October will be a busier month for companies listing on the ASX after a lull over the first half of the year due to the COVID-19 pandemic. But despite reduced activity, returns on initial public offerings have been healthy, reflecting strong share markets since April.  

According to Marcus Ohm, partner, corporate and audit services at HLB Mann Judd, IPO activity for the first six months of 2020 was at historically low levels. By 30 September 2020, there were 24 IPOs which had raised $564.7 million. That compares to the same period in 2019, with 35 IPOs raising $2.94 billion and 2018 with 66 IPOs raising $6.52 billion.

“Whilst the first half of the year historically experiences lower volumes of listings, it would appear that the COVID-19 pandemic had a significant impact on the IPO market,” says Ohm.

“This underlies the fact that it is really just a partial recovery in the IPO market as opposed to anything more, and only in certain sectors and business which have done well under COVID.”

However, reflecting stronger share since April, IPOs have performed well overall, and much better than they did in 2019 or 2018. Ohm’s analysis indicates that average returns on IPOs over the year to September 30 were 52 per cent, compared to 34 per cent over the same period in 2019 and a loss of 18 per cent in 2018.

“For those companies which listed in 2020, returns have generally been quite positive. The majority of the IPOs occurred later in the period meaning they listed after the market volatility in March and benefitted from the market recovery,” says Ohm.

According to Luke Laretive, CEO of financial advisory firm Seneca, the key feature of IPOs in 2020 has been the reduced size of business listings, with the average market capitalisation this year under $90 million versus $320 million last year. Last year’s average was boosted by a few large listings valued at over $1 billion including PointsBet (ASX: PBH), Tyro Payments (ASX: TYR) and Fineos Corp (ASX: FCL). In contrast, , says Laretive, the biggest deal to hit the ASX this year has been Aroa Biosurgery (ASX: ARX) with a $400 million market capitalisation.

Pick-up in IPOs expected

Yet the remainder of October through to December is likely to be busier for IPOs, with several floats planned.  “Things are really going to pick up between now and Christmas break. The hot companies seem to be focused on offering software-as-a-service (SaaS), digital and personal security products, e-commerce or unique deployments of artificial intelligence, machine-learning and 3D printing,” says Laretive.

“That being said, I think sectors like buy-now-pay-later (BNPL) and non-bank lending are showing evidence of fatigue and saturation.”

HLB Mann Judd’s Ohm points to proposed listings of companies that have done well in the COVID environment, such as Mydeal.com.au, listing later this month in a $40 million capital raising, Adore Beauty (online retail) with a relatively large $269.5 million raising and Aussie Broadband, also with a $40 million raising. Other companies expected to list this year include CleanSpace Holdings which wants to raise $131.4 million. That company designs, manufacture and production of respiratory protection equipment.

However, overall, these are small deals. “The most notable difference is the lack of large IPOs at this time compared to previous years,” says Ohm.

Morningstar analyst Gareth James backs this point. The vast majority of IPOs on the ASX are small issues and the pick-up in IPOs towards the end of the year is a simply seasonal effect, he says, rather than any significant backlog of floats.

“Companies have got their financial reports out of the way and some will be trying to list before Christmas. Overall, on a net basis, the number of companies listed on the ASX is falling,” says James. Reflecting that, 2,164 companies were listed as at September 30, 2020, compared to 2,242 a year earlier.

Opportunities for gains but proceed with caution

Yet Seneca’s Laretive recommends clients examine IPOs for investment opportunities and invest in high quality businesses at reasonable prices, if available.

“We don’t mind if that is in the secondary market or as part of primary issuance (IPO).  Private companies, as result of the increased financial disclosure and reporting requirements of being listed on the ASX, are more likely to be mispriced than a company that has been listed for many years … [this] can throw up opportunities for excellent returns,” says Laretive.

But would-be investors need to be careful as the promotors of IPOs can use this mispricing to their advantage.

“The IPO process is often exploited by vendors, corporate advisers and brokers, who use the IPO process to generate lucrative fees through listing companies at unsustainably high valuations,” says Laretive.

“This may be to assist wealthy, existing shareholders (that is institutional investors or private equity firms) exit or materially reduce their position in a business that’s operationally peaked or simply to win the right to IPO the firm ahead of their competitors, like two real estate agents competing for a property listing, the one who gets the listing usually quotes the highest appraisal price.”