- The City has briefly shrugged off Covid-19 and Brexit, with a string of household names preparing to float
- We look at four prospective IPOs likely to draw investors’ attention
Christmas is over but the bells are ringing out once again, for an unusually lively IPO season is upon us.
A string of household names are set for an initial public offering in London, providing the City’s best start to the year for listings since 2008, according to Bloomberg. Following a prolonged dry spell worsened by the onset of the pandemic, the London Stock Exchange is preparing to welcome a number of businesses that have benefited from lockdown restrictions over the past year.
Companies including Deliveroo, cyber security firm Darktrace and review site Trustpilot should be hoping to ride on the back of a wave of enthusiasm for tech companies, which has benefited recent entrants to the market such as Airbnb (US:ABNB) and online retailer The Hut Group (THG).
UK businesses lining up for a flotation will also be hoping the City can shrug off bad omens around Brexit, after billions in euro-denominated trading fled the capital in the days following its full departure from the EU. With other cities now vying for London’s European crown, these homegrown listings should fire up those who believe Brexit provides the opportunity to shake off EU rules they say limit participation by retail investors. City bosses have nonetheless warned the government against taking deregulation too far, after chancellor Rishi Sunak reportedly recalled the Thatcher era and embraced the idea of a “Big Bang 2.0” last week.
For now, investors should be reassured that the bubbly UK market is not showing the same signs of overheating as the US, which besides Airbnb has recently welcomed DoorDash (DASH) and a torrent of so-called special purpose acquisition companies, says AJ Bell.
Among the inbound listings, four well-known names are likely to draw attention. All have seen revenues grow during lockdown, while all but one (Deliveroo) are currently owned by private equity investors, suggesting these buyout firms think now is the optimal time to take profits.
How many investors are keen to take their bait will not be clear until the companies enter the market. But a look at these businesses’ listed peers gives an indicator of the level of incoming demand.
Foodie or techie?: Deliveroo
Food delivery apps could not have asked for a better year. They have found themselves in a prime spot: with restaurant doors closed, they are not losing customers who can be bothered to get up from the sofa. But with kitchens still open, their partners are still serving up their product. Small wonder then that Roofoods, the owner of takeaway app Deliveroo, is targeting a float while investors are still on their sugar-high from US peer DoorDash’s IPO, which hit a $60bn (£45bn) market value on its first day of trading.
The Investors’ Chronicle has previously marvelled at how food delivery has muscled its way to the top of the UK’s tech sector: see JustEat Takeaway.com (JET), where orders climbed by more than half in its latest quarter. Ocado (OCDO), which started to bill itself as a tech company last year, has seen its shares more than double since their nadir last March. The company now has a whopping £19bn market value. Both outshine London’s long list of software stocks, including its old guards Aveva (AVV) at £11bn and Sage (SGE) at £6bn.
But these foodie-techie hybrids struggle to secure something that is often not an issue in pure-play tech: profitability. While JustEat made an adjusted cash profit for the first time in 2019 of €12.3m (compared with a loss of €11.3 million in 2018), Deliveroo has yet to turn an annual profit. Both models are weighed down by tricky logistical issues surrounding delivery, as well as the costs and complications around hiring gig workers.
With food delivery reigning at the top of the LSE’s (relatively sparse) tech sector, investors will be watching Deliveroo’s listing closely. The influence of Amazon (US:AMZN) as a stakeholder should also help the company navigate the profitability problem that stems from delivery. But with intense competition in the sector, as well as a long horizon for profitability ahead, the stock may not be able to withstand concerns over the sustainability of demand for its service once coronavirus restrictions eventually draw to a close. As JustEat pours more resources into fortifying its huge market share, as well as its own ‘Scoober’ delivery network, it looks increasingly difficult to knock off the top spot.
Battle of the sexes: Bumble
The past nine months will not have been easy for lonely hearts. But online dating apps have evidently offered some solace, looking at the growth in Tinder-owner Match Group’s (US:MTCH) average subscribers. The company, which owns veteran websites such as Plenty of Fish and OkCupid, has grown its market value more than ninefold in the six years since it first listed on Nasdaq.
It is no surprise as to why: unlike food-delivery apps, online dating services are not burdened with complex operating costs connected to logistical networks. Its capital-light model means that gross margins sat at an enormous 73 per cent in its latest quarter. And building on top of that is relatively easy: the non-physical nature of its product means that it does not cost much to acquire and keep new users.
With such a juicy business model, it was only a matter of time before the company found itself facing more rivals. Enter Bumble, itself an unhappy by-product of Match Group. Its chief executive Whitney Wolfe Herd was on the founding team at Tinder, where she left after filing a lawsuit against the company for sexual harassment and discrimination. This pushback against the often misogynistic culture in the world of online dating sits at the heart of Bumble’s selling point: putting women in the driver’s seat, by only giving them the power to make the first move.
