5 top floats

Financial journalist and commentator on 3AW and Sky Business
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2016 was a very active year for initial public offerings (IPOs), or floats, with 96 new listings on the Australian Securities Exchange (ASX), raising about $8.3 billion. And it was a good year for float premiums, too, with IPOs returning an average first-day gain of 16.6%, according to the OnMarket 2016 IPO report. This was an improvement on the 11.5% average debut gain of 2015.

By year-end, the Class of 2016 had returned an average gain of 25%, more than triple the 7.5% delivered by the benchmark S&P/ASX 200 index. In 2015, the 85 floats showed an average end-of-year return of 21.7%.

Many of the 2016 floats have left their issue prices well behind, taking much of the perceived value off the table. After the dust has settled, is there still good long-term value to be found  in any of these newly listed companies?

Here are five companies that I like.

Motorcycle Holdings (MTO, $4.45)

Market capitalisation: $169 million

Motorcycle dealership group Motorcycle Holdings came to the stock market in June last year, raising $46.3 million in a share issue at $2, which capitalised the company at $76 million. The shares surged to a 30% premium on their first day of trading, at $2.71, and have since moved steadily higher, to $4.39.

Motorcycle Holdings’ business plan is to aggregate dealerships in the highly fragmented motorcycle market, which sells $2.8 billion worth of bikes a year. It’s a growing market – the number of registered motorcycles in Australia has almost doubled to 807,000 over the last decade – but it is characterised by about 700 single-operator dealerships. MTO is looking to change this.

Like aggregation models in other industries, Motorcycle Holdings looks to apply benefits of scale, where it can get improved terms from suppliers through volume discounts, cross-sell its finance, warranty and insurance offerings, and amortise overheads over a larger number of dealerships. Effectively, MTO’s strategy is the two-wheeled version of the business model used by two big ASX-listed car dealership firms, AP Eagers and Automotive Holdings Group (AHG), both of which have been strong long-term performers on the ASX.

At present MTO has 34 franchises across Queensland, NSW and the ACT, selling some of the most well-known brands including BMW, Harley-Davidson, Yamaha and Suzuki.

Motorcycle Holdings’ first-half profit beat expectations by 10%, rising 27% to $5.56 million, with sales growth of 17.5%, driven by a 23% rise in new motorcycle sales, to 4,943, while used bike sales were up 11%, to 3,618.  The company said in its half-year result that industry conditions were the best since 2008-09, the height of the GFC. It also announced two new dealership acquisitions, including its first in Victoria. These acquisitions will boost full-year revenue, with analysts lifting both revenue and margin expectations for FY17. With trading conditions buoyant, MTO said it “expects to see continued earnings growth.”

An expected 15-cent dividend for FY17, out of earnings per share (EPS) of 25 cents, places MTO on a fully franked yield of 3.4%, on an expected payout ratio of 60%. Next year, analysts (on FN Arena’s collation) see EPS of 28 cents, enabling a lift in the dividend to 17 cents, pricing MTO on an expected fully franked yield of 3.9%. The analysts’ consensus target price for MTO is $4.67, implying upside of 4.9% if that gap is closed.

GTN (GTN, $2.85)

Market capitalisation: $635 million

Global Traffic Network (GTN) came to the stock market in June last year as a media company with a difference. GTN specialises in traffic information reports, which it provides to radio and television stations, in exchange for embedded advertising spots, which it sells to advertisers. GTN operates its traffic reports business in Australia, Canada, Brazil and the UK and has mobile traffic and weather applications in the United States and Canada.

The company began business in Australia in 1997, operating out of Bankstown Airport, supplying Sydney traffic reports. GTN was floated when GTN’s Chicago-based sponsor parent private equity firm, GTCR, decided on a partial exit. The shares were floated at $1.90, raising $187.9 million. The first day saw a 10.4% premium, at $2.10, but GTN then drifted back down close to its issue price. The stock surged to $3.91 in mid-November, but has receded to $2.85, opening up some decent value.

In December GTN raised $60 million to fund the purchase of US traffic report provider Radiate Media, for $15 million, and provide a war chest to pay more US radio stations to run its reports. Access to the massive US market is a potential game-change for GTN.

The interim profit for the December 2016 half-year came in ahead of expectations, with revenue up 12.3% to $92.5 million (up 41% in local-currency terms), adjusted EBITDA (earnings before interest, tax, depreciation and amortisation) up 55% to $23.9 million and net profit (after tax and amortisation) up 58% to $13.6 million. GTN showed it was on track to achieve its prospectus forecasts, achieving 50% of FY17 forecast revenue in the first half, 54% of forecast EBITDA and 58% of forecast NPATA.

The company is forecasting revenue of $177.4 million this financial year, with net profit of $21.1 million. It expects to pay an interim and final dividend of 10.5 cents a share, 95% franked. At $2.85, the expected yield 3.7%, but capital gain prospects look good: FN Arena sees analysts’ consensus target price of $3.65, while Thomson Reuters sees a target price of $3.83. The analysts’ optimism is based on the US expansion going well – that is the main risk.

Reliance Worldwide Corporation (RWC, $2.90)

Market capitalisation: $1.5 billion

Melbourne-based plumbing fittings and water valves manufacturer Reliance World Corporation is a genuine Australian global leader: it is the world’s largest manufacturer of brass push-to-connect plumbing fittings the world of safety valves for hot water tanks and of brass “push” to connect plumbing fittings, selling into the European, North American and New Zealand markets as well as Australia. Reliance World’s biggest market is the US, which represents more than 60% of sales.

