Weak ASX debut by Cuscal may be due to lack of scale rather than fundamentals

While institutional investors are eager to see more opportunities, they say one of the problems is that many prospective IPOs are still not cheap enough to be attractive. Picture: NewsWire / Max Mason-Hubers

Questions are being asked over whether scale rather than fundamentals is increasingly playing a part in a company’s performance on listing, after Cuscal shares fell on their debut on Monday.

The company that provides the payment rails between customers and vendors listed after its shares were priced in an initial public offering at $2.50 each to give it a $479.1m market value, as it raised $336.8m.

It is considered a solid business with a robust growth profile, and reasonably priced at 13 times earnings when the market is trading at about 19 times. But on debut the shares closed down 8 per cent at $2.31.

That’s only just days after construction and engineering group Symal ended its first day as a public company with its share price flat at $1.85, the same price as the stock was sold at in its initial public offering to raise $136m.

Equity capital market operatives had high hopes that the market had turned the corner and was now more welcoming for IPOs. That’s after a year when weaker economic conditions created volatility and made investors cautious, with the opportunity to earn more in bank accounts, as high inflation drove up interest rates.

But while institutional investors are eager to see more opportunities, they say one of the problems is that many prospective IPOs are still not cheap enough to be attractive.

A new phenomenon playing out, though, is that the rise of passive index funds means that scale now plays an important part in determining whether IPO deals go well.

Passive funds don’t take part in IPOs, but once listed, if the company is big enough, they need to buy in, which pushes the price up in the early stages.

But eventually company fundamentals take over, and if the business is not performing strongly, investors sell out and the shares fall.

When HMC Capital lists DigiCo Infrastructure REIT next month, it is initially expected to be a strong performer for that very reason.

The company has paid top dollar for its data centre assets that require much capital investment, making some wary about its future prospects.

But the business will be worth $2.75bn, which means passive funds will buy in and drive up the price. Also helping the deal has been that the data centre sector is in hot demand, as they become increasingly valuable due the high level of computing power needed by artificial intelligence.