What makes a successful IPO: 7 factors for ASX investors to watch

There's nothing quite as euphoric as investing in an upcoming listing and watching the stock rip higher on its debut. But what are some of the common ingredients for a successful IPO?

Since most of our IPOs are mining and exploration stocks, this piece will focus on some of the niche elements that help new listings outperform.

The prospectus

The prospectus provides key details of the offer, the company's financials, management team and forward-looking plans. Here are some of the nuggets you should look out for:

#1 Lead manager: These are the people who guide the company through the listing process. They help with everything from pricing and valuation, marketing the IPO and allocating shares to institutional and retail investors. The key things to note include:

• Underwritten?: The lead manager often commits to buying a certain number of shares and selling them to investors. This guarantees that the company raises a certain amount of capital. For instance, micro-cap explorers aren't often underwritten. It's one of those 'nice to haves'.

• Any options?: Consider checking if the lead manager has any vested interest in the IPO. They might be issued shares or options (if options, check the exercise price). If the firm responsible for the IPO has a vested interest, they're likely to go the extra mile to ensure it is well-marketed and has a strong investor base.

• Track record: Who is the lead manager and how have their previous IPOs performed? What does the day-one performance look like for their previous IPOs? What does the short-to-medium-term performance look like? Every lead manager does it a little differently. One might focus on hot commodities, heavily market the IPO and opt for a few oppies, while another might be there for the paycheque. It's worth taking a look at any common themes.

#2 Near-term plans: The last thing you want from an explorer is for them to list and then remain inactive for several weeks or announce trivial updates like desktop studies or the submission of an exploration licence. Check the prospectus to see if they have any concrete plans to hit the ground running.

#3 Substantial shareholders: If you want to go the extra mile, have a look at the substantial shareholders and where they work. More often than not – They're on the board of another ASX-listed resource company and/or work for the lead manager.

Time, Place and Peers

#4 Right time and place: Listing at the right time can make a world of a difference. Picture an early-stage exploration company with some tenements next door to Core Lithium. If this company listed in 2022, when the lithium market was booming, I wouldn't be surprised to see it double or triple on day one.

But imagine trying to list it today, when lithium prices are down more than 80% from all-time highs and Core Lithium has placed its project into care and maintenance. It might struggle to raise money, let alone list.

#5 Oversubscribed?: An oversubscribed IPO reflects favourable demand and sentiment towards the company. You should look out for:

• IPO open period: If an IPO closes early, it's a sign of strong investor demand.

• Scale back: When demand for an IPO exceeds the available number of shares, it often results in scaling back the allocation of shares to each investor. It's worth looking around for the scale-back percentage.

#6 Sector and peers: Taking a closer look at the sector and its peers is essential. Here are a few key points to consider:

• What is the underlying commodity price doing? Sun Silver (ASX: SS1) is currently one of the best-performing IPOs of the year. Notwithstanding other factors, the company listed amid a bullish backdrop for silver, where prices had rallied 23.5% year-to-date and around 12% in the month before it listed.

• How are peers performing? Sticking with Sun Silver, its peers Adriatic Metals (ASX: ADT) and Silver Mines (ASX: SVL) were up around 40% between late February and the day it listed.

#7 Valuation: If the company is profitable, how does its earnings profile compare with its peers? Tasmea (ASX: TEA) is a maintenance and engineering group that raised $59 million for an indicative market cap of $340 million, valuing the business at 6.7x FY24e EBITDA. This valuation is relatively in line with peers like GR Engineering Services (ASX: GNG), Lycopodium (ASX: LYL) and Monadelphous (ASX: MND).

Source: Bell Potter, March 2024