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Float your boat?

by Ben Power | 26 Feb 2014

With plenty of floats coming to market in 2014, now is the time for expert advice on whether and when to jump on board.

 

A surging stock market has triggered a round of new floats on the Australian Stock Exchange after years of little activity, with investors recently scoring big gains from listings of internet companies OzForex and Freelancer.com.

A raft of small-cap mining companies listed on the ASX during the mining boom, but in recent years a bear market and the global financial crisis have limited the number of new companies hitting the market. But that is changing.

Floats lure investors with the prospect of quick gains, but experts say retirees focused on capital preservation need to be disciplined, avoid speculative listings, and limit investments to reasonably priced companies with strong track records.

A float is an initial public offer (IPO) of shares to the public. A company is basically selling a stake in the company via shares, which are then listed on the ASX.

As of November 2013, 12 to 14 floats were scheduled in the final weeks of the year. “I think that’s probably the first wave of floats,” Ross MacMillan, Senior Equities Analyst at Morningstar Australasia, says. “In 2014 we should see quite a number of floats coming to market.”

Investor appetite for equities is growing. “There is more confidence in the market shown by investors,” MacMillan says. “A lot of investors have stayed away from equities since the GFC, but the Australian market has now had two years of quite reasonable performance.”

Performing well

A number of companies, including OzForex and online jobs portal Freelancer.com, have listed on the market recently and their shares have traded well above the price at which they were offered to the public, which has boosted appetite for floats.

Investors face a low-return and low-yield environment, particularly from fixed income, and the prospect of a windfall from a float is attractive.

However, floats are often brought to market with heightened excitement and slick promotion, but very little track record. Fund manager and finance journalist Matthew Kidman, in his book Bulls, Bears and a Croupier, says floats are not just a potential trap, “they are a complete lottery”.

Even big companies can under perform. Thousands of Australians are still sitting on losses from the sale of the second tranche (T2) of Telstra, which listed on the market in 1999 at $7.40, still well below the current share price of $5.08.

There have been successful floats. Kidman cites QR National and Promina, companies he says have long histories of delivering acceptable returns and floated at reasonable prices.

Retirees could focus on companies that have a strong competitive advantage, which allows them to maintain revenue and earnings growth, even during recessions. “They have the ability to go out into the market, and they have strong growth possibilities not just in Australia but internationally,” MacMillan says.

MacMillan identifies data analytics business, Veda Group, which listed

5 December as an example of a company with strong competitive advantages, including its entrenched relationships with customers, and one that may be worth exploring further.

Paul Banner, financial planner with Provenance Advice, agrees that retirees probably shouldn’t buy shares in floats of small, start- up companies without a track record. But they could look at larger companies that do have a track record, are profitable and operate in a growing market. He says having disciplined investment criteria when considering floats can mitigate some of the risks.

Banner wants evidence “beyond reasonable doubt” that the stock is going to do well from its listing. He says that investors are not going to get every investment right, but clear discipline will serve them well over time and help improve their returns.

There are no companies set to float in the near future that meet Banner’s strict criteria.

Taking a punt

Some retirees may choose to invest a portion of their portfolio in risky floats. But they need to view those funds as speculative and they may suffer heavy losses. Banner says some of his clients ‘punt’ a small amount of their portfolio – no more than five per cent – on floats and they treat it as a hobby.

With the number of floats set to soar this year, the action and excitement will be tempting. “Capital preservation is just so important for retirees,” Banner says, adding that equities are volatile enough without taking on the added risk of speculative floats.