Broo Limited opened its fourth day on the ASX with a market cap of $288 million, the brewer’s shares having last traded at 250 per cent higher than the issue price.
The shares were listed at 20c on Friday October 14, soaring to a peak on Tuesday morning of 61c.
Wednesday’s opening price of 50c values founder Kent Grogan’s 68 per cent stake at $196 million, despite the fact the company has so far operated at a loss and has not yet sold a single beer in its new focus market of China.
“In sharemarkets, people often get excited about a stock and it’s not a rational reaction,” Tapan Verma, director of corporate finance at Deloitte Financial Advisory, told Australian Brews News.
But Verma said there are several drivers behind Broo’s impressive debut, starting with the recent track record of Initial Public Offers (IPOs) for consumer goods companies in Australia.
“There’s probably been about 25 to 30 small cap consumer stocks that have listed in the last four or five years, and across the board they are performing extremely strongly – way ahead of other sectors,” he said.
“The vast majority of them are performing at over 50 per cent [higher than their issue price] at this point. There’s very few that have really tanked – only three or four out of the 25-odd stocks have done really badly.”
Verma said the 2014 listing of baby formula company Bellamy’s Australia, which is now trading at a 1200 per cent premium, epitomised some of the recent speculative gains made by investors on consumer goods IPOs.
But he said Bellamy’s was a very different proposition when it went to market, to that of Broo.
“They were just about profitable at that point, so they had a track record of growing revenues and then customer base, etc,” he said.
“We would call Broo a pre-IPO stock, which should actually be going to private equity and venture capitalists at this point.
“But, you are seeing a lot of smaller cap companies now going to market, given there is investor appetite. A lot of retail investors do want to participate in high growth stocks.
“Interest rates are so exceptionally low these days. It’s really driving investor behaviour to get into equity markets as much as they can. They see smaller stocks performing extremely well, and In my view that drives a lot of it.
“There’s no doubt you will see a lot of smaller companies like that coming to market,” said Verma.
He was neutral when asked to comment on Broo’s $122 million market cap upon listing, which has had beer industry insiders scratching their heads.
“However that has been arrived at, I guess there are people in the market who are willing to accept that valuation and others who will question it,” said Verma.
Kent Grogan’s 68 per cent shareholding, as well as the eight per cent held by non-executive director Geoff de Graaf, are to be held in escrow for 24 months, meaning they cannot be traded until October 2018.
Verma said this concentration of ownership is actually viewed as a positive by the market, even though it means smaller investors will have little say in how the company is run.
“He’s clearly got a lot of skin in the game here, he’s not taking money off the table. It is all being invested in the future growth of the company. That’s a significant positive more than anything,” Verma said.
Investors who bought into Broo at the issue price reacted to its fortunes with glee on the stock market forum, Hot Copper.
“All those naysayers of the IPO must be biting lips,” said one.
“IPO madness,” another investor commented, while others expressed disbelief that they had overlooked the stock.
“I am seriously dumbfounded by this… and here people are arguing over five per cent on [IPO hopeful] Charter Hall and they could have got 40 per cent on this baby in a day.”
But one of their peers questioned how long the company’s dream debut can last, comparing it to the 2015 IPOs of Martin Aircraft Company (MJP) and HR technology company Reffind (RFN).
The fortunes of both these stocks deteriorated rapidly after an initial surge in pricing.
“I wonder if this will be like MJP or RFN… Massive rise, then reality will kick in,” the investor mused.