Ingham shares hatch to wary IPO market

When an IPO is revised it's usually because fund managers feel the business is not appropriately priced for the risks that come with a business which either doesn't have a track record as a listed company, or is returning to the ASX after a few years under private equity ownership.

The $1.1b Charter Hall Long WALE REIT, which would have been Australia's largest ever property float, was scrapped less than three weeks ago after a bookbuild failed to raise sufficient institutional support.

It will attempt a second go at listing under revised terms this week and with a higher dividend yield.

Bravura Solutions, a private equity-owned software business, is targeting a listing later this month, but that deal too was re-priced at a lower level.

Not all floats have experienced setbacks.

On Friday, the caravan group Apollo Tourism and Leisure posted a strong finish in its first day of trading, closing at $1.32 versus its $1 per share issue price.

Apollo raised $50 million which will be deployed for growth in the United States.

"This IPO cycle has been stronger and longer than many of us expected in terms of the duration, it's been running for about three years now," said Steve Black, who co-manages the Pengana Emerging Companies Fund.

"If history's any guide at the tail end of that IPO cycle the quality does tend to reduce somewhat."

Many of the bigger floats promoted in the past three years have suffered earnings downgrades or missed prospectus forecasts, heightening investor cynicism.

It's not just failures such as Anchorage Capital's collapsed Dick Smith Holdings or the troubles of Pacific Equity Partners' Spotless.

Healthscope delivered a profit warning last month; the 2014 float was delivered by TPG and The Carlyle Group.

Ingham's is the dominant poultry brand in Australia.

A price range of $3.57 to $4.14 a share had been marked out for Ingham's stock, but it was repriced last week by its private equity vendor at $3.15 apiece.

TPG, which bought Ingham's from Bob Ingham in 2013, will also hold onto a bigger chunk of the business as a listed entity:

A 47 per cent stake will stay in its hands instead of the 24pc to 40pc range mooted earlier.

TPG went into the IPO with 90.1pc ownership of Ingham's.

Fund managers indicated they were appraising IPOs carefully.

"It is always important to apply an element of scepticism to the forecasts, particularly when a vendor is private equity.

Markets are pretty aware of whose selling and that their motivation for listing is to exit the investment," said Simon Conn, senior portfolio manager at Investors Mutual.

"Some of the multiples vendors have been asking were just too high, especially for a business like Ingham's where there is not much top-line growth and the forecasts rely on taking costs out of the business.

“While the management at Ingham's has a strong track record, with any IPO I always think you want some discount for the fact it hasn't been listed.

"Recall that many ex-PE firms such as Spotless and Myer struggled after listing, with their forecasts clearly proving to be far too ambitious."

He favours the approach taken by floats such as prestige car dealership Autosports Group, a float that priced at the top of its range ahead of its trading debut on November 16.

Its owners, the Pagents, will go from an 82.1 per cent stake to a 51 per cent stake.

"There's a preference for businesses that are raising capital to grow their business, or where the vendors are raising capital to continue to grow," Mr Conn said.

"Autosports is an example of a stock where the vendors will retain a significant stake giving new investors some confidence you're investing with them, whereas something like Ingham's they're not putting money in, it's money off the table which is a very different motivation."

The other factor in the re-cutting of big floats is that markets have entered a downbeat period since the offers were shopped around weeks earlier.

"It's a low growth and uncertain world, as the current AGM season is highlighting, and investors need to apply an element of caution given the backdrop," the Investors Mutual fund manager said.

Mr Black observed a subtle shift in investor sentiment.

"There's no doubt the market in the last little while has turned its nose up at higher-growth stocks and that's a symptom of a market that's a little bit more wary generally," he said.

Still, "the sample size [of float setbacks] is still quite small, in the context of the last three years, there's been well over 100 IPOs”.

“The promoters have to sharpen the pencil a bit more.”