"2017 in a nutshell: rampant IPOs and deals that don't work out"

I wrote a piece titled...

"2017 in a nutshell: rampant IPOs 

and deals that don't work out"

...which was uploaded just now to the ShareProphets website.  A link to the piece (free sign-up) is here.

TSB - the price at which to say 'yes' to the shares

Since their listing in the middle of the last year - and also since my last write-up on the stock in December (link here) - shares in the UK bank TSB have continued to fall:

Are they interesting enough to buy now?

The simple answer is not yet.  At the above link I noted a return on equity generation a couple of years hence which just about justified the prevailing valuation.  At a valuation point 4% odd below that level the return profile of the company would have had to move on progressively to make the numbers work.  

Unfortunately the reality is that despite 'headroom for growth' via a firm-looking tier 1 ratio...

...and a continued good UK current account win ratio (replete with positive comments from independent consumer bodies and the like)...

...the company is not seeing much net progress despite an inherent flat interest income line.  It really is easier to be in simplification mode (RBS, Barclays amongst the UK peers) than attempted expansion mode.

The cost profile/profitability changes are not the most fantastic news either.

My conclusion from all of this: take a 10% discount to help adjust for all the above factors.  From a 270p base as in December that implies c. 245p or below.  I have noted the level down.  

A tale of three IPOs...where are we now? #1 Markit

Back in June I wrote a posting about three financial sector IPOs which came at pretty much the same time: Markit, TSB and Euronext.  So how have all three got on?  First...Markit.

At the time of the IPO I noted that: 'Around x20 a reasonable near-term ebit is a big price...but now it is all down to delivery and those recurring contracts and more.  I will remain on the sidelines until the first quarterly disclosure as a public company.  Markit though is a company to be keeping in touch with - and not just for its economic/related data output'.  

First things first, the share has declined since float.  No disaster but it is down:

So what about the company's Q3 numbers today?  Well the nine month numbers on a year-on-year basis are all growing at more than a double digit rate with the exception of diluted adjusted EPS at 9.6%.  Adjusted earnings only grew by 6.2% in the Q3 year-on-year period however.  

I noted before the ultra high recurring revenue proportion and this continues.  So what is dulling slightly the shorter-term earnings momentum?

 It certainly was not the largest division 'Information' which had strong pricing growth and customer retention/renewal.  This is the division I personally am most familiar with as seen at the Markiteconomics site and others.

Processing - less well known to the casual observer of the company - did well too.  As the company noted, nice margin progression due to increased volatility boosting derivative processing.

 Solutions grew more slowly at the ebitda level due to 'continued investment in growth initiatives' (including Asia and KYC solutions) which given the 25%+ revenue increase in Q3 year-on-year is understandable.  An 11% year-on-year increase in ebitda is hardly a problem.

So where is the fire then?  General operational expenses rose 11% so no huge issue there.  The reality is acquisition expenses and the wonderful 'other' helped pull back the proportional number for Q3.  Essentially whichever way you look at it, Markit is currently still a 10%+ growth company.

And cash generative too.  Interesting to see the US$70m+ reduction in net debt YTD too.  At less than one times net debt to ebitda the company could be described as underleveraged.

So what price the above profile?  US$4.8bn or around a x16 forward (FY15e) ebitda profile.  I would still say that is fairly full but no disaster for a company targeting 5-7% organic growth in a slow(er) growth world.  Below a US$22 share price (or c. 10%+ down from here) the company trades nearer a x16 EV/ebit profile.  That's the first price that I will take a look.  

Good company and I like their products...but I am going to wait for the share to come to me for the time being. 

Next up for this post IPO review (on Thursday) TSB and Euronext.  

Charts today - Scottish referendum, India & technology, impact of debt, energy efficiency and first 100 days of tech IPOs

A few charts that strike me as more interesting than average today.

I see the Scottish referendum vote is, at least via the bookmakers quoted below, starting to go slightly back in favour of the 'no' vote again:

If true that should calm down the British pound a little albeit that the growth of localism as reflected by a much closer result than ever anticipated is a political reality.

