Financial Analysis: Evaluating IPO Performance of Three ASX Companies

This case study examines the initial public offerings (IPOs) of Ozforex, Virtus Health, and Meridien Energy, all listed on the Australian Securities Exchange (ASX). It evaluates their financial performance post-IPO, focusing on stock price behavior and the impact on their businesses. The analysis covers the amount raised during the IPOs, the returns on the first day of trading, and the costs of equity for each company. It discusses the underpricing strategies employed by the companies and their effects on investor interest and capital raising. Furthermore, the study explores the cyclical nature of IPOs, the influence of market conditions, and the long-term performance of the companies, including changes in share prices over a five-year period. The case study concludes by examining the reasons why companies undertake IPOs and their impact on shareholder value.

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Managing finance
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Author’s Note

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Introduction:
This assignment deals with the initial public offering (IPO) of three companies, which
includes Oxforex, Virtus Health and Meridien Energy. These above mentioned three companies
are listed with Australian Stock Exchange. The financial performance of the above mentioned
three companies are being evaluated in accordance with the stock price on their initial public
offering. This assignment also deals with the effect of initial public offering on their business.
The conducted study is made on the ups and down of the share price and how it will impact the
business and overall financial health of the company. The study also mentions about the under-
pricing and overpricing strategy of the share price of initial public offering of all the three above-
mentioned companies (Boone, Floros & Johnson, 2016).
Discussion:
Question a:
The three companies which are taken for the assessment are Ozforex, Virtus Health and
Meridien Energy. OzForex, mainly deals with the financial business, which is diversified in
various part of the business. They have announced their initial public offering in October 2013.
OzForex has raised $439.4m through initial public offering. Virtus Health, which is a second
taken company, works in the Healthcare Equipment industry. They have made their initial public
offering on the month of June 2013 (Virtus Health, 2019). They have raised $346.5m through
initial public offering. Meridien Energy a company, who mainly works in the utilities industry.
They have announced their initial public offering in the year of October 2013. They have raised
their total amount of $1129m from initial public offering. The very advantage of initial public
offering is to raise capital from the market and creating a huge investor base (Wang & Sarkis,

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2017). By utilizing the raised capital in the market effectively the company spread their wings
and able to invest in a new kind of project.
From the above-mentioned chart, it can be observed that OzForex has gained huge
amount of profit of 31%. In the case of Virtus Health and Meridien Energy who got profit of
10% and 6 % respectively from the initial public offering. It can also be analysed from the above
chart that both the company Virtus Health and Meridien Energy was benefited from the initial
public offering because it shows the positive return from the first day of trading in the market. It
also a good sign for the company that the company was able to create a good investor base in the
market (Meridian Energy - NZ Power Company & Renewable Power Generator, 2019). On the
other hand, OzForex has gained a huge amount of profit from the first day of trading. All the
above mentioned three companies had performed pretty well in the market. This will help to
increase the working capital of the company, hence the company will able to expand more, and it
will help the company to grow financially (Finkler, Smith & Calabrese, 2018).
Question b:
Costs of equity for the selected companies are as follows –
Company name Beta market Risk
premium
Risk free rate Cost of equity
Ozforex -0.02966 4.38 2.5 2.444234
Virtus Health 1.761646 4.38 2.5 5.811895
Meridian Energy 0.670775 4.38 2.5 3.761058

