As some of our readers may recall, we talked some weeks ago to the looming IPO pipeline in Australia. Since then, a number of these IPOs have listed. At the same time, the Australian market has seen a correction of over 2% since the beginning of December. In this context, it is interesting to note the performance of some of the higher profile listings, as well as consider any lessons we may take away from this.

Four of the most prominent companies to have listed in December include: TV network Nine Entertainment, down 4.4% since listing; retailer Dick Smith, down 1% since listing; education provider Vocation Group, up 7.9% since listing; and credit bureau Veda Group, up 47% since listing. Of these four, all bar Nine Entertainment, have significantly outperformed the wider market.

So, what are the lessons that we can learn from this survey?

First, you need to understand what type of business you are buying before you participate in any IPO. This entails a considerable amount of research, not only about the company’s operating and financial prospects, but often also the motivations behind the company listing on the market.

Second, valuation does matter. A company that comes to market at an expensive valuation will often underperform, certainly relative to a company that comes on at a discount to its fair value. In the case of Nine Entertainment, Milford declined to participate given the company’s lack of future growth as well as its fully priced valuation multiple. In contrast, Vocation Group presented as an attractive investment, given the significant growth opportunity in front of it over the next 3 years, as well as its attractively priced valuation relative to its peers and the wider market.

Third, there are risks associated with investing in the market, and it is important for investors to realise this. The more work you can do on understanding and valuing a company, the better chance you have of not only buying a stock at the right price, but avoiding bad stocks as well!

 

Marc Whittaker

Portfolio Manager

 

Disclosure of interest:  Milford owns shares in Dick Smith and Vocation Group on behalf of clients.