Good morning,

They say “time flies when you are having fun” and this year has certainly flown by and while I can’t hand on heart say its always been “fun” its definitely been the most rewarding, challenging and exciting year of my relatively short career. This weekly note will be the last for 2018, and I will resume again sometime in January when I’m feeling inspired, rested and ready to hit the ground running in 2019 (anyone else feeling daunted by January already?)

It pains me to end on a sour note but the ASX 200 was down 2.27% yesterday as everything but the big miners and gold got beat up. That result dragged the market down 3.79% for the week and since this time last year, the index has declined 7.37% before accounting for dividends or 1.11% after (notice how important considering dividend reinvestment is when looking at your total returns).


IPO’s… not all that glitters is gold

I thought today I’d cover something I seem to get asked about a lot and that’s initial public offers, otherwise known as IPO’s. An IPO is the first time the public is offered the opportunity to buy a stake in a company.

IPO’s usually are “sponsored” by a stockbroking firm (or 2, 3, 4 of them) and these firms are allocated stock by the company, which for a fee, they sell to their clients. The firms ‘corporate advisory’ division is also paid a fee for doing the prospectus, marketing the deal and managing the offer of shares. These firms are often held on retainer for a period after the IPO to help with managing the share price, the communications with the market and any transactions from major shareholders, on which they collect brokerage.

I could spend a full weekly note explaining the deeply conflicted and flawed nature of the IPO process and how everyone’s pockets get lined, but I won’t cover that today. Remind me next year, and I’ll give it a run.

For now, I’d like to review the IPO’s from 2018 with the help of my loyal offsider/health expert/client/friend Jordan Travers. The purpose is to point out that while many wish to have access to IPO’s and many experience fear of missing out (FOMO), the harsh reality is that avoiding most deals is the best strategy.
All numbers below are from the ASX website or our research using the prospectus for each offer.

First off, some summary statistics. In CY 2018 we’ve seen 93 IPO’s of which 31 have made a positive absolute return, while 62 have failed to this point in time. $8.3bn in investor capital has been raised so far in 2018 across over $20bn in market capitalisation at current prices.

Adriatic Metals (ADT) is the best performing IPO of 2018, listing at 20c and trading at 63c today. They raised $10m back in May through Canaccord & Ashanti Capital in Perth.

The worst performer is Frontier Diamonds (FDX) which raised $4m back in January through Novus Capital at 20c and is trading at 4c today, down 80%.

To be honest, this information is interesting but useless in helping us make money/avoid losing it in the future.

Listed Investment Companies
First off, last year was a big year for LIC’s with 11 new listed investment companies hitting the boards and raising $2.88bn in capital from investors. This wasn’t a very good strategy with some big blow ups and pretty average returns at an absolute level across the board. L1 Capital’s Long Short Fund raised $1.329bn from investors before dropping 30% and losing investors almost $400m. Those guys are having a hard enough time of it at the moment so let’s not put the boot in (and they had an exceptional track record up to that point in time).

Broker Performance
Looking at the brokers (excluding the LIC’s) there were only 15 firms that raised more than $20m throughout 2018, and returns have averaged -16% across that group.

The year was headed by two big deals:
Merrill Lynch & Deutsche Bank raising $2.6bn for Viva Energy (-22%) and
Goldman Sachs and Bell Potter raised $774m for Coronado Resources (-36%)
I’ve excluded these from the table below and in the interest of simplicity, I’ve only included the first brokers listed on the dealt, or the larger firm as I’m assuming they did more of the raise.

Though they only did three deals, Morgan’s had the worst average returns across those deals with CY5 (-55%), IHR (-63%) and SIL (-65%).

However, I think these sort of statistics are a bit erroneous. Using Bell Potter as an example, they did 8 IPO’s in 2018 losing an average of 5%. They did very well on EXL (+109%); however, the other 7 out of 8 deals are down an average of -21%. Same could be said for Canaccord who had ADT +215% and averaged -17% across their other five deals.

Regarding strike rate, Peloton is the winner. Having been involved in 3 transactions during 2018 with EM2 up 25%, KTD up 110% and KWR down -15%, 2 out of 3 is good going relative to the others. With Morgans, PAC, Taylor Collison, Sequoia, Evans and Hartley’s devoid of winners.

Failure to Launch
Many deals just merely failed to get away. The below table is taken from Mason Stevens, who quote the AFR as their source.

There are eight different brokers featured in the top 10 IPOs for the year while eight different brokers are in the bottom 10 performing IPO’s. 2 out of the top 10 deals were not fully subscribed, same as the bottom 10 performing deals. The bottom 10 deals raised a total of $167m; the top 10 raised an average of $92.5m. None of it matters.

What is important – knowing when to cut and run!

Of the deals done this year, there were some really high performers… for a while. This phenomenon is known in the industry as a ‘pump and dump’*. I’ve taken the difference between the year high return and the current return for all the stocks that IPO’d this year.

  • Althea Group (AGH) went from 20c to 76c before trading currently at 19c.
  • Star Combo Pharma (S66) went from 50c to $2.03 and back to 55c
  • Clearvue Technologies (CPV) went from 20c to 83c and back to 33c (also the best trading opportunity of the year, low to the current of 200% return).
  • Though the “gold medal” goes to Cygnus Gold (CY5) – started at 20c, then reached 38c, and now is currently trading at 9c.

* I haven’t investigated the in’s and out’s of each of these performances, so perhaps its been a genuine issue with the business… excuse me if it’s not, in fact, a ‘pump and dump’ and only appears to be.

In summary,

  • “Access to deals” from 1 or 2 stockbroking firms is pointless. Chances are you won’t be on one of the top 10 or so performing deals for that year, and if that is the case, chances are you’ll lose money.
  • It would be best if you saw deals from EVERYBODY to give yourself the best chance of identifying the handful of successful IPO’s every year.
  • It’s no good merely seeing them; you need to be able to secure an allocation!
  • Picking good IPO’s that are going to give you strong returns in the short term is complicated, especially recently with only 13 out of 93 delivering double-digit returns or better.

This is why I love the way Seneca is set up (here comes a blatant plug). We try and source as many opportunities, from as many brokers, corporate advisors, and connections as we possibly can. We then help you assess the opportunity, allocate an appropriate amount of your hard earned money and then guide you through the sometimes volatile and often arduous task called “holding” a small, emerging business. Importantly, we help you ‘cut and run’ when the market gets ahead of the story or the valuation exceeds what the company can realistically achieve. Conversely, we can advise you on when we the market has become overly pessimistic, and perhaps, a trading opportunity exists.


Movers & Shakers

Defensive stocks up. No surprises there. Coles (COL) bounces back after a rough start.

IOOF (IFL) had a VERY tough week after the Royal Commission got its claws into the management team in a big way. I’ve got NO IDEA why any adviser, with all their working knowledge of this industry, would own IFL for clients over the past 12 to 18 months. They are literally doing exactly what you do! Are you not paying attention?!?!

Otherwise… I mean what else can I say… pretty savage.

I’d like to thank you all for reading my rubbish each week and more recently listening to the podcast. I’ve been pretty pumped on how the subscribers to this list have grown (doubled again this year) and more so how engaged the readers are each week (we regularly reach over 55% open rate vs 16% for the industry) with most readers opening the email at least a couple of times.

On that note, I’ll finish and wish you a very happy holiday period. Make sure you sit back with your family and friends, have a couple of wines, eat some good food, be very grateful to be surrounded by such fantastic people and remember those who might not be so lucky.

If you need me, I’ll be working until the 19th, down in Tassie for Xmas with the in-laws and then back in town from about 2 January-ish.

LL