Market Report: Optimism will lead to IPOs

‘IPO’ and ‘listing’ are a few words that I haven’t heard too much in the last little while. During calendar year 2007 an impressive total of 260 entities hit the boards of ASX, cooling to 71 in 2008 and dropping to just seven for 2009 to date (source: Deloitte Annual IPO Report). You may be tempted to think that this is because the bottom fell out of the capital markets. But recent statistics show that this just isn’t the case.

In fact, in FY2009 ASX listed entities raised a total of about $90 billion, compared to circa $61.85 billion in FY2008 (source: ASX Monthly Activity Reports). Interestingly this represents an increase of around 31 per cent despite the market shifting further away from bull market conditions. The statistics also revealed a change in fundraising methodology, with secondary market raisings more than making up for the steep decline in IPOs.

A closer look at current economic conditions and indicators suggest that we may see a change in this trend, with IPOs to work their way back on to the corporate agenda in the near term. While there are still some key risks that stand in the way of market recovery, we are now seeing promising signs, here and abroad to indicate that Queensland companies are in a unique position to obtain capital off the back of global demand for resources.

In a reversal of other recent trends, we are also experiencing the expansion of PE multiples for mid cap companies. Since October of last year, PEs for this market segment have increased from around seven times earnings to approximately 11 times earnings as at the end of FY2009, providing further signs that the necessary market corrections have now occurred.

Looking abroad, the enormous growth in countries such as China and India offers unique opportunities, particularly for Australia. Like many, I thought that I had seen the end of the commodities boom in early 2008, but with ubarnisation rates for China and India forecast to peak between 2015 and 2020 (source: United Nations, May 2009) strong short to mid-term demand is likely to feed the Australian resources sector (and no doubt have a favourable ripple effect as we have seen in the past).

Various brokers also tip the re-opening of the IPO market in the latter half of 2009, citing rumours of big name IPOs such as Readymix Cement and Myer reported in the Australian Financial Review in June 2009.

The forecast return of IPO activity is not surprising. As market confidence and the consumer’s appetite for risk slowly return, the attractiveness of an IPO to investors is the potential value uplift upon listing. After the stock market losses recently sustained by many investors, this just may help those investors who have lost money to recover some of their losses. From a company perspective, the key benefit of an IPO is improved access to capital, but it is also worthwhile considering which exchanges offer the best liquidity and demand for your stock.

Overseas markets may assist in broadening your shareholder base and increasing profile and visibility. While Australian companies are not eligible for admission to Chinese markets, if you are looking for a gateway to access Chinese investors, a listing on the Hong Kong Securities Exchange (HKEx) may provide this opportunity. A brief comparison of the ASX and the HKEx is provided below.

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