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As all the above mentioned entities were incorporate in 2013 and issued the IPO in the
same year, they did not have the equity cost equity before the IPO. However, the cost of equity
after the IPO are shown in the above table that will help the companies to compute the weighted
average cost of capital and taking investment related decisions (Finance.yahoo.com, 2019)
Question c:
OzForex is a financial company in Australia, whose business deals with the diversified
financial activity. OzForex was listed in the year 2013 by October. It listed with Australian Stock
Exchange. The initial public offering of the company was $2.00 and at the end of the day it
raised up to $2.62, from which we can understand that the company has underpriced its share and
got a profit of 31 % after the trading day ends (OFX | Bank beating rates on global money
transfers, 2019). The company has gained a huge amount of profit from the first day of trading
and raised almost $440m. This was a huge success from the company’s point of view and it will
help the company to expand in more business (Rodriguez-Fernandez, 2016). The company can
also invest in many other type of business for the purpose of diversification. Currently OzForex
is a growing company in Australia, which has a high growth rate in the market.
Virtus Health has also went for under-pricing strategy on the first day of trading. Virtus
Health mainly deals with healthcare equipment. On its first day of listing with Australian Stock
Exchange the company has went for $5.68 and it raised up to $6.25 at the end of the trading day.
The company has gained 10% of profit from the first day of trading. They have accumulated
around $346.5m on the first day of trading. They have clearly successful from the allover
strategy of the business. The financial position of the company is very stable, which has provided
a considerable amount of boost to the management of the company and hence it will also help
the company to expand more (Virtus Health, 2019).

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At last, the company, which is taken for evaluation is Meridien Energy. This company
deals with the utilities business of Australia. They were listed with the Australian Stock
Exchange in the month of October of 2013. They have listed with the offer price of $1.50 and it
will increase to $1.59 at the end of the trading day. They have gained 6% of profit on the first
day of the trading (Rivera, Munoz & Moneva, 2017). The company also adapted under-pricing
method, which has proved to be fruitful for the business. This would help the company to grow
more in the future, which can be observed from the above mentioned chart. Overall value of the
company will automatically increase from investing and raising capital from the market.
Company holds a good financing status in the market, so the company went for under-pricing,
which will automatically enhance the overall financing position in total business (Meridian
Energy - NZ Power Company & Renewable Power Generator, 2019).
Under-pricing does not depend on industry to industry rather it depends on the
company’s management strategy to raise fund from the initial offering of a company. Under-
pricing of the share on the first day of trading is considered as a very good strategy for the
business because it attracts more investors and helped the company to raise targeted capital for
the company, which in turn help the company to expand and become financially stable (Renz,
2016). Under-pricing method has provided creates a more diffuse ownership structure. It also
helped to the company for liquidity. According to above-mentioned benefit of the under-pricing
the strategy does not limited to industry to industry. On the contrary it totally depends on
management, market condition and behaviour of the market in the past market situations of the
irrespective industry (OFX | Bank beating rates on global money transfers, 2019).

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Question d:
Initial public offering in an economy is cyclical, which is also the function of the market.
The stocks, which show displacement by moving up and down depending on the current
situation of the company, are known as Cyclical Stocks. These are the parts of initial public
offering stocks, which are mainly, affluent, traded in the market. In this case the potential
investors try to buy and sell the shares in the market to gain profit and also to gain dividend.
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
0.000
50.000
100.000
150.000
200.000
250.000
300.000
IPO Activity in last 10 years
IPO Activity in last 10
years

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2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
-100.000%
-50.000%
0.000%
50.000%
100.000%
150.000%
IPO Activity %
IPO Activity %
According to the historical data of seven to eight years of Australian Stock Exchange it is
evident that the under-pricing initiative of the new listed companies are turning up to be more
fruitful. It can be observed that all the company has entered into the under-pricing strategy for
the initial public offering. The very reason for adopting for the companies to go for under-pricing
during initial public offering is because of the market condition and also the behaviour of
economy in Australia. This is the potential strategy which can be adopted by the companies
going for first day trading with Australian Stock Exchange (Asx.com.au, 2019). The decision is
based on the overall objectives and the current position of the business. If the proportion of the
IPO which also the part of the risky stocks increases in that case and there should be greater
average under-pricing. There is certain risk associated with the valuation of the company along
with the under-pricing of the shares in the market. The minor changes have been adopted
overtime in under-pricing if there is stationery risk return relationship (Finance.yahoo.com,
2019).
Over the last decade, the Australian Stock Exchange has seen considerable amount of
increase in initial public offering and hence there is a rise in capital for Australian Stock

