Today’s meteoric rise of Initial Public Offering (IPO) Reliance Worldwide Corporation Limited (ASX: RWC) will no doubt remind investors of Medibank Private Ltd (ASX: MPL), and Link Administration Holdings Ltd (ASX: LNK), two other recent IPOS that experienced strong buying interest.
The Reliance IPO was heavily dominated by institutional investors such as JP Morgan (holds 14%), HSBC (11%), Citicorp (4.6%), BNP Paribas (2.3%), Credit Suisse (2%), RBC, Merrill Lynch, Australian Foundation Investment Co. Ltd. (ASX: AFI), and others.
In fact, the top 20 shareholders hold an estimated 87.3% of the company as of this morning, presumably leaving other investors competing to buy the remaining 12.7%. 42 million Reliance shares had changed hands at the time of writing.
After today’s rise, shares in Reliance trade around 30 times their forecast 2016 earnings, which is not cheap, and is above the 21 times investors would pay for similar business Reece Ltd (ASX: REH).
However, investors get a company which earns 77% of its revenues overseas, and has a substantial warehousing and distribution network through which new products can be effectively on-sold to end users. With the company’s in-house development of products such as its Shark Bite ‘push to connect’ plumbing fittings, this could prove to be an effective way to gain market share and disrupt competitors.
Investors also gain the prospect of growth via expansion into new regions such as Spain, as well as growing sales and market share in existing regions, including Australia and the USA.
No business is a buy at any price, although investors do appear to be getting a quality business with Reliance Worldwide. Additionally, management remains well aligned as a result of retaining a significant chunk of the company. Nevertheless, I expect shares could come off the boil over the next few days as some profit-taking occurs.
Motley Fool contributor Sean O'Neill has no position in any stocks mentioned. 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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