This week, low-cost investment platform AJ Bell fired the starting gun on its much-anticipated plan to list on the London Stock Exchange later this year.
It has registered explosive growth over the past few years and the company wants to reward customers for achieving this. As a thank you, it is reserving shares for its own customers at the IPO, which could be a great deal.
However, if you are thinking of buying into the IPO, there are several issues you need to consider first.
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Customers only
Firstly, if you are not already a customer of AJ Bell and want to take part, you had better hurry up.
In order to qualify for the customer share offer, investors will need to have an AJ Bell account in place by 15 October and the minimum £1,000 share purchase value available in the account. That’s not a big ask, but the number of shares yet to be allocated, and the price they will be allocated at, is not yet known.
AJ Bell is only planning to float around 35% of its outstanding shares although management has declared that if demand is high enough, allocations to institutional investors will be cut to make up for the extra room.
A premium price?
Secondly, while we don’t yet know the exact valuation the company is targeting, the City’s estimate of £500m indicates that investors might have to pay a premium price to get their hands on the shares.
Back in May, the firm announced that revenue for the six months to the end of March rose 16% to £42.9m and pre-tax profits jumped 24% to £13.9m, hinting at annualised sales and pre-tax profits of around £83m and £28m.
On this basis, it looks as if the stock will get off the ground at a multiple of approximately six times sales or 18 times pre-tax income, right at the top end of what I would consider acceptable, although it is in line with peers.
However, I should say that these are just preliminary figures and we don’t yet know the exact IPO numbers.
Tight market
Even though AJ Bell is planning to float 35% of its shares, the rest of the company will remain tightly held. CEO Andy Bell is keeping 25% and the firm’s current largest investor, Invesco, is selling 20% of its stake leaving it with 25% of the business. The DIY investment platform provider used to count Neil Woodford as one of its largest shareholders until March, when he sold his 8% stake to Invesco.
With so many shares off the market, it may be difficult to buy and sell AJ Bell when it finally does come to the market. What’s more, if either of these substantial shareholders is forced to exit, it could create an overhang on the stock, pushing down the share price.
Conclusion
After considering all of the above, I am cautiously optimistic about AJ Bell’s IPO.
We should get some more figures on the business later in the year, along with the valuation range, which will add further meat to the investment case. I reckon these figures will show further earnings growth improving the investment prospects for customers who intend to buy into the IPO.
