Flurry of floats sours as year ends

A STELLAR year for equity raisings in Australia is being marred by a string of poor listings in recent weeks.

Watching the Australian Stock Exchange board in Sydney.

A STELLAR year for equity raisings in Australia is being marred by a string of poor listings in recent weeks, bringing into focus growing investor fatigue and raising doubts over how soon companies may be able to return to capital markets in the new year.

In the past two months, shares of nearly a dozen companies have tanked on listing or have slumped below the issue price within days of their ASX debut. In December alone, only two out of 12 debutants have managed to hold above the listing price.

“The poor performance is a combination of some investor ­fatigue and some optimistic valuations by companies. Not surprisingly, the fundamentals of the company are taking precedence again,” said Julian Beaumont, analyst at fund manager Investors Mutual.

Australia has witnessed an IPO boom over the last 12 months as sustained economic growth, low interest rates and a fast-­growing superannuation savings pool has driven investments in ­equity markets, prompting more companies to brush off capital raising plans.

In 2014, about $17.3 billion has been raised in the IPO market, nearly three times higher than the $6.3bn in the previous calendar year, according to Bloomberg data.

While the $5.6bn Medibank offer dominated the headlines, nearly two-thirds of the 73 companies that listed through the IPO route this year have been small cap stocks, for whom pricing remains a crucial factor in attracting investor demand.

“People were happy to pay high valuations when the market was at the top. But now they are not getting that opportunity to offload stock after listing. There is no support in the after-market,” a fund manager said, declining to be identified.

The benchmark S&P/ASX 200 index touched a peak of 5679.5 points in September, but has since fallen nearly 10 per cent.

The strong performance by the stockmarket through most of the year set the tone for the wave of capital raisings, but a slump in global resources and energy prices and a gloomy economic outlook in the past two months had weighed heavily on recent floats, bankers said.

“There is no doubt that a lot of IPOs were brought forward when the market sentiment was strong, and it was easier to sell the issue. But with volatility in the markets increasing, it has become difficult to price the offers,” said a source at a global investment bank.

Most recent IPOs have fallen victim to seesawing markets. Even in the case of well-known brands such as oOh! Media, Estia Health, Australian Careers Network and Surfstitch, the offers have had to be reduced or offer prices cut ahead of the float.

Investors are blaming investment banks and company founders for rushing to cash out before the offerings were ready for the market. Nearly 30 offers have crowded the market in November and December, with companies rushing to raise cash before the IPO window shuts for about three months after Christmas.

“There is a growing perception that due diligence of companies coming to the market has been ­really poor. The quality of information provided has not been great,” a banking source said.

“There have been cases where companies have changed forecasts after listing.”

The dose of reality is forcing ­investors to review long-held ­assumptions. For instance, the aged-care sector — an investor favourite because of its strong growth potential — saw three large companies list this year. But leading operator Estia’s market value was eroded by a fifth within days of its ASX debut, as investors questioned the valuations.

Bankers and analysts are fretting the recent turmoil could have an impact on upcoming floats in the new year. They expect many IPO-hopefuls will be forced to cut back on valuations, while some companies may just have to cancel listing plans. “A lot will depend on what happens in the broader market over the next two to three months,” said Investor Mutual’s Mr Beaumont.

Business Spectator