Initial Public Offerings (IPO) – What to Look For

By Jason Fittler

When the markets are high and positive like they are at present, you will see many new company floats as promoters take advantage of the positive view of the market to raise funds. I have never read a prospectus, which was negative. They are written to entice the investor to part with their hard earned money. Every prospectus will have a risk section but this is normally towards the back and they hope that you will not read that far.

Below are a few tips on what to look for in the prospectus.

1. Ignore all of the photos, these look great and give you a warm feeling but do not provide you any information of use.

2. Look for the real reason of why the company is floating. Are the owners selling out of the company? If so, check out how many shares they will still have. Are they escrowed (they can not sell these for a number of years)? If the reason is to raise funds for acquisitions, do they have these already lined up? If so, will these acquisitions add value to the company?

3. What is the Price Earnings Ratio (PE), and how does this compare to other companies in the sector. Is it higher or lower? Generally, you want it to be lower.

4. What is the dividend policy, how does their dividend compare to other companies in the sector.

5. What is their forecast income, how does this compare to last years income. Have they forecast a high level of growth in the year following the float? If so, is this achievable?

6. Is there a lot of interest in this float, normally only your broker will be aware of this? A lot of interest should means good support on open.

7. How have similar companies like this, which have floated previously performed? What aspect of this new company will mean it will do better then an all ready listed company.

8. Who runs the company and what experience do they have? Have they been involved with previous listed companies and how have these companies performed.

9. Know if you want to hold the company long-term or sell for a spike on the open. Make sure you know this before you invest and make sure you execute your plan on the open regardless of the price. If you buy an IPO for a spike sell on the open.

10. Read the full prospectus and look for what they are not telling you. Take your time in making the decision and make sure that you fully understand the product? Better still let your broker take care of this for you.

11. If dealing with a broker, be careful that they do not just bring you every float, which comes along.
If they do, they are most likely just pumping stock for the fee. Good brokers will not do every float. They will only present floats, which will make you money.

At ABN AMRO Morgans Townsville, we want to help you grow long-term. Give us a call on 4771 4577  when you need help and advice.