After years in the doldrums, Australia’s equity markets look set for a rush of initial public offerings as investors tire of the low interest rate environment and prepare to meet issuers’ expectations on price.
The pickup in activity is already evident in first-half figures, with Thomson Reuters reporting a four-fold increase in IPO issuance in the six months to June 2013 compared to the same period last year. This is the highest first-half total since 2008.
Relative to other markets, however, volumes are still small; the total raised from IPOs in the first six months was only $721 million, and over the past year only 33 listings out of 82 have been above $20 million in size.
But dealmakers are confident a number of large deals are ready to launch, including at least two billion-dollar-plus transactions for national television broadcaster Nine Entertainment, and mortgage insurance business Genworth Financial – a subsidiary of the US-listed financial security company.
The timetable for Genworth has not been announced but lead manager Goldman Sachs is said to be sounding out investors now. Nine Entertainment could come as early as November.
Other deals in the pipeline include an already-announced $395 million deal for shopping mall owner Pacific Retail Reit, another $198 million offering for Centuria Property Trust, and a possible listing of private-equity owned electronics retailer Dick Smith, though this may not come until next year.
The increased activity shows there is pent-up demand, said Campbell Lobb, an equity markets veteran who ran Credit Suisse’s ECM division in Australia for 18 years before being promoted to vice-chairman of investment banking in July.
Lobb attributes the lacklustre activity in recent years to a general reluctance by issuers to take their companies to market. “During that period, valuation multiples were relatively low,” he said. “In January 2012, the average forward PE was 9.4 x 18 months forward to June 2013. Now that comparable multiple is approximately 14.3 x June 2014, making it a lot more attractive for vendors to consider an IPO.”
Multiples are expanding due to an improved appetite for equities from institutional investors, said Lobb.
“Investors have been worried about the general economic outlook and haven’t been prepared to pay the price that issuers want.
“But this looks different now. The stock market is up in 2013, meaning investors have been making money on stocks and performing well. This has led to an influx of new funds under management, so there is a large pool of cash ready to be deployed. Investors are looking for things to buy in the sectors they feel confident about.”
Lobb admits it has taken a while for local investors to warm up. “The market for IPOs in the US has been strongly open for 18 months, but Australia has lagged,” he said.
“The key driver for equity markets in the US has been the low interest rate environment, which we also share,” he said. “It appears Australian investors have taken some time to realise they are not going to make sufficient returns from bonds and fixed income.”
The sectors currently in favour are financial services, infrastructure, health, real estate trusts and essential services. “There is a view that businesses in these sectors are now leaner and better managed,” said Lobb. “Business managers have been using the lull in the IPO markets to add value to their companies and make them more saleable.”
The most recent IPO of size was the early-August listing of Steadfast, a network of insurance brokers, which raised $303 million through joint lead managers JP Morgan and Macquarie. The shares priced at the top of the range and traded up 26% on debut.
However, not all IPOs have traded favourably this year. Health insurance website iSelect fell about 15% on its first day on the share market in June. And another deal for New Zealand electricity generator Mighty River, which cross-listed in New Zealand and Australia in May this year, is currently trading about 10% below its issue price.
Credit Suisse was joint lead manager on both deals. “Pricing is tricky,” said Lobb, adding the market remains prone to volatility. “Some of the deals done in May and June were priced after a huge run-up in the market, and they got caught in a downdraft.
“You always price an IPO with perfect information on the day, but seven days later, that information may not be as relevant as it was.” Lobb is still confident “the outlook for iSelect and Might River is good”.