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Exchange. This proves that the economic growth of the country is moving towards epitome of
the economy (McDonald & Masselli, 2018). This is also a good sign for all the investors present
in the Australian Stock Exchange market as they can fetch more profit from the market. This
helped to increase the market capitalisation of the market. According to recent study about the
stock market in Australia, one tenth part of the market capitalisation came from the initial public
offering. According to Coronado Global Resources, the second largest initial public offering
done in America is interested in to invest in the Australian Stock Exchange. This will not only
fetch a considerable amount of capital, it will also help the economy of the country to rise up.
Questions e:
Companies mainly use IPOs for many reasons such as converting a private company to a
public company, spinning off a business of an existing listed company or privatization of a
public company. Despite these different objectives, the underlying motivation would be to
increase shareholder value (A-Malkawi, N & Pillai, 2018). As the financial and economic
situation in Australia, the share price of the company will increase gradually; this will motivate
the potential investors increase to invest in the market. Reducing the price of the initial public
offering will attract the potential investors in the market and hence it will help the share price to
increase.
From the above chart, we can clearly observe that OzForex share price has increased in first
two years and then a downfall has happened from 2014. In case of Virtus Health it is interpreted

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that on the basis of the five year share price after the initial public offering the share value of the
company went low (Flammer, 2015). It is evident that the strategies adapted by the management
for all the three above mentioned companies became a success for the initial public offering but
in later stage the companies did not perform well and hence the company has seen the
considerable down in the share price in the company. In case of Virtus Health the share price
keeps on decreasing and hence it is proven that the companies financial health are going down.
In the case of Meriedien Energy their share price has increased for all the five years, which
indicates that the company is on a right track and the working capital and capital of the company
has increased. This shows that the company is on a right track and the management of the
company has taken some right decision and hence the financial position of the company has also
increased. The gradual increase in the share price of the company will attract the potential
investors of the company (Alon, I & Elango, 2018). This will increase the overall business
performance of the company.
Question f:
From the above mentioned discussion it can be observed that dividend yield by the
investors from the company’s shares will fetch extra income to the investors (A-Malkawi, N &
Pillai, 2018). Hence in the case of Meridien Energy, the potential investors will able to earn a lot
through investing as the dividend yield of the company will be high as the current financial
performance of the company is satisfactory (McKinney, 2015). The company’s overall financial
performance will also increase and later the company will flourish more and hence the investors
will get more income (Barr et al., 2018). The previous performance of the initial offering of the
company and the company’s high growth in the share price in later stage will fetch more

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investors and hence it will help the company to raise the fund in the market for the betterment of
the company.

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Conclusion
From the above discussion, it can be concluded that there are certain benefits of the IPO
of the company as well as there are some disadvantages which prevails for the company. The
strategies adapted by the company must be fruitful otherwise; it will affect the overall financial
health of the company in long run. The management of the company must take certain initiatives
after planning and analyzing the current market status, in order to increase the potential business
of the company. As per the conducted analysis it is found that the Meridien Energy, the strategy
adapted by the company has became fruitful and hence the company is performing well. On the
contrary, the business performance of OzForex and Virtus Health is below average and here the
management system of the company in that case needs to take certain measures to improve the
current business status and improve the financial performance of the company. The effect of
under-pricing and the overpricing of IPO in the market thus have been duly represented in the
conducted study.

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References:
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conventional governance mechanisms into the GCC Islamic banking
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Alon, I., & Elango, B. (2018). Franchising and initial public offering: a signaling
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Asx.com.au. (2019). Home - Australian Securities Exchange - ASX. Retrieved 2 May 2019,
from https://www.asx.com.au/
Barr, M. J., & McClellan, G. S. (2018). Budgets and financial management in higher education.
John Wiley & Sons.
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