One swallow may not make a summer but do two disappointing flotations signal a turning point for the new issues market?
You would arguably have been better off putting your hard-earned dosh into one of the flakier looking borrowers on Funding Circle’s peer-to-peer lending platform than investing in the company’s share flotation.
The signs were not looking good last week when reports emerged that the City schmoozers sounding out institutional interest in the flotation had tightened up the range of possible offer prices from 420-530p a share to 440-460p.
In the end, the advisers went with 440p, right at the bottom of the revised range and still the City could not be persuaded to give the issue a warm welcome; in the grey market, the shares plunged to 364p and this morning, with the official start of trading, the shares have pulled back some more to 360p, having dipped below 340p at one point.
Shaken but not stirred by Aston Martin’s initial public offering (IPO)
It is almost as if Funding Circle Holdings PLC’s (LON:FCH) flotation has been a template for the IPO of Aston Martin Lagonda Global Holdings PLC (LON:AML), the maker of ludicrously expensive cars, including the iconic jobbie driven by that fictional misogynist British spy chappie, James Bond.
The company has no shortage of fan-boys and goodness knows they have proved their willingness to pay through the nose for what they really crave but even they have baulked at the price of the shares.
Aston Martin narrowed the price range on Monday for the initial public offering to 1,850 – 2,000p from 1,750 – 2,250p and finally settled on an issue price of 1,900p.
After initially edging up on the grey market this morning when dealings commenced, the shares had reversed to around 1,775p by mid-morning, suggesting the brokers advising the firm might have been better off swallowing their pride and picking a price at the bottom end of the range, as Funding Circle did.
Neither company could be described as a cash machine
In the case of Funding Circle, investors were expected to buy into the disruptive nature of the peer-to-peer lending idea, which could make the lending model of the high street banks as old hat as the idea of having a bank manager in the wardrobe (ask your granddad about that reference).
Like other sexy tech firms such as Uber, Funding Circle is an enabler – it’s not actually lending the money, just matching up borrowers with lenders (Tinder for lenders) – so investors might reasonably have been expecting the City to go wild for this company, just as they have other tech-based enablers, particularly as Funding Circle lends only to business.
According to widely respected personal finance site moneysavingexpert.com, “the advertised rates are higher [on Funding Circle], but so are the bad debt provisions, so it's [the] riskiest”.
Despite the fintech glamour, P2P lending has possibly not been the industry shaking threat its advocates were hoping it would be.
Certainly, Funding Circle has yet to turn a profit but that’s not uncommon for tech start-ups. Revenue in 2017 was up to £94.5mln from £50.9mln in 2016. It made an underlying loss of £25.1mln.
“Personally I think funding circle is a financials company not a fintech company. They obviously wanted to be known as tech to get a higher valuation but it's a lender at its core. The performance today is just market trying to find the right price for it,” said Niall Pearson, the head of corporate broking & sales at broker, Hybridan.
Aston Martin, meanwhile, has gone bankrupt seven times in its hundred-year history and has a patchy record at best this decade in terms of profitability. In 2015, it made a loss before tax of £128mln on revenue of £510mln; in 2016, it made a loss of £163mln on revenue of £594mln and in 2017 it made a profit of £84.5mln on revenue of £876mln.
It could just be a coincidence that the owners have gone for an IPO the year after the company finally turned a profit but some pundits have wondered why the punters should buy the shares if the owners are selling off?
The company has what it calls its “Second Century Plan” that will see it launch seven new core models, one each year from 2016 through to 2022 with each model having a seven-year life-cycle.
In 2018 the brand was recognised as the fastest-growing auto brand of 2018 and the fastest-growing brand in the UK, up 268%, according to Brand Finance, so the growth potential is there but there must be some concerns over a luxury cars maker that prides itself on hand-finishing each car going for a big boost in production.
“High-end brands likes Ferrari and Hermes have performed well in recent years as the super-rich have seen their wealth grow considerably since the global recovery,” observed David Madden, a market analyst at CMC Markets.
Let’s hope Aston Martin does not make the mistake of naming one of its new models the Marie Antoinette ...
“Aston Martin Lagonda is still trading at a higher price-earnings multiple than Ferrari, which is the only other stock that bears successful comparison with Aston Martin. Yet Ferrari is still regarded as a more profitable company,” said Fiona Cincotta, a senior market analyst at City Index.
“The entire UK car manufacturing industry is living under a big Brexit cloud at the moment, as the sector is so reliant on parts sourced from inside the EU. A hard Brexit has the potential to cripple the industry overnight, and Aston Martin would be no exception,” she opined.
Neil Wilson, at markets.com, said, “The strike price may be a disappointment for the owners – it’s a long way short of the £22.50 talked about previously as the top of the range but this is a fairer valuation when you compare with peers – notably Ferrari – and therefore this price could offer an in for longer-term investors that the higher valuation would not have afforded”.
“It does look as though Aston Martin will not join the FTSE 100, with the valuation a little short of where it needs to be and early indicators pointing to investors not being excessively bullish on this stock. Longer term the ambitious goals for sales growth indicate it could have room to the upside,” Wilson suggested.
The IPOs may just be another casualty of Brexit and trade war uncertainties
Neither stock looks a winner on fundamental grounds; any investment case had to be made on the basis of a fast-growth future and who can predict the future, particularly with Brexit looming on the horizon – although the sort of high net worth individuals who buy Aston Martins are no more likely to be put out by any Brexit outcome than an elephant seal would be by a global ban on the use of tin openers.
“The biggest concerns remain around the global outlook at a time when trade tensions are rising there is a risk that a further escalation could see the sales numbers take a hit, and that is undoubtedly something to bear in mind, even if you take the view that someone who can afford an Aston Martin isn’t likely to be as price sensitive the conventional car buyer,” opined Michael Hewson, at CMC Markets.
The fact that both Funding Circle and Aston Martin soiled the IPO bed this week may just simply be a case of the financial advisors getting a bit too greedy.
“Ultimately it looks like both companies have simply been priced on too high a valuation versus their growth prospects, quality of business and financial strength,” concluded Russ Mould, the investment director at AJ Bell.
Derren Nathan, the head of research at Hybridan, definitely thinks the market is suffering from IPO fatigue.
“There is money for deals but investors want access to the upside too rather than purely lining the pockets of earlier backers and private equity. Valuation is key but so is the translation of disruptive technology into commercial success. There is a lot of hype out there around blockchain, and AI etc. and it is important to be able to cut through this,” Nathan said.
--- adds comments from Hybridan and corrects a typo in the profit figure for Aston Martin ---