IPO apocalypse

Extracting value from the new issue slump

A toxic cocktail of slowing growth, rising inflation and belatedly hawkish central banks has resulted in the current dire performance of risk assets. During risk-off periods, capital tends to flow to larger, liquid assets. Initial public offerings (IPOs) are generally more illiquid than longer-established peers due to lock-ins and newly established share registers. It is therefore no surprise that the share prices of companies that listed in 2020 and 2021 have struggled, but what is surprising is the magnitude, with 84% of IPOs trading below their issue price. Moves of this scale often present opportunities. The move to liquid assets tends to lead to illiquid names getting mispriced quickly. In this report, we endeavour to identify value and investment potential against a valuation screen of companies that have listed in the US, European and UK equity markets since the beginning of 2020.

84% of 2020 and 2021 IPOs trading below issue price

The IPO fallout has been both broad and deep. Our analysis of 1,205 non-special purpose acquisition companies (SPACs) IPOs launched since the start of 2020 (in the US and Europe) suggests that, as at 31 August 2022, c 84% are trading below their issue price and almost 50% have at least halved. We have identified 94 public offerings that are down at least 90%.

Screening the IPOs for names to revisit

Our screen focuses on valuation using two ratios (EV/EBITDA and EV/sales) and two balance sheet-related metrics (Price/book and net cash to market cap) and ranks 975 stocks that passed qualitative and quantitative screening. Attractive valuations and a financial position to weather the near-term economic headwinds were used as a basis for looking for businesses which, on a medium-term basis, could be revisited by investors. Our screen of the top 30 pan-regional stocks on an unweighted average, forward-looking basis trades at EV/sales of 0.6x, EV/EBITDA of 3.7x, Price/book of 0.6x and at 104% net cash to market cap.

As with all screens, more work would need to be done to assess the fundamentals of the businesses, but the objective of the exercise was to identify names which we should look at with a fresh perspective. The names identified inevitably face near-term headwinds, and in some cases go against current investor sentiment. Examples include:

• THG (THG.L, £469m market cap), which listed at 500p, is today trading at 38p, and recently lowered guidance. A medium-term perspective might focus on governance issues at the time of the float, which have been addressed with the appointment of a new chairman. There is scope to grow the beauty business through M&A and improvements to the ESG standing of the business.
• hGears (HGEA.F, €84m market cap), which listed at €26 and is now trading at €8. The company manufactures high-precision gears and components for e-mobility drive applications. While supply chain and inflationary headwinds might put near-term profitability under pressure, long-term growth potential is attractive given its exposure to the fast-growing e-bike and e-vehicle segments.

Click to view the full report.

Subscribe to receive related research