Tony featherstone is watching these three recent ipos

I recall my first issue as editor of the old Shares magazine. Eager to boost circulation, I plastered “FLOAT STAMPEDE” on a bright yellow cover, replete with an image of a charging herd.

The issue quickly sold out. Readers craved info on upcoming floats and the tech boom supercharged their interest. I never forgot the appeal of IPOs in bull markets.

That was just 20 years ago. Today, newspaper headlines scream “Float Frenzy” and “Float Boom”. After years of weak activity, the IPO market has roared back to life.

I learnt some valuable lessons with IPOs over the years, mostly by covering hundreds of them through my former weekly IPO column in the Australian Financial Review. And here they are:

1. Take even more care with IPOs in hot markets. Good companies are outweighed by opportunistic, low-quality ones that capitalise on the conditions to raise capital.
2. Accept that stock in the best IPOs is hard to get. Frustratingly, the best IPOs go to fund managers, then top retail clients of wealth managers. Small investors are often an afterthought for in-demand IPOs, or mostly there to make up the shareholding numbers.
3. The aftermarket for IPOs is becoming more volatile. Floats that disappoint on debut seem to get whacked harder than ever. Perhaps that is due to algorithmic trading or the effect of day-traders and other speculators in the IPO aftermarket.

Some IPO lessons are less obvious (and even more valuable). The main one is to follow IPOs closely in the first year after listing. I’ve never understood why investors clamour for stocks in floats, then give up on the company when they miss out on IPO stock.

Sometimes the IPO is 10-20% cheaper within a year of listing, simply because it was overvalued at the start or because IPO investors have bailed on it.

The other lesson is to watch IPO escrow anniversaries closely. ASX Listing Rules deem some shares held by early investors or directors as “restricted securities” that cannot be sold for a year or two. The rule stops seed investors dumping their shares upon listing.

I’ve seen many small-cap IPOs tumble after their escrow anniversary, providing opportunities for patient investors. Eager to take profits, early investors sell their restricted shares at the first opportunity, even though nothing fundamentally has changed with the company.

Often, the best opportunities emerge 12 months after a float when the hype has faded and the company has more information as a listed entity.

Here are three IPOs from the last two years to watch. Each is a small- or micro-cap company, meaning they suit experienced investors who have high risk tolerance.

1. Openlearning (OLL)

The promising education-technology (edtech) company listed on ASX in December 2019 through an oversubscribed $8 million IPO. OLL provides online-learning platforms.

After a shaky start, the 20-cent issued shares raced to 34 cents within a month of listing and hit a 52-week high of 41 cents this year. But OLL has tumbled to 24 cents in the last few weeks.

Operationally, OLL is performing. In November, it announced a five-year deal with the University of New South Wales and University of Queensland to be the technology and operating partner for a biotech education platform.

In October, OLL announced a five-year licence agreement with UNSW Global to deliver a transition program (online) for international students.

By all accounts, OLL has good technology and COVID-19 has boosted the uptake of online learning and platforms that deliver it. Yet the market is paying less attention to the deals or OLL’s potential, judging by its falling share price in recent weeks.

Change in issued share capital might partly explain the recent price falls. OLL said in early December that almost 21 million shares and 26 million unlisted options were released from escrow on December 9.

That is a big change in issued capital for a $29 million company.

OLL looks like it is heading towards its 20 cent issue price, even though the company has made good progress operationally in its first years on ASX, particularly given COVID.

Chart 1: Openlearning

Source: ASX

2. Prospa Group (PGL)

The online lender to small business made a cardinal IPO sin: a nasty profit downgrade within six months of listing. Nothing destroys market credibility and the share price faster than companies lowering earnings guidance in prospectus forecasts soon after listing.

Macquarie Capital in June 2019 underwrote Prospa’s $109 million raising at $3.78 a share. The float has been a disaster for IPO investors, hitting a 52-week low of 40 cents.

Prospa has recovered to 86 cents, or just under a quarter of its issue price. Poor execution and COVID’s impact on small-business credit demand and bad debts crushed Prospa’s price.

I included Prospa in my Switzer Report column in late June (“Volatility Provides Opportunities”) at $1.06 a share and noted the company “could easily bounce around the bottom for some time”.

I also wrote: “I suspect Prospa, in a few years, will look cheap at today’s prices when the economy is in full swing again and small and medium-size enterprises are eager for credit.”

That view holds. If anything, economic data and vaccine news has vastly improved since that column. So, too, has repayment rates of deferred loans by households and small businesses.

At the November AGM, CEO Greg Moshal said Prospa is encouraged by the speed of recovery and improved confidence in the small-business sector.

Prospa provided no earnings guidance, but its loan origination in August and September was strong and its balance sheet is in reasonable shape.

I am optimistic on Australia’s economic recovery prospects and believe doomsayer predications about massive increases in bad debts were always overblown – a reason I took a bullish view on the big banks in April.

For all its early faults after listing, Prospa has good brand recognition and dissatisfaction from small business towards the big banks is as high as ever. If it delivers on its potential, Prospa should have years of growth ahead as it wins small-business customers from the banks.

However, Prospa’s recovery will take time and the stock clearly suits investors who can withstand volatility. Risks aside, Prospa looks more interesting at 86 cents than it did at $3.78 at the IPO as the economy roars back to life.

Chart 2: Prospa Group

Source: ASX

3. Hipages Group Holdings (HPG)

I usually like to wait longer before writing up IPOs after listing, but Hipages is an exception.

Shares in Hipages, which has an online platform that connects tradies with homeowners, jumped from its $2.45 issue price in the November 12 IPO to $2.85, but is back at $2.13.

The fall is more significant given the share market had a cracking month in November. Some investors have taken quick profits in Hipages by selling into a strong market.

The News Corp-backed Hipages IPO closed early after attracting good interest from fund managers, even though its valuation seemed reasonably full.

Hipages looks a lot more interesting at the current price, and ideally below $2. Its platform has a significant first-mover advantage in connecting tradies with the public. The service solves a problem for tradies who want work and for homeowners who want an easier way to find services.

Hipages has built a strong brand in its space, thanks to the News Corp connection and promotion by its newspapers and websites. If Hipages achieves a fraction of the success of another News Corp-backed platform, REA Group, investors will be thrilled.

My interest in Hipages is threefold. First, demand for home repairs and renovations (and thus tradies) should rise in the next 12 months as house prices recover and more homeowners plough part of savings accrued during COVID into their dwelling.

Second, COVID has quickened digitisation of services. Arranging tradies quotes and services via online platforms is a lot more efficient than calling them directly. Hipages is a simple idea to connect tradies and consumers – and potentially a lucrative one as it dominates this market.

The third reason is valuation. Hipages is 13% cheaper compared to its issue price. Further price weakness in the next few months is a fair bet, judging by the record of IPOs that disappoint after listing. Again, this shows the value of watching and waiting for better value in IPOs.

Chart 3: Hipages

Source: ASX