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May 23 2015 at 12:15 AM | Updated May 23 2015 at 12:15 AM
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Boom in disrupter stock listings but pick with care
Carlos Gil, chief investment officer at Microequities Asset Management has observed a 'frenzy in upcoming deals
for tech companies that want to list. It's very speculative.' Tamara Voninski
Disruption may be an overused piece of jargon, but it does
describe a phenomenon that's shaking up business. Wade
through the hype and you'll find companies listed on the ASX
with proven revenues and whose business model is essentially to
by Tony
Featherstone
disrupt their competitors with smarter technology, better
customer experiences and a more nimble cost base. And it's not
just those willing to dabble in small cap stocks who should be
paying attention: even big businesses are engaging in a little disruption on the side. The trick is finding the right companies to invest in. Every second hopeful is
marketing itself as a disrupter, but though true disrupters are rare. "Disruptor is the
buzzword of the day," says Celeste Asset Management CIO Frank Villante.
"It's a unique situation when a SEEK or Carsales.com benefits from a significant
industry change through a new form of connectivity with customers," he says
referring to two well-known business who helped reinvent how Australians look for a
job or a second-hand car. "Finding a true disrupter is like finding a needle in a
haystack."
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Boom in disrupter stock listings but pick with care | afr.com
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Definitions of disrupters vary. The term was coined by Harvard Business School
professor Clayton Christensen in his 1997 book, The Innovator's Dilemma, to
describe the theory that established companies are vulnerable to start-ups flooding
the market with cheaper and more accessible products. It's a twist on the idea of
"creative destruction", the term invented in the 1940s by Czech-born economist
Joseph Schumpeter to describe the process of ceaseless innovation that sees
established businesses disappear like dinosaurs while new giants rise. What makes
disruption different is the idea that a disrupter's offerings can seem inferior to its
competitors. Yet they seize market share because a cheaper option with fewer bells
and whistles is exactly what customers want.
The best example is AirBnB - a platform that allows people to rent out a spare room or
an entire apartment or house to tourists. Sleeping in the home of a complete stranger
might sound unappealing compared to a hotel, yet Air BnB's growth has been so rapid
that this month it began TV ads trumpeting that it has over one million rooms
available around the world – more than hotel giants like Marriott and Hilton. Salim Ismail in the book Exponential Organisations defines disrupters as being hypergrowth companies who are at least 10 times better, faster and cheaper than their
nearest competitors. They are true "game-changers".
It is unlikely many Australian companies are 10 times better, or even a few times
better, than their closest competitor. SEEK, REA and Carsales.com achieved that in
advertising, at least at the start. Freelancer, in the micro-jobs market, and Xero, in
cloud-based accounting software, might do the same. Many so-called disrupters
would have that target as an ambition.
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Showing 44 entries (1 to 8)
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Date of
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to ASX
Operations*
CAQ Holdings
2015-05-11
Retail property construction, China
Feore
2015-05-11
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UCW
2015-05-11
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2015-05-06
Online insurance provider
Success Resources
Global
2015-04-23
Education and events management
Justkapital
2015-04-02
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2015-04-02
Clean energy explorer
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2015-04-02
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BEWARE RISKS
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Page 3 of 5
If you're interesting in the business model of disruption, then inevitably you'll be
investing in technology firms. The tech sector is booming, and that can have big risks
for investors. Smart Money understands that more than 45 companies, mostly in the tech or life
sciences sectors, have applications before the ASX for a back-door listing. Their
vendors want to put a business or assets into the shell of a struggling listed company
and bypass an initial public offering.
There have already been 20 back-door listings this year, ASX data shows. That
follows 28 back-door listings in 2014, when tech companies feasted on the carcasses of
failed exploration companies.
Back-door listings this year are on track to at least double the peak of 32 at the height
of the dotcom bubble in 2000, such is the interest in emerging tech companies'
potential to disrupt bigger rivals struggling with the digitisation of business models.
This trend could be the start of a long tail of micro-cap tech stocks listing on the ASX,
in a similar way to junior explorers, which have a history of using public markets for
early-stage risk capital because they cannot get venture capital.
