The market obsession with dividend yield is having strange effects. Boring utility stocks with reliable yield have rallied, resource companies have paid special dividends and even the troubled initial public offering (IPO) market is showing signs of life thanks to utility and property floats.
New Zealand Finance Minister Bill English speaks at NZX at the listing of Mighty River Power.Photo: Maarten Holl
Remarkably, this year could see one of the stronger IPO markets in the past decade, by capital raised, if current and mooted floats get off the ground. The partial privatisation and dual listing of New Zealand electricity provider Mighty River Power in a $1.9 billion float in May has already eclipsed last year’s entire IPO market.
That was not hard. The 2012 float market was a basket case: only 44 companies raised about $1.3 billion between them – the lowest in more than a decade.Most IPOs were for junior explorers and many had to be extended or abandoned. Those that did list were mostly crushed in the aftermarket.
The first-quarter 2013 IPO market was just as dismal, despite the rally by the Australian sharemarket. A handful of companies listed, most of them tiny. A savage correction in mining stocks was an awful backdrop for junior explorers or mining producers trying to raise capital and list.
The big surprise has been several industrial IPOs in the second quarter. Investment-grade floats with decent yield have been rare since the 2008 global financial crisis. Apart from Aurizon (formerly QR National), Myer Holdings and Westfield Retail Trust, there have been no blockbuster floats.
Predictably, there has been a long list of mooted floats, with investment bankers talking up the IPO market’s prospects. But few IPOs materialised because of volatile global sharemarkets, lingering concerns about private equity vended assets and retail investor indifference towards floats.
As BRW went to press, the $100 million IPO of Domus US Multifamily Real Estate Fund was expected to be postponed due to the Australian dollar’s fall (Domus has US assets) and market volatility. Domus, one of the better looking floats, showed how quickly IPO conditions can turn.
However, rising demand for reliable yield, the New Zealand government’s privatisation program and the strong performance of Australian Real Estate Investment Trusts (A-REITs) – which is encouraging other property floats – are game-changers for this year’s IPOs.
With popular income stocks such as Telstra Corporation and the big four banks looking fully priced, there is an opportunity to bring more companies to market that provide new options for income seekers, even if the IPO market is typically more suited to capital-hungry growth companies.
Of course, the IPO market’s recent recovery could stall if global sharemarkets fall and the local market’s recent pull-back extends to a 10 per cent correction. Moreover, the IPO market’s recovery is so far based on a few billion-dollar floats; overall listing volumes remain terrible.
Most small companies still find it tough to raise IPO capital, aftermarket support for most IPOs remains weak and floats losers after listing vastly outweigh winners. Junior exploration IPOs, in particular, look more problematic than they have in years.
But for retail investors, it is the handful of big name IPOs that matter. The rest are too small for institutional investors and too speculative for most retail investors. For the first time in a few years, a batch of IPOs and recent listings look interesting for long-term retail investors.
Mighty River Power, 51 per cent owned by the New Zealand government, is trading just below its $2.08 issue price – a mighty effort given it listed during the market correction in May. As the first in a likely series of electricity-asset privatisations, Might River looks reasonably priced. The New Zealand government clearly wants to create solid investor demand for other asset sales.
The Mighty River IPO was well-structured, had a high proportion of retail investors and its implied gross dividend yield (after franking credits) of 6.4 per cent to 7.7 per cent in 2013-14 is attractive. Producing about 17 per cent of New Zealand’s electricity, Mighty River looks a solid utility stock for long-term income investors.
Privatisation program continues
The next leg of New Zealand’s $5.9 billion privatisation program should be a $2.5 billion IPO for another power generator, Meridian Energy. The Australian Financial Review reported in May that the New Zealand government had appointed investment banks to handle the float, likely in October.
Meridian might have to be sold in a few tranches if sharemarkets weakensimilar to the sales process for Telstra float. But the Mighty River IPO and demand for reliable income from utility stocks should see Meridian proceed.
A third New Zealand power float, Genesis, is a mooted $750 million offer in late 2013 or early 2014.
Among other floats, assisted reproductive services provider Virtus Health has a $126 million IPO, the childcare-focused Arena real estate investment trust is trying to raise $75 million and list in early June and a much-anticipated float of iSelect is expected soon.
Two property IPOs from 2012, Woolworths spin-off Shopping Centres Australasia Property Group and NEXTDC spin-off Asia Pacific Data Centre Group, featured in this column in January, have done well since listing. Shopping Centres Australasia in particular has good long-term prospects.