Carsales success should drive more floats: Bartholomeusz

There would have been a lot of relieved investment bankers and promoters after Carsales.com.au drove smoothly onto the ASX lists. The listing, the first big initial float since the financial crisis erupted, was seen as a vital tone-setter for the pipeline of IPOs, some larger, to come.

A solid gain of about 10% on the $3.50 issue price would be regarded as a ‘just about right’ outcome – not too big a gain to upset the relatively small group of pre-existing shareholders who sold into the offer process but big enough to make the subscribers content.

More significantly, had Carsales been seen to have been over-priced and had the shares been under water on debut, it would have made investors leery about the floats to come, including the very large Myer re-flotation.

The Carsales float was engineered to reduce risk. With most of the pre-existing shareholders hanging onto their shares and only a very small number of new shares made available to cover the costs of the listing, there wasn’t a lot of stock available in a company that has a terrific record of earnings growth.

A very strong result leading up to the listing – a 64% earnings increase to $30.7 million – provided reassurance that the online auto classifieds business could flourish despite the broader downturn in the auto market.

It was also helped by the performances of its fellow ‘dot-coms’. Seek, more vulnerable to the downturn in employment advertising, reported a normalised earnings decline of only 5%, better than the market expected. Wotif‘s earnings were up 26% and REA Group’s earnings from continuing operations were up 12.6%.

With economic conditions, while still perhaps a little fragile, certainly better today than they were six months ago, the dot-coms leveraged to activity levels, and the stressed conditions over the past year perhaps accelerating the structural shifts in activity towards their online environment, the timing of Carsales’ float has turned out to be quite astute.

It hasn’t hurt that the wider sharemarket and the dot-coms in particular have had a good month.

When the Carsales price was being determined last month the overall market was just under 4% lower than it is today. Seek, Wotif and REA Group shares are all up more than 10% over the past couple of weeks.

At or around the $3.85 to $3.90 a share level, Carsales, at around 24 times forecast 2010 financial year earnings, would appear to be trading roughly in line with the market’s valuation of Wotif, slightly higher than REA Group’s and slightly lower than Seek’s.

Thus the shares are trading more or less in the right ballpark, the one occupied by companies with market positions and business models that are similar to its own.

The dot-coms trade at a very substantial premium to the overall market – price-earnings multiples in the mid-20s against multiples in the mid-teens – because of the perceived superior rates of growth as they continue to carve into markets once dominated by more traditional players.

This article first appeared on Business Spectator.