Market Wraps

Weekend Wrap: 3 things I learnt about the Guzman Y Gomez IPO

Sun 23 Jun 24, 9:00am (AEST)

Hi there! This article is an excerpt from our weekend newsletter – which talks all things markets plus some interesting data insights and memes

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"Something just came across my desk. It is perhaps the best thing I've seen in the last six months. The name of the company is Guzman Y Gomez. It is a cutting edge high-tech firm out of the Midwest, awaiting imminent patent approval on the next generation of burritos that have both huge military and civilian applications."

Alright, alright, let's stop bashing Guzman y Gomez. It's a much needed IPO for the dwindling Aussie market. Let's hope there's more to come.

(For those that don't get the reference – This is an altered 'Wolf of Wall Street' quote where Jordan Belfort is selling penny stocks over the phone)

1. Three Things I Learnt from the GYG IPO

Guzman-Y-Gomez
Source: Guzman Y Gomez

Guzman Y Gomez (ASX: GYG) listed on the ASX this week and here are three interesting things I learnt along the way. If this IPO has flown under your radar, you can catch up here. #1 Built to Rip Higher – There were several factors that helped the IPO have a ripper debut, these include:

  • No general public offer: Only brokers, employees and franchises could participate in the IPO. The only way for retail to obtain shares was to wait for it to debut – in other words, there was more demand on the sidelines.

  • Heavily oversubscribed: Institutional investors were fighting to get a hold of the stock. According to the AFR, the IPO was 20 times oversubscribed. To put that into perspective, that’s asking for $335 million and receiving $6.7 billion.

  • Tight twenty: The top 20 largest holders owned 85.7% of the company and approximately 54% of the shares outstanding are subject to voluntary escrow. This leaves a pretty small pool of shares to trade among keen investors.

  • Mr 30 bucks: The share price was strangely stable on day one. If you watched the order flow – You’ll notice an unwavering amount of support at $30. This was likely an institution/fund with deep pockets, willing to soak up in excess of $100 million in shares. This kept the stock above $30 on day one.

#2 Fundamentals matter later – I think it’s pretty hard to argue against GYG’s valuation. But day one was all about the hype – the largest IPO in 11 months, immense media coverage and buzz on social media, heavily oversubscribed etc. #3 When IPO hype dies down – In my experience, a hyped-up IPO tends to run anywhere between one to three days before pulling back. A few examples from this year include Sun Silver (ASX: SS1), Infini Resources (ASX: I88) and Kali Metals (ASX: KM1). Always be wary of the pullback.

2. They'll Be Back

shutterstock 2260085813
Source: Shutterstock

Mortgage insurer Helia (ASX: HLI) lost a fifth of its market value on Wednesday after its biggest client – Commonwealth Bank – said it would put a lucrative contract up for tender.

The external Lenders Mortgage Insurance deal with CBA represented approximately 53% of Helia’s Gross Written Premium in FY23 – So it’s a pretty big deal for the business.

But when you think about it – a 20% selloff vs. 53% of GWPs – this makes the selloff sound quite forgiving. In fact, Helia recouped more than half of its selloff the next day.

This isn’t the first time CBA has put this contract up for tender. The exact same announcement was released on 29 June 2021 and triggered a 16% selloff for Helia shares.

About six months later, on 27 January 2022, Helia announced that it was selected as CBA’s exclusive provider of Lenders Mortgage Insurance.

This isn’t to say Helia will win the contract again … but history has a way of repeating itself.

3. Fortescue’s Big Selloff

Fortescue (ASX: FMG) experienced its worst selloff in almost a year after a large fund manager offloaded $1.1 billion worth of shares at a 6% discount.

This event – In parallel with falling iron ore prices, dragged Fortescue down as much as 20% over the past 21 sessions. The stock was trading at an RSI of 20.9 on Tuesday.

You almost never see Fortescue this oversold – An RSI of 20.9 is approximately 2.75 standard deviations from the average. In other words, Fortescue does not trade like this 99.4% of the time.

I took a deep dive into how Fortescue historically performs after reaching such oversold levels. You can read my full article here – but here are the forward returns since 2008.

FMG
Source: Market Index

Fortescue’s forward returns for when it trades below an RSI of 28 (two standard deviations from the mean). The data only counts the first instance in each month when the RSI is below 28.

The forward returns are extremely compelling but the big question is – How reliable is historic data for a company that’s making an aggressive push from iron ore into green hydrogen? (Which is eating away at its dividend payout ratio and free cash flow)

4. Don’t Miss Dividends

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Source: Shutterstock

Deterra Royalties (ASX: DRR) built its reputation on the back of a lucrative royalty agreement with BHP's Mining Area C operation. This arrangement provides Deterra with quarterly payments of 1.232% of revenue, plus $1 million bonuses for each dry metric tonne increase in annual production capacity.

Since its 2020 demerger from Iluka Resources, Deterra has maintained a 100% dividend payout ratio, cementing its status as a stable and predictable income stock.

Last Friday, the company unveiled plans for an all-cash $276 million acquisition of Trident Royalties, a lithium-focused royalty company. While Deterra pledged to maintain its 100% payout for FY24, it plans to reduce the target payout ratio to 50% thereafter.

The market's reaction has been swift and negative. Deterra's stock is down 8.5% over the past six sessions, touching its lowest point since November 2022.

The burning question on many minds: Why risk altering a winning formula?

5. Marketing Notes

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Source: Shutterstock

An ‘interesting’ broker report hit my inbox on Monday – Shaw and Partners maintained a Buy rating for Evolution Energy Minerals with a 24 cent target price.

Evolution Energy is developing the Chilalo Graphite Project in Tanzania with a market cap of $9 million. The stock is down more than 80% in the past twelve months and trading at record lows of 3.4 cents.

So you’re telling me – This broker reckons the stock has more than 600% upside?

Last week, Evolution Energy raised $4 million at 4 cents per share or a 2.4% discount to its last closing price. The raise featured continued support from major shareholder ARCH Sustainable Resources Fund and German fund Deutsche Balaton AG.

Who were the joint lead managers of this raise? Shaw and Partners.

The next time you see a target price that’s rather outrageous – Go and find who led their last capital raise.

6. Memes of the Week

This has to be one of the most hilarious videos about the Guzman Y Gomez IPO. You'll have to trust me on this one. Speaking of which – Remember that time we discovered the most hilarious announcement typo of the year? (Ctrl F the word 'bag' – It's the third one)

Written By

Kerry Sun

Content Strategist

Kerry holds a Bachelor of Commerce from Monash University. He is an avid swing trader, focused on technical set ups and breakouts. Outside of writing and trading, Kerry is a big UFC fan, loves poker and training Muay Thai. Connect via LinkedIn or email.

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