Originally published by Rivkin Securities
Initial public offering’s or IPO’s are the mechanism by which companies become public. In other words, they list their shares on the ASX which can then be freely traded by investors.
The subject companies are often held by private equity firms or are divisions of a larger listed parent company or in some cases are simply held by private investors. Usually the current owners of the company hope to achieve a good sale price through the IPO and realise the greatest possible value for their investment although in some cases they simply use an IPO as a means to raise capital.
Investors participating in IPO’s often hope to receive what it called a ‘stag’ profit which occurs when the stock opens on its first day of trading at a higher price than the shares were issued to investors in the IPO.
Although this seems like an easy way to make money, it doesn’t always work out. Many IPO’s will open trading at a lower price than the issue price and investors are therefore faced with an immediate loss.
The current IPO environment is unfortunately quite weak. Several intended IPO’s have been pulled recently due to the weak market.
One such IPO was the intended float of Officeworks by Wesfarmers Ltd (AX:WES). WES has held Officeworks since 2007 and since that time has doubled its earnings and more than doubled its return on capital. According to its most recent quarterly report, Officeworks was one of the strongest performing divisions of WES with sales growth of 7 % for the financial year to date.
Nevertheless, sales are only a small percentage of WES total sales and therefore WES believes there is significant value in the Officeworks brand that would only be realised fully by splitting it off from the main business. Unfortunately, WES does not like the state of the current IPO market and doesn’t want to risk a poorly performing Officeworks float. As a result, the listing has been delayed indefinitely.
The retail sector in particular is suffering at the moment due to fears of the impact of the entry of Amazon into the Australian market. While the true impact of Amazon won’t be known until well after they arrive, the market is certainly pricing in a significant impact. Strongly performing companies like JB Hi-Fi Ltd (AX:JBH) have seen their share prices fall this year despite there being no deterioration in their results as a result of the Amazon.com Inc (NASDAQ:AMZN) fears.
The Officeworks IPO isn’t the only one to be pulled recently. Tap and appliances company Zip Industries was set to be floated this year by Quadrant Private Equity but this was shelved for the same reason as Officeworks. In fact, the total value of IPO’s pulled this year is already higher than any of the past five years and the value of successful IPO’s is still only a fraction of what was done in 2016. Nevertheless, there is still a line-up of large IPO’s scheduled for this year including Latitude Financial Services and Origin Energy’s Lattice Energy. One large successful IPO could be all it takes to turn the tide with respect to IPO sentiment but for now things remain in the doldrums.