IPO activity drops – return to form 6-12 months away - 26 June 2008

Still feeling the impact of the credit crunch, IPO activity has softened significantly as the Australian equity market was forced to make a series of heavy adjustments in the first half of 2008.

Analysis released on 26 June 2008 by PricewaterhouseCoopers, incorporating all expected float activity until 30 June 2008, shows that 21 IPOs will complete in the first six months, raising $334 million. In comparison, the same period last year produced 33 IPOs which raised $4.5 billion. PricewaterhouseCoopers’ analysis excludes resources, compliance and backdoor listings.

PricewaterhouseCoopers Corporate Finance partner Greg Keys says, “Twelve months ago, financial institutions were not adequately pricing risk. Today, we are still waiting to see the full impact on local markets”.

“What we have seen is a consequential reduction in investor appetite for equities and a substantial contraction in financial liquidity. Investor preference has shifted to more stable higher yielding asset classes, such as fixed interest securities and cash. This has driven demand for IPOs down and seen many companies delay or cancel plans to list until more favourable market conditions and a return of investor appetite occurs”.

The decline in float activity, both in the number of IPOs and total funds raised, is due to the absence of new Large Cap issues in 2008 year-to-date (YTD). This is a direct result of the sub-prime induced softer equity market, making large capital raisings more difficult to place with investors at prices which are also attractive to vendor shareholders.

The top five floats in the first 6 months of this year have raised only $251 million, in contrast with the $3.7 billion raised for the equivalent period in 2007.

Consistent with prior years, the majority of IPO activity in the first half of 2008 has comprised smaller floats of less than $100 million market capitalisation on listing. The most notable change has been a dramatic shift in the composition of total floats between Small and Large Cap listings. Small Caps have accounted for 86 per cent of all floats YTD. In comparison, Small Caps accounted for 48 per cent in the prior comparable period.

The median funds raised per company has dropped by close to two thirds from $13 million in 2007 to just $5 million. Similarly, the median market capitalisation of companies listing on the ASX has declined by three quarters from $79 million in 2007 to $20 million in 2008.

Mr Keys says “It is unlikely, given the current uncertainty around the global economic outlook and financial market liquidity, that we will see a return to the buoyant IPO activity of the last few years, for at least another 6-12 months”.

2008 second half outlook
The first six months of 2008 has seen a significant decline in IPO activity. The number of floats has dropped by 36 per cent with the amount raised down 93 per cent. This fall is consistent with a 27 per cent drop in the ASX 300 Industrials Index YTD.

Mr Keys says, “With this trend set to continue into the second half, the full year number of IPOs will be down on the 91 completed in calendar year 2007”.

Companies such as the Australian-based ammonia producer, Burrup Holdings, which had sought to list in the first half of 2008, have been forced to delay listing plans. This float remains much anticipated by the market. Burrup was seeking to IPO with a market capitalisation of around $2.5 billion, raising over $500 million from the sale of 20 per cent of its business. If completed, the IPO would have tripled total funds raised by the market in the six months YTD.

Mr Keys says, “The Burrup IPO would have signalled a return of Large Cap listing activity to the market. The delay suggests Large Cap listings will continue to remain scarce until market conditions stabilise”.

“A notably weak pipeline of floats is apparent heading into the second half of 2008. At this stage, there is only one non-resource company with a defined listing date in July, seeking to raise $3.5 million, although there are a further three floats with listing dates yet to be advised”.

Despite continued speculation of a US recession, slowing global economic growth and rising oil prices, Mr Keys says “sustained growth in the world’s BRIC economies provides some hope that a return to a more positive economic cycle may not be too far off”.

“While in the long-term we expect to see greater de-coupling of the US and Australian markets, the next 6 to 12 months will be a true test of the resilience of the Australian financial markets to any further slowdown coming out of the US”, he says.

Small and Large Cap float performance
“The year so far hasn’t been a ‘happy haven’ for investors with the majority of new listings trading at a significant discount”, Mr Keys says.

The analysis shows that only five of the 21 first-half floats (24 per cent) are trading at a premium to their issue prices, with the balance of IPOs underwater.

Nearly all Small Cap floats and the two Property & Investment Funds which listed are trading at a discount to their issue prices. The Small Cap floats have shed an average of 25 per cent of their original value. The solitary Large Cap float fared much better, returning a 4 per cent increase in value relative to its listing price. In the same period last year, there were 11 Large Caps averaging a 28 per cent increase.

Mr Keys says, “Neither Small nor Large Cap listings have been immune to market volatility and shifting investor sentiment. However, the contrast between Small and Large Cap performance is not surprising. Historically, Large Cap floats have a more diversified business and established history of earnings so tend to gain greater after-market support from investors”.

Sector analysis
On a sector by sector basis, seven of the 21 listings YTD (33 per cent) have been relatively small renewable energy and clean technology companies seeking capital injections to fund development and commercialisation of proprietary technology. This is a noticeable increase on last year during the same period when there were zero.

“As oil prices continue to rise and climate change drives political agendas, companies will continue to leverage-off favourable policy and legislative changes geared to foster growth in the renewable energy and clean technology sectors”, Mr Keys says.

“As a result, we anticipate increasing levels of IPO activity in the renewable energy sector over the next 12 months. The rise will be driven by an increased focus on ethical and environmentally responsible growth opportunities as a result of revisions to the Mandatory Renewable Energy Targets (MRETs) and the pending implementation of Australia’s carbon trading system”.

Historically strong sector contributions from Property & Investment Funds and Health & Biotechnology have softened considerably in the last 12 months with two listings in each sector YTD. Respectively, this compares with six and five IPOs for the same period last year.

According to Mr Keys, this result is no surprise. The fallout from the sub-prime crisis is still being felt by companies across most sectors.

“The increased cost of funding since September 2007, liquidity constraints, non-performing loan write-downs and 12 year highs for inflation and interest rates continue to make investors cautious”, he says.

“The more expensive cost of capital is also reshaping investor risk profiles. Twelve months ago, investors were prepared to take positions in riskier assets, now we see a flight toward blue chip investments which offer relative stability and stronger income yields”, Mr Keys says.

While uncertainty is here to stay, at least for the short term, Mr Keys is optimistic.

“Given time, investor confidence will return to the equity capital markets, generating increased demand for quality IPOs”, he says.

Media Contacts