Hobson: Why I Don't Buy Shares at IPO

THE WEEK: Morningstar columnist Rodney Hobson looks back at UK companies that have floated, soared and sunk

Rodney Hobson 29 June, 2018 | 2:45PM
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Royal Mail caused quite a stir when it IPO'd but then shares were in trouble

An initial public offering is also known as a flotation. But all too often the shares soar briefly and then sink instead. That’s why I don’t take part.

Estate agent Countrywide (CWD) is a case in point. Just over five years ago it floated at 350p and a year later the share price had doubled. That peak was the end of the good times. The shares were already down to 440p in February 2016 when the company described a slowdown in business as “the new normal”. Profits fell 16%.

Twelve months on Countrywide was forced to cut the dividend and close branches. By then the shares traded at less than half their float price and a subsequent string of profit warnings has taken them to 55p.

Some form of money raising is now necessary. If, as is likely, it takes the form of a rights issue, one shudders to think how heavily discounted it will have to be. It is not too late for sadder and wiser shareholders to get out before they are asked to throw a hefty chunk of good money after bad.

It worries me that a chain of estate agents cannot succeed at a time of rising house prices and a desperate scramble to get on the housing ladder. If the housing market is finally coming off the boil, as seems to be happening, then how is Countrywide going to cope? It is loaded up with debt, which will be a serious burden now that interest rates are at last rising.

Countrywide shares have admittedly not fallen quite as badly as department store chain Debenhams (DEB), though the latter has had longer to suffer and had a pile of debt from the start. There was a warning sign even as it floated, with the price set at 195p, the bottom of the projected range, in 2006. The shares now languishes at 15p, having lost more than 90% of their value.

Don’t even think about buying for recovery. The whole High Street is suffering.

Despite catering for the burgeoning older population, Saga (SAGA) has slipped from its float price of 185p four years ago to around 120p, not a disaster but hardly what we hoped for. The shares were already sliding before a profit warning last December and a subsequent recovery has petered out. Even so, it looks a better prospect than Countrywide or Debenhams at this stage.

It’s true that Royal Mail (RMG) has proved to be a particularly successful investment but only because the shares were grossly under priced at 330p at the float six years ago, about £1 less than they should have been sold at. Well done those who snapped up the opportunity. The shares are now around 500p.

Apart from Royal Mail, where the Government was duped by its own advisers, it’s hard to extract immediate gains from initial public offerings because the pricing mechanism is so much more accurate these days.

The Tide May Be Turning

Outsourcing group Serco (SRP) has had so much bad press that investors may be assuming bed news when it isn’t there. The shares slumped 5% on the latest update, yet this was one of the better pronouncements to emanate from the group over the past few years.

Profits are starting to grow and the strong order intake seen last year has continued into 2018. Serco is likely to pick up a few Carillion contracts, which will be a further boost.

The shares slipped as low as 80p earlier this year but have actually remained fairly steady for the past two-and-a-half years. Serco may be turning the corner. The shares are only for the brave, which probably won’t include me, but if you specialise in recovery stocks now is the time to take a look. Any price below 100p may be worth considering.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
International Distributions Services PLC272.20 GBX-1.16
Saga PLC110.80 GBX0.73
Serco Group PLC179.10 GBX0.56

About Author

Rodney Hobson

Rodney Hobson  is a columnist for Morningstar.co.uk and author of several investing books, including The Dividend Investor and How to Build a Share Portfolio.

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