Hastings Direct & Worldpay - The biggest IPOs of 2015?

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26 October 2015

Hastings Direct & Worldpay – The biggest IPOs of 2015?

A bumper IPO line-up

The UK market is experiencing yet another solid year for Initial Public Offerings (IPOs), maintaining the trend of the last two years with total listings worth an estimated £20bn expected by year-end. This confirms a still very healthy appetite for new shares, even if less than that of 2014 which saw a frenzied rush to market as equities rallied and private-equity owners factored in the prospect of higher interest rates.

While stock exchange data shows 93 UK IPOs in first 9 months of 2015 raising £5.3bn (vs £11bn from 136 in the same period last year) a whole host of companies remain queued up to sell stakes to the public in 2015. With UK Election risk behind us and rate hikes still on ice, the flow is seen continuing.

While IPO issuance momentum has certainly slowed since Summer 2014, the quality remains and we have seen some very successful and high-profile names list. Challenger bank Virgin Money (VM.) was valued at £1.25bn in November while online automobile marketplace Auto Trader (AUTO) the biggest so far in 2015, worth a whopping £2.4bn in March. Note both companies’ shares have gained 35-40% since coming to market. But there is plenty more to come.

In this report Accendo Markets highlights potential IPOs for 2015 and 2016 with a variety of names which could deliver interesting trading opportunities both pre-and post-IPO.

How can you trade IPOs?

With not all IPOs open to the public (buying shares from the company at the official IPO offer price) due to listings often being reserved for financial institutions only, we look at the alternatives available to the public; such as Grey market and Conditional Trading.

Looking at the statistics for the biggest and most covered IPOs of the last few years, we note that the conditional trading option (explained in detail later) has offered extremely attractive trading opportunities with an impressive 65% of companies still trading above their official IPO price.

Some of the names we can expect to IPO in October include Hasting Direct and Worldpay with the latter potentially being the biggest IPO since Royal Mail (RMG) got the IPO frenzy going in Sept 2013.

Confirmed 2015 Listings

Motor insurer Hastings Direct could be valued at £1.5bn which would make one of the biggest UK IPOs of 2015 and see it join the likes of Direct Line Group (DLG) which was worth £2.6bn in Oct 2012 but whose shares have more than doubled since.

Payment processing firm Worldpay could be the big one, however, worth £5bn making it the biggest London IPO since 2011 after the company declined a takeover offer from French rival Ingenico.

Hastings and Worldpay are due to IPO in London in October while Ferrari has opted for a $10bn New York float. To learn more about these three read on.

Worldpay – the biggest yet?

Payments processing firm Worldpay could be the big one of 2015. Worth a potential £5bn, this would make it the biggest UK IPO since 2011. Pricing looks set to be around 235-250p/share.

Worldpay is a leader in global payments, providing the technology required by retailers to accept multiple payment methods across multiple channels, nearly anywhere in the world. On a typical day it processes around 31m mobile, online and in-store transactions worldwide via access to 326 payment methods in 126 currencies across 146 countries.

Partnership with Mastercard and Visa is a major endorsement along with its success in enabling retailers to reduce the chances of lost sales and protect both the retailer and consumer against fraud.

Furthermore, the quantity of payments processed provides access to a wealth of highly valuable consumption and payments data which can be used with analytics to provide insights services into consumer and retailer performance. Worldpay grew profits by 10% per annum (to £370m) in 2011-14, while H1 2015 saw a further 13% growth.

Following its IPO, Worldpay expects a 25% shares free float (shares available to trade) which would make entry into the UK 100 almost a given while dividend distribution of 20-30% of profits is being targeted.

Will a 2015 IPO result in a bumper pay-day for the payments processor?

Hastings Direct – another assured IPO?

Motor insurer Hastings Direct could be valued at an impressive £1.5bn which would make it one of the biggest UK IPOs of 2015 and see it join the likes of Direct Line Group (DLG) which was worth £2.6bn in Oct 2012 but whose shares have more than doubled since!

One of the UK’s fastest growing insurers servicing the domestic car market, the group achieved 23% average annual profits growth in 2012-14 to hit £105m last year (H1 2015 +19%) and amassed a 5.5% market share in UK private car insurance via 1.9m live policies (vs 3.6% and 1.1m in 2012). A whopping 88% of business comes from Price Comparison Websites (PCW) despite having a highly selective policy which results in its 72% claims loss ratio being above the industry average.

Hastings benefits from being highly selective with quotes and policies allowing it to post solid results based on a ‘quality over quantity’ risk assessment model which enabled it to account for 11.0% of all new PCW private motor insurance sales in 2014, returning around 1.5m quotes per day.

The company’s largest shareholder is a holding company that falls under the umbrella of Goldman Sachs, which will retain a significant holding after the IPO. A dividend equal to 50-60% of profits is proposed from 2016 while the expected 25% free float of available shares should be enough to see it included in the index at the next index reshuffle.

