus valuation: $3.05 (FN Arena)

After its first listing attempt was pulled at the last minute in June 2018, amid concerns from the Australian Securities and Investments Commission (ASIC), small-business specialist lender Prospa got away second time around, in June, jumping 19% on its debut, after being priced at $3.78. By September the stock had pushed almost to $5, but Prospa hit the skids in November, slumping 28% after releasing an earnings update that the market saw as disastrous.

Prospa told investors that its earnings and revenue for (calendar-year) 2019 and the first half of 2020 would be below its prospectus forecasts – in fact, it would fall short of its June 2020 earnings forecast (that is, EBITDA, or earnings before interest, tax, depreciation and amortisation) by more than 60%. (Net profit is not expected until FY21.) The shares almost halved in price in four trading days.

The company attributed this to higher-than-expected costs, amid a chase for premium (that is, better credit quality) customers. Loan originations for CY19 are expected to be ahead of prospectus forecasts, but while this sounds better for the business, the revenue suffers if more loans are to premium customers, because they pay lower interest rates. The better-quality loans do mean lower loan impairments, however.

In reaction to the November update, the company’s board cut bonuses for executives and demanded improved processes and controls be put in place around lending, forecasting and expenses.

What we have now is a company that has a great business opportunity – to improve the access to finance for the 2.8 million small businesses in Australia and New Zealand, and to use “fintech” and its credit assessment skills to lend profitably. For investors, this business opportunity is now priced much more favourably than it had been. The price “haircut” applied by the stock market has been brutal on float subscribers, but could present a bargain for new investors. Even after the downgrade, analysts hold bullish price targets for Prospa – Macquarie sees $3, while UBS posts $3.10 – but bear in mind that these firms were the joint lead-managers for Prospa’s float.

 

2. Damstra Holdings (DTC:ASX)

Market capitalisation: $145.7 million

Cloud-based workforce management software company Damstra was floated in September at 90 cents, and made a strong first impression, surging to as high as $1.345 on debut. The stock has since come back to $1.06.

Damstra is the newest member of a thriving little mini-sector on the ASX of “software-as-a-service,” or SaaS stocks – this describes a business where software is centrally hosted and delivered to subscribers over the internet, representing a much cheaper option for customers. It provides workplace management solutions to clients in a wide variety of industries, which help these customers to track, manage and protect their staff, contractors and their organisations, and to reduce the risks associated with worker health, safety and regulatory compliance, and environmental regulations. With these considerations becoming increasingly for businesses and organisations, Damstra’s software-as-a-service solutions (and the hardware it can integrate into a combined package) find a ready market.

From a single labour-hire office in Australia in 2002, Damstra has grown to have more than 350 clients around the world, with more than 333,000 registered licences, across eight countries. Damstra has operations in Australia, New Zealand, the US and UK, and has a global operations centre in the Philippines. The company says it sells into a market that was worth US$15.6 billion ($23 billion) in 2018, and is expected to reach more than US$20 billion ($29 billion) in 2022.

A November update told the market that Damstra remains on track to achieve its prospectus forecasts for FY20, which are for revenue of $21.3 million – up from $15.3 million in FY19 – and a gross profit of $14.7 million, up from $8.9 million in FY19. But Damstra expects to be still in loss at the net profit level in FY20, making investment a speculative proposition. However, the company has a very highly regarded product that is selling strongly, and more importantly, solving a big problem for many of its customers.

 

3. Powerwrap (PWL:ASX)

Market capitalisation: $36 million

Listed in May 2019 at 35 cents, wealth management platform Powerwrap has not had a pleasant time on the stock market, opening lower and mostly continuing in that direction. But the shares look to be oversold, given that the industry trend that the company is based on – where financial advice firms increasingly move to independence from the major banks and wealth companies – fits the post-Royal Commission times very well.

Powerwrap’s FY19 results were actually quite good, with platform revenue of $16.3 million up 9% on the previous year – and higher than $15.4 million forecast in the prospectus – while the underlying net loss of $5.4 million was also better than the forecast loss of $6.4 million. Funds under administration (FUA) on the platform reached a record $8.1 billion, which was $550 million higher than the prospectus forecast, thanks to net fund flows of $614 million. Powerwrap does not expect to be profitable in FY20, either, but it has $20 million in cash on the balance sheet and no debt, and given the significant fall since listing, the stock appears to offer an attractive speculative prospect with industry tailwinds behind it.

 

4. Victory Offices (VOL:ASX)

Market capitalisation: $78 million

Flexible workspace provider Victory Offices listed in June after being issued at $2 in the prospectus, and traded as high as $2.55 by October, before retreating back below issue price, where it still sits.

Victory has not done much wrong on the stock exchange – it released FY19 results which were in-line with prospectus forecasts, with $47.6 million in revenue and a net profit of just under $10 million, which represented improvements of 51% and 67% respectively on its private-company performance in FY18.

Victory offers premium serviced offices, co-working and lounge spaces, virtual offices and meeting spaces in high-quality buildings in Melbourne, Sydney, Brisbane and Perth, and in October, it launched its first workspace outside Australia, at a premium location on Level 76 of The Center building in the Central area of Hong Kong. Customers come mainly from industries such as finance, legal, recruitment, technology and consulting: Victory is riding the wave of growing demand for flexibility in space needed by smaller, start-up companies and individuals, and the rising preference of “millennial” business owners for communal workplaces.

Victory said it would add 8 new locations in FY20 but now says it will add 11 locations, to reach 30 locations, which would make it the second-largest operator in Australia behind the much-larger Servcorp (SRV), which has been an occasional favourite for fund managers. There is not yet a dividend forecast, as Victory says it is reinvesting cash flow to acquire new sites. Servcorp is a strong dividend payer from its much larger portfolio and business, and Victory shareholders will be looking ultimately for the company to follow this path.

 

5. Primewest Group (PWG:ASX)

Market capitalisation: $402 million

Western Australia-based real estate investment trust (REIT) was listed in November at $1.00, and has moved nicely to $1.15. The group is best known for its commercial investments nationally, but has diversified into the retail, industrial and large format retail property sectors, and more recently, into the residential and mixed-use projects: Primewest has more than $4 billion of assets under management.

Primewest told the market that the main reasons for listing were to expand its development footprint and ramp-up its program of acquiring smaller property syndicates, while also looking to expand its wholesale mandates with large institutions beyond its current deal with Singapore’s GIC Real Estate. The group is also aiming to expand its US portfolio to about $500 million from its current $100 million portfolio, made up of two San Diego assets.

At listing Primewest was offered at a forecast FY20 distribution yield of 5%, which has come down to 4.3%, but a lot of analysts and fund managers like the counter-cyclical investment approach of Primewest – its managers are considered very savvy property investors.


About the Author
James Dunn , Switzer Group

James Dunn is an author at Switzer Report, freelance finance journalist and media consultant. James was founding editor of Shares magazine, and formerly, the personal investment editor at The Australian. His first book, Share Investing for Dummies, was published by John Wiley & Co. in September 2002: a second edition was published in March 2007, and a third edition was published in April 2011. There have also been two editions of the mini-version, Getting Started in Shares for Dummies. James is also a regular finance commentator on Australian radio and television.