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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Kathmandu IPO: Jan Cameron lands a blow to IPO
Kathmandu IPO: What is it worth?
Kathmandu IPO: Retail Interest HighKathmandu IPO: A tough mountain to climb
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c Share Investor 2009

Chart of the Day: Kathmandu Holdings Ltd

Kathmandu Holdings Ltd [KMD.NZ] shares have had a poor run since its media/broker hyped November market debut, a few cents above the $2.13 IPO price. The stock reached an intra day all-time low of $1.78 yesterday on bad news before finishing at an all-time low of $1.82 at market close - down 17%. The share price reached an all time high of $2.56 in mid April.

I have been brutal in my criticism of this company over the last year or so for one reason or another and cant see why so many invested in the IPO.

Having said that the company does have some value. Not the value calculated in the IPO but it could be getting close to something worth looking at soon.

Put it on your watchlist because the company has more bad news to come and therefore the stock could be under share price pressure.

It is a guess but value might be found in the $1.20 -1.30 range.


Chart of the Day @ Share Investor

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Kathmandu @ Share Investor

Kathmandu Holdings: Market Update Misleads
Kathmandu's 2011 Results Under Pressure from Jan Cameron
Kathmandu IPO: Prospectus Analysis
Kathmandu IPO: Jan Cameron lands a blow to IPO
Kathmandu IPO: What is it worth?
Kathmandu IPO: Retail Interest High
Kathmandu IPO: A tough mountain to climb
Kathmandu No.1 but IPO should get the Bullet
Download the detailed Kathmandu Value Cruncher Report - Requires free registration at Share Investor Forum to download
Download Kathmandu IPO Prospectus
KMD Investor Presentation to Macquarie

Discuss Kathmandu @ Share Investor Forum

Download KMD Company Reports


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c Share Investor 2010

Kathmandu's 2011 Results Under Pressure from Jan Cameron

I have given Kathmandu Holdings Ltd [KMD.NZ] alot of criticism since its IPO and float back in November 2009 and its result 2010 interim result out in March doesn't really change much for me.

Its results for this period are largely academic because they cannot be accurately compared to last years figures with were calculated using pro-forma figures. Pro-forma accounting is calculated by removing "irregular" business transactions and smoothing out the balance sheet to make things look better to investors - a great way to hide bad news. Pro-forma is generally accepted as misleading.

The increases in revenue and profit for the 2010 half year look spectacular at first glance but the comparison to last year means little as I have outlined above and the headline figures of the NZX release omit significant IPO costs - $21.3 million, $6.3 million more than budgeted. The profit result then is a $13.3 million dollar loss not an $8 million profit.

Of particular interest to shareholders should be the figure tucked away in the 2010 Interim Report of the net tangible asset backing per share. It is 12c.

A better comparison on how well Kathmandu is going will be able to be made this time next year when we can accurately compare like for like figures (we still have to add the IPO costs to get a good comparison) and then perhaps I will stop my criticism if it is a good result.

Of further concern to Kathmandu shareholders will be the possible re-entry of the former owner of the Company, Jan Cameron, back into the same retail sector sometime in 2011.

She is currently in talks with Macpac, an outdoor equipment and clothing retailer, to establish some kind of competition against the former brand that she built up and as I have said before she is one smart cookie whose business acumen in retailing should never be underestimated by her competitors.

Kathmandu as a strong in your face brand have the outdoor sector mostly to themselves in New Zealand and Cameron's expertise and contacts in retail will be a formidable challenge to Kathmandu if she decides to make a move back into this area of retailing.

Kathmandu shares have traded as high as NZ$2.56 earlier in 2010 but finished trading last Friday at $1.90.

Kathmandu @ Share Investor

Kathmandu IPO: Prospectus Analysis
Kathmandu IPO: Jan Cameron lands a blow to IPO
Kathmandu IPO: What is it worth?
Kathmandu IPO: Retail Interest High
Kathmandu IPO: A tough mountain to climb
Kathmandu No.1 but IPO should get the Bullet
Download the detailed Kathmandu Value Cruncher Report - Requires free registration at Share Investor Forum to download
Download Kathmandu IPO Prospectus
KMD Investor Presentation to Macquarie

Discuss Kathmandu @ Share Investor Forum

Download KMD Company Reports


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c Share Investor 2010

Kathmandu 2010 Profit lacks good comparison

I am not a big fan of Kathmandu Ltd [KMD.NZ] I will admit that. A prospectus as bent as Elton John on speed and growth largely centered on debt driven store expansion.

Their 2010 half year profit out yesterday that blew the market out of the stratosphere, share price wise, hasn't changed my view.

The trouble with this particular profit release is that it suffers from lack of a good and accurate comparison from last year.

Shareholders are therefore still unable to assess the state of the company yet with any form of credibility.