Technology is an interesting aid to localism.  It can also radically change even the most established institutions. I enjoyed this photo - kudos to @ncbn - showing the Indian political cabinet having a paperless meeting.

Back to economics per se.  The Bank of England shows the impact of debt on private consumption levels...first it is good...and then it is bad.

Interesting on energy sources...which makes you wonder about the need for the persistence of many renewable subsidies

Finally, Alibaba upped their pricing range yesterday.  I liked this Fast FT chart which showed how some of the other big technology IPOs have got on over their first 100 weeks:

I think Twitter and Facebook may provide many insights for the Alibaba secondary market: volatility but opportunity too.

Alibaba - favourite 10 charts from the IPO slideshow

Having already posted an excellent guest post on Alibaba earlier this week...now it is the turn of the IPO slideshow review a document link that was kindly posted up here.

So what are my favourite ten slides from the presentation?

The opportunity backdrop...

...starts with a huge incumbent population...

...and much lower e-commerce penetration rates than the US:

Despite the lower penetration rates the company is already the largest global online/mobile commerce business:

 Nice 'ecosystem' chart...

 ...and what was it that Apple was saying about payment systems yesterday?  Alipay is already well-established:

Opportunity...

...and two charts on the ultra-strong mobile position and...

...the scope for increased mobile monetisation (the theme that is driving Facebook and Twitter shares today):

Ten huge theme charts...and you can see why apparently the deal is oversubscribed already.  Clearly lots of blue sky (especially in the nearer-term valuation) but also medium-term opportunity?  Most certainly.

My pension fund already owns Google and Twitter shares amongst others: I can certainly see a place for Alibaba too albeit like the former two via the embracing of volatility in the share and constant appraisal of the published quarterly numbers as they come out.

Asia today - interest rate increases problems (Australia/NZ) & Chinese IPOs/do you know what you are buying?

Around about ten days ago I cited this insightful graphic which summarised where a number of leading global economies are with regards to interest rates.  Yes, that's New Zealand at the front and Australia tucked up behind the UK and the US

(h/t @ChrisWeston_IG)

Now we can debate the relative rankings and likelihoods on this chart and certainly last week's UK Monetary Policy Committee disclosures indicated it may be a little time prior to a rate rise.  What I do note however is that New Zealand - as shown in the graphic above - has started the process...and it is having an impact.  As Fast FT notes today:

'The Kiwi dollar slipped to an eight month low against its Australian counterpart on Tuesday, after output prices fell and New Zealand government cut its GDP forecast and estimate for fiscal surpluses...The decline accelerated after a government report - ahead of the general election on Sept 20, cut its GDP forecast for the year ending March 2015 from 4.0 to 3.8 per cent, as "monetary conditions tighten" and exports decline'

Oh dear...the dulling impact of higher interest rates (although most countries outside selected emerging markets would not be too worried about 3.8% growth!)

Of course this is logical...but as perhaps the UK's MPC indicated last week (and potentially Ms Yellen of the Federal Reserve will at the Jackson Hole conference later this week) if underlying growth rates are not that strong then the rate cycle probably does not kick in.  This is what many global bond markets are indicating...and is also consistent with the comments from the Reserve Bank of Australia this morning too who noted:

'Output growth would probably be somewhat softer in the near term after recent higher readings, but was expected gradually to strengthen again over the forecast period. Members noted that there was inevitably a significant degree of uncertainty about the outlook, given the number of forces working in different directions. The Board judged that monetary policy was appropriately configured and that, on present indications, the most prudent course was likely to be a period of stability in interest rates' 

Yes, 'stability in interest rates'.  That says a lot.  Low for longer.  

Elsewhere, this made me smile about the Chinese IPO market.

'Zhang Xiuli says she knows nothing about the nine Chinese companies that held initial public offerings last month. Not a problem. Zhang, 37, tried to buy shares in each and every one, confident that she knew what was coming next: an immediate surge in price that has rewarded investors in Chinese IPOs with an average first-day gain of 43 percent this year'

Amazing the behavioural impacts of the Chinese bourse being at an eight month high (and not too far from a 52 week high)!

