Professional Advice Guidelines For Investing In Australian IPO Firms

Analysis of Australian IPO Market

The purpose of this report is to prepare a report that will be considered as the professional advice guidelines towards the client of Dynamic Investment Ltd, who are interested in investing in Australian IPO firms in consumer Discretionary, Financials and Information Technology sectors. During 2016, the Australian IPO market reached at its new peak position subsequent to the financial crisis in 2009. It has seen that last year 36 companies were listed their shares in the Australian IPO market. Research has shown that there are several reasons such as technology, media and telecommunications (TMT)  industry growth, better performance of healthcare industry has shown 16.5% growth in this market (Amor, Ben and Kooli, 2016). As the market is growing steadily, the investors are keen to invest in this market and thus want specific advice from Dynamic Investment Ltd.  Research has shown that the short run performance in the US market is a well known aspect. Though the recent trend in US IPO market has turn down, the phenomenon of under pricing not a new thing in this market. However, there is no such evidence that the Australian market is also the same as US IPO market for under pricing concept (Bajo et al. 2016).

Under this situation, it is very much important for investors to understand the Australian IPO market in a better way, how the risk and return relationship holds over the period. Considering this, being the financial adviser at Dynamic Investment Ltd has explored the return of IPO listed on the Australian Securities Exchange (ASX) from 1 November 2014 to 31 December 2014.

The first section of this report is thus representing calculation of initial return and evaluating the Australian IPO market with the help of this return calculation. The second section of this report is evaluating the long run performance of consumer Discretionary considering two years holding period return (Ball 2012). Finally, the study explored reasons for the occurrence of short-run IPO under-pricing and ability to compare and contrast these reasons using the results of an empirical study.  

Here, the first step is to identify the sample IPO from Australian IPO market. In order to identify the IPOs listed in between selected time interval, the financial advisor has considered Morningstar premium database (Banerjee and Pawlina 2016). While accessing these IPOs, any IPO which did not have issue price as well as which were suspended have been excluded from the sample. After, excluding, the adviser has found 29 companies. 

The below mentioned table has shown the descriptive statistics of initial return:

Mean	3.61%
Median	0.00%
Minimum	-22.02%
Maximum	55.00%
1st Quartile	-2.50%
3rd Quartile	5.00%

  From the above table, the mean value indicated that the average initial return level was 3.61%. If only the mean value is taken into consideration, then it can be said that the Australian IPO market was doing well in the short run. However, the maximum and minimum values as shown above are representing different scenario (Bhanu Murthy, Singh, and Gupta, 2016). From the max and min value, it can be argued that the short term performance of IPOs deviated significantly across companies as well as industries. The deviation will become clear from the below mentioned graph: 

Analysis of Long Run Performance of Consumer Discretionary Industry

Here, the consumer Discretionary has been chosen to evaluate the long run performance of Australian IPO market. As the first step, the financial advisor has identified the 2 years holing price of selected firms from the issue date. The below mentioned table is showing the results of two years holding period return:

ASX Code	Company Name	Issue Price	2-year holding price	2-year holding period return
APO	APN Outdoor Group Limited	2.55	5.26	106.27%
EVO	Evolve Education Group Limited	1	0	-100.00%
GFY	Godfreys Group Limited	2.75	1.02	-62.91%
LOV	Lovisa Holdings Limited	2	3.8	90.00%
OML	Oohmedia Limited	1.93	4.7	143.52%
SIO	Simonds Group Limited	1.78	0.42	-76.40%
SRF	Surfstitch Group Limited	1	0.185	-81.50%
			Average return	2.71%

From the above table, it has seen that the industry is showing 2.71% return considering the 2 years holding period from the issue date of the individual firms. The next step was to identify the two years holding period return of all ordinary index. Below mentioned table is showing the same:

ASX Code	Company Name	Issue Price	2-year holding price	2-year holding period return
AORD	All ordinaries	5190.7002	5560.399902	7.12%

Here, the 2-year holding period return for All Ordinaries Index was calculated by using the adjusted closing value on 1 Dec 2014 as Pt and adjusted closing value on its 2-year anniversary.

Now, if the 2 years holding period return of consumer Discretionary is taken into consideration, then it can be said that the industry is showing good result as far as the IPO industry long run return is considered.  However, the 2 years holding period return of all ordinary index has shown 7.12% return, which is far best than the consumer Discretionary industry 2 years holding period return. Thus, it is quite clear that the consumer Discretionary industry is currently under performing than the all ordinary index performance (Bollerslev et al. 2013).

It is also true that investment decision on a particular firm or industry largely depends on the risk taking ability of the investor. As the individual investors are mostly risk averse, the deviation in return might influence the investment opportunity. However, in this case, the all ordinary index is showing far better than the consumer Discretionary 2 years holding period return. Therefore, even if the consumer Discretionary has shown better performance in the short run, in case of long run, the investor should not consider the consumer Discretionary as the chosen investment industry.

