Warnings of 'bubble' from BDO as IPO market overheats


LONDON (ShareCast) - Companies and City institutions are concerned about a London stock market bubble, with recent valuations of initial public offers (IPOs) looking 'overpriced' according to some observers.

A new survey of market sentiment has found that the majority of companies and advisers are concerned about overheating of the IPO market and hiring expectations have also dropped as companies take a more sober view of the economic recovery.

Last week holidays-to-insurance firm Saga scaled back its offer in order to ensure a positive aftermarket performance, not long after retail group Fat Face shelved its £440m IPO.

The latest Small and Mid-Cap Sentiment Index from BDO and the Quoted Companies Alliance adds fuel to the fire with findings that showed 59% of companies and 55% of advisors agree that recent IPO valuations have been overpriced.

Scott Knight, Partner at BDO, said "the risk of a bubble is a real concern" and welcomed the restraint from some companies and advisers.

Fat Face said it had decided to discontinue plans due to unfriendly equity market conditions, with the company's owners, including private equity firm Bridgepoint, feeling investors were not likely to pay what the company was worth.

This week Timico followed suit and on Tuesday put its own flotation on ice, citing recent weakness in institutional investor demand. "Unfortunately, due to some high profile disappointments, sentiment towards IPOs has softened," Chief Executive Tim Radford said.

BDO also found that companies' hiring expectations dipped slightly in April, falling from 6.6% annual growth to 5.8%, perhaps demonstrating their refusal to take bullish sentiments at face value. However, annual turnover growth expectations have continued to rise strongly, increasing from 14.4% in January to 15.7% in April, an all-time high for the index.

Knight said: "The IPO market is grabbing the headlines because it is achieving full valuations but advisors should not get carried away with the recovery.

"It is no doubt encouraging that investor interest has increased and equity markets are helping companies grow, but the risk of a bubble is a real concern.

"Quoted companies can sometimes feel ignored and want more from their listing. Therefore, a degree of restraint from companies is to be welcomed as it supports realistic share prices and underpins credibility."

After the Saga saga, Schroders (LSE: SDR.L - news) fund manager Andy Brough had warned that the scaling back of price and allocation from Saga "has probably killed the market for the upcoming new issuances".

"Saga had made a lot of its retail shareholders, inviting them to take part, and then the private equity owners decided they weren't going to sell. If the customers don't make money on the shares it will be interesting to see how long they remain customers".

BDO's Small and Mid-Cap Sentiment Index is based on a survey of small and mid-cap companies across AIM and up to FTSE 250.

The survey also found that 81% of advisors believe the uptick in the IPO market is supporting the wider investment environment versus only 44% of companies, which it suggested showed companies were taking a "more grounded approach" than advisers.

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