China is moving from a cheap to a stock picking market...and the inevitability of a few IPO disappointments will help drive this.  

NN Group IPO today - a few thoughts pre-trade

A couple of weeks ago I mentioned that the upcoming NN Group IPO (sale by ING) looked quite attractive:

'So what price this?  Well with a mid-range implied market cap of c. Euro6bn the company is indicated to float at around x0.5 book...which seems cheap given the either side of 9% RoE noted above'

Well the share formally lists today after the confirmation of a successful sale:

'NN, the insurance arm of Dutch lender ING, has raised €1.5bn in one of the largest European flotations of the year.

ING is having to sell NN as a condition of the state bailout it took during the financial crisis.
About 77m shares were sold for €20 each - the middle of range of €18.50 to €22 the company had set, though the amount was higher than the 70m originally planned'

I expect the opening to be quite strong but even factoring in that ING are ultimate sellers of more of their retained 74% stake.  As with Voya (the US ING successful spin-off) I see good medium-term value. 

Applying a 20% discount (reflecting the overhang above) to what I regard as a fair fundamental value (x0.9 book for a 9% RoE) the target I get for NN Group shares is just over Euro28.  Even with a big start today embracing the opportunity still seems the order of the day (at least in my view). 

Asia today - Japan's damp squib third arrow, China expands its role and Australia's resource sector

Was the latest on the 'third arrow' in Japan a bit of a damp squib?  This write-up from Stratfor is underwhelming from my perspective:

'today Abe provided only guidelines for reform, with a few notable exceptions, including a pledge to lower the corporate tax from 35.64 percent to less than 30 percent in the next few years. Other reform proposals, such as allowing more women and immigrants into the workforce, will be far harder to implement and sustain socially in a country that has long-running issues with integrating women into the workforce and that historically has had great difficulty integrating foreigners socially'

More stimulus, please?

Meanwhile, as per today's Financial Times, 'China is aggressively expanding plans to establish a new global financial institution to rival the World Bank and the Asian Development Bank, which Beijing fears are too influenced by the US and its allies'.  

Should we be really surprised?  Seems an inevitable trend to me...and it is not just driven by China as the report goes on to note:

'So far 22 countries across the region, including several wealthy states in the Middle East – which China refers to as “West Asia” – have shown interest in the multilateral lender, which would be known as the Asian Infrastructure Investment Bank'

Staying in China, the Shanghai bourse remains just above the 2,000 index point level.  Two interesting observations about the structure of the Chinese market.  The first is on the consumer which I have often noted is the strongest underlying theme in the economy.  This consumer confidence measure was surprisingly weak:

And then there was this Bloomberg report which noted the dulling role of a wave of IPOs on the market:

'Speculation that Chinese investors will pull money from the stock market to invest in new offerings is weighing on the Shanghai Composite Index (SHCOMP), which has dropped 4.3 percent this year for the biggest retreat among 46 emerging and developed countries. Chinese IPOs have jumped an average 43 percent in their trading debuts this year, the most worldwide, as the securities regulator pressured companies to price offerings at below-average valuations to protect small investors. “The stock market will continue to bleed as investors remain interested in the new IPOs,” said Zeng Xianzhao, an analyst at Everbright Securities Co. “This could continue for another month before they return to the secondary market.” '

What a mixed up world we live in when the US has high consumer confidence and IPOs in 'the West' are generally correlated with market excitement...

Finally the excellent BREE report on Australia's energy/resource sector had many interesting charts including the growing importance over time to the Australian economy of the non-energy space (iron ore, coal etc)...

 ...and the sheer size / weight of the Chinese steel market

A tale of three financial IPOs...Markit, TSB, Euronext

Financial sectors watchers have had a few different stories to think about over the past 24 hours.  Yesterday Markit IPO'ed in the US...

...then it was the turn of TSB in London to re-list...

...and then Euronext in Paris (to also re-list)

So what should investors think?

