MoneyTalks: One fundie’s advice on how to spot good IPOs and emerging companies
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MoneyTalks is Stockhead’s regular recap of the ASX stocks, sectors and trends that fund managers and analysts are looking at right now and in this edition we’re looking at finding good IPOs.
Today we hear from Nick Guidera, portfolio manager at Eley Griffiths.
Eley Griffiths was founded in 2003, beginning with the Small Companies Fund, and in March 2017 it launched an Emerging Companies Fund.
The latter returned 38.5% last year and has averaged over 20% p.a. since the fund was launched.
“Investors are getting more confident in backing companies earlier in their growth journey and there’s a wave of capital competing for those investment opportunities which is supporting that area of the market,” Guidera said.
“We’re always debating what’s the next best thing, how the portfolio is positioning and challenging ourselves.
“Particularly in the last 12-18 months COVID has forced you to rethink what’s defensive, what’s a reopener, what’s a beneficiary.”
Guidera says the fund has had some good breadth and attribution over the years, having gotten into Afterpay (ASX:APT) early – by owning Touchcorp – as well as Silver Lake Resources (ASX:SLR), Hub 24 (ASX:HUB) and NZX-listed industrials business Mainfreight (NZX:MFT) which is up nearly 120% since February 2020 benefiting from the ecommerce boom.
“Tim [Serjeant] and I have spent a fair bit of time in China over the last 10 years. When we were able to travel, we would travel twice a year looking for inflection points to happen in the EV supply chain,” Guidea said.
“We saw that when lithium prices began to bottom and we put Galaxy and Pilbara Metals (ASX:PLS) in the portfolio early – in September last year – and it paid off handsomely as investors wanted to understand how you can play EVs.
“That’s only been accelerated by the policies by governments globally both in the US and UK with mandates to reduce the number of internal combustion engine vehicles in the next couple of decades, and as a result, it’s been a key attributor.”
While there have been dozens of IPOs in 2020 and 2021, Eley Griffiths only played in a small fraction of them.
“We’re very selective about how we invest in IPOs because there are so many good companies in our investment universe already – over 600 from what we monitor,” Guidera said.
“IPOs without the track record of being a listed entity, without historical financials and without the comfort of a good listed board, they are ultimately a high risk proposition.
“But when you see a good company – and there’s certainly been some absolute crackers in last few years – we’ve backed them abundantly and built our conviction in those positions as they come to market.”
And yes, sometimes finding good IPOs means buying on Day 1.
“Even if that stock is up 20-30-40-50% we will have conviction over where that business will go over long term and often that’s best day to do your buying,” he said.
Finding good IPOs is possible, but of course, as Guidera warns, you need to think before you buy and think long term.
“I think it’s really important to assess an IPO with same rigour you’d assess a regular listed investment in your portfolio,” he said.
“Because you are fortunate in that you’re given a 150-page prospectus in most instances. You are typically given access to management if you’re an institutional investor – perhaps not as much as you’d like.
“But we approach IPO investing with relative caution because of the lack of track record but I think if you assess IPO candidates on the merits of business, the industry in which they operate in, who their customers are, what the power of their suppliers are, what’s the regulatory environment likely to be, where are the risks in their ability hitting prospectus forecasts…”
“I think IPO investing requires the same amount work or more as investing in individual stocks listed for years with pages of annual reports available.
“And I think if you can back the management teams you think are aligned with you and have a five-year journey, not cashing out on day one, and then relying on the market to fund the growth going forward, I think you can back some winners.
“There is art to it [finding good IPOs] but to be fair it’s just work and preparation that goes into it.
“And I think not just doing work prior to IPO but once the company is listed, spending the time with management, doing industry calls, getting up to speed on a part of business you’re less familiar with, will set you up for success in the long term.”
One good IPO Eley Griffiths found was Aussie Broadband which listed last year at $1 per share and now sits well over $4.50.
“Aussie’s taking significant share from major telcos across residential and business,” Guidera said.
“I liken it a lot to the financial platforms of 2015-16 when Hub 24 (ASX:HUB) and NetWealth (ASX:NWL) were minnows but had technological offerings to disrupt banks and wealth managers. Advisers were moving with their feet and bringing flows across.
“Aussie is in a very similar position in that you have incumbents that haven’t innovated, let them down from a customer perspective.
“And a sweet spot with a proposition that resonates with the Australian consumer and business. Having won Westpac, it’s good validation that it isn’t just a niche consumer brand but it can be a force to be reckoned with among enterprise.”
“BlueBet is an interesting holding for us,” Guidera continued.
“It’s more recent, t listed in July this year off back of a strong interest in sports betting sector as PointsBet (ASX:PBH) has trail-blazed ahead on its ambitions of moving into the US market.
“[Bluebet has] a profitable Australian gambling business with significantly less share in Sportsbet, but winning share from Tabcorp and there’s optionality around US which we’re attracted to.”
DDH is a WA mining services company that listed in March this year.
“It is one of the pre-eminent contractors out there in terms of sector-leading returns to capital, some of the highest margins in the mining services sector and its maiden result exceeded almost every major metric,” Guidera said.
The stock is only just above its $1.10 IPO price but Guidea says it could have more room to grow.
“You’ve got good management in there and an exposure to mining services cycle which has been treacherous in the last 12-18 months as the market struggled to value these stocks,” he said.
“This business has increasing rig numbers which is a barometer for revenue; not only are they bringing new rigs on but they’re also improving utilisation of fleet and getting into the position where they can actually drive rates.
“So all those three trends are trending positively off the back of demand for end commodities.
“And we’ve seen elevated iron ore prices over the last 12-18 months, so the miners are flush with cash thinking of how they can expand production going forward, and DDH is one of the key beneficiaries of this.
“We think there’s significant upside to this name and it’s one that’s worth watching coming out of reporting season.”
This company has taken off since its listing earlier this year. It is a chemicals, logistics and waste management company.
“What was good is there was no sell down from a founder that owned 100% of equity at time of IPO and he raised capital to invest in his business to grow over time,” Guidera said.
“We often see capital raised at IPO but rarely do you see it deployed so soon after IPO and this company has gone after it very, very hard.
“They’ve deployed $20 million since IPO into new initiatives for brownfields, greenfields as well as acquisitions as they seek to build barriers to entry in what is a highly regulated environment.
“Not only that but [there’s] significant opportunity to sell across divisions and make further acquisitions.
“Chemical warehouse, storage and environmental solutions doesn’t have the appeal to some investors as perhaps sports betting or the latest tech innovation, but often they’re some of the best quality industrials out there that can be next mainframe.
“This stock was is priced relatively expensively to when it listed but their earnings are ahead and we think they’ll grow into it.”
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