Yesterday’s launch of Poundland shares appears to have been well received by investors with the 300p issue price about 15 times oversubscribed with the shares pushing as high as 400p at one point yesterday. Market enthusiasm for IPO’s has certainly been boosted by last year’s successful flotation of Royal Mail, which some have said was botched. While an argument could be made that the shares were too cheap, don’t underestimate the impact last year’s sale has had on investor sentiment which got absolutely battered in the aftermath of the financial crisis. With a lot of retail share prices near record highs and the general retail sector up 13% already year to date, the return of IPO’s has been a welcome boost to investor appetite and an engaged small investor is essential for an effective and well-functioning stock market. These IPO’s also open up the opportunity, as long as the IPO is fairly priced for small investors to get a slice of a company at a good price as opposed to other listed shares which are already at fairly elevated levels. The big question as always is whether the shares offer good value and whether or not the growth prospects for what is essentially a budget retailer are there. For this we only need to look at the success of small budget retailers Aldi and Lidl in the past few years in eroding the market share of big beasts like Tesco, Sainsburys, Asda and a lesser extent Morrisons, who are finding themselves squeezed at either end of the demographic divide. With consumer budgets likely to remain squeezed for some time to come, particularly as inflation is still trending above average income growth, the prospects for budget retailers could find a receptive consumer. Poundland’s profits for 2012 were positive with sales of £880m, up 15% and profits up 29% at £23.1m so the underlying business looks positive and with plans to grow their store base in the UK, and across Europe there does appear to be a niche for this type of retailer in an economic environment that is likely to remain price sensitive for quite some time, particularly in Europe where unemployment rates are high, and wage growth is likely to remain low. To get an idea of how lucrative the budget retail sector can be one only has to look across the Atlantic at the success of Dollar Tree Stores, where everything costs $1, which since 2010 has seen its share rise from levels of around $15 to above $50 now. Not only that, revenues for the last full fiscal year were $7.4bn with profits of $979m, and EPS profits growth since then of over 30%. The US market is undoubtedly more mature given that Dollar Tree has been going since 1985, but Poundland certainly has the potential in the UK and Europe given it has first mover advantage, even if its online presence isn’t up to the level of the more mature retailers here in the UK. That is beside the point though given that the price point is the key metric at play here, and likely to remain so at a time when consumers continue to look for what they perceive is a bargain. The big test will come next week when the shares go fully tradeable but this looks like one IPO that is likely to be well watched over the next few months. CMC Markets Poundland price 378.947p/380.554p 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