Let's start with Markit.  My first disclosure is that I am a huge user of the Markit Economics site (link here) as regular readers of this website will know.  So do I like the product?  Absolutely...very rapidly it seems to me Markit have developed themselves into a formidable supplier of relevant and regular financial information in conjunction with other entities (think HSBC, JPM etc on the various ISM/PMI reports).  That sounds like a good almost natural monopoly to me...so long as they keep the contracts (95% of the revenues are 'recurring' subject to retaining contracts of course). And they do a lot more than that...

And how about the numbers?  Well the below from the IPO filing document.  Clearly the business is growing at a revenue clip of around 10% pa.  Costs are growing too and this crimped Q114 profitability a little.  Could we get to a c. US$250m operating profits business throwing off US$175m+ cash per annum?  I think so.  Using some akin peers like McGraw Hill Financial you could apply a x12 ebit multiple to this and get a market cap of around US$3bn implied. 

Markit though is a slightly different business to McGraw Hill and shares some similarity to private businesses like Bloomberg which inevitably will give it a premium valuation...currently a little under US$5bn.  Around x20 a reasonable near-term ebit is a big price...but now it is all down to delivery and those recurring contracts and more.  I will remain on the sidelines until the first quarterly disclosure as a public company.  Markit though is a company to be keeping in touch with - and not just for its economic/related data output.  

TSB inevitably is a quieter story given the need of Lloyds to partially spin-off some of its UK branch network operations for competition reasons.  Those with a long memory will recall that TSB was one of the inaugural privatisations in the UK in the mid-1980s and, just like then, first day investors have been rewarded with the stock up 13% from the 260p IPO price at the time of writing.  Well done any investors. 

Reflecting good interesting Lloyds confirmed earlier today that the offer size had been increased from 25 per cent to 35 per cent, or 175m of the 500m TSB shares in issue at admission. 

So does TSB offer any value?  I took a quick look at some of the bank's disclosures and noted that 2016 hopes seem to congregate around a 350p tangible book value per share and a 8.5% tangible return on equity (currently 3.1%).  If I put those two numbers together I get to around 308p a share (350* 0.88)...but that's 2016 and some discount should be applied.  Somewhere between 10-20% seems about right and hence I think the shares were pretty sensibly valued at about a 260p IPO price (c. 15% discount to the 2016 theoretical value).  Now, today investors are more sanguine but my view is to stay on the sidelines...especially when I can see better relative value in other UK financial names like RBS and Barclays (for reports on these two see here and here) who are also applying simplification / cost cutting stories.  I have set a marker of 277p (10% discount to implied 2016 value) as a level to have another look against these other players in the UK market but am sticking with these alternative names today. 

Finally Euronext.  Well this one has not had such an interesting first day back on the markets (after parent Intercontinental Exchange was forced to divest the index operator as part of its larger NYSE Euronext acquisition last year).  As Reuters reported:

'Shares in financial market operator Euronext started trading at 19.40 euros on Friday, 3 percent below the price set for its initial public offering. Parent Intercontinental Exchange had priced the shares at 20 euros late on Thursday, at the lower end of a previously announced IPO price range of 19-25 euros.

ICE said on Thursday that all 42.25 million shares offered were sold, representing 60.36 percent of the capital, implying a market value of 1.4 billion euros ($1.91 billion) for all of the company.

A group of European institutional investors bought a 33.4 percent stake in the market operator last Friday at a 4 percent discount to the IPO price, or 19.20 euros a share, in a move designed to allay local regulators' concerns that the pan-European bourse could be snapped up by another foreign firm'

Ah...the old 'special discount' and 'core investors'.  No wonder ordinary investors and the market in general felt a bit peeved...

So who are Euronext?  Well as the prospectus puts it:

'We are a pan-European exchange group, offering a diverse range of products and services and combining transparent and efficient equity, fixed income securities and derivatives markets in Paris, Amsterdam, Brussels, Lisbon and London. Our businesses comprise: listing, cash trading, derivatives

trading, market data & indices, post-trade and market solutions & other'

The better news is that we have been here before.  The LSE (London Stock Exchange) trades on c. x13 EV/ebit and so Euronext on a static high single digit multiple looks ok valued even taking into account the pre-sale.  