Has Hastings Direct got what it takes to be the next Direct Line (DLG)?

Both Worldpay and Hastings Direct published their ‘Intention to Float’ documents (links above) in mid-September. However, IPO pricing has yet to be confirmed. When further details emerge on pricing, dates for conditional trading etc. we will endeavour to keep you updated.

Other Confirmed/Potential 2015-16 Listings

Equiniti (October)

The share registrar and investor services company aims to raise £390m from a £700m IPO in October to bolster its proven growth strategy, benefiting from a growing market and favourable trends towards outsourcing, greater regulation and digitalisation.

Ferrari

The iconic Ferrari is set to list on 20 October in a $10bn New York IPO with share priced $48-52 is on the cards to fund the next chapter in its history – and owner Fiat Chrysler may have to increase its planned floatation of just a 10% stake to meet ballooning demand for shares.

Primark

Arguably the UK’s dominant discount fashion retailer with big plans to go international. Primark is likely to be spun-off from food processor Associated British Foods (ABF) and represent a great investment opportunity. Potential for consistent double-digit revenue and profit growth.

Uber

We still don’t have an official IPO date, but the way in which the ‘cat amongst the pigeons’ ride-share firm has shaken up the taxi industry (for better or worse?) has got many excited about participating in any IPO. Where do you see the industry going if Uber comes to market?

Ashley Madison

With over 36m registered users in 46 different countries worldwide, the highly controversial dating website, which values itself at $1bn, is looking to raise £135mn in a London IPO.

Successful 2015 Listings

Wizz Air (WIZZ) - listed 25 Feb at 1150p/share; market value £600m

The Hungarian low-cost airline, which began flying in 2004 has a fleet of 54 airbus, revenues of €727m in H1 2015 and net profits of €158m (+45%) IPO designed to strengthen balance sheet.

DFS (DFS) - listed 6 Mar at 255p/share; market value £540m

With 105 stores in the UK, Ireland & Netherlands, the ‘on sale’ furnisher came to market to reduce debts.

Aldermore (ALD) - listed 10 Mar at 192p/share; market value £650m

The UK challenger bank followed One Savings Bank, TSB and Virgin Money to market.

Autotrader (AUTO) - listed 19 Mar at 235p/share; market value £2.35bn

Another example of private equity making a profitable turn; a £600m purchase converted to a £2bn float.

Shawbrook (SHAW) - listed 1 Apr at 290p/share; market value £725m

No April fool, the challenger bank joins fellow challenger banks cited above.

Sophos (SOPH) - listed 26 Jun at 290p/share; market value £1bn

The biggest London tech IPO, the cyber security company put UK software on the IPO map.

Pre-IPO – How can you get involved?

Grey market

A grey market is an instrument for speculating on the market capitalisation (no. of shares x price) of a company on the close of its first day of conditional trading. Pricing is unofficial and allows speculation on the success of a company’s IPO debut whilst giving an ‘idea’ of demand for the shares.

Ahead of an IPO (sometimes well in advance) traders bet long or short whether they think the shares will close higher or lower than the official IPO price. The price rises or falls according to the volume and size of any bets placed. The grey market closes, and all bets are settled at the end of the first day of trading.

Conditional Trading

Conditional trading takes place for a few days between the official IPO and full LSE listing. Shares can be bought during this period and, despite common misconception, held indefinitely thanks to trading moving seamlessly from conditional to full trading. Shares are bought and sold in the normal manner but trading tends to be limited to big investors (i.e. pension funds, hedge funds).

HOWEVER, because conditional trading involves the underlying shares CFD traders can still benefit from being able to participate. A deposit of just 5-25% of the trade value allows the trader to benefit from any potential gains (or losses) being magnified via the leverage (4x to 20x) involved.

Note that if for any reason an IPO should be cancelled during the ‘conditional trading’ period (share price collapses, LSE refuses) any trades placed during the period would be null and void (all profits, losses and trading costs) and reversed from clients’ accounts. The chance is, however, very unlikely these days with most IPOs fully underwritten meaning the investment banks take on the risk.

For a look at the performance of some of the best known IPOs since 2013 read on.

UK IPOs 2012-2015 and Conditional Trading activity

On the next page is a list of the 40 biggest IPOs since 2012 and how they fared when shares were first traded including their trading ranges during the conditional trading period. In most cases there is an average range of 8.1% which, when using CFDs, offers significant trading opportunities versus physical shares thanks to the leverage involved and the average 4.2% gain from open to high is not to be sneezed at.

So even if you don’t get on-board at the official IPO price in order to benefit from the ‘pop’ on day 1 (like AO World’s +40.6%, Royal Mail’s +36.4%, Foxtons’ +19.3% or Poundland’s +18.3%; average of +6.0% from 40 major IPOs since 2012) there are still options available to you in terms of trading during the conditional period and before the seamless move into full trading.

