New listings help keep ASX afloat

There’s something weird happening on the Australian Securities Exchange. Most market heavyweights are down, the ASX/200 is struggling to keep its head above the 5000 mark, but strangely enough initial public offerings (IPOs) are still going gangbusters.

Those who thought the volatility in the market would see the IPO pipeline dry up were wrong. And it’s easy to see why. Despite not having the mega floats this year like Medibank Private it’s still been a strong year for IPO volumes and for the people who invested in them

An old colleague of mine at Fairfax Media, Tony Featherstone, recently did some numbers of the sector and concluded that this year 74 IPOs have delivered an average share-price gain of 22 per cent relative to their issue price. Remarkably, the average first day gains overall have been 12 per cent higher than the issue price compared with last year’s 8 per cent. And demonstrating ongoing demand first day buyers are 8 per cent in front.

Overall winners are outnumbering two-to-one compared with last year.

There have been some disappointments, notably real estate group McGrath and online furniture company Temple & Webster but neither had troubling raising the required funds to pay for expansion. And this week technology networking group Megaport was on track, rewarding new shareholders with a 75 per cent premium on debut.

IPOs are in demand for the simple reasons that despite their moderate size many are quality operations with a good earnings records and they offer diversification into sectors that have not been available to investors before.

A lack of mining and energy speculative issues, which usually accompanies a strong IPO market, have been missing in this cycle thus helping to keep numbers in the black.

Demand is also being underpinned by fund managers who until recently have been content to follow the herd and trade underperforming market heavyweights. They can no longer ignore the gains to be made in the float market. In a sign that this sector might be peaking comes criticism in some quarters that floats are being too tightly held and valuations pushed into upper levels. Of course it could also be ‘sour grapes’ from those who missed the boat.

Only time will tell but there doesn’t seem to be any let-up in the IPO market with analysts pointing out that 2016 should see more offerings in the tech and disruption sector, particularly those with global ambitions, health and aged care as Australia grows older and companies with products aimed at the growing Chinese consumer market.

Tony Featherstone points out that at least 40 backdoor listings have occurred on the ASX this year and dozens more are in the pipeline. This compares with 28 backdoor listings in 2014 and 19 in 2013. Most of these are smaller tech hopefuls that are saving money by listing though mouribund mining stocks. Many would still be rated as speculative themselves.

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