The IPO market is heating up. Here are 6 tips to help you spot the winners
Fed rate cuts and surging small caps are reviving the IPO market. Here are some tips to identify solid new listings.
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KEY POINTS
- Lead managers with skin in the game through options or shareholdings typically drive better marketing and investor support, while their track record of previous IPO debuts reveals their ability to deliver strong launches.
- Oversubscribed IPOs that close early and require scale-back allocations create pent-up demand that often translates into massive day one gains.
- Listing at the right time can make all the difference, evidenced by lithium companies that rode the 2021-22 boom while latecomers flopped.
The resumption of Fed rate cuts, soaring small cap benchmarks (ASX Small Ords and Russell 2000) and bullish equity markets is pumping life back into the IPO market.
On Wall Street, IPO volumes in the first three weeks of September hit US$7.6 billion, marking the biggest month since November 2021, according to Bloomberg.
Meanwhile, the ASX's IPO calendar hasn't been this busy in a long while.
September: DPM Metals (18th), Revolution Private Credit Income Trust (22nd), Everlast Minerals (23rd), Ryman Healthcare (29th), Golden Globe Resources (30th), Temas Resources (30th)
October: PC Gold (7th), Nexsen (7th), Desert Minerals (13th), Golden Dragon Mining (21st), Sentinel Metals (28th)
November: Black Pearl Group (28th)
When it comes to investing in new listings, there's nothing quite like watching the stock rip higher on its debut. But what are some of the common ingredients for a successful IPO?
The prospectus
The prospectus contains everything you need to know about the IPO and the company. From my experience, there are three key things to look out for:
The leader manager: These are the professionals who guide the company through the listing process, from pricing and valuation to marketing and allocating shares to new investors. When evaluating the lead manager, I look for:
Underwriting: The lead manager often commits to buying a certain number of shares from the company and selling them to investors. This guarantees the company raises a specific amount of capital. However, most microcap listings aren't underwritten, though it's a 'nice to have'.
Options: Check if the lead manager has any vested interest in the IPO. They might receive shares or options (if options, check the exercise price). If the firm responsible for the IPO has a vested interest, they're likely to go the extra mile to ensure it is well-marketed and has a strong investor base (I call this the 'broker pump'.)
Track record: It's worth doing a background check on the lead manager. How have their previous IPOs performed? What does the day-one performance look like for their recent listings?
Near-term catalysts: The last thing you want is for a company to list and then sit idle for weeks. Look for urgency in the prospectus, with clear near-term milestones or catalysts that show management is ready to hit the ground running.
Substantial shareholders: Examine the company's existing major shareholders. Does the founder retain significant ownership? Perhaps an existing major shareholder is well-connected or sits on the board of another major company?
Time and place
Listing at the right time can make all the difference.
If you listed during the peak of the lithium boom in 2021-22 with some quality tenements, the stock could easily double or triple on debut. But if you listed towards the tail end of the lithium boom with a wannabe company name like "Western Australia Best Lithium Limited", you'd probably tank on debut.
Given the current hype around several themes like AI, gold and precious metals, copper, and tech valuations, it's an opportune time to test the public markets.
Investor demand
An oversubscribed IPO reflects strong demand and positive sentiment towards the company. You can gauge investor demand through:
IPO open period: IPOs typically remain open for a fixed period but may close early if they receive their target amount. Early closure signals strong investor demand. During the IPO golden era (2019-2021), many offerings would open for just 5-10 minutes before closing due to overwhelming interest.
Scale-back allocation: When demand exceeds available shares, allocations are often scaled back for each investor, creating pent-up demand. Let's say you applied for $50,000 worth of shares but received only $20,000 due to high demand, you might be inclined to buy additional shares on the listing day. The scale-back percentage is worth tracking, though it's typically found through word of mouth or investor forums rather than official channels.
Company commentary: Management statements about investor interest can provide valuable insights into demand strength. Though it's very uncommon to see this type of commentary.
Sector, peers and valuation
We'll dive in a few examples for this segment.
Tasmea (ASX: TEA) has been one of the most successful IPOs, currently trading at $4.63 versus its IPO offer price of $1.56 (listed May 2024). The stock traded sideways from May until September, before experiencing a powerful ~80% surge in just three months.
There were three market-sensitive announcements (FY25 results and two acquisitions) between May and September 2024, none of which significantly moved the share price. However, Tasmea clearly listed at an opportune time for the engineering and construction sector, which benefited from several tailwinds and megatrends:
Federal and state government investment in data centres, renewables, energy, transport (airports, rail, road and ports), health and aged care, defence, agriculture and utilities
Exponential growth in data centre demand
Australia's energy transition and electrification activities
Exploration, drilling and maintenance for the resource sector, particularly gold and copper
At IPO, Tasmea raised $59 million for an indicative market cap of $340 million, valuing the business at 6.7x FY24e EV/EBITDA. At the time, peers were trading at various forecast multiples:
GR Engineering at 6.6x
Monadelphous at 9.5x
Worley at 11.0x
Putting it together: Tasmea had a solid debut on 29 April 2024, closing 9.0% above its IPO offer price. However, the stock spent the next four months trading sideways before experiencing a powerful breakout, later supported by earnings upgrades and accretive acquisitions. The breakout was supported by a relatively stable share price prior to the move, a relatively undemanding valuation relative to larger peers and a solid FY25 result that beat prospectus expectations.
Tasmea weekly price chart (Source: TradingView)
Without going into too much detail, some other IPOs of interest include:
Kali Metals rallied 74% on its debut (8-Jan-24) as MinRes boss Chris Ellison emerged as the third largest shareholder with a 4.86% stake. The lead managers (Bell Potter and Cannacord) were also issued up to 3.9 million options, exerciseable at a 50% premium to the offer price
Sun Silver more than doubled when it listed on 15 May 2024. This was right before silver broke out to decade highs. The company also had one of the largest silver equivalent resources on the market. On the listing day, Sun Silver noted it raised $13 million through a "highly successful oversubscribed IPO which closed early."
Virgin shares gained 11% on its first day on the market, a highly anticipated IPO given a dry spell in new listings. The company was listing at around a 25% discount relative to Qantas' valuation.
The bottom line: Not every IPO is a winner, but understanding these key factors can help separate the winners from the losers. At times, patience is required, with names like Tasmea, Cuscal and Alfabs trading sideways for months before a powerful breakout.