And just like speculative mining companies tout all sorts of blue-sky projections of
what's under their tenements, every second technology stock is calling itself a
disrupter. "There seem to be three new tech disrupters every week wanting to present to
investors," says NAOS Asset Management chief investment officer Sebastian Evans. "A
lot are not even close to being investment grade."
Microequities Asset Management CIO Carlos Gil says: "We are seeing a frenzy in
upcoming deals for tech companies that want to list. It's very speculative."
IN DEMAND
Yet the appetite is there. More than $1.5 billion was raised through initial public
offerings in the past two years for tech companies such as iSentia Group, 3P Learning,
Vista Group International, Urbanise.com, OzForex Group, iSelect and Freelancer.
Several have rallied strongly since listing.
More tech companies are expected to list this year if sharemarket conditions hold.
The year's biggest float so far, the $833 million IPO of accounting software provider
MYOB Group, could be followed by other large tech floats in the fourth quarter,
including WiseTech Global.
Among likely back-door listings, consumer technology platform Yatango is
expected to list on the ASX in June. Prominent
telecommunications executives including former iiNet chief executive Michael
Malone are backing Yatango's push to be an online lifestyle brand across several
industries.
Even if you like to stick to the bigger end of the ASX, it's worth thinking about
disruption as an investment theme. Established businesses are often the strongest
source of industry disruption.
"The best companies continually challenge how their industry does things, look to
disrupt their own business and are dynamic and fluid," Villante says.
He nominates the plumbing business Reece Australia and the insurance broker
Steadfast Group as examples of established companies that are disrupting their
industries. Reece is using technology to enhance the customer experience by ordering
products on mobile devices. Steadfast's alliance with US insurance
giant Berkshire Hathaway, for a new line of retail insurance products, is potentially
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Boom in disrupter stock listings but pick with care | afr.com
Page 4 of 5
disruptive to the insurance sector. Even the big banks are paying attention - Westpac
Banking Corp has invested in peer-to-peer lender SocietyOne. VALUATIONS TRICKY
A big problem with tech disrupters is valuation. The majority of tech offerings are still loss-making as they reinvest in the business to
drive growth, or build a subscriber base that can later be monetised. Traditional
valuation metrics are redundant.
Microequities' Gil says the promotion of tech companies is increasingly based on
revenue multiples or by ascribing a value to each customer. "Revenue or customer
valuations usually come into vogue when investment bankers are trying to justify
high valuations to investors," he says.
"These types of methodologies were last used heavily during the dotcom boom. As a
value investor, we prefer to stick to tech companies with earnings that can be more
reliably forecast and valued."
There are also concerns that tech companies are listing too early. The best ones
typically raise several rounds of venture capital and are more established before
floating on the ASX. But the success of Freelancer and others is encouraging
some with little history to list much earlier than in the past.
NAOS's Evans says: "You want to invest in tech companies that have an established
record, not those that have been around for six months. The best disrupters usually
get funding from private investors who know this space much better than the equity
market. The disclosure in some of these tech hopefuls is so marginal that you can
barely make an investment decision."
STUNNING GAINS
Several tech listings have defied the critics and delivered stunning gains. Rhipe, a
wholesaler of Microsoft cloud-based software products, has almost tripled its share
price since its back-door listing on the ASX in April 2014, while cloud-based data
security provider Covata has more than doubled its share price since its November
2014 back-door listing.
The aerial mapping provider Spookfish has also attracted plenty of interest since its
back-door listing in February. Backed by Navitas managing director Rod Jones,
Spookfish is seen as a competitor to the well-performing Nearmap.
In emerging tech stocks, Mobile Embrace, a provider of interactive digital advertising
services on mobile devices, and 1-Page, an online recruitment service that provides
one-page job proposals from candidates, stand out as potential disrupters, says
Wilson Asset Management chairman Geoff Wilson.
Prominent executives and investors putting their capital into emerging tech
companies is perhaps the best sign that the latest tech bull market has more
substance than previous incarnations.
But as with most booms, unwary investors will inevitably buy into opportunistic, lowquality, thinly traded stocks as the hype peaks. The only thing disrupted will be their
wealth.
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