Resource IPOs lose their shine

THE BOURSE WHISPERER: Although not entirely extinct, it would appear the small resource company Initial Public Offering (IPO) could soon be included on the endangered species list.

A recent investigation into the 2013 IPO activity on the boards of the Australian Securities Exchange has concluded there was a definite shift towards larger IPOs last year.

According to the latest HLB Mann Judd IPO Watch report, in 2013 96 percent of all funds raised were completed by companies with a market capitalisation of more than $100 million.

This compares to 2012 where just 40 percent of funds raised came from large companies.

It would seem the collective investment community appetite for risk has been sated somewhat due to recent global happenings with the HLB Judd analysis finding the total amount raised from new listings in 2013 was more than $8.5 billion.

To provide a bit of perspective for that statistic let’s take a look back in time.

IPO activity hit a three-year high in 2010, with more than 90 floats, almost twice the number of listings, raising just over $7 billion.

This was something of a dead-cat bounce for the sector following $1.6 billion raised through IPOs in 2008 and $3 billion in 2009 as the global financial crisis poured a great big bucket of cold water over float activity.

The height of the boom saw around 270 IPOs list on the ASX in 2007, as companies turned tenements into ‘new projects’ and subsequently into 20 cent IPO opportunities a voracious investment community was unable to resist.

The capital raised in 2007 totalled $11.13 billion, making 2007 a bumper year for new – small capitalisation – listings.


Number of Small Cap IPOs by Market Capitalisation. Source: HBL Mann Judd


What is interesting about 2013 is the $8.5 billion raised is significantly higher than the $2.3 billion average of the past five years.

It is also more than $8 billion higher than the historic low of $0.4 billion reached in 2012.

In total, 49 companies listed on the Australian Securities Exchange in 2013, a slight increase on the 46 listings of 2012, but low when compared with the 103 companies listing in 2011 for $1.5 billion.

Of these new entrants, small cap companies comprised 61 percent of the total. This contrasts markedly with the previous year, where small caps represented 93 percent of total listings, and is also less than in 2011 where small caps represented 67 percent of total listings.
“While small cap resource companies have dominated the IPO statistics in recent years, this was not the case in 2013.

“A combination of falling commodity prices and reduced investor sentiment appear to have had a negative impact on resource IPOs during 2013,” HLB Mann Judd Perth Marcus Ohm, author of the IPO Watch report said.

Ohm said this reflects the difficulties in completing smaller raisings under current market sentiment.

According to Ohm’s analysis there was very little activity from companies with market caps of less than $10 million in 2013, with only four companies of this size successfully concluding listings during the year.


IPO Activity by Quarter. Source: HBL Mann Judd


“This has historically been a market position occupied by junior exploration companies and the low volumes reflect the difficult conditions currently facing this sector,” Ohm continued.

“The average amount raised within the small cap sector was $12 million.

“This is an increase of 125 percent on 2012 ($5.3 million) and 66 percent on the average ($7.2 million) of the previous five years.”

Ohm pointed to the positives of last year’s IPO market indicating that 25 out of the 49 newly-listed companies finished the year even or in the black, with several recording gains of over 100 percent on their listing price.

“This is a similar experience to that of 2012 and is an encouraging sign for the market after a number of difficult years,” he said.

Another encouraging aspect of the analysis for Ohm was that IPO activity by sector in 2013 was much more diversified than in previous years, with 15 different industry sectors being represented, compared to just seven in 2012.

Although resource companies still made up a healthy slice of the IPO pie, accounting for 35 percent of all new listings, this was significantly down on 2012 where 83 percent of the IPO market was from the two sectors of Energy and Materials.

“For small caps specifically, the industry sectors of Consumer Services and Pharmaceuticals, Biotechnology & Life Sciences were the best performers,” Ohm said.

“They averaged 34 percent and 27 percent year-end gains respectively, and modest average first-day gains as well.”

One constant to remain for the IPO market was the annual ‘rush to market’, which is always a highlight of the final quarter of any year and was again evident in 2013.

The HBL Mann Judd analysis found that 51 percent (25) of the year’s listings occurring in the final quarter, with 31 percent (15) of these achieving their listing goals in the month of December.

This quarter also accounted for 62 percent of the total amount raised, and 67 percent of all the funds raised from small cap companies.

A strong finish to 2013 hasn’t been translated into a strong start for 2014, however with only five planned listings at the time of writing.

This is in comparison to 14 planned listings at the start of 2013 and 26 at the beginning of 2012.

“Despite the low number of listings, the target subscriptions sought are nevertheless in excess of recent years,” Ohm said.

“These planned listings are seeking to raise a combined total of $143.7 million which is significantly higher than 2013 when the 14 planned listings were seeking to raise a total of $85.2 million.”

Having said that Ohm pointed out it is difficult to assess whether activity will increase throughout 2014.

“It would appear that small caps, historically the largest contributor by number of listings, have struggled to pursue IPOs throughout 2013 and it is unclear to what extent a small cap recovery will occur in 2014, particularly one originating from the resources sector,” he said.

“Contributing factors to the degree of any recovery are likely to include the extent of any upward movements in the market, investor sentiment returning to small caps, and also the degree to which commodity prices recover in 2014.”

HLB Mann Judd is an Australasian association of independent accounting firms and business and financial advisers, with offices in Australia and New Zealand.