Any exchange business is going to be correlated with the market but I quite like the sound of Euronext especially if I can get the shares at or below the Euro19.2 'core investors' level.  A newly liberated management with the scope to realign costs, pay a dividend etc.  Liquidity will not be the best - but that can cut both ways.  At Euro19.2 I will buy a few (Euro19.8 currently).  

So a tale of three IPOs..all very different.  The key is, as always, to keep looking and thinking about them.  

Voya mark 2? The NN IPO

One of my larger positions at the moment is in Voya otherwise known as the US arm of the Benelux financial giant ING. As per my most recent report on the stock (link here) I still see an attractive valuation opportunity despite a strong performance since floatation:

And all of this whilst the parent company is continuing to sell down their shareholding.

I mention this as ING are at it again this time selling c.25% of their NN division.  Who or what is NN?  Well to quote the prospectus:

So where or how does the company make money?  Well unsurprisingly the company is very Netherlands centric in terms of profitability although return on equity is generally higher in other parts of the world.

I also note good business momentum (higher ROE) in all geographies apart from Dutch Life business in Q114:

So what price this?  Well with a mid-range implied market cap of c. Euro6bn the company is indicated to float at around x0.5 book...which seems cheap given the either side of 9% RoE noted above.

Of course the Voya experience suggests that such a regulatory forced transaction - combined with the inevitable ongoing share sale - caps the valuation.  Hence I was not surprised to read that 'Bankers handling the flotation of ING's Europe and Japan insurance arm have received indicative offers for all the shares on offer just a day after they unveiled the price range, people familiar with the matter said.'

Additionally the Lex column in The Financial Times noted the potential for a 'sturdy 5%' dividend yield.  

Unfortunately I will not be able to get an allocation but the 2 July IPO point is going to be an interesting one.  Voya mark 2?  Quite possibly...

Charts today - fund management industry profile, IPO fees, CEO compensation and the UK property market

A few charts and graphics today I have come across. 

A must-read report from KPMG for anyone interested in the fund management industry was cited in today's Financial Times

Investment banks have suffered from multiple pressures over the past six years or so.  At least IPO fees are the best in three years...but nowhere near the best four years of the last fourteen though (more lower fees/more competition than lack of volume per se I would say)

Fascinating CEO-to-worker compensation ratio chart

And then there is the UK property market.  A must-read piece by the legendary Roger Bottle can be found here where he noted:

'At some point soon there will have to be a reckoning. This is not to say that someone planning to buy a home to live in should desist. There are all sorts of pecuniary and non-pecuniary advantages to owning your own home and there is more to life than money. But anyone who thinks that residential housing currently presents an attractive medium-term investment needs to have their head examined – and their finances'

This chart I independently found also makes a good point about recent relative price movements:

Charts today - geopolitics, breakevens, S&P adjusted for inflation, put/call ratio and UK IPOs

Charts today starts today with some geopolitics.  There has been much talk about this but Stratfor nicely pulled together who is and who is not attending the St Petersburg Economic Forum:

This does not surprise me.  As I noted in one of my SIC2014 observation pieces last week (link here)
'1. You have to think about geopolitics.  Ian Bremmer noted that 'volatility in 2014 over geopolitical risk quite great' but noted that the biggest risk was centred on Russia...and the differing reactions / gap between Europe and America ('we have put sanctions on Russia...but the Europeans have almost bolted...Germany is the relationship (the US) is most likely of losing').'

I think the above trend is very clear in St Petersburg this week. 

 

A fascinating chart from @chrisweston_IG on the 5 year breakeven rate in the US.  The way to think about this is surely that we should not rule out at least a little more inflation...

 



...especially as did you see the underlying strength of the US manufacturing PMI data yesterday?

 

 

An equally fascinating chart from @mjb4632 with the comment that 'S&P500 adjusted for inflation monthly chart (1900-2014). 8th cycle where RSI(14) has reached 80'. The market looks a bit excitable...

...although I was surprised that the put/call ratio is classified as 'neutral' currently:

 

 Finally a selected list of UK IPOs this year are not looking so great...sign of the times: