- Applied Nutrition may look to test investors’ appetite for new joiners to London market
- Cash returns from dividends, buybacks and takeovers currently dwarf sums raised by new floats or secondary offerings in London
- Investors must apply the same rigorous research to new market entrants as they would companies that are already public
“The Applied Nutrition flotation will be an interesting test of investor appetite for UK assets, which seems to be showing some gradual signs of revival, if the FTSE 100’s gains for the year, the warm welcome given to Raspberry Pi’s listing and sterling’s rally to its highest level against the both the dollar and euro since 2022 are any guide,” says Russ Mould, investment director at AJ Bell. “A new stock market entrant always intrigues investors. Initial public offerings (IPOs) can represent a chance to buy into a new, exciting story that generates capital gains or welcome income over the long term, or at least make a quick turn if a deal looks like it is going to be hot and the shares are going to spike.
“However, a market entrant requires every bit as much diligent research as a company that is well established in the public domain or even a constituent of one of the UK’s headline indices.
“Investors certainly need to take each deal on its merits and carefully assess the strength of a company’s competitive position, the integrity and acumen of its management team and the solidity of its balance sheet, before taking a view on the valuation and whether it means the stock is coming to them at a price which provides both upside potential and downside protection.
“The price and valuation at which a company comes to market is as much art as it is science. Yes, the valuation can be benchmarked against established, quoted peers and rivals (assuming there are any) or at least firms in a similar industry or those with a similar financial profile, in terms of their growth and profit margin profile, be they from the same geography or a different one.
“But the syndicate of lead investment banks that manages the deal will be trying to balance the requirements of three interested parties and get the price and valuation points that work for all.
“First comes the seller. They may wish to maximise value and get the best price possible.
“Then comes the would-be buyers. Investors will want to pay the lowest price possible, to maximise their upside potential and also provide some downside protection should anything unexpected go wrong.
“And finally comes the group of lead banks hired to run the deal. They will want the deal to go well, not just on day one but subsequently, so there is an active after-market where the share price ideally continues to advance over time. That means they will avoid the risk of having to place any unsold shares, get paid by their client, boost their chances of any follow-on work from that client and use the deal in their pitch book to prospective corporate accounts who may be looking at a transaction of their own.
“Bulls of the London stock market will also be hoping to see a run of successful deals to follow on from Raspberry Pi.
“London has not hosted much by way of primary deals in 2024 to date, just 26 across the Main Market and AIM and new issues have raised less than £700 million between them.
Source: London Stock Exchange data. *2024 to the end of August
“Secondary deals have raised £10.5 billion, and the bulk of that comes from National Grid’s blockbuster £7 billion rights issue.
Source: London Stock Exchange data, primary and secondary issues. *2024 to the end of August
“However, there is some upside too.
“There is an old market saying that ‘bull markets end when the money runs out’ and a sudden torrent of new listings, or secondary sales of stock by major shareholders in companies that are already quoted, could therefore be a warning sign. Instead, investors are not being asked for too much cash and are in fact getting way more out of the London market than they are being asked to put in.
“According to analysts’ consensus forecasts, the FTSE 350 is due to pay out £90 billion in dividends in 2024, and the FTSE 100’s members alone are running share buyback schemes worth £50 billion. Add in £48 billion in takeover bids (including £6.2 billion for Rightmove, where REA’s approach could admittedly fall by the wayside) and the London market could be primed to offer £188 billion to investors, a figure that dwarfs the £11 billion or so for which they have been tapped so far.”
