New issues struggle to rise above the ordinary: With the spring flood of flotations, investors are becoming choosy about new shares, writes Tom Stevenson

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The Independent Online
THE new issues market is in trouble. Private companies raised as much from stock market flotations in the first four months of 1994 as in the whole of last year and more than twice as much as in 1992.

Such has been the flood, that there have even been calls for a return to the old 'queueing' system under which new issues had to wait their turn. Indeed this week's planned flotation of London Capital, the old Randsworth Trust property company, was pulled yesterday, with Citibank, its backers, expressly citing the 'sheer volume' of such floats. For there are growing signs that investors, who have stumped up nearly pounds 6bn for the 92 companies listed this year, are reluctant to keep dipping into their pockets.

'Our clients aren't rushing to take up the issues,' one private client broker says. 'Markets are volatile and the issues have not been at all attractive.'

One concern for merchant banks pricing the floats is that quality is no guarantee of a healthy first-day premium. Sponsors look silly when issues flop, so expectations are being reined in to try to ensure success. But the future is still uncertain for the dozens of companies that plan to come to market this summer.

A worrying sign is the way that the public elements of larger issues are failing to attract enough subscribers to create the strong after- market demand that keeps share prices above the issue level.

Any float raising more than pounds 50m is obliged by the Stock Exchange to offer a percentage of its shares to the public. But the private punter is losing interest, and banks and companies are finding this an increasingly onerous requirement.

Capital Shopping Centres, the out-of-town retail outfit that owns the Lakeside shopping centre at Thurrock in Essex, attracted applications for only 13 per cent of the public part of its recent float. Redrow, the housebuilder, also failed to generate interest in all its public offer shares.

One reason for the lukewarm response is the absence of quick profits when dealings begin. Few new issues have traded more than 10 per cent above their flotation price in the weeks after first dealings.

Once dealing and interest costs have been taken out, anything less than a double-digit percentage rise in price usually means nothing is left for the shareholder.

The market could not be more different from 1987, when issues soared to massive first-day premiums on the back of over-subscriptions. Filofax, the personal organiser maker launched at 120p that year, romped to 170p in early dealings before settling at the end of day one at 160p, a 33 per cent premium. Sock Shop and Tie Rack were similar successes.

The most recent sign of flagging interest in new issues has been the number of companies forced to announce that they are raising less than originally hoped. Last week, Denby, the stoneware pottery maker, confirmed advisers' nervousness by pitching its flotation on a prospective p/e ratio of 14, much cheaper than Portmeirion Potteries, its nearest quoted rival.

Lombard Insurance also played safe so that Redrow came to market with a market capitalisation of pounds 298m instead of pounds 350m.

Speciality Shops, a property company, decided to pitch its shares at a 14 per cent discount to its underlying net assets despite the fact that most property companies are trading in line with the value of their shareholders' funds. As recently as March, Capital Shopping Centres tried to sell shares at a premium to assets.

There are several reasons for the lacklustre performance of new issues, most notably the state of the stock market. Since February, the FT All Share index has fallen from 1,760 to 1,570. In this market, investors can afford to be choosy.

With many believing interest rates will rise, and some sectors anticipating greater profits, companies must come up with compelling arguments or attractive discounts to tempt investors. This is especially true of the property sector.

Wainhomes, Beazer, Redrow, Capital Shopping Centres and Speciality Shops are all trading below their offer price. Not surprisingly, that is putting investors off when other housebuilders or property investors knock on their door.

Faced with a flood of issues, institutions can afford to cherry-pick. A weak company may find it difficult to grab a slice of a fund's limited sector allocation if institutions know that a stronger company is coming to market in two months.

For the private investor, the situation is worse than it first seems because the few issues that have been successful have been placings, with no public offer element. This is the safer route on to the stock market for small companies which don't have to offer their shares to the fickle public market.

Superscape, the virtual reality software group, is trading 18 per cent above its placing price, but private investors have missed out on the profits which all went to favoured institutions. My Kinda Town, 40 per cent above issue price, was also a placing.

With the flood showing no signs of abating, investors need to look carefully at the reasons for a company coming to market. If there is the slightest suspicion that management is taking advantage of optimistic stock market ratings to cash in an investment, the issue should be left to the institutions.

The best-value issues occur when a large already-quoted company floats off a division it no longer wants in the group. These floats tend to be offered at attractive prices because the parent cannot afford to fail.

Tarmac's former subsidiary Ruberoid; Graham, BTR's builders merchant division; and Alpha Airports (spun off from Forte) have all done well since their market debuts. In difficult markets, selectivity is the key.

----------------------------------------------------------------- New issues: recent arrivals ----------------------------------------------------------------- Company issue price current price change p p % My Kinda Town 10 14.5 +45.0 Alpha Airports 140 170 +21.4 Superscape VR 198 238 +20.2 Midland Assets 14 16.5 +17.9 House of Fraser 180 193.5 + 7.5 Vymura 150 160 + 6.7 Speciality Shops 130 133 + 2.3 Go-Ahead 120 122 + 1.7 Lombard Insurance 160 162 + 1.3 Hamleys 185 186 + 0.5 Healthcall 105 100 - 4.8 Beazer Homes 165 157 - 4.8 Redrow 135 127 - 5.9 Oxford Molecular 80 74 - 7.5 Int Bio Trust 100 92 - 8.0 Capital Shopping 230 206 -10.4 Chiroscience 150 117 -22.0 MAID 110 64 -41.8 ----------------------------------------------------------------- *Yesterday's close -----------------------------------------------------------------

----------------------------------------------------------------- New issues: due soon ----------------------------------------------------------------- Company Type likely value pounds m Exco money broking 200 London Capital property 150 CLS property 110 Peptide biotech 100 Norcor packaging 40 Cassell publishing 15 Argent property 150 Aerostructures aircraft parts 90 Camas construction materials 250 Amey building materials 50 General Cable cable 400 3i venture capital 1,500 British Printing printer 250 TeleWest cable 1,700 Oasis Stores retailer 60 EuroDollar car hire 100 Chesterton Int property agency 50 Jasmine bingo 14 Dairy Crest dairy 250 Gardner Merchant catering 600 -----------------------------------------------------------------

(Graphs omitted)