At the beginning of the year there was a fair amount of optimism that the return of IPO’s would be a welcome boost to investor appetite and in the process help re-engage small investor interest in a market that has for some time seen a reluctance on the part of some to re-engage with new issues.
This is especially important given that equity markets remain near record highs, and new investment opportunities remain well sought after.
The main caveat remains around whether or not the IPO is fairly priced for small investors so that they get a slice of a company at a good price, as opposed to other listed shares which are already at fairly elevated levels.
For quite some time Poundland had been one of the few IPO’s this year that had managed to keep its head above water, as company after company succumbed to doubts about the high valuations that were being asked, and subsequently slipped below their break even levels.
Recent activity in the IPO market would appear to suggest a growing element of IPO fatigue amongst investors, which to my mind hasn’t been helped by the greed and short sightedness of the private equity sellers.
Unrealistic valuations have given way to share price losses after, in some cases an opening day pop, and this increased focus has given way to a lot of the early gains seen earlier this year melting away.
Even budget retailer Poundland, which up until recently had been the exception to this rule, and continued to perform well and appeared fairly well priced, has seen its early gains slip away as more focus turns to the underlying business model.
In the last month we’ve seen the shares slip below its IPO price of 300p and given this week’s trading update, is likely to be significant as to whether or not we once again see the heady heights of 370p, where we were at the beginning of June.
To recap Poundland's profits for 2012 were positive with sales of £880m up 15%, and profits up 29% at £23.1m. During May the company issued a year end trading update for 2013 saying total profits had increased 13% to £998m, and that profits were expected to be around £27m, and later this week these numbers will be formally ratified.
The company says it plans to open 70 new stores in the UK a year, and as part of its European expansion hopes to move towards 10 stores in Spain over the next two.
The big concern, as always will be the squeeze on margins as the big supermarkets, like Tesco (LONDON:TSCO), react to the pricing squeeze brought about by these new kids on the block with price cuts of their own.
This remains a concern with respect to future revenue growth so any indication of a downward nudge to earnings forecasts may not be well received. Currently forward expectations for 2014 are for revenue of £1.1bn and pre-tax profits of £44m.
Nevertheless the underlying business looks positive and there does appear to be a niche for this type of retailer in an economic environment that is likely to remain price sensitive for quite some time.
While the performance of budget retailers still remains a little bit of an unknown quantity here in the UK, in the US they have been hugely successful, with companies like Dollar Tree (NASDAQ:DLTR) , which generates billions of US dollars of turnover in a market where it has to compete with grocery giants like Wal-Mart (NYSE:WMT) , Publix, Costco and Krogers (NYSE:KR).
Will the US model work here? There is no reason to suppose not but competition is likely to be fierce and that will squeeze margins so investors will need to be nimble when choosing their company of choice.
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