Kathmandu IPO: Prospectus Analysis

I was right about this one, took about 2 years longer to come unstuck but come unstuck it did.

Will it work with a new person? Well out of all the retailers in this part of the world id give Rod Duke 50/50.

Hes getting the company for what its worth by the way.


Right from the get go the Kathmandu IPO Prospectus (Requires free registration at Share Investor Forum to download ) is all about the flash, the sheen, the image and impact of the Kathmandu brand - at first glance the document looks more like a catalogue for their product rather than a prospectus - and to be sure the brand is part of what the present owners are selling and it is a great loyally followed brand but what of the bones, the inside, the guts of the company, how are they selling prospective investors that?

Well in short the present sellers are not telling investors the full story. Pro Forma figures - figures based on an "as if" scenario rather than reality - are used throughout the document.

Pro-forma figures do not show investors the true state of a companies books and this alone should have prospective investors running for the hills (without a Kathmandu backpack).

I will go on however.

For example pro forma sales figures from 2007 and 2009 indicate that in 2007 Kathmandu sales were $A151.4 million and in 2009 A$215 million and respective store numbers were 58 and 82. That works out roughly the same level of sales per store for each of these years. Very hard to get this sort of consistency in any sector of the economy, least the retail industry. These particular figures have clearly been manipulated or "smoothed" to make things look good and we can safely assume this for other comparisons made. This makes the figures misleading to say the very least.

It is pointless to make any further comment about the prospectus' other figures or comparisons used except to say they cannot be trusted.

Some more key points but they rank in far less import for potential investors than do the inclusion of pro forma figures to make comparisons year to year to sell the company.

1. management are more than halving their stake - not alot of faith there in the company and they are insiders!

2. $85 million in debt to be paid off - not a high figure considering indications that debt in July 2008 was more than double that.

3. IPO costs of more than $15 million, far too high.

4. Investors will not know how much their application for shares will cost them until after the IPO has closed. At NZ$2.01 - $2.32 per share a large range in price exists.

5. A major emphasis throughout the prospectus on growth through increases in store numbers - an expensive way to grow and to be fueled by more company debt or perhaps additional capital raising from shareholders.

6. Omitting financing costs and essential financial data like historical NPAT.

I was skeptical of the Kathmandu IPO before perusing the prospectus but after reading it I have come to the conclusion that this IPO is a complete and utter stinker.

Too much emphasis is on the media grabbing sexy Kathmandu brand and not enough on what is important when an investor needs to make a wise decision - full, frank and accurate financial statements and not pro forma monopoly style accounts that are only fit to wipe your bum with.

I am appalled at the gall of the present owners, the accounting firm signing off on pro-forma accounts and the NZX for allowing this kind of bullshit and calling it sufficient disclosure pre-IPO.

I could be wrong and this IPO could be the best listing since Coca Cola but investors cannot tell that from reading disclosures in the prospectus with accuracy what sort of condition Kathmandu the company is in - why are the present owners playing shell games with investors one would have to ask?

If you sink your money into this one you deserve to lose it.


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Facebook IPO: Should you "Like" it?

Just pondering the pandemonium over the highly anticipated Facebook Inc [FB.NASDAQ] IPO. (download the prospectus here)

There has been so much hype and interest whipped up by general mainstream media, online media and Facebook itself it is hard to know just what is hype and what is reality. Even U2's Bono is in on the action !!!! Cue bizarre looking smoky shades.

Well, Facebook is expected to file a preliminary prospectus for an IPO today and prospective investors will find out whether the hype matches reality and the value that Mark Zukerberg and his mates at FB central have put on the popular social networking site.

I don't have to tell you the littered corpses of hundreds of tech companies that were going to be "the next big thing" that have gone before Facebook and only just a handful of them still remain.

One of course is Google Inc [GOOG.NASDAQ]which debuted in 2004 and has been a moderate success since. Google though, had and still has strong revenue streams and their market share is such that they dominate just about every business sector that they operate in. They are pretty much a dominant monopoly cash cow.

Facebook, when listed, would, in actual fact, have to go after Google advertising revenue - and win - to have a decent shot at long-term success.

Both Facebook and Google operate businesses in the fast moving, ever changing technology sector where Google has thus far cemented their place on the internet as a business but Facebook, while dominant in the social networking arena, could be subject at any time to a new technology start-up that removes that dominance in a heartbeat. Anyone remember MySpace?

Facebook may well be one of the notable exceptions to the tech disasters the markets have seen since the late 1990s but it would be one of the rarities if it did.

