While it might seem premature to do a year in review style article given it’s only the first day of December, the fact is that December is typically a quieter month for initial public offering (IPO) candidates.
But the 11 months before December have been anything but quiet, with a steady flow of companies entering the ASX through IPOs or reverse takeovers of old shell companies (for the sake of simplicity, I’ll refer to both as IPOs from now on).
Following an IPO, it is almost inevitable that the news flow and analysis falls off a cliff as the media, analysts and investors alike turn their attention to the next candidate or financial news story. This is true even for multi-billion dollar floats, as evidenced this year with the Medibank Private Ltd (ASX: MPL) sale.
But the evaporation of news and analysis after the IPO of a smaller stock is even more pronounced, so that’s where I’ll be focussing my attention. Because there are so many IPO candidates, the 2015 IPO Review will be broken up into a few parts, so we can spend a little longer looking analysing the prospects of a business rather than just giving it a quick summary.
PWR Holdings Limited (ASX: PWH) is one of the most recent debutants on the ASX, with a mid-November listing date. However, this very limited trading history has not slowed down the supplier of custom car cooling systems on its way to being one of the best-performing floats of the year.
PWR Holdings raised slightly over $80 million at $1.50, but opened some 60% higher and traded as high as $2.90, over 90% up on the float price. So why all the fuss?
PWR Holdings has many of the hallmarks of an especially Foolish business. First of all, it operates in a niche industry, but dominates that industry. Specifically, the company designs, researches, manufactures and sells engine coolers and radiators for high performance racing vehicles. The success of their products has seen most V8 Supercar teams and over half of the world’s Formula One teams become customers of PWR Holdings products. That’s a huge deal, as without precise and reliable high-tech cooling systems, these multi-million dollar cars are unable to operate as well.
In further positives, the business remains family run, with the founding family controlling 38% of shares, while the falling Australian dollar will provide a free kick to the bottom line for all revenues earned in overseas currencies.
Costa Group Holdings Ltd (ASX: CGC) was a stock that came to the market with much fanfare, as it seemed ideally timed to take advantage of the megatrend of exporting fresh food to Asia.
However, concerns about the structuring of the float and the high value that the vendors of Costa Group would continue to earn in “rent” from the listed company initially sent shares down from the IPO price.
However, since then, the stock has recovered strongly and now trades at around a 20% premium to its float price. The market and investors appear to be reacting positively to the fact that Costa is more than just a pure play agricultural stock, and less exposed to the vagaries of the weather and climate than first thought.
Indeed, the company has significant research and development expenditure committed to trying to eliminate as much of that risk as possible. The value of the technology flows through to increased crop yields, particularly in higher value and higher margin products like blueberries and mushrooms.
With the company exceeding prospectus forecasts and able to scale its technology innovations in different markets to be closer to the end customers, the business may well outperform expectations in 2016 as additional revenue streams are opened up by access to these new markets.
Adairs Ltd (ASX: ADH) was one of the less spectacular debuts of 2015, with the sheets and bedding retailer only slightly ahead of its listing price of $2.40, having traded in a tight range for much of the year.
The company is a reliable profit generator, with forecasts of net profit after tax of approximately $20 million drawn from its 132 store network. Future profit increases will be driven by an increase in the store footprint, with management stating an intention to grow stores by 8 – 12 a year for the foreseeable future, and also to export the brand to South Africa and New Zealand.
Upmarket sheets and bedding are slightly more resilient to negative shocks tied to the welfare of the broader economy, as the core customer is slightly better off than average, and the store rollout story has seen many niche retailers profit handsomely over the years.
Of the three on this list, PWR Holdings is the standout business, while Adairs Ltd has the best growth prospects in 2016 on a risk / return basis.
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Motley Fool contributor Ry Padarath has no position in any stocks mentioned. Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.
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