Saturday, May 29, 2010

Aurora Funds Management IPO

As I have shares in the Aurora Sandringham Dividend Income Trust, I just received a prospectus for the IPO of the manager. Investors in the funds get a $A5,000 "priority allocation" of shares in the IPO. They pay exactly the same price as all other investors though. So this is only an advantage if the IPO is oversubscribed. The company does not seem to think this is likely as they have specified a minimum offering of $A2 million and a maximum offering of $A5 million. Why list two limits if you were confident of raising the $A5 million?

The prospectus provides 2 1/2 years of accounts. In the 2007-2008 financial year they made $A400k in profit and in 2008-2009 they made $A1.3 million on a pro forma basis. However, in the first half of 2009-2010 they lost $A400k. Both management and performance fees were below those of previous years and costs were up. So it is hard to value the company. The IPO values the firm at $A20 million. So this is a P/E of about 20 based on the three years but the income volatility is huge.

In the 2008-2009 financial year the company paid shareholders $A590k in dividends which is entirely reasonable. But in the first half of 2009-2010 they paid out $A1.1 million despite actually losing money. This seems to be a case of the directors taking a last chance for fat dividends before going public.

The prospectus also claims that all the funds will be used for operations including product development, debt repayment, regulatory capital, and offer costs ($A340k if the offer only nets $A2 million which is big bite). But existing shareholders will receive $A750k in cash for shares they hold. The prospectus states that this will be paid out of pre-offer cash, but of course cash is fungible.

So at this point I'm leaning towards passing on this one. Any thoughts?

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