Most of the time investors trade stocks on the secondary market but from time to time we get access to new floats through our brokers or general public offers, so knowing what to do when you’re offered shares in a float is an important investing skill. Let me step you through what we do.
Grooming retailer, Shaver Shop is currently taking bids from institutions into a book-build ahead of a retail offer later this month.

Shaver Shop is an Australian speciality retailer of personal grooming products and aspires to be the market leader in everything to do with hair removal.
By the end of this month, Shaver Shop expects to have 100 stores across Australia and New Zealand. It plans to open 10-15 stores per year with a target of 145 stores three years from now. There’s a good deal I like about this business: exclusive product distribution agreements with wanted brands, upside from buybacks of franchised stores and online sales growth, leverage to a category growing faster than general retail and the economy, experienced hands-on management, and little strong competition in this specialty retail format.
So, Shaver Shop is worth a look. But let me express some words of caution – how does an investor approach new floats, as opposed to companies which have been listed for a while?  Where the latter have reported to shareholders and released financial accounts to the market, new floats have no public records of financial performance and growth. If you buy into a float you’re taking everything on trust and wise investors will understand prospectuses and related broker research are essentially “marketing documents” designed to ensure full take-up (of the offer) so the float brokers collect their underlying fee without having to take up unwanted stock which they later have to sell at a discount.
Also, one key difference with floats are the vendors. Usually longstanding owners of the business, who know everything about the business’ financial performance – but you as the investor know nothing other than what the vendors choose to tell you in the prospectus. This is highly asymmetric information: you’re being asked to buy something from someone who knows vastly more than you about what’s being sold to you.
Additionally you’re entitled to ask, why are the vendors selling if the growth outlook is as good as what it appears in the prospectus? If you owned a business with strong forecast profit growth, wouldn’t you want to hold onto it, or even invest more into its growth?
In the case of Shaver Shop, we’re being asked to pay 14 to 17 times next year’s earnings, which is no more than a market multiple, for a business whose earnings are forecast to more than double from 2015. That’s attractive. There are ASX 50 stocks trading on more than 17 times with less growth than this.
The uncomfortable truth is – the vendors have probably spent months or years working towards an exit at the most favourable time for them and will have taken advice from that now is the peak in their sector or the overall market. In the case of Shaver Shop, I believe the vendors, who are a consortium of private investors, have been particularly well-advised on the float’s timing. The equity market has risen for seven consecutive weeks and is back to levels of August last year. Sentiment has recovered substantially from the panic levels of September, October, January and February and the market’s earnings multiple has expanded to 17 times, above the long-term average of 15 times. It’s quite a reasonable time to be selling equity, but this means as the investor, you are paying more. Sometimes you’ll decide to wait to see if you can buy the business more cheaply in the secondary market.
Now these criticisms of floats are not a good start and are why a good number of investors avoid all new floats on principle. Despite this, some floats become good investments and fund managers are usually obliged to consider them because floats can be a way for us to get set in a growth business which might be too illiquid for us to be able to build a meaningful position in the secondary market. You as a retail investor however do not face this constraint and have the additional advantage of knowing what price you’ll pay. As institutional investors all we can do is bid into a book-build by specifying the most we would pay without knowing the final price we’ll have to pay. If the final price is a cent more than what we bid, we miss out.
With all those cautionary words said, how you consider an equity raising by a new listing is similar to how you consider a raising by an existing listed company.

The best floats and equity raisings retain the float proceeds to grow the business. In contrast Shaver Shop plans to pay most of the proceeds straight out again to vendors as capital payments and dividends while there are also the costs of the offer and bonuses to directors. This doesn’t mean the stock can’t perform but the way the proceeds will be used is a deterrent. I’ll proceed straight on now but if you’d like to peruse the slide in more detail just press pause.
From here, how you consider a new float is not so different from an existing listed business. You’re looking for a business you understand, with realistic growth forecasts, sustainable competitive advantages, competent management with skin in the game, good cash conversion into earnings, a clean balance sheet and available at a fair or cheap price.
For a guide on how to research IPOs, a guide is available on our stock valuation and research platform, StocksInValue. Register for a 10-day trial.
Written by David Walker, Senior Analyst.