Small cap initial public offers (IPOs) generated outstanding returns for investors in 2005, eclipsing the performance of their larger company counterparts on average by 15 per cent, according to the 2005 HLB Mann Judd IPO Watch report.
The accounting firm’s information shows small cap IPOs, those companies with capital of $100 million or less on listing, produced average returns of 35.6 per cent over the previous calendar year compared with a 20.6 per cent return delivered by larger company IPOs and a 17.5 per cent return provided by the S&P/ASX200 index.
The main driver for the significantly high IPO returns for 2005 was the strength of commodity prices in the materials sector. However, when non-materials companies are examined in isolation, small cap IPOs still performed remarkably well.
“Even excluding materials the returns by the small cap companies were 25.4 per cent, so still significantly ahead of larger IPOs. This is interesting because a lot of people would attribute that stock performance to the booming resources sector,” HLB Mann Judd head of corporate finance Justin Audcent said.
Overall materials and energy continued to dominate the small cap listing activity as the two sectors accounted for 60 per cent of small cap IPOs in 2005 compared to 50 per cent in the previous 12 months. Within this category uranium exploring companies were noticeably active in 2005.
“There were six companies in that specific area, all of which listed in the second half of the year, and there were another six companies that had uranium as one of their areas of interest,” Audcent noted.
Companies dealing with alternative fuels, namely bio-diesels, also entered the public equity markets for the first time in 2005.
In all 134 companies gained new listings during the year, excluding those by investment companies, property trusts and infrastructure funds, raising $5.9 billion of capital. Of this group of companies small cap listings numbered 118 and contributed $1.1 billion to the total aggregate funds raised.
For the year ahead Audcent feels there will be a slight weakening in IPO activity, particularly in the second half of the year, although he still anticipates there will be more than 100 IPOs in 2006.
He identified an expected easing off of commodity prices, along with the possibility of an interest rate rise, and a reduction in returns from Australian equities as reasons for the projected drop in IPO activities for the current year.
“In terms of sectors, resources will continue to be strong — by resources I mean materials and energy — and there’s very strong business investment at the moment that favours those in the capital goods sector. The companies that will struggle in our view are those in the biotechnology industry, retailers, and other consumer businesses, particularly those that are focused on more discretionary items of expenditure,” Audcent said.