In one example they are comparing pro-forma net profit after tax (NPAT), pointed out in the prospectus, with an "adjusted" figure for the "actual" 2010 HY NPAT - what does that really mean? I don't know.

All important same store sales look impressive at first glance but have they also been "adjusted" as well to show the company in a better light? Once again I don't know.

One glaring example of poor management were the IPO costs, $21.3 million compared to the prospectus estimate of $15 million - 40% higher.

IPO costs relating to advisory fees were substantially higher, due to the scope of work eventually required to meet the requirements of dual listing on both the NZX and ASX. Additional costs were also incurred as a result of the change in banking arrangements.

If management cant get that right then you have to wonder about management of the company in the future.

The stockmarket needed a reason to get this company back up above its IPO price (see 4 month chart above) and insiders sent the price up sharply from mid February and mums and dads got back in over the last few days and pushed the share price up by more than 10% to NZ $ 2.46

Kathmandu @ Share Investor

Kathmandu IPO: Shares set for discount
Kathmandu IPO: Prospectus Analysis
Kathmandu IPO: Jan Cameron lands a blow to IPO
Kathmandu IPO: What is it worth?
Kathmandu IPO: Retail Interest High
Kathmandu IPO: A tough mountain to climb
Kathmandu No.1 but IPO should get the Bullet
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Download Kathmandu IPO Prospectus

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c Share Investor 2010

Kathmandu IPO: Shares set for discount

According to a Bloomberg story the Kathmandu Holdings [KMD.NZ]IPO looks set to be oversubscribed, indicating that either this is the best IPO since IPOs were invented or that investors have failed to look close enough into the prospectus for the numerous omissions and sleights of hand made by current owners Milford fund shareholders and their associates and decided there is money to be made.

If the Myer float last week is anything to go by Kathmandu is going to begin trading at a deep discount when the shares begin trading on the NZX and ASX in late November.

Myer Holdings Ltd [MYR.ASX] shares were dumped as institutions holding stock soon realised they couldn't stag the issue and began to sell off.

Those patient investors wanting to get Kathmandu shares may get them for closer to their worth if they are willing to wait a while and let Mr Market decide what the company is worth.

KEY DATES

Prospectus date Friday, 23 October 2009

Retail Offer opens Tuesday, 27 October 2009

Retail Offer closes 5:00pm AEDT/NZDT, Friday, 6 November 2009

Institutional Offer and Institutional Bookbuild opens Tuesday, 10 November

Institutional Offer and Institutional Bookbuild closes Wednesday, 11 November 2009

Pricing and allocation announced Thursday, 12 November 2009

Expected commencement of trading on ASX (conditional and deferred settlement basis)
and on NZX (conditional settlement basis) Friday, 13 November 2009

Institutional Offer settlement and last day of conditional trading Tuesday, 17 November 2009

Shares expected to begin trading on a normal basis on NZX Wednesday, 18 November 2009

Expected despatch of holding statements and any refund payments if required Thursday, 19 November 2009

Shares expected to begin trading on a normal settlement basis on ASX Friday, 20 November 2009


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c Share Investor 2009

Kathmandu IPO: Jan Cameron lands a blow to IPO

I have been covering the Kathmandu IPO over the last few weeks and am working on the prospectus in between changing nappies and trying to get some sleep.

News out today that Jan Cameron, former owner of Kathmandu, will set up her own outdoor clothing chain in New Zealand and Australia is clearly bad news for the IPO:

Now she has revealed she is well advanced in plans to set up an outdoor clothing business of 60 stores - 30 in New Zealand and 30 in Australia - to compete with Kathmandu next year. She said she was earmarking A$27 million for the venture.

She was even dismissive of the Kathmandu model of regular 50 per cent off sales.

"I imagine that if we are offering a similar product at competitive prices, at everyday low prices, around 50 to 60 per cent lower than Kathmandu, I imagine that might be quite attractive," she said. "I really love the product and the industry and I see an opportunity with a different model.'' More at Stuff.co.nz

Cameron is an individual not to be underestimated when it comes to competition. She has made a career out of buying cheap assets and making money from them and her retail prowess when it comes to starting a business is almost unparalleled.

She recently bought up large stakes in Pumpkin Patch Ltd [PPL.NZ] Postie Plus Group [PPG.NZ] and purchased cheap retail sites in Australia abandoned by The Warehouse Group [WHS.NZ] a few years ago and set up a cut price chain.

Her move back into outdoor retailing will affect the value of the Kathmandu IPO to investors because of the direct competition with her old company.

All the figures contained in the prospectus, on which the value of the company is based, are now largely academic due to the new entrant and prospective investors will now have to reassess their position as they contemplate writing out their IPO cheques.

Disclosure: I own PPL and PPG shares.


