Navigating The IPO Mine Field

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By Tim Boreham, Editor, The New Criterion

How to pick the winners from the duds amid the ongoing IPO mania

Like climbers queuing below the Mt Everest summit before the next blizzard sets in, private vendors are continuing to join the initial public offering (IPO) conga line before the market turns foul.

Or has the IPO ‘weather’ turned already? Frankly, it’s hard to tell.

According to the esteemed website smallcaps.com.au, 84 companies have already executed an IPO in calendar 2021, compared with about 76 for the entire 2020 year.

At least 24 more IPOs are in the offing, although this number is a moveable feast as vendors chop and change their plans and the regulators force delays because of prospectus wording and such.

A few months back, IPO investors looked to be on a good thing more often than not; now it looks more like a crap shoot.  

The seemingly random performance is reflected in the recently listed gold plays. Monger Gold ((MMG)) listed on July 6 at a 40% premium, while Askari Metals ((AS2)) was pertly out of the blocks a day later with a first-day gain of up to 35%.

But Lode Resources ((LDR)) flopped -32% on listing on July 2, while Barton Gold (BGD) fell -22% on its public outing on June 28.

Silk Logistics ((SLH)), a relatively chunky raising, is off and trucking with a 25% gain.

If it all looks like a bit of a punt, you’re right: shares in online sports betting hopeful Bluebet Holdings ((BBT)) soared 55% on debut and have held these gains.

On July 1, the IPO market faced its earliest and sternest test for the new financial year, with online property settlements platform Pexa Group ((PXA)) debuting at a 5% gain.

Tapping the housing boom, Pexa’s vendors raised $1.175 billion in the biggest IPO to date for calendar 2021.

There’s certainly an indistinct pattern among the bigger brand name IPOs. In the go-go non-bank sector, Latitude Financial ((LFS)) is off -7% since listing in April and Pepper Money ((PPM)) shares have fallen -10% since the lender listed in late May.

But hang on! Alternative lender Butn ((BTN)) is up some 150% since its July 6 listing.

Another prominent listee, Airtasker ((ART)) has delivered a 67% gain since its March listing, helped along by this week’s earnings upgrade.

Good job!

Best and worst

The best performer so far this year is Firebird Metals ((FRB)), which has also gained 200% on the back of its manganese exploration in the Pilbara.

The Perth-based internet provider Pentanet ((5GG)) is up 136% and at one stage had tripled in value.

Penta who? Pentanet provides fixed internet services for homes and business.

Primarily a steel-hardening ingredient, manganese is also gaining street cred as a component of lithium-ion batteries.

Speaking of which, lithium listings have also done well, with Lithium Energy ((LEL)) up 75% and Global Lithium Resources ((GL1)) climbing 27%.

WA nickel explorer Lunnon Metals ((LM8)) has gained 50% since listing in mid-June.

On the flipside, the mid-May listing of Audeara ((AUA)) fell on deaf ears, despite the company’s innovative hearing assistive headphones. The stock has lost almost half its value.

Even the support of appreciative footballers wasn’t enough to spice up the listing of HitIQ ((HIQ)), which has developed an interactive mouthguard device to measure and manage head impacts in real time.

HitIQ shares gained 15% on the day, but have since been concussed by some -10%.

Pet-minding play Mad Paws ((MPA)) delivered a 20% first-day gain but is now in the doghouse with its shares down -5%.

Another disappointer is recruitment disrupter Hiremii ((HMI)), down -50% since listing in mid-May.

How to pick a successful IPO

The moral of the tale is that when it comes to picking an IPO winner, there’s no distinct bias between industries and sectors, or the size of the offering.

Gary Rollo, small cap portfolio manager with fundie Montgomery says: “IPOs can give you wonderful returns if you get them right but burn your money if you don’t.”

Rollo notes that brokers select IPOs they can “get away” – and that means providing the flavour of the month.

By whipping up demand, brokers create “extreme pricing dislocation events”. In other words, the company could well be valued at more than it should be, but if you get your timing right that’s fine.

On the issue of timing, it sometimes pays not to fall in love with your new bundle of joy.

So far this year only four stocks have improved from listing day to the present. The simple lesson here is that if there is money on day one, take it off the table.

A case in point is skincare and consumer health play EZZ Life Sciences ((EZZ)), which closed 132% higher on its first trading day in early March but has now sunk -10% below the listing price.

And need we mention the troubled tech house Nuix ((NXL)), which soared 50% on listing in December last year but has now lost -70% of its value?

In sizing up an IPO, it’s always worth looking past the broker spin and getting a clear understanding of the vendors’ motive for selling out (or, more likely, selling down).

Is it really to share the joy and create liquidity, or get out while the going’s still good?

Investors should also know the level of ‘pre-money’ investment in the company and what these backers paid for the stock. An early investor who got in at, say, 2 cents won’t care too much if a 20-cent stock is trading at 15c.

Rollo cautions investors not to be captive to hot theme of the day.

“Remember if you want it, there is an IPO banking team that has got the deal for you,” he writes on the Livewire site.

During the pandemic, this meant a rush to providers of e-commerce, meal kits and buy-now-pay-later stocks.

 “An IPO on a hot theme can look good in the short run, but can come with longer term pain, as the hot money…does what it does best and moves on to the next shiny thing.”

Consequently, most if not all these types of new issues don’t find a real investor base anywhere near their IPO price and end up firmly under water.

Disclaimer: Under no circumstances have there been any inducements or like made by the company mentioned to either IIR or the author. The views here are independent and have no nexus to IIR’s core research offering. The views here are not recommendations and should not be considered as general advice in terms of stock recommendations in the ordinary sense.

Content included in this article is not by association the view of FNArena (see our disclaimer).

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