No wonder the Nine Entertainment float went at the low end of its price range yesterday ahead of tomorrow’s float.
The up and down nature of trading yesterday, helped by the weak growth data and the fall in the dollar, made for a tough initiation for Dick Smith (DSH) which floated at $2.20 and ended there.
But that steady close came after the shares rose 5.5% in early trading, and then fell 1.8% below the issue price (to $2.16), before regaining the $2.20 level at the close.
The volatile trading would have made the promoters of the Nine float more than a little nervy about setting an issue price too high. Not even the afternoon market rebound yesterday was enough to force the price off the $2.05 floor (which will mean good profits for the issuing shareholders though).
At the $2.20 price Dick Smith was valued at $520.3 million, a more than 400% increase over the value a year ago when it was bought from Woolworths by a private equity group.
The company has forecast $40 million net profit for this financial year. Revenue is expected to reach $1.2 billion.
The company’s prospectus said that Dick Smith’s directors intend to pay out approximately 60-70% of net profit for the 2014 financial year.
Around 66% of Dick Smith was sold through the IPO, with Anchorage holding onto 47.3 million shares, or 20%. Existing owners will hold on to the remaining shares.
Dick Smith will be competing against JB Hi-FI, The Good Guys and Harvey Norman in this competitive retailing category. It is a category that has been wracked by price deflation as consumers move from PCs and larger equipment to smartphones and tablets.
As well the sector also faces its toughest competitor in Apple which just sell the hottest products in the category in iPhones, iPads and Mac computers, plus iPods.
Even though other retailers handle Apple products, the US company has snatched hundreds of millions of dollars in sales and earnings from the sector in the past five years by strategically growing the number of stores in capital cities.
Meanwhile, Nine Entertainment set the listing price at the bottom end of the range at $2.05 a share. The top of the range was $2.35.
There had been talk the company would try for a range of $2.08 to $2.10, but the volatile trading conditions and pressure from big investors obviously forced the reduction in the issue price.
But market reports said the issue was heavily oversubscribed at the $2.05 and would have been filled completely at $2.10.
Major institutional shareholders including AMP, Colonial and Perpetual will take up allocations of between 2% and 3% each.
Even at this lower end of the range the price is expensive (relative to the company’s main competitor, Seven West Media) with the $2.05 level a multiple of 8.3 times earnings. Seven West is around 6.4 times earnings.
Either Seven rises in price over time, or Nine comes back to Seven’s valuation level, meaning a sharp fall in price could be in store. Nothing will likely change until we see the first or second earnings results from Nine.
But the overhang of stock held by the selling hedge fund owners, Apollo and Oaktree will put an upper lid on the share price until they sell out in 2014.
The $2.05 price and heavy oversubscription will mean there is a lot of buying pressure on Friday when it lists.
That will mean two things – a solid opening and nice profits for the floating shareholders, especially the larger institutions.
That in turn means easy profits and performance for the month of December, which has started poorly with losses on Monday and Tuesday and yesterday’s small gain.
In other words there might be a price spike at the opening on Friday and buying then might see a high price for what transpires in the US Friday night, our time, with the November jobs report.
If it’s strong, stocks, gold and the Aussie dollar could take a bit of battering.
If it’s weak the market will conclude that the Fed’s spending will remain in place at its current level for a while longer and Nine shares, and those of other local companies, might enjoy good trading conditions early next week. As usual, there are pitfalls where trading the shares of newly listing companies is concerned.
