Analyst view: Why this fund manager ignores ’80-90 per cent’ of IPOs until they list
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A senior fund manager at the Pengana Emerging Companies Fund says investing in IPOs makes more sense after the company lists because it’s “easy to write a prospectus”.
2020 saw 66 ASX IPOs gain 42 per cent on average since debut, up on both counts from the 61 debutantes in 2019 which gained an average of 35 per cent.
Twenty-nine of the 2020 ASX IPOs came in December alone.
Senior manager Ed Prendergast says Pengana runs a ruler over most new IPOs that come to market, in the wake of the 2020 market frenzy heading into Christmas.
However, the fund’s philosophy is based on the development of more in-depth knowledge about the company and management. So they usually pass on ASX debutants.
“We don’t do pre-IPO, but we definitely do invest in IPOs as they list,” Prendergast said.
“We look at a lot of them, and right now feels like the busiest it’s been for five years. It’s been a frenzy.
“All in all I’ve got to say the quality’s not too bad. We’re pretty cynical on most IPOs, and that’s because you don’t get time to make a proper investment decision.
Prendergast says that to make such a decision, Penagana would have up to “20/30 meetings over the years with those management teams”.
“Whereas an IPO is one meeting, and it’s mostly generic information.
“So on average, we’d say ‘no’ to around 80/90 per cent of the IPOs we look at. And if we do invest in IPOs it’s always a small position to start with.
“We want to watch what they do over 6-12 months and make sure what they said is coming through to the numbers.
“In our experience it’s easy to write a prospectus, but it’s harder to actually prove their business model can perform.”
Travel was a key theme among Stockhead’s stable of pro investors in their ‘sectors to watch’ for 2021.
But for Prendergast, the 2020 commodities boom should have positive flow-on effects for the mining services sector this year.
“Mining services would be one area I’m focused on. It’s been a long road off the lows in 2013/14, and it did have a slight recovery when iron ore spending restarted a bit in 2017,” Prendergast told Stockhead in a year-end interview.
“There’s been some stop/start delays but I think the environment is actually looking reasonably good for an established recovery there.”
Evidently, global funds management giant Elliot Advisers feel the same way, snapping up a 50 per cent stake in mining services firm Thiess last week in a deal that left ASX engineering firm CIMIC Group (ASX:CIM) $1.7bn to $1.9bn richer.
Prendergast said that heading into 2021, activity will be underpinned by the ongoing strength in iron ore markets.
“There’s a large capex cycle from the three majors (BHP, RIO, FMG) coming for iron ore,” he says.
“And it’s all due to the ‘holiday’ they went through after the last boom ended. They weren’t actually spending on expanding their mines.”
“So there’s this catchup effect coming in, and by extension there’s a lot of project work in the pipeline, a lot of tender activity.”
“Broadly speaking, we think on a two-to-three year basis the cycle is looking better than it’s looked for a while.”
On the company investment side, Prendergast also highlighted two stocks that make up a material chunk of the Pengana portfolio.
The two holdings reflect Pengana’s belief that 1) reports of the death of commercial property have been exaggerated (Charter Hall), and 2) structural growth in the aged care sector has just begun (LifeStyle Communities).
And in discussing the holdings, Prendergast provided some useful insights in terms of how professional fund managers go about valuing companies.
“They’re a very capable property fund manager and we’ve had a big investment in them for quite some time,” Prendergast said.
He highlighted that as the global economy recovers, central bank policy means commercial property still offers an attractive yield for large capital flows.
“When you look at where the bond market is right now, the demand is there for commercial property in Australia which is still yielding 4-5pc,” he said.
“Big global investors have to get some return above cash, and property in Australia is still an outlier.”
“CHC have a great presence in both the listed and unlisted space. They’re a very slick machine in terms of marketing products and sourcing property itself.”
“The other leverage they have is they can grow profits faster than revenue, because they’re working with a fixed cost base in a funds management operation.”
As a retirement village developer and manager, the Victoria-based LIC is “very well established with a well run business”, Prendergast says.
“I think they have something like 13/14 villages now. And they have a successful model where each one they develop is similar to the last.”
“We think demand will keep growing because of the ageing population, and these guys do one or two new developments each year.”
“They’ve got lots of happy customers with a self funding model when they can sell developed units to release capital.”
“So that also builds a strong rent roll of recurring income because they don’t sell the land, they sell the building.”