Summerset IPO: A Closer Look

The coming Summerset Group Holdings Ltd [SUM.NZX] IPO (read the prospectus) will be an interesting one.

The aged care sector that this newly listed company will occupy is a fast growing and profitable one for companies that run the right business model and manage their clients well.

As well as numerous independent aged care homes and larger privately owned chains a listed Summerset will compete with two NZX listed companies. Metlifecare Ltd [MET.NZX] and Ryman Healthcare Ltd [RYM.NZX]

MET has been poorly managed and is currently undergoing a capital restructure of some kind and Ryman has had stellar revenue and profit growth since its listing almost 15 years ago.

Given the promise of the sector at large, the Summerset IPO could be one of the best IPOs the NZX has seen for some years.

Management at Summerset have put an IPO value on the company of $307 million of which approximately $120 million are the proceeds of the partial sell-down of approx 30% of the company and the balance is to be majority owned by present owners Quadrant Private Equity and various members of management. Shares will be $1.40 a piece.

Lets take a closer look at this IPO to see how it stacks up.

Summerset operate 13 villages, 1,364 retirement units, 323 care beds, have over 1,700 residents and approximately 450 staff. They have an aggressive development schedule that would close to double the size of their retirement units within five years and part of the IPO funds are to fund that expansion with the bulk of the funds raised put towards paying off debt.

All good thus far with the exception of the amount of IPO funds to be used for paying off debt - why should future shareholders pay off debt from the majority 70% shareholders?

Lets looks at some numbers.

It is not until page 64 of this 144 page prospectus that we get the prospective and historical financials for the company, albeit once again tainted by the use primarily of pro-forma figures and the usage of "underlying profit" accounting terms to smooth figures that make comparisons from year to year difficult.



Total revenue over the 5 years to 2010 (pro-forma) show it has almost doubled but so have expenses and forecast figures look even less promising. Financing costs look to have taken the bulk of any profit over the years and the IPO proceeds look to ameliorate that somewhat.

Audited figures for the 2010 year saw a loss of 1.9 million dollars so the forecast for 2011 of 9.6 million and 17.2 million in 2012 (before financing costs) look to be out of the ballpark in terms of historical performance.

I like the aged care sector very much as I have invested in Ryman Healthcare and Summerset may operate their business well but it is hard to tell this because of the use of pro-forma figures.

The large debt accrued by present management will still be a worry for the new shareholders even after a small portion is paid off.

The lack of liquidity in the market, because current shareholders will still retain 70% of the shares, will affect minority shareholders because of the veto power of the majority shareholders so don't look for management to favour the minority if they don't have to.

Metlifecare shareholders have found this out to their detriment over the years.

This IPO is one of the best the NZX has seen for years (there have only been 3 [1,2,3]over the last 2 years and none of them spectacular) but I have reservations as the whether it is a starter for the average investor like me.

Best those interested wait for some results to the NZX before plunking down the shekels and then see the fair value for the company.


Disc I own RYM shares in the Share Investor Portfolio


Summerset IPO @ Share Investor

Summerset Prospectus
Discuss SUM @ Share Investor Forum


Metlifecare @ Share Investor

Metlifecare: Its Assets could be worth more under different management
Stock of the Week: Metlifecare Ltd
Stocks on My Watchlist: Metlifecare Ltd
Time for retirement?

Discuss Metlifecare @ Share Investor Forum
Download MET Company Reports


Ryman Healthcare @ Share Investor

Share Investor's Total Returns: Ryman Healthcare Ltd
Share Price Alert: Ryman Healthcare Ltd
Ryman Healthcare Ltd: 2011 Half Year Profit Review
Gordon Macleod on Ryman Healthcare's Australian Expansion
Share Investor Q & A: Ryman Healthcare's CFO Gordon MacLeod
Ryman Healthcare: Interview sneak peak
Ryman Healthcare Ltd: Australian Expansion Needs Care
Share Investor Q & A: Reader Questions to Ryman CFO Gordon Macleod
Long Term View: Ryman Healthcare Ltd
Stock of the Week: Ryman Healthcare Ltd
Why did you buy that stock? [Ryman Healthcare]
Long VS Short: Ryman Healthcare Ltd
Time for retirement?

Discuss RYM @ Share Investor Forum
Download RYM Company Reports





c Share Investor 2011

Energy Mad IPO: A Closer Look

The Energy Mad IPO (see the prospectus for detail) is a coming listing that will be welcomed by the NZX but what can investors expect from this company, why are they going to the market with an IPO when all they want is 5 million bucks and what about intense competition from large multinational electronics companies who pop out the bulbs this company makes in their billions.

Lets have a closer look should we.

Management at Energy Mad [MAD.NZX] have put an IPO value on the company of $37,677,684 million, $32,677,684 million of that figure will be held by existing shareholders pre-IPO and up to 10 million shares will be available to the IPO if it is oversubscribed. The shares offered are a dollar a piece.

Lets see if that value holds up.

The company say they manufacture a unique energy efficient bulb for the retail mass market (they sell them to power companies and the like who then on-sell to consumers) and that the technology used in them is protected by patent. The company places a large emphasis in this technology to justify their business plan, sales, revenue and profit for the next few years but a quick google of energy efficient bulbs will tell you that not only are other companies making similar claims for their bulbs but there is emerging LED technology for bulbs that puts the power savings well above the compact fluorescent light bulbs (CFLs) that Energy Mad are selling.

The company tackles the issue of emerging LED technology on page 34 of the prospectus and naturally they are skeptical for its uses, cost, light output and LEDs other benefits over CFLs but it is worth pointing this out.

On this count alone a potential investor would have to question the company and its claim to have "unique technology" that has few competitors. They do presently and have future competition from emerging and future technology.

Lets move on to some of the facts and figures.

The company has not made a net profit since 2007 (accounts do not go back further than that in the prospectus) and revenue has been very patchy in the last 5 years with only a tiny increase since 2007.

The company has made much of a dramatic increase in futures sales but its past performance certainly would not be a good indicator of a future bonanza.

Their two year projection below maps out an ambitious revenue and net profit that increases
substantially on previous years. The 2012 projection is more than $5 million higher than the just over $8 million sold in 2011 and this sort of increase has thus far never been achieved.



The company carries just over $1.07 million in borrowings and some of the IPO funds will be used to pay that debt down.

The Energy Mad IPO will not be for everyone. It is a high risk proposition in a company with a patchy track record and high expectations for its future. The $37 million in value placed on the company is over the top given the company lost over $80,000.00 in 2011 on revenue of $8.6 million and the company itself only expects a $2.1 million profit for 2012 on revenue of $13.6 million. Perhaps half that value would have been more appropriate given the company's patchy financial past.

If you think this company will be able to satisfy their own high expectations and defy their past operational history then this IPO is for you. If you are skeptical for reasons of questions over the uniqueness of their technology and the competition that is coming from emerging and new technology then just buy an Ecobulb instead.

Footnote

The final nail in the coffin for me is that the company is involved in trading tooth fairy carbon credits to make its product look more appealing to the green conscious public in an attempt to curry favour with governments so they can sell their "green" bulbs to government backed environmental agencies with a taxpayer subsidy not far behind - in fact a small portion of the company's revenue already comes from the taxpayer.


Energy Mad IPO @ Share Investor

Energy Mad Prospectus
Discuss Energy Mad @ Share Investor Forum

From Fishpond.co.nz



Buy Every Bastard Says No - The 42 Below Story, by Geoff Ross & Justine Troy & more @ Fishpond.co.nz




c Share Investor 2011