Will it float or sink?
My kids all played this game at the Montgomery residence when they were very young. We’d line up all manner of items next to a bowl of water and the kids had to think about whether the item would float or sink. Heavy pieces of wood were always fun because despite their weight, they floated.
That surprised look must also be on the faces of those who purchased shares in some of the recent wave of floats.
Despite the fact that in the long term it will be the economics of the businesses that determine share prices, the short term machinations are nevertheless of great interest to many.
With that in mind we thought you may find the following list (Table. 1.) of post IPO share price performance curious, if not useful.
For what it is worth, we have participated this year in several floats this year including Virtus, Veda, Lifehealthcare and Cover-more.
Table 1. Post IPO performance (prices as at 10 December 2013)
|Company Name||Code||Description||Listing Date||Listing Price||Share Price – 10 Dec||% Change||Market Cap ($M)|
|OzForex||OFX||Diversified financials||11 Oct 13||$2.00||$2.65||32.5%||636|
|Australian Industrial REIT||ANI||Property||21 Oct 13||$2.00||$1.98||-1.0%||129|
|Freelancer Ltd||FLN||Software and services||15 Nov 13||$0.50||$1.06||112.0%||458|
|Mcaleese||MCS||Specialised transport and logistics||28 Nov 13||$1.47||$1.45||-1.4%||440|
|Industria Reit Fund||IDR||Property||3 Dec 13||$2.00||$1.83||-8.5%||229|
|Dick Smith Holdings||DSH||Retail||4 Dec 13||$2.20||$2.24||1.8%||544|
|Lifehealthcare Group||LHC||Healthcare||5 Dec 13||$2.00||$1.90||-5.0%||82|
|Veda Group||VED||Data intelligence||5 Dec 13||$1.25||$1.72||37.6%||1,562|
|Nine Entertainment Co.||NEC||Media||6 Dec 13||$2.05||$1.93||-5.9%||1,881|
|Vocation||VET||Education||9 Dec 13||$1.89||$1.96||3.7%||392|
|Affinity Education Group||AFJ||Childcare||9 Dec 13||$1.00||$1.05||5.0%||93|
OzForex (ASX: OFX)
OzForex has carved a profitable niche in the foreign exchange market by undercutting the banks on transaction fees. The business is highly attractive, generating meaningful cash flows, with no debt and requiring minimal capital expenditure. But the listing price accounted for a very high growth rate, which we believed would be difficult to maintain, particularly once the company obtains licences to operate in all US states. As such, we chose to not participate in the float.
Read our previous article on OzForex.
The Australian Industrial REIT (ASX: ANI) and the Industria REIT (ASX: IDR)
We consider that industrial real estate is more attractive as a long term investment than office and retail property, as it requires minimal capital investment and provides favourable yields, particularly when compared to cash investments. Two pure-play Industrial REITs have recently listed. The Australian Industrial REIT has a forecast yield of 8.65 per cent for 2014, while the Industria REIT is planning to provide a yield of 8.2 per cent (each yield is based on the listing price). There is an absence of high quality Industrial REITs on the ASX, and Montgomery Investment Management considered that both listings were priced at a sufficient margin of safety to warrant investment.
Freelancer (ASX: FLN)
Freelancer.com is the world’s largest freelancing, outsourcing and crowdsourcing marketplace by number of users and projects. Employers can hire freelancers to do work in areas from software development to legal services. While the company has generated considerable growth and has attractive fundamentals, we declined to participate in the float as we were not comfortable with strength of the company’s network effect and organic growth prospects.
Read our previous article on Freelancer.
McAleese (ASX: MCS)
McAleese is an Australian provider of specialised transport and logistics solutions. Not only is road transport a capital intensive industry, which doesn’t auger well for long term value creation, there are ongoing concerns with the McAleese fleet after the company experienced a fatality in the months preceding the float. As such, we chose not to participate.
Dick Smith (ASX: DSH)
Many of you would have visited, or at least be familiar with, this iconic electronic retailer. In the space of a year, Dick Smith has passed from the hands of Woolworths, to private equity, and now to the public domain. After meeting with management, we were confident with the company’s transformation and growth prospects, but didn’t believe the price provided a sufficient margin of safety to warrant investment.
Read our previous article on Dick Smith.
Lifehealthcare (ASX: LHC)
Lifehealthcare is a distributor of specialised medical equipment in Australia and New Zealand. We are not typically attracted to investing in distributors as they tend to have little control over the products that they sell. Yet Lifehealthcare manages a superior sales force that has strong relationships with the doctors that use the equipment. These relationships are difficult for competitors and suppliers to replicate, and we consider that Lifehealthcare provides sufficient incentives to retain their core assets. Lifehealthcare is planning to increase the range of products that it sells for its core suppliers, which will provide the next stage of growth for the company as a listed entity.
Read our previous article on Life Healthcare.
