UK IPOs have significantly outperformed the FTSE All-Share this year

Stocks that joined the UK stock market in 2024 have generated more than six times the return achieved by the FTSE All-Share since the start of January, according to analysis by AJ Bell. Of the five IPOs seen in London year-to-date, the average return is 16.4% compared with 2.5% from the benchmark UK index.

This upbeat performance is seen against a backdrop where the FTSE 100 last week was on the verge of hitting a new all-time high. UK GDP data for February also showed 0.1% growth which means we only need March’s data to be in positive territory to deliver the full quarter of growth and no longer be qualified as in recession.

These factors combined with the strong performance of new listings this year create a more positive backdrop for IPOs in the UK. The performance of the 2024 IPOs and the FTSE 100 also show the UK stock market is not stuck in the mud, despite opinions to the contrary.

The Bank of England starting the firing gun on interest rate cuts would add a further catalyst to drive more positive sentiment among businesses. That could encourage more companies to list their shares on the London Stock Exchange and access capital markets to support their growth.

The only problem is that it can take quite a long time between a company pressing the ‘go’ button on an IPO process and the shares to start trading. That suggests any big uptick in IPOs may not happen until the tail end of the year at the earliest. Companies may also want to wait for the general election to happen in case markets wobble in the interim period.

Source: AJ Bell, company accounts, London Stock Exchange

What’s happened with IPOs in the UK this year?

There have been five London IPOs so far this year and three of them have already delivered strong returns.

The best performing IPO is MicroSalt, up 62.8%. We live in a world where consumers are paying a lot more attention to health and wellness and that is causing a shift in diets and food preferences. MicroSalt has a low-sodium salt aimed at food manufacturers and consumers. While it is still early days for the company, investors have warmed to the story.

Small cap miner European Green Transition raised £6.5 million at its AIM listing a week ago and its share price is already up by 24%. Its team has a proven track record in buying distressed assets, improving them and selling them on.

An airline previously part-owned by BAE Systems hasn’t fared as well since floating on the London market in February despite reporting upbeat full-year results. Air Astana sits in the international Main Market segment and has listed GDRs in the UK. The term GDR stands for ‘global depositary receipt’ which is a packet of shares traditionally aimed at the institutional investor market, not retail investors.

Fuel Ventures VCT floated in March – this is a venture capital trust, a type of investment that appeals to a narrow group of investors who are typically wealthy and want to take advantage of the tax benefits that come with VCTs. Its shares haven’t budged.

The most recent London IPO is Helix Exploration which joined the market on 9 April. The helium exploration company has operations in the US and a near-10% increase in the share price implies a growing appetite among investors for smaller companies, something we haven’t seen in a long time.

IPOs in the US

Quite a few IPOs in this US this year have delivered stellar gains, such as solar energy equipment and LED lighting specialist SolarMax Technology whose share price doubled on its first day of trading and is now up 262% on its February IPO.

Reddit priced its March IPO at $34 per share and they quickly jumped to $65. Its successful IPO represents a return to pre-pandemic days when investors were happy to lap up shares in loss-making companies if they offered a compelling narrative. Reddit’s content is seen as one of the engines that will feed AI models.

What’s interesting about Reddit is that it has a long list of ideas to improve the user experience and grow earnings. That’s another reason why investors have been drawn to the stock. There is an opportunity to increase awareness of the brand and grow user numbers. It’s a classic network effect – the more people using it, the more useful it will be.

The hype has died down about the stock in recent weeks, but that is in line with the natural pattern for IPOs. We often see investors pile in and bid up the shares, traders bank profits quickly which pulls the share price back down, and then longer-term investors start to build positions and the shares can often go back up.

Having popular products or services doesn’t equate to guaranteed success on the market, nonetheless. Amer Sports, which owns the Wilson tennis racket brand, didn’t have a great start after pricing its February IPO below its target range and then saw little price appreciation on the first day of trading. The shares have since risen by just under 10% but the IPO is still considered to have been as frustrating as Emma Raducanu’s post-US Open career – high expectations that haven’t been met.