The Melbourne-based Munz family made about $900 million in the float, selling 70% of the company they acquired in 1986 and subsequently built into a global plumbing supplies operation. The Munz family held on to 30% of the stock. The float raised $918.8 million at $2.50 a share: the shares surged 18% on the first day of trade last April – the same day as Motorcycle Holdings debuted – to $2.95, and moved as high as $3.41 in July. RWC has traded back down to $2.90, potentially offering double-digit total return.

The interim (December 2016) result was better than analysts expected, and Reliance World confirmed that it is confident of meeting, or marginally beating, its FY17 prospectus profit forecast of $62.6 million in net profit.

The yield situation is not spectacular. The analysts’ consensus collated by FN Arena sees FY17 dividend yield of 2.1%, 40% franked, rising to 2.4% in FY18. But the analysts see a consensus target price of $3.20 – which would be 10.2% upside from the current price.

Viva Energy REIT (VVR, $2.24)

Market capitalisation: $1.5 billion

The $1.5 billion Viva Energy REIT (real estate investment trust) was a welcome addition to the growing band of specialist REITs when it floated last August, being the only listed trust that owns purely service station sites. The stock is partly a proxy for the petrol industry, but can also be seen as an exposure to consumer-staples spending, on fuel and convenience items. Viva Energy – the sole tenant – was formed through oil trading giant Vitol’s $2.9 billion acquisition of Shell’s oil refinery and fuel-retailing business two years ago. Viva retains 40% of the REIT.

The portfolio holds 425 Shell and Coles Express-branded sites throughout the nation. The distribution flow is backed by the contracted rental growth profile, on triple net leases – which means that the tenant is responsible for all operating costs and capital expenditures of the building – and good geographic spread of properties. Occupancy is 100% and rent rises at 3% a year fixed. The weighted average lease expiry (WALE) is 14.9 years – Viva will not face a lease expiry until 2026. Also, Viva Energy REIT has a strong market position, as entry barriers to the industry are high and service stations are operated under a long-term alliance agreement. The company is also looking at acquisition opportunities – it is not restricted to properties leased by Viva Energy.

VVR made a strong market debut in August, trading more than 16% higher than the $2.20 issue price. Since then, distributable earnings for the December 2016 half-year came in 3.7% higher than projected. With the unit price having declined to $2.22, the analysts’ consensus forecast unfranked yield has moved up to 6% (FY17) and 6.4% (FY18). According to FN Arena, analysts see a consensus target price $2.53 – implying 14% upside from here.

Volpara Health Technologies (VHT, 52.5 cents)

Market capitalisation: $33 million

New Zealand-based Volpara Health Technologies, which listed in April 2016 at 50 cents a share, is making good progress with its suite of breast imaging analytics software, which makes a critical advance in that it measures breast density – which is both a key indicator in early breast cancer detection, and a flaw in current mammograms, because breast density can hide cancer in a mammogram.

Studies suggest that mammograms detect only 65% of cancers in women with dense breasts: Volpara’s software analyses breast density and also the probability of missing potential tumours, helping to determine whether further scans are required. The Volpara technology enables personalised, high-quality screening to give a better chance of early detection of breast cancer.

A recent Dutch study using the Volpara Density software has shown that increased breast density has a direct impact on mammography performance measures. The study determined that Volpara Density software was a powerful predictor of screening performance and thus might be used to help get the best out of breast cancer screening programs.

The Volpara technology is approved for sale by both the US Food & Drug Administration (FDA) and under the European Union’s CE Mark. It is sold in 34 countries and Volpara recently signed global distribution deals with GE Healthcare and Siemens Medical Solutions USA. With regulatory risk out of the picture, Volpara is focused on growing sales.

Volpara has also launched VolparaEnterprise, a cloud-based software solution that offers breast screening clinics an all-in-one tool to assess data from multiple X-ray machines. In October the company announced the first sale of VolparaEnterprise to the Women’s Breast & Imaging Clinic in Perth, Western Australia. As at the end of February 2017, the company had nine signed VolparaEnterprise software-as-a-service (SaaS) contracts, including US deals with Stanford Medical Center and University of Virginia. The company has “multiple” large trials of the system underway.

The Annual Recurring Revenue (ARR), or the amount of revenue expected to be recognized over the next 12 months based on current SaaS and support contracts alone, now stands at NZ$707,000, up 464% on the end of FY16. The company’s SaaS model incorporates an annual licence fee and a fee for each breast screening: revenue is recognised over the life of the contract (as the service is delivered), rather than up-front, as it would be with a capital sale model – but the advantage is that the company earns revenue from every screening.

US sales will be the key to moving into profit: Volpara has a market share of just 1% of the US market at present, but about 40 million mammograms are done in the US a year, at a cost of US$7.8 billion ($10.1 billion). Volpara – which was one of our “four speculative growth stocks” in October, at 59 cents – expects to reach cash breakeven stage this year. While VHT will not be profitable at net profit level this year or next – and certainly not a dividend payer – analysts see hefty upside potential: the FN Arena analysts’ consensus target price of 87 cents is just under two-thirds higher than the current price.

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.

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