By all accounts, market watchers expect the company to be way overvalued and that really is a symptom of the hype surrounding the IPO and the expended demand as a result of that hype rather than the fact it is a good business worth investing in. Overvaluing an IPO of a company with an unproven business model seems to me to be a recipe for disaster, for initial investors in the public pool anyway.

In a once over lightly of facts and figures leaked from Facebook back in 2009 it showed revenue of US$ $1.24 billion and net income of $355 million for 9 months in the 2009 financial year. It is unclear whether this revenue has increased over the years or how much of that income has been spent on keeping Facebook going and growing but the IPO could be one of those nasty grabs for cash that happened during the dotcom frenzy of the 90s and may need to happen again if FB is to continue to grow.

The big winners are going to be Mark Zukerberg and the rest of the early investors in Facebook who will be billionaires or multi millionaires when the company lists and early participants in the IPO.

I am clearly very cautious about the Facebook IPO and will not press the "Like" button just yet.

My comments above will suffice.

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Trademe IPO: A Closer Look

TradeMe Ltd [TME.NZX] has been a major success by anyone's standards. An online auction site that dominates the New Zealand auction market and one of the most popular websites in the country.

It has also done well for its original founders when sold around five years ago for around NZ$750 million and well for the current owner Fairfax Media Ltd [FXJ.ASX] who are going to sell 34% of it to raise money to pay off its huge debts.

As I said above TradeMe dominates in just about every sector that it does business in and has done well to grow revenue and profit over the last few years by raising auction fees and participating in new sectors.

The question is though, can TradeMe continue on into the future the way it has in the past and will its current market dominance be diminished by competitors or new technology in the fast paced and quickly changing delivery mechanism that is the internet?

Management at Fairfax have put an IPO value on the company of $1.069 billion of which approximately $363.5 million are the proceeds of the partial sell-down of approx 34% of the company and the balance is to be majority owned by Fairfax which will have a 66% holding. Shares will be $2.70 a piece.

Lets take a closer look at this IPO to see how the numbers stack up.

Like many recent IPOs in New Zealand this one comes with a debt mountain courtesy of its parent. TradeMe lent Fairfax $192.7 million in 2010 and paid out $220 million in dividends in 2011, according to just-released financial statements. So they milked it to keep Fairfax afloat over the last 2 years and are now set to have a third squeeze during this IPO by pulling in $529.5 million, with Fairfax netting about $363 million with $166 million of new debt to languish on TradeMe books.

TradeMe has done well but we must remember what has got its parent into financial trouble - debt.

Lets have a look to see how TradeMe can cover that debt.

Trade Me recorded a profit of $69.7 million in 2011, up from $63.6 million in 2010 and revenue came in at $128.8 million, compared to $114.4 million in 2010. Profit and revenue is rising, so that is clearly a promising sign but with a $166 million debt to service they are going to need increasing revenues.

Trade Me is forecasting pro forma earnings (I must add pro-forma figures are highly misleading and I will not use them further in this post because they are largely meaningless) before interest, tax, depreciation and amortisation (ebitda) of $104.8 million in 2012, up 8% from $97 million in 2011, rising to $110.9 million in 2013.

It expects to make a profit of $65 million in 2012 on revenue of $144.8 million, up 12% from $128.8 million in 2011. Revenue is forecast to increase to $154.1 million in 2013, with profit rising to $68.5 million.

A much better indicator of where TradeMe might be headed in the future comes from a five year historical summary of statement of income (as audited) from 2007 -2011:

The numbers above look good and should be the ones looked at by prospective investors when deciding to buy shares.

Conclusion

The TradeMe IPO is one that will be very popular with investors and is likely to be over-subscribed when it comes to its expected listing date on December 13. The high debt of $166 million on its books is a drawback the company could have done without but if its past performance is anything to go by it should be able to be serviced adequately.

Watch for the majority owner though trying to continue to milk its only profitable asset by extracting overlarge dividends this time rather than loans to the parent.

This company will be watched closely and the IPO price should be easily beaten on listing day because of its wide brand recognition and the part it plays in many of our lives. The really interesting thing to watch for though will be its long term prospects.

I wont be investing but this is a reasonable investment based on its past performance, investors need to be wary though that its past record of good growth is unlikely to continue for the long-term and there will be bumps along the way.


TradeMe Ltd@ Share Investor

TradeMe Prospectus
Discuss TRE @ Share Investor Forum

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