Six companies that may choose to float in the next year or two

London Tunnels

One of the next names set to join the UK stock market is London Tunnels which is hoping its underground network will become a major tourist attraction.

There is certainly the kind of narrative that could lure in retail investors – buy a slice of a business who hopes to commercialise a series of tunnels steeped in history, having been used in World War 2 and been the inspiration for the Q-Branch in Ian Fleming’s James Bond novels.

Waterstones

Reports suggest Waterstones wants to float on the stock market soon. The book seller has been through the wars over the years and has come out fighting. Despite the threat of people shifting reading habits to tablets and phones, physical book sales continue to go from strength to strength.

The company has hit upon a magic formula with stores having their own book recommendations for customers, together with stationery, games, cards and bags to help shoppers part with more money each visit. It is profitable, although earnings were hit last year by warehouse problems and higher costs.

Its brand strength should work in its favour if there is an IPO. There is also a suggestion it could be a generous dividend payer and that would give it a nice sales pitch during a period when interest rates are falling on cash savings accounts and savers look for higher rates elsewhere.

Boots

Walgreens couldn’t get a sale of Boots over the line so an IPO now looks the obvious exit route. The American parent is desperate to be shot of the UK business as it has enough of its own problems without having to worry about something across the pond.

That’s not a good look when you’re trying to get a good price for an asset. Boots is a staple on the UK high street and plenty of people might be interested in owning a slice of it – as long as the price is right. One suspects it will need to float at a cheap price to get the IPO away successfully, particularly as Walgreens seems so eager to offload it.

Investors can be short-term in their thinking and it helps that Boots achieved record sales in 2023 and is streamlining its store estate. Nothing pleases prospective investors more than when you can produce a list showing top-line gains and cost-cutting across a business.

That said, it’s hard to ignore the fact that competition is fierce for cosmetics and healthcare products, and cutting investment in its store estate could leave it lagging rivals longer-term.

Starling Bank

Starling Bank has been talked about as an IPO candidate for years, so could 2024 finally be the year its IPO happens?

The bank made £194.6 million pre-tax profit in the year to March 2023 and a 29% return on tangible equity. Growth has come from increased lending and a higher base rate – the latter is an area to watch if the Bank of England starts to cut rates as that could have a negative impact on Starling’s earnings.

Costs have gone up at a slower pace than revenue and overall fixed costs are lower than a traditional bank because Starling is not weighed down by clunky legacy technology systems that have been an anchor for many of its bigger rivals.

The key hurdle to clear is finding a new chief executive as founder Anne Boden last year surprised everyone by stepping down after a row with investors.

Unilever’s ice cream division / Froneri

We face the unusual prospect of potentially seeing two ice cream businesses join the stock market. Unilever has already announced plans to separate its ice cream arm, whose portfolio includes Cornetto and Magnum. A stock listing rather than a sale is seen as the logical route, with the full separation expected in 2025.

Meanwhile, Froneri is a 50:50 joint venture between Nestlé and private equity firm PAI, the latter rumoured to be seeking an exit for the investment and where an IPO could be one solution. It would certainly help if Unilever’s unit is also going to be listed as investors would have a ready-made peer to compare strategies and valuations.

The ice cream sector might suffer from seasonality, but it is not short of innovation. Producers continue to find new flavours and styles to capture the public’s attention and both Unilever and Froneri are custodians of big brands in the space.

While most people would be happy to buy any ice cream on a hot day, many are looking for something more sophisticated if consuming at home. Unilever’s biggest opportunity on this front is Ben & Jerry’s which costs a little more than standard ice cream but has a reputation for quality. It goes head-to-head in the market against Häagen-Dazs, whose brand is licenced by Froneri in the US and Canada.

It’s not all sweet tasting. Unilever’s ice cream division is being jettisoned partly because it has a lower growth profile than the rest of the group. That creates an immediate stigma for the division if it does float on the stock market.

The other issue to consider is that there is no guarantee Unilever will pick London if it chooses to float the ice cream division, despite its own shares being UK-listed. There is talk it could pick Amsterdam instead. Froneri may also choose an exchange in mainland Europe if it lists.