Furthermore, following the official IPO sale of shares to investors and before conditional trading begins, Accendo can help mitigate some of the risk involved by giving you an idea of the IPO’s success together with indications as to where the shares will start trading (above or below the IPO price?) helping you to decide whether or you want to participate.

Conditional Trading activity 2012-15

Post-IPO – How can Accendo markets help?

If you are disappointed with your IPO allocation (not enough/none at all) and still see potential for a share price rise you could buy shares. To save on costs and capital outlay CFDs are an alternative trading option with no stamp duty and only a 10% deposit required.

Do you see growth in the company warranting a long position? Or do you simply see demand from investors who missed out pushing the price higher? Will its inclusion in a major index (e.g. UK 100 or ) be a driver? Will the implied dividend yield attract or will growth lead to improved cash conversion and pay-out?

If you missed out on a quick profit and believe the hype surrounding an IPO is too much and the shares to be overvalued fundamentally, you could use CFDs to short-sell the shares allowing you to profit cost effectively from a decline in the share price.

A handful of high profile IPOs had a great start but soon faltered. Facebook (FB), LinkedIn (LNKD), although US, are good examples of too much hype with volatility and losses from the off. Wizz Air (WIZZ), DFS (DFS), Aldermore (ALD) and AutoTrader (AUTO), however, have done rather better since their 2015 listings. How will the next IPO fare?

Risks: As always IPOs come with risks such as deteriorating economic conditions which could impact business levels with a knock on to both financial (revenues, profits) and share price performance. Extreme events as well as failure to execute strategy successfully may also reduce growth potential. Note also that past IPO performance is no guarantee of future performance and both pre and post IPO trading could differ extensively to that of recent market admissions.

Pricing

IPO pricing tends to start in a range which is then revised up/down depending on demand from institutions and then narrowed towards the upper/lower end of the range as time goes on. This provides an approximate indication of market value for the company.

Retail investors often have access to a portion of shares but often not quite as much as they might like, with the majority tending to be allocated to long-term institutions such as pension funds, insurers and hedge funds.

Part of the service at Accendo Markets is to deliver breaking news on any changes and amendments to the company’s IPO plans (pricing, dates, size etc.) as soon as the market becomes aware.

IPO Timetable

Shares listing in the UK tend to start trading conditionally from Fri through to Tues after which they gain full market listing and trade unconditionally from Weds (normal schedule; subject to change). US IPOs tend to be quick affairs with a roadshow followed by pricing within a week before trading begins.

IPO Parameters

Newly IPOd shares tend to require CFD margins of 10-20%. Short positions are not possible during conditional trading on account of shares being unborrowable but usually become available for short selling when trading goes unconditional after a few days. Guaranteed stops are usually unavailable until trading becomes unconditional.

Want to know more?

Big IPOs tend to be heavily traded by professional investors & retail traders like, making them important from both a market point of view as well as potentially representing a cornerstone of many a portfolio. If you want to trade or invest in any upcoming IPOs, Accendo Markets is here to keep you in the loop.

If something major is announced when will you find out? That day? The next? The benefit of working with Accendo Markets is getting a call from your trader in-time and on-time, not just some time.

We’re here to ensure you are in a position to participate in any IPO in the most cost effective manner. Our award-winning technology coupled with our unique personalised trading and research offering is what Accendo Markets is renowned for and what sets us apart from the competition.

The Accendo approach – what’s different?

At Accendo Markets we don’t tell you what to do. It’s your call whether you buy or sell. Our aim is to provide all the help you may require, highlighting opportunities which may be profitable to you the trader and assist you in making trading decisions which can benefit from the use of leveraged instruments.

Our approach focuses on 3 elements below:

Education - not obligation
Observations - not recommendations
Assistance - not persistence

Our unique and award-winning service provides you with the help and tools you need to make appropriate trading decisions in the financial markets, both to grow and protect your capital.

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For any questions on how to trade IPOs via CFDs or shares,

including ways in which your risk can be managed,

call us to discuss on 0203 051 7461

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This research is produced by Accendo Markets Limited. Research produced and disseminated by Accendo Markets is classified as non-independent research, and is therefore a marketing communication. This investment research has not been prepared in accordance with legal requirements designed to promote its independence and it is not subject to the prohibition on dealing ahead of the dissemination of investment research. This research does not constitute a personal recommendation or offer to enter into a transaction or an investment, and is produced and distributed for information purposes only.

Accendo Markets considers opinions and information contained within the research to be valid when published, and gives no warranty as to the investments referred to in this material. The income from the investments referred to may go down as well as up, and investors may realise losses on investments. The past performance of a particular investment is not necessarily a guide to its future performance. Prepared by Michael van Dulken, Head of Research

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Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 67% of retail investor accounts lose money when spread betting and/or trading CFDs with this provider. You should consider whether you understand how spread bets and CFDs work and whether you can afford to take the high risk of losing your money.

26 October 2015