June 27, 2019 / 10:21 AM / in 20 days

Breakingviews - European IPO investors show reassuring rationality

A worker shelters from the rain as he passes the London Stock Exchange in the City of London at lunchtime October 1, 2008. REUTERS/Toby Melville

LONDON (Reuters Breakingviews) - Initial public offering bankers typically cite “market conditions” when ropey listings run into trouble. For once there’s some truth to that catch-all excuse, with three very different European companies pricing at relatively modest valuations on the same day. It’s a welcome indication that investors can stay rational despite buoyant stock markets.

Volkswagen’s truck business Traton and the African unit of India’s telecom group Bharti Airtel will each sell shares towards the bottom end of their respective initial ranges, Reuters reported late on Wednesday. On the same day, online clothing retailer Global Fashion Group (GFG) lowered its IPO price to 4.50 euros per share, or one-quarter below the bottom end of the initial range.

There were reasons to be wary. VW will hold a controlling stake in Traton after the float. The same is true for Bharti Airtel and its Africa unit. New investors therefore know they may have no say over big decisions. The risk that major holders may sell down also casts a shadow. Meanwhile GFG is backed by controversial German tech investor Rocket Internet, whose reputation took a hit after its 2018 float of online furniture company Home24, which subsequently lost 85% of its value.

That association is a little unfair since other Rocket companies, such as Jumia Technologies, performed well. And the three groups’ valuations probably compensate investors for the risks. At the new price, GFG’s enterprise value is substantially below the 1.3 billion euros of revenue it will generate this year assuming roughly 10% growth. That compares with a 1.2 times multiple for peers. Traton’s implied enterprise value of seven times operating profit is about 24% below Swedish truck-maker Volvo’s 2019 multiple, using Evercore ISI numbers. And Airtel’s price implies a 14% discount to African peer Vodacom Group, Bernstein analysts calculate, using 2020 forecasts.

The upshot is that investors in European IPOs appear more discerning than those who have piled into highly valued floats of loss-making U.S. companies, such as Beyond Meat. Traton, Africa Airtel and GFG span defensive and cyclical sectors, suggesting the healthy scepticism transcends any single industry. The STOXX Europe 50 Index is up 15% so far in 2019 and trades on a rich 16.4 times trailing earnings, using Refinitiv data. Even so, investors’ credulity only extends so far.

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