Virgin Australia faces questions on IPO in testing market conditions

The $3bn question of whether Virgin Australia will sell shares to the public through an initial public offering has equity experts HLB Mann Judd scratching their heads.

The $3bn question of whether Virgin Australia will sell shares to the public through an initial public offering has even equity experts HLB Mann Judd scratching their heads, arguing the airline must weigh up strong earnings with difficult market conditions.

IPOs have “ground to a halt in 2023,” said HLB in its mid-year report released Thursday, with only $150m raised this year to date, down 81 per cent from the same time last year and a whopping 95 below the previous year.

Market conditions are in “one of the most challenging periods for IPOs” since the late 2000s and are even worse than during the Global Financial Crisis, ­according to HLB Mann Judd partner Marcus Ohm.

He said the Virgin Australia board would be mulling high ­interest rates and poor investment sentiment against the airline’s strong performance.

“I know what the airfares are like and it is a great time to be listing an airline, but what is the intrinsic worth of the business, what does the market want to pay for it?” said Mr Ohm. “The chief executive is trying to talk things down a bit in terms of the possibility of listing so we will have to see how that eventuates.

“Maybe quarter four or into 2024, but there is going to be a window for this because there are a few issues, people don’t value the Virgin loyalty scheme as highly as the Qantas one,” Mr Ohm said.

If it does hit the Australian Securities Exchange this year it will dramatically bolster the capital market figures.

Australia’s second-biggest airline ­is expected to have an ­equity value of close to $3bn, ­although shareholders Bain, ­Virgin Group, the Queensland government and key executives are likely to retain shares.

Virgin under the reins of chief executive Jayne Hrdlicka has pulled off a strong turnaround from its collapse during Covid.

It has produced its highest profit margins since 2007, pulling in estimated earnings of about $125m from first-half ­unaudited revenue of $2.5bn.

But the underperformance of the country’s only other significant listing this year, the chemical and ingredients distributor Redox, must be hanging over the Virgin board.

Redox raised $402m when it floated earlier this month, giving it a market capitalisation of $1.3bn and the company’s shares have sagged since then, from a list price of $2.55 to trade at $2.29 on Thursday.

“Everyone has their beady eyes on that one just to see how it performs … that will really give a barometer for potential listings coming to the market,” said HLB Mann Judd director Warrick Oakes.

In the first half there were just 14 IPOs and Mr Ohm said that doesn’t include the companies that tried and failed to do a book build and raise capital.

The pipeline for the current half was only for 11 new listings worth $693m including Redox.

It’s a “very difficult time with the capital markets in general. We’ve seen a lot of our clients just really struggling to raise money, regardless of the industry. It’s been hard on the secondary rising front, that’s really gone through to the IPO market as well,” Mr Ohm said.

“The market remains difficult going into the second half thanks to the combination of unfavourable macroeconomic factors and poor investment sentiment.

“It’s interesting what‘s going on with the demand side but more particularly in probably more relevantly the supply side with both lithium and rare earths and they’ve certainly been the listings that we’ve seen during the year,” Mr Ohm said. “We think they’ll continue in the short to medium term.”

After that, he said it will depend on price, with the global forecast for lithium expected to fall as increased demand is offset by increased supply.”

While investors have been diverted from gold to critical minerals, he expects it will remain an important share of equity raisings on the Australian sharemarket.

“The consensus for gold is it’s pretty much going to stay as it is for the next couple of years,” he said. “Gold is like a real mainstay of small cap systems. So I do think we’re going to get more of those coming through. It’s just that the investment funds have been quite limited at the moment. They’ve all been going to those critical minerals stocks.”