Here’s your ultimate IPO investor manual – Stockhead edition
Need an IPO investor manual to wrap your head around the flurry of listing activity on the ASX?
Stockhead has you covered, with a user guide of our own that we workshopped with industry professional Adam Dawes.
Dawes is a senior investment adviser and has worked at Shaw and Partners since 2003 – long enough to have seen pretty much everything when it comes to pre-IPO presentations from listing hopefuls.
Leveraging that experience, he provided a useful framework for retail investors to assess IPO investments.
And he did it just in time for a December onslaught — with no less than 27 companies set to list before Christmas Eve:
Scroll or swipe to reveal table. Click headings to sort.
DYOR — it’s a well-worn phrase in investment circles. But in building an IPO investor manual, how does one actually go about it?
As Dawes explains below, it’s not just about the numbers. There are a number of boxes to tick when assessing IPO risk, starting with a more subjective topic – people.
Who are the directors?
“When it comes to DYOR (do your own research) you need to look at the company’s management,” Dawes says.
“Who are the directors? How much experience have they had in the industry?”
“Your due diligence on them is really important because they could be the best directors in the world, but if they’re not in a sector they understand then there’s no point investing in them.”
And what are they getting paid?
Dawes said director remuneration shouldn’t exceed the low six-figure mark for smaller IPOs.
“You don’t want them getting a seven-figure fee – they’re not running Woolworths.”
“We also look closely at directors that aren’t domiciled here in Australia,” he said.
“You want management to be close and you want them on the ground. Sure, if they’re a mining company with operations abroad it makes sense for them to be there.”
“But a lot of the time you want them to be close, so a) you can speak to them and b) they’ve got their eyes on what’s going on in their business as well.”
“I always make sure the directors own a truckload of the business themselves. It shows they’ve got skin in the game and they’re focused on the long-term success of the company,” Dawes said.
He added that as well as the shareholdings of directors, it helps to know who the significant investors are.
While some institutional investors take a long-term view of the companies they invest in, there are also some “flippers” in the Australian market – instos that look to sell up soon after a successful float.
“You want to be aware of that, so capital structure’s really important,” Dawes says.
“One thing you need to know is what the escrow period is for all the seed investors and pre-IPO investors prior to the listing,” Dawes said.
“Generally the ASX will lock them up for 24 months, but some can be 12 months and some are basically free to sell at IPO.”
“That can put pressure on the shares as the company tries to succeed and go forward. So you look at the escrow period, as well as any share-based bonus structure.”
Before joining the ASX boards, pre-IPO hopefuls need to submit a prospectus with ASIC, the corporate regulator.
A prospectus contains information about management, revenue projections and how funds will be deployed — all crucial in the development of an IPO investor manual.
So, you want to list on the ASX…
“The prospectus should include an answer for two simple questions – why are they listing and what are they using the funds for?”, Dawes says.
“There needs to be a clear statement in prospectus and it’s usually on Page 1 — a note from the managing director or CEO saying ‘this is what we’re going to be doing with these funds’.”
That brings us to one of the most tricky and subjective aspects of the IPO game – valuation.
“Pretty much everything on day one comes back to how the IPO’s priced,” Dawes said.
“So you want a valuation that’s going to give an indication of growth of the business. But it’s a tussle at this point between what shareholders want and how much money the company wants.”
Is there an exact science when it comes to listing valuations? “Probably not,” Dawes says.
Valuation multiples above 10x revenue are too high, whereas 4-5x ongoing revenues “might be the level that you’d look at a valuation”. However, it’s a balancing act.
In that context, industry comparables are a useful guide. But valuation multiples ultimately come down to “what investors are willing to pay and what the company wants, and you’ve got to get it right”, Dawes says.
To help with the judgment calls, Dawes said he has two golden rules for a simplified decision-making process.
The first golden rule concerns the IPO listing price.
“If a company comes to market and price gets re-rated – either up or down — you walk away,” he says.
“If it gets priced lower they’re going to say, “well it’s better value for you’, but that just means they’re struggling to attract funding.”
“So any kind of change in the direction of the IPO from the original prospectus – don’t go near it.”
Dawes’ second golden rule? “Never buy from private equity.”
He cited Myer as a prime example, where the department store’s PE backers sold their shares into its 2009 float at $4.10 and made a profit of $1.5 billion. Myer shares closed yesterday at 38c.
If you’ve done your homework and invested in a stock that’s made a successful listing, Dawes says patience is a virtue.
“If a stock has traded at a premium to its listing price and stays there, there’s a good chance it’s going to move sideways for a good 6-8 months,” Dawes said.
“So don’t do anything, because a lot of that growth is already baked in.”
“A classic example is Aussie Broadband (ASX:ABB). They had a $1 listing price, came on at $1.80 and they’re currently at $2.”
“It’s a great business, but it’s not going to do anything because it’s already realised a premium.”
“Then you look for the next quarterly update. Is it an upgrade or a downgrade, and how does it compare to the prospectus numbers?”
“A prospectus will always give you a 12-month forecast. So if they fall short of prospectus numbers, it usually means the stock falls sharply. If they upgrade, then you want to stay in.”
With a mad IPO rush on the cards to end the year, Dawes concluded with a word of warning not to get too caught up in the hype.
“In this market, corporates have a small window coming up to Christmas where they need to get their IPOs done,” he says.
“After December 24, it’s quieter until February. There’s less eyeballs on it, no instos are looking at it and that can be quite negative for a stock.”
“So I’d be really careful about investing in anything leading up until Christmas. There might still be a couple but I think picking winners will be pretty tough.”