But, unlike Match Group, Bumble (which also owns European dating app Badoo), saw its growth slow last year. In the first nine months of 2020, revenues grew 15 per cent to $417m, compared with the 36 per cent rate that it reported in 2018 to 2019. It also did not turn a profit in the period, with net losses of $117m, compared with earnings of $69m in the same period last year – although the company said that this was down to transaction costs.
Bumble is looking to fetch a valuation of around $3bn, compared with Match Group’s current $40bn. Ms Wolfe Herd still has some catching up to do – but a pure tech model means that building scale should not prove to be a huge hurdle. The most pressing issue is making sure that its product stays competitive: the two companies battled over allegations of patent infringement as recently as last year. With internet giant Facebook (US:FB) introducing its own dating service, newer competition should spark more innovation in the market. With this in mind, we think that both Match Group and Bumble make for attractive holdings.
Trendy to riches?: Dr Martens
Another firm planning to stomp onto the LSE soon is Dr Martens, purveyors of the iconic British lace-up boot.
Never mind that about a third of its shoes are now made in China, with pairs sold upwards of £149, or that the successful flotation of more than a quarter of the company would be a boon for its private equity owner, Permira, which took the firm from family ownership in 2014. The footwear of choice for Thatcher-tramping punks and skinheads has continued to outperform in times of political upheaval. In the nine months to December, revenue increased 14 per cent, with e-commerce sales up almost three-quarters as retail stores around the world were shut, the company said.
The firm, which now has 130 stores worldwide, could risk losing its core counter-culture fanbase as it expands, said Susannah Streeter, senior investment analyst at Hargreaves Lansdown. “I think they are trying to position as a luxury brand – that’s quite tricky, thoug,h because it’s a specific style,” she warned, flagging how quickly the tide can turn in the fashion industry.
But investors will hope Dr Martens can tread the line between subculture supplier and global profit-driver that fellow shoemakers Adidas (DE:ADS) and Nike (US:NKE) have straddled for years. It should only be helped by the changing face of cool in the age of social media, the popularity of which has globalised tastes and blurred the line between pop culture and subculture. For a trendy to riches story closer to home, look to Burberry (BRBY), which since the 2000s has similarly made a pretty profit dressing supermodels and rock stars alike in its famous trench coats.
The youth are changing, but in the UK Dr Martens’ teenage kicks remain hard to beat. Its performance on the stock market could depend on how much growth it can squeeze from the fashion-hungry American and Asian markets, where its footprint is comparatively small. Both Nike and Adidas trade at above average multiples of analysts’ consensus earnings for 2021, perhaps foreshadowing a popular IPO if investors believe Dr Martens can become a truly global brand.
Happy returns?: Moonpig
Besides its birthday, anniversary and Valentine’s Day ranges, online greeting card retailer Moonpig has now added “Lockdown cards” to its selection.
The company, which is reportedly targeting a valuation of over £1bn from an upcoming listing, has certainly had cause to celebrate since coronavirus restrictions were enforced last year. In the six months to October, Moonpig said revenues soared 135 per cent year on year to £155.9m, as consumers were forced to buy their cards online. Pre-tax profits more than tripled to £33m.
Historically, investors have not received many happy returns from the greeting cards sector. Clinton Cards left the LSE to enter administration in 2012. Shares in Card Factory (CARD), which estimates the card market declines 1 per cent each year, have lost 86 per cent of their value since peaking in 2015. WH Smith (SMWH), owner of Moonpig rival Funky Pigeon, was faring better until lockdown shuttered its high street stationery stores and sent its shares off a cliff.
Moonpig’s success on the markets should hinge on how far it can distance itself from these firms. The company’s solution seems to be to sell itself as a tech company, emphasising its “proprietary technology platforms and apps, which utilise unique data science capabilities designed by Moonpig”. Strong words from a business whose website essentially allows customers to personalise their greeting cards.
But other businesses have set investors’ hearts racing with a similar pitch. Ocado, the online grocery firm and self-described “disruptive innovator”, is apparently now the UK’s highest valued tech company. Shares in The Hut Group, which similarly makes a pre-tax loss and has a charismatic founder to boot, have jumped more than a quarter since its listing in September.
The UK card market is getting smaller, but at a very slow rate. There is plenty of room for Moonpig, the online leader, to snap up more of it. But watch out for over-enthusiastic investors on the stock market opening, buoyed by Moonpig’s short-term lockdown gains and 'tech' credentials.