Carsales leads the IPO field

PORTFOLIO POINT: Here come the floats. After a prolonged drought of new offerings, there is a lineup on the grid after Carsales.com.au.

The enormous interest in the $811 million float of Carsales.com.au has broken the IPO drought in Australia, where just 27 companies raised a paltry $1.1 billion in 2008-09. It virtually guarantees a rash of keenly anticipated initial public offerings in coming months, with the $2 billion float of Myer expected to be the jewel in the crown.

Investors with painful memories of floats late in the cycle – such as Boart Longyear in 2007 – may be hesitant about participating in the next round of IPO lotto, while those who snared an allocation in floats earlier on, such as the Promina float of 2003, will have much higher hopes. That’s because listings in the recovery phase are much more likely to outperform those when the market is hitting fresh peaks.

Source: Deloitte

George Boubouras, head of investment strategy at UBS, says: “This is not rocket science. Take a look at the capital raisings and the astonishing outperformance in pretty much every sector over the past six months. On that basis you would have to think that the next lot of IPOs will perform accordingly.”

Ivor Ries, partner and research director at stockbroker EL&C Baillieu, agrees. “Absolutely. An IPO is always going to perform better coming out of a slump than if it is issued at the top of the cycle.”

That was certainly the view held by the institutions as Carsales.com.au was shopped around last week. With major shareholders, including ACP Magazines, electing to hang on to about 70% of the listed entity, it didn’t take long for the entire $248 million worth of scrip, at $3.50 a share, to be allocated in the very first stages of marketing.

In fact, interest was so strong there will not be a retail component of the offer. Carsales.com.au is expected to make its debut on September 10 under an ASX code yet to be decided. For what it’s worth, my money is on CAR.

The popularity of the float has not prevented discussion about its sharp pricing. David Allingham, a senior analyst with Eley Griffiths, says: “The multiple is getting up there and we would have preferred it to be at the lower end of that range '¦ it feels a little stretched.”

Ries agrees. “It’s an excellent business but it’s been priced fairly aggressively. The online sector at the moment is on a weighted average of 20.1 times 2010 earnings and Carsales.com.au is on 21 times. On enterprise value to EBITDA, which is probably a more meaningful way of looking at it, the weighted average is 13.8 and Carsales.com.au strikes at 14.3.”

But the potential for upside remains because revenue at businesses with fixed costs such as Carsales.com.au tend to flow straight to the bottom line. With more than 60% of the online automotive classified market, Carsales.com.au is the clear leader in an online space where the number one players are traditionally able to grow their business at a much faster pace than their rivals.

The question on the minds of most investors will be whether to enter the aftermarket. And that, of course, depends on the price.

David Allingham says: “We are looking to increase our stake following the listing but we think there will be a reasonable return on day one. At around issue price we would look to build our position. If it comes on at a 10–15% premium [$3.85-$4.02] we would hold off, but that doesn’t necessarily mean that we would be sellers.”

Asked whether he would be advising private clients to buy in the aftermarket, George Boubouras is more circumspect. “Probably not,” he says. “In that sort of space there are so many other things for private clients to pick up.”

The IPO of Kerr Neilson’s Platinum Asset Management at the top of the market in 2007 may serve as a useful guide to the risks involved. Shares in the lauded funds management company were issued at $5 each but considerable demand pushing it to a high of $8.71 on its first day. From there the shares began a slow downward trajectory. Within six months they were below the issue price, hitting a bottom of $2.60 in July 2008 before recovering to $4.87 at the close today.

In many ways, floats at this part of the cycle are a lot like well run train services. If you miss one, there’s another due any minute. Expected arrivals include the $2 billion float of department store Myer, the $600 million float of outdoor clothing specialist Kathmandu, the $3 billion float of the Burrup ammonia plant and the on-again, off-again listing of the Qantas Frequent Flyer program, which could be worth as much as $2.5 billion.

“If Myer gets off the ground this year it will be the pearl of 2009,” Boubouras says. “It will be the blue-chip Australian stock listing for the year.”

Bought from Coles Myer for $1.4 billion by TPG in 2006, $400 million has been invested in the department store with the aim of improving everything from its supply chain to sales per square metre. With TPG’s reputation for swift exits from its investments and comments from Myer management hinting at a listing on the horizon, perhaps good things come to those who wait after all.

Separately, the New Zealand-based manufacturer of clothing for nomads, Kathmandu, is also believed to be nearing a listing. It was bought by Goldman Sachs JB Were and the private equity fund Quadrant in 2006 for about $400 million, and there has been speculation that a listing could command as much as $600 million.

The planned $3 billion float of an ammonia facility by Perth businessman Pankaj Oswal could also be back on the agenda, after the plant’s finance director, Raj Jeyarajah, was reported earlier this month as saying that it was under consideration for 2010. Although Qantas has said as recently as today that it no longer has plans to float its frequent flyer business, that’s a refrain we are likely to hear right up until the very minute an IPO is announced.

And that’s before we even begin to cover the swarm of microcap companies from everybody’s favourite speculative sectors of mining and technology. Among the miners are Sinogas, which has been operating in China since 2005 and is seeking to raise $10 million for ongoing activities in the coal seam gas sector. Separately, Ballarat South Gold and Genesis Resources are looking to raise up to $5 million each for exploration activities.

In technology, the telecommunications hardware company Digislide is looking to raise $5 million, while ICT company Azurn successfully gathered $3 million before listing last Friday. Then there's the ambitious plans of Granite Energy, a hot rock company that combines the best of both sectors, with plans to raise up to $50 million for the development of geothermal assets.