Surfstitch IPO frays at the edge

MEDIBANK’S disappointing debut has reignited concerns about whether Australia’s IPO market is beginning to run out of steam.

A DISAPPOINTING debut by the $5.9 billion Medibank Private combined with a radical repricing of online retailer SurfStitch has reignited concerns about whether Australia’s lengthy IPO market bull run is beginning to run out of steam.

Many investors are questioning whether the momentum can be sustained, with 2014 set to end as a record year for new issuances, and have singled out Estia, one of the country’s largest aged care operators, as the litmus test.

A $725 million institutional bookbuild last week valued the company at $1.03bn, equating to a multiple of 21 times forecast net profit. Estia will list on the stock exchange on December 5.

Yet while investors are stampeding into these high-yield stocks, the relentless expansion of the IPO market has some worried about an imminent pullback.

According to Matt Williams, head of equities at fund manager Perpetual, new issuances are “more fragile” and he claimed this should “not come as a surprise given the amount of IPOs and the size of Medibank”.

The private health insurer closed down again on its second day of trading, slipping to $2.10, 5c below the institutional debut price.

Medibank’s sluggish performance comes as online retailer SurfStitch was forced to reduce the cash target for its float, scheduled for December 16, to between $76m and $93m, as revealed online by The Australian. SurfStitch had initially targeted a raising of $110m.

Sources say management and the lead manager, JPMorgan, opted to pare back the share price to $1 ahead of yesterday’s institutional bookbuild in an effort to secure a solid aftermarket.

SurfStitch was formerly controlled by its major competitor, Billabong International. Last August a group of investors, including blue chip fund managers Perpetual, Paradice, Regal and AusbilDexia, acquired a 51 per cent holding in the company.

While fund managers have pointed out the difficulties in assessing the value of a growth stock, sources said the pre-IPO shareholders had backed the bookbuild and would retain up to 90 per cent of their original stake.

SurfStitch’s revised valuation, which will deliver a market capitalisation of around $200m, represents an enterprise to revenue of one times 2015 sales. The company’s international competitors such as ASOS, BooHoo and MySale trade at multiples of 2 to 2.5 times.

But despite the enthusiastic response to the revamped SurfStitch, the patchy performance of new IPOs is heightening investor caution. APN Outdoor Advertising, listed by Quadrant Private Equity this month, slumped below its debut price of $2.55 to close at $2.49.

Paul Taylor, who heads the Australian operations of global fund manager Fidelity, argued prospective investors should discount mega-market themes.

He claimed the market was now “very individualistic” and said each IPO should be assessed “on a case-by-case basis”.