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TSB's a hit, but is the IPO bandwagon coming off the rails?

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by James Phillipps on Jun 20, 2014 at 11:47

The IPO bandwagon continues to roll on apace, but can it keep gathering speed or are the wheels set to come off? We look at how this year's high profile floats have performed.

The IPO bandwagon continues to roll on apace, but can it keep gathering speed or are the wheels set to come off?

This year has seen a number of high profile companies coming to market with TSB the latest big name float today. Its share price quickly rose from 260p to 290p with demand sop strong Lloyds upped the amount of stock it offloaded from 25% to 35%. Over the next few weeks the likes of Chinese online retail giant Alibaba will debut on the New York Stock Exchange, while closer to home, the RAC the AA are lining up their listings.

The value of IPO deals in the UK alone has topped £7 billion so far this year, more than three times the amount seen in 2013. However, the performance of these companies since flotation has been decidedly mixed.

Boohoo.com opened 70% above its offer price, while AO World surged by 40% on its first day of trading. Both have since sunk well below their issue price and others headed that way more swiftly.

Card Factory plunged by 10% on day one, with Saga flat on its open, despite being three times oversubscribed by retail investors. Poundland has bucked the trend among retailers, sitting at 370p, up from its 300p March float.

But it is little surprise that concerns are mounting about the prices at which many of these companies are coming to market.

Questioning the price

Richard Buxton (pictured), head of UK equities at Old Mutual Global Investors, last week warned investors to be wary of ‘highly questionably priced IPOs’ and Schroders’ Julie Dean has been worried by ‘very high initial valuations’.

However, Wells Fargo chief portfolio strategist Brian Jacobsen believes float prices have not yet reached levels of ‘financial excess’ and discerning investors can still profit from backing some of these new companies.

‘Last year, the IPO market was dominated by private equity bringing companies to market, which always raises red flags, but when you have the likes of Alibaba – actual operating companies – coming straight to market, that is healthy,’ he said.

But timing your entry point can be a bit of a lottery. Jacobsen said that while ‘it looks good if it shoots up by 20% on day one, that is money left on the table’.

Last year, Royal Mail rose by 38% on its debut, much to the anger of taxpayers, and finance directors at newly listed companies might be similarly displeased.

Jacobsen added that even if a share offering is heavily oversubscribed, it is difficult to know how many are long-term investors trying to get in and how many are short-term investors ‘looking to play the pop’.

Research by Julius Baer shows that IPOs tend to move most independently from the market in their first three months of trading, suggesting short-termism is the most profitable.

There are always exceptions however, with Facebook more than halving and taking over a year to climb back to its float price. Two years on it is up 65%, underlining the gamble of backing and timing IPOs.

AO World: 7.89%

The online retailer surged by 44% on its debut in February, rising from 285p to as high as 412.25p. the stock hit a peak p/e ratio of 187x, which prompted Artemis UK Growth fund manager Tim Steer (pictured) to brand its valuation ‘ridiculous’. Steer went on to short the stock and was rewarded handsomely. Last week AO World announced that revenues increased £38.9 million year-on-year, but the £15.4 million cost of floating led to it positing a £7.2 million operating loss, prompting a further 2.5% share price fall on the 5 June date of the announcement. Although it is up 7.89% from its float price at 307.5, it is 27% of its peak.

Pets at Home: -10.44%

The pet store chain floated on the same day as Poundland but the trajectories of their share prices have been starkly different. Investors have speculated that this in part due to the fact that its private equity owners, KKR, paid £995 million, or 12x earnings, for the group, which was half funded by debt. After flotation its leverage was still 2.5x earnings, which is likely to be a drag on future earnings growth and dividend payouts.

Saga: -6.49%

The over-50s group rose by an insipid 0.6% on its debut on 23 May. Its 185p float price was already at the very bottom end of the range despite its retail offering being three times oversubscribed. A combination of a glitch in returning money to investors who were not allocated shares and news that hedge funds were shorting the group have seen its share price drift down by 6.49% since its flotation, having been down just over 7% at one point last week.

Card Factory: -6.2%

The gift card chain sank by just over 10% on its debut on 15 May, which ECM Asset Management fund manager Sam McGairl put down to the ‘lukewarm reception for the recent private equity-owned IPOs’.
After bottoming at -12.2% a week later, it has since tentatively clawed back some of these losses and now sits down 6.2%. The Wakefield-based group, launched in 1997, has 733 outlets across the UK and is considered by many to be a low growth business.

Poundland: 3%

Poundland has bucked the trend as it has broadly been able to hold on to its early share price gains. It rose from 300p to 360p on the first day of trading in March. Since then the stock has been volatile. It suffered a dip back to 287p in mid-May before surging back up to 370p, then falling back to 309p currently. Although this is still 3% up on the float price, it is 14.81% off the 360p level it moved to on its debut.

Axa Framlington UK Select Opportunities manager Nigel Thomas said: ‘We liked and invested in Poundland; we are all promiscuous shoppers now.’

He is backing the management team led by Jim McCarthy, whom he has successfully invested in before.

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