MR MONEY MAKER: Can a minnow grow to become a mighty titan?
I have generally found new issues, or IPOs (initial public offerings) as they are called in the UK, to be an unreliable investment here. In the Far East they were often priced to be a success on the first day, but not so much that they were seen as undervalued.
But in the UK I have found that the greed of the advising banks and brokers over fees often provide generous returns for them and meagre ones for private investors.
This is a gross generalisation but I pass it out as a warning against such sales hype. Actually, with a newly floated business we should look at the longer term prospects of business growth and not as a punt for ‘stags’ on the opening day.
On the market: Tinybuild found its share listing oversubscribed which is always a positive sign at a debut
One recent new entrant has been Tinybuild (TB), which recently floated on the AIM, and riding the current tech wave found its share listing oversubscribed which is always a positive sign at a debut.
It’s a very small business but with a large opportunity.
Why Does It Matter?
TB is all about the online games world, but rather than creating them, it acquires new video games and titles from smaller writers and developers.
However, from this base they are now moving into the creative space themselves, rather than just being the financial midwife to the petulant and fashionable infant games developers. The company’s most successful games so far have been titles such as Hello Neighbor, Graveyard Keeper and Totally Reliable Delivery Service.
No, they mean nothing to me either but that is not the point.
In fact Tinybuild gets more than 70 per cent of its income from its back catalogue.
What Should I Do?
I like this style of business, whereby it has an existing asset base already generating cash. In the fickle world of gaming, having some reliable earners is very helpful. After the float we can see that the directors have kept their investments and hold around 45 per cent. This is a good sign to me as all too often a new issue can be an excuse for the previous owners to cash in and we are the mugs paying for their very comfortable pension.
Obviously a purchase of a holding for the medium term looks attractive, both as a growth stock but also as an attractive purchase for some larger entertainment fish. Alternatively there are funds in this area and even some ETFs.
In fact the consumer discretionary and communications services sectors have done well in the past year.
As of January, the Consumer Discretionary Select Sector SPDR ETF posted a one-year total return of 30.8 per cent and the Communication Services Select Sector SPDR ETF had a total return of 21.8 per cent.
Compare that with a mere – but none the less positive – return of 15.6 per cent for the S&P 500.
However, you should always apply caution to fashion fads, but fads with assets makes TB really rather attractive.
Justin Urquhart Stewart co-founded fund manager 7IM and is chairman of investment platform Regionally.