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2014, the year the IPO market sputtered back to life
00:00, 08 December 2014
Last year’s successful flotation of Royal Mail while controversial in terms of valuation did reawaken a sleeping giant in the form of the UK IPO market, as a raft of new companies came to market into 2014. Unfortunately for some of the investors involved in this year’s early floats the success rate was somewhat mixed as IPO advisors, conscious of the torrent of criticism that greeted Royal Mail led advisors pushed valuations to quite high, and in some cases eye wateringly stupid levels. This has caused some concern that the UK/European IPO market hasn’t been functioning properly with calls in some areas, for an inquiry by the city watchdog the FCA on the basis that some advisers are distorting the market by putting pressure on bank analysts to put unrealistically high valuations on the stock. There is certainly a case for some form of investigation given how poorly a lot of this year’s IPO’s have performed relative to their IPO price. There is certainly an argument for bank analysts being prevented from commenting on an IPO that their bank is a lead advisor on, as there is a clear conflict of interest, which rightly or wrongly, appears to have damaged confidence in the integrity of the market. That being said a little independent analysis and common sense also goes a long way and it should have been clear to anyone with an ounce of intelligence that some of this year’s IPO’s were an accident waiting to happen in terms of their initial pricing, and this appears to have been borne out in the way a lot of them have performed in the months since. With that in mind let’s have a look back at some of the more noteworthy IPO’s this year as we compete for the turkey of the year, as we head towards Christmas. Pets At Home – launched at 245p and has pretty much traded steadily lower, hitting a low of 163p in October though it has recovered some of that lost ground, pretty much all of the early enthusiasm which surrounded the IPO has dipped away. On the business side of things like for like sales in the six month period to October saw an increase of 4.2%, with revenues of £382.5m, which bodes well going forward, but concerns remain about the amount of debt it is carrying. Poundland – the budget retailer priced at 300p was greeted with a lot more enthusiasm and it also had a first day pop higher. Its business model is quite transparent and profits look fairly resilient with favourable comparatives to the much more mature US market. With the big four supermarkets feeling the pinch, value offerings of the type Poundland offer certainly seem to be extremely popular. Poundland also has first mover advantage in what could well be an extremely lucrative market if the US experience is anything to go by, and this appears to be reflected in the share price which has held, bar the odd day, managed to hold above its 300p IPO price. No turkey here, in fact its recent underperformance is a little concerning but given the changes taking place in the retail sector at the moment, the value offering is unlikely to go away anytime soon. Boohoo.com – a little bit of Boohoo here but not that much, the on-line company has been touted as an alternative to ASOS for the 16-24 years age group. The shares were priced at 50p, which means you’d be slightly underwater at the moment, but you wouldn’t be too offside with the shares predominantly trading around the 45p mark for most of the last three months. The market for discounted fashion continues to look strong and with fairly low overheads the company has plans to significantly increase its warehouse capacity and staff to meet a three year growth plan. The most recent results showed a 31% jump in sales and a rise in pre-tax profits by 23% to £4.5m in the period up to August 31st. AO World – the on-line white goods seller, it was listed at 285p with a valuation of £1.2bn, and post IPO the company was briefly worth more than Home Retail Group the Argos owner. Since then the shares have slid back touching a low of 150p in October, but have since rebounded to just above 200p. Given that its last set of full accounts showed a net loss of £7.2m on revenue of £385m that post IPO pop was quite a rich valuation. Projections for 2015 are for pre-tax profits of £7.9m on revenue of £499m. Zoopla – the on-line property portal its nearest rival would be RightMove, sprinted out of the blocks at 220p and traded as high as 270p before finding the air a little thin and slipping back. Since then the shares have drifted back below their IPO price largely as a result of the slowdown in the housing market seen in the months since September. This slowdown has also affected other residential real estate stocks like Foxtons whose shares have halved since their February highs. TSB – originally priced at 260p this new challenger bank was spun off as a result of the conditions imposed by the EU as a condition of the Lloyds Bank bailout after they swallowed the poison pill of HBOS. This was another float that was open to retail investors from the beginning and it’s been pretty much steady as she goes with the share price trading between 250p and 295p. With no legacy issues to worry about, the only thing holding it back is the absence of a dividend, which won’t come before 2017. Just Eat – an eye watering valuation, it IPO’d at 260p and it continues to grow even if it did slide initially post IPO. The company trades on over 100 times its 2013 earnings, as well as being valued with a market cap more than double of Domino’s Pizza UK and Ireland, just below £2bn. Its turnover in 2013 was £97m while the turnover for 2014 is projected to be £149m. At a share price of over 330p its forward P/E is projected to be at 113 which when compared to Domino’s which trades on 26 times. Just Eat is undoubtedly a success story at the moment, but the lack of any tangible assets and readily replicable business model makes its valuation a little bit rich. Saga Group – there was a lot of controversy about how Saga should be rated in the context of whether it is a leisure company or an insurance company. This appears to have hit the share price as it has traded lower gradually from its 185p launch price to be trading just below 160p. While this isn’t great for its shareholders, demographics are clearly on its side in the long term, which is just as well given the recent slide in the share price. AA – an oversubscribed IPO, the AA was always likely to be a popular and launching at 250p the shares have performed well moving steadily higher, despite an initial dip to 230p soon after launch. The breakdown business was always the jewel in the crown and what the company is best known for but the insurance business is likely to be key revenue earner going forward, with the company always looking to cross sell between its divisions. Jimmy Choo – launched in October there was some speculation it could have been pulled at the last minute but it got away at the bottom end of the price range at 140p, and as such it has found it easier to move higher. This may well have been fortuitous in that it has less downside risk, but nonetheless the company remains very much a niche luxury brand. With an ambitious expansion program in Asia and none of the IPO money going back into the business there are doubts about the ability of the company to sustain its profits against a slowing Chinese and Japanese market. Virgin Money – too early to tell with this IPO, originally priced at 283p it is a welcome addition to the challenger bank community. With a significant business in deposit accounts and mortgages it lacks the one thing necessary to really be a serious contender to the rest and that is a current account. If you want a one stop shop for banking services, you need a current account offering, and the hope is that the management realise that and move quickly to rectify that. All in all it’s been somewhat of a mixed bag for the IPO market this year, and while the activity has been encouraging, by mid-July the early froth was starting to come off quite significantly. If any lessons have been learned from this year’s new issues it is probably this one. Make sure your valuation stands up to scrutiny and be clear about what your communication strategy with your prospective client base is going to be. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person