The aim of this section of the study was to identify one stock market from Austria, Canada, France, Greece, Italy, Spain and Sweden stock market. Here, the financial adviser has selected the Sweden stock market and identified am empirical study and investigates the existence of short-term IPO under-pricing in the stock market (Bruzgyte and Guliyeva, 2016).

The study that has been selected here, consist of 83 IPO firms as the final sample. Initially, the study was considered 161 IPO firms. The companies considered in the sample were categorized to eight different industries. However, a majority of the companies were from financial sector followed by Industrials and Health Care industries.

The study has shown firm age being one of the most essential aspect that influence the under pricing strategy. At the same time, the study has also explored that the offer size of the IPO has inverse proportion with under pricing aspect. Further, when turnover and leverage has positive association with stock under pricing; the study has shown that there was a negative between IPO under pricing and certified adviser reputation.  Again, the study has shown that the technology industry is evidencing the highest under pricing features in the Sweden stock market (Brau et al. 2012).

Analysis of Empirical Study

The principal aim of that paper was to evaluate the IPO under pricing and the factors persuading this phenomenon particularly for NASDAQ First North Stockholm market. IPO under pricing has been examined by scholastic researchers for many years; however, no consensus has been reached yet. The level of under valuing fluctuates for various stock trades, enterprises or nations. As per the past writing audit, diverse thought processes exists for firms opening up to the world, setting their offer costs lower, “leaving cash on the table” and giving speculators a chance to win anomalous returns. Under valuing is once in a while observed as a sane guarantors’ conduct to draw in enough speculators, to empower positive market criticism on the forthcoming IPO or, actually, to flag the association’s quality.

In this theory, Swedish IPOs issued on the First North market amid the time of 2009-2015 were observed to be underpriced all things considered by 4.74% in the wake of changing for the general market returns (Chen et al. 2013). The most astounding level of under pricing was distinguished for IPOs having a place with the Consumer Goods industry, with normal market-balanced beginning returns of 28.20%, though the most minimal returns were watched for the Basic Materials segment with – 8.89%. Despite the fact that the under pricing wonder was affirmed for this market, new issues were not entirely underpriced for consistently in the test. For example, normal market-balanced starting returns for 2012 were as low as – 29.59%.

Such discoveries of fluctuating levels of starting returns for various years propose that IPO under pricing might be an arbitrary marvel in the First North market. This could be clarified by the particular First North structure as this market contains generally little and seriously developing organizations, which might not have enough assets to convey the under pricing dangers and tend to set offer costs higher keeping in mind the end goal to raise as much capital as required.

Reference

Anon 2017 [online] Available at: https://datanalysis.morningstar.com.au.ezproxy-f.deakin.edu.au/ [Accessed 27 Apr. 2017].

Amor, S, Ben & Kooli, M 2016, “Do acquisitions affect IPO long-run performance? Evidence from single vs. multiple acquirers”, Journal of International Financial Markets, Institutions and Money, Vol. 40, pp. 63–79.

Bajo, E, Chemmanur, TJ, Simonyan, K, & Tehranian, H 2016, “Underwriter networks, investor attention, and initial public offerings”, Journal of Financial Economics, Vol. 122 No. 2, pp. 376–408.

Ball, L 2012, “Short-run money demand”, Journal of Monetary Economics, Vol. 59 No. 7, pp. 622–633.

Banerjee, S, G bilmez, U, & Pawlina, G 2016, “Leaders and followers in hot IPO markets”, Journal of Corporate Finance, Vol. 37, pp. 309–334.

Bhanu Murthy, KV, Singh, AK, & Gupta, L 2016, “Long-Run Performance of IPO Market in India”, International Journal of Financial Management, Vol. 6 No. 1, available at: <

https://search.proquest.com/docview/1772607064?accountid=8144%5Cnhttps://sfx.aub.aau.dk/sfxaub?url_ver=Z39.88-2004&rft_val_fmt=info:ofi/fmt:kev:mtx:journal&genre=article&sid=ProQ:ProQ%3Aabiglobal&atitle=Long-Run+Performance+of+IPO+Market+in+India&title=Interna>.

Bollerslev, T, Osterrieder, D, Sizova, N, & Tauchen, G, 2013, “Risk and return: Long-run relations, fractional cointegration, and return predictability”, Journal of Financial Economics, Vol. 108 No. 2, pp. 409–424.

Brau, JC, Cicon, J, & McQueen, G, 2016, “Soft Strategic Information and IPO Underpricing”, Journal of Behavioral Finance, Vol. 17 No. 1, pp. 1–17.

Brau, JC, Couch, RB, & Sutton, NK 2012, “The Desire to Acquire and IPO Long-Run Underperformance”, Journal of Financial and Quantitative Analysis, Vol. 47 No. 3, pp. 493–510.

Chen, S.S., Ho, K.W., Huang, C.W. and Wang, Y. 2013, “Buyback behavior of initial public offering firms”, Journal of Banking and Finance, Vol. 37 No. 1, pp. 32–42.

Link to access empirical article:

https://lup.lub.lu.se/luur/download?func=downloadFile&recordOId=8877619&fileOId=8877620