By Chris Walker,
, November 2007
Share floats, or initial public offerings (IPOs), offer investors a chance to get in on the ground floor of a newly listed company, potentially enjoying early gains if the stock performs well. But without the benefit of a history for the share price showing what the market thinks of the stock, investors need to make their own assessment as to whether a share's initial subscription price is under- or overvalued. And it's not always an easy task when the prospectus is designed to sell the company to investors.
The term "share float" refers to the first time a company is listed on the Australian Stock Exchange (ASX). Listing is a big step for any company, bringing an important injection of capital or providing existing owners with the opportunity to sell out.
The company prospectus will state an initial subscription price per share; in other words the cost of buying into the stock.
In some cases, investors can make an instant "stag" profit if the share price skyrockets once the shares start trading on the open market. This was certainly the case when fund manager Platinum Asset Management listed in May this year. Its shares closed at $8.80 on the first day of trading, well up on its subscription price of $5. All subscribers made a massive profit; by mid-October Platinum was trading around $6.20.
But profiting from floats is certainly not guaranteed. Home lender RAMS is a case in point. It had an issue price of $2.50 and a first day closing price of $2.49 in July. By mid-August, as the US sub-prime loans debacle blew up, its share price had plummeted under $1 and then there was another steep fall at the beginning of October; mid-October it was trading around 30c.
The current resource boom is dominating new floats and a swag of resource companies are going public. With plenty of blue-sky optimism, it's important for investors to do some mining of their own to assess each share's merits.
Henry Jennings, senior broker with Cube Financial, says: "There are some key aspects investors need to consider with share floats. Firstly, look at what the business does. If you don't understand the business or how the company works, don't go there.
"You also need to ask why the company is being floated," he says. "It may be that the company is in need of new money, or it could be that the directors want to get out. A useful indicator here is how long the directors' shares will be held in escrow for [in other words, how long before the directors can cash in their chips]. If it looks like the directors are keen to make an early exit, the warning bells should start ringing."
It is also worth looking to see who is backing the float financially. "If the float is being underwritten by a large broking group it is usually a better-quality listing than if it's backed by a small broker," Jennings says.
The volume of capital being raised is also noteworthy. If the capital raising is small relative to the nature of the company's operations, it's a reasonable bet it won't be too long before it goes back to the market asking for more cash.
All this information should be available from the company's prospectus, but here as well investors need to exercise caution. "Be wary of being swayed by persuasive pictures and images presented in a prospectus," Jennings says. "Often photographs are included in a prospectus that imply or suggest the company has certain contracts or business connections, when in fact nothing of the sort exists."
Not surprisingly, companies see the timing of their float as critical. A buoyant market can sweep a share value upwards with the overall market mood. But as Jennings points out: "It's impossible to know what sort of market conditions will prevail when a company eventually floats. The good ones will perform well, but a lot of recent floats are struggling because of the present market conditions."
A list of upcoming floats is available on the ASX website at www.asx.com.au click on "prices, research and announcements".
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