Nine Entertainment Company (ASX: NEC)
For those of you who follow Montgomery Investment Management, you would hardly find it surprising that we declined to participate in the float of Channel Nine. The free-to-air TV market does not provide favourable economics for long term value creation, which we have previously described thus:
“Structurally, we liken the free-to-air TV market as three brusque men locked in a room with no windows playing a perpetual game of cards. Inevitably the chips will accumulate with one player until another gets a good run of hands (TV programs), at which time the chips will start to accumulate in that player’s pockets. Because the game never ends, no-one can ever take their chips off the table and walk away.”
Read our previous article on Nine Entertainment Group.
Affinity Education Group (ASX: AFJ)
G8 Education (ASX: GEM) is a company that owns and operates childcare centres, and is a prominent holding in the Montgomery funds. G8 Education Group has experienced considerable success by “rolling-up” childcare centres, which means buying a privately held centre on a lower multiple than what can be realised as a public company. This success has attracted competitors like Affinity (ASX: AFJ), who has raised capital to purchase a portfolio of childcare centres. Affinity was essentially floating a business plan, rather than an established business, which offered little confidence in management’s ability to replicate G8 Education’s returns. We decided to maintain our holding in G8 Education, who we considered as the superior child-care operator.
Veda Advantage (ASX: VED)
Veda Advantage is the largest credit reference agency in Australia and New Zealand. The company charges a fee every time a customer conducts a credit check, which equates to revenues of $1 million per day. What makes the business even more compelling is the changes to the regulatory environment. Australia currently operates under a negative credit reporting system, which means that lenders can only reference credit applications and credit defaults. From March 2014, lenders must conduct ‘comprehensive credit reporting’ by referencing the last 24 months of an applicant’s credit repayment history. Of course, this information will be charged on a per-click basis, which considerably improves Veda’s earnings potential. Veda is our pick of the floats, and we are delighted with the returns it has generated for our clients since it has listed.
Read our previous article on Veda.
Vocation Limited is one of the largest Vocation and Training (VET) providers in Australia, with expertise in student recruitment and training delivery. The company’s growth has largely been driven by a change in the regulatory environment. In 2009, the state of Victoria began providing subsidies according to a student’s preferred teaching institution, rather than TAFE being the primary recipient. Vocation’s future growth is heavily reliant on various state governments following Victoria’s lead, but there is material uncertainty surrounding this timeline. As a result, we declined to participate in the float.
We will update our table as the wave of floats continues, so make sure you stay tuned here on the blog for our latest insights.
By Ben MacNevin and Roger Montgomery.
What’s your take on Life Healthcare (LHC)? The company has been doing very well with performance slightly exceeding prospectus forecast. But wouldn’t being the middleman in this case put LHC in some uncomfortable position without the power to either raise price or pass cost onto the end users?
We have previously owned LHC. It was sold for two reasons 1) It was too small for us and 2) given the TGA process for reimbursement reset every 1-2 years, we weren’t confident the company could pass on the higher costs associated with a weaker Australian dollar.
I find your comments on the Industrial REIT’s interesting. I agree with your comments on being a much more preferable space than office and retail.
Do you feel that the negative conditions around Australian manufacturing will impact Industrial property? Also, considering the NTA on both REIT’s you mentioned were listed around NTA, where do you find the margin of safety in these properties? Is it the ability to increase rents therefore increasing property values?
Just an observation on VED being your pick of the floats.
I note that the company’s Skaffold score is C4 and it’s Net Debt/Equity ratio is a staggering 185% and has been around that level for the past 3 reporting seasons. THE ROE is at it’s best level in years at only 3%. Whilst the company has a Funding Surplus, on these raw figures alone this is not the type of company you would normally even consider a moment for an investment.
For the Montgomery Fund to invest in VED, you must indeed believe the company has compelling long term prospects.
Perhaps you need to rethink the numbers on a pro-forma basis…
What are your thoughts on Steadfast (SDF)? Would you be interest in that company for your fund?
If it were cheap enough we would have a look.
LHC was actually 1.90* at Dec 10 (close) and is now $1.79.
Would you say it is an attractive investment at these levels or is there perhaps something more sinister behind private equity selling.
Of course we can’t tell if something sinister is going on – by definition sinister people wouldn’t tell us. It would be natural to expect some selling from managers for whom the position is too small. This could be feeding on itself to a certain extent. Having met management and discussed the potential for the company, we believe that there is an opportunity to significantly increase value. We will review our assessment again shortly.
The fundamental of Lifehealthcare seems to be quite strong but the share price of Lifehealthcare keeps going down since its IPO, is it a buying opportunity or am I missing some information about the company?
You might like to see my reply to a similar question from Daniel: Of course we can’t tell if something sinister is going on – by definition sinister people wouldn’t tell us. It would be natural to expect some selling from managers for whom the position is too small. This could be feeding on itself to a certain extent. Having met management and discussed the potential for the company, we believe that there is an opportunity to significantly increase value. We will review our assessment again shortly.