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Kathmandu IPO: Retail Interest High
Kathmandu IPO: A tough mountain to climb
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Download Kathmandu IPO Prospectus

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c Share Investor 2009

Kathmandu IPO: What is it Worth?

I have given you my opinion of the Kathmandu IPO on a number of occasions, based on my knowledge of the company from media circles and from the downturn in economy as a whole as it affects retailing.

It is however good to get other views from people with different opinions and ValueCruncher.com has done an analysis based on 3 different scenarios that is very interesting:

Valuecruncher has completed a base case valuation and three separate scenarios for Kathmandu. The first scenario (EBIT 8%) assumes EBIT margins of 8% against 10% in the base case. The second (Growth 5%) assumes 5% growth not the 10% of the base case. The third (CAPEX $40m) assumes CAPEX of NZ$40m compared to NZ$30m in the base case.

This base case and three scenarios give an enterprise value range of NZ$354 million to NZ$460 million (8.9 to 11.5x estimated 2009 EBIT). Valuecruncher gave a 25% weighting to each scenario which gives a NZ$411 million valuation (10.3x estimated 2009 EBIT). This NZ$411 million is our mid-point valuation of Kathmandu. See Valuecruncher for more

Valuecruncher have given this alot of thought but in my opinion their models, while giving 3 possibilities of value for the company, seem too positive given the global economic outlook.

Indications have been that sales at the company have been down, so a prospective investor needs to assume the worst in the current economic climate and that means no growth at all or indeed going backwards.

Debt levels are also largely discounted in the VC model, and as many have commented, debt levels were high over a year ago at more than $NZ180 million and the majority of IPO money is going to the former owners, not to be used within Kathmandu itself.

In addition more capital will be needed to fund the aggressive growth plans that management have.

To be fair Valuecruncher's estimates, as they point out, are based only on publicly known information, excluding the prospectus, so their estimate of value, like mine, is a bit of an educated punt.

We will look at the Kathmandu IPO prospectus - Requires free registration at Share Investor Forum to download


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c Share Investor 2009

Kathmandu IPO: Retail Interest High

I have to say I am very surprised by the level of interest in the Kathmandu IPO.

This comes after confirmation of the IPO where Kathmandu will offer between 166.9 million and 197.4 million shares or 84-99% of the issued capital to investors. The IPO will be valued at between $A1.65 and $A1.90 ($NZ2.01 – $NZ2.32). This will raise a total of between $NZ338.6 and $NZ457.2 million.

Economic circumstances as they are at present would at first thought be indicative that there was no money around.

As I pointed out a few weeks ago Google searches that have reached this blog with "Kathmandu" as the search subject were gathering pace.

I can inform my readers that the level of interest in this subject has at least tippled since then with a record being set for readership for the Share Investor Blog.

As before the interest comes mainly from New Zealand and Australian readers.

This level of interest shows that at retail level investors are possibly ready to take some risk again after being burned in the sharemarket and that there is spare cash around to invest.

Having said that it could just be curiosity for a major recognized brand that will end in disappointment for the company as happened with the Burger Fuel IPO in 2007.

Kathmandu has aggressive expansion plans in Australasia with the possibility of 70 stores being opened over the next 3 years.

It looks like then a large part of the IPO funds will be spent on expansion rather than paying down their very large debt - disappointing in the current economic squeeze and folly considering that same store sales and overall company profit is down.

The IPO opens on October 27 and closes on November 6 and the shares will then begin trading on the NZX on November 18.

Investors interested in buying Kathmandu shares might be better advised to see what happens to the share price post IPO after company results are announced to the market.

Present Kathmndu owners will be hoping for a good Christmas shopping season to bolster the share price because current company fortunes do not make for pleasing reading.


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Kathmandu IPO: What is it worth?
Kathmandu IPO: Retail Interest High
Kathmandu IPO: A tough mountain to climb
Kathmandu No.1 but IPO should get the Bullet
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Download Kathmandu IPO Prospectus

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c Share Investor 2009

What is Jan Cameron up to? (UPDATE 4)

What is Jan Cameron up to?

(PPG share purchase update) On Monday 5 July 2010 she bought 600,000 shares to take her holding in PPG to 19.26% or 7,702,537 shares. She previously held 17.76%.

Cameron, who sold a 51 % stake in her Kathmandu outdoor clothing company for NZ$275 million in 2006, would now own over 7 million shares in PPG for a sum of less than $5 million.

The 19.26% of PPG Cameron now owns is not far short of the 20% takeover threshold where if she wanted more of the company she would have to make an offer to all shareholders for their holdings.

Like her competitor in retailing, Rod Duke, who has recently built up a stake in Pumpkin Patch Ltd [PPL.NZ] she could be just taking advantage of beaten down stock prices, with a small non controlling stake in Postie Plus or building up a holding for a possible takeover. This doesn't seem likely though.

Jan likes control in her business life so it would be natural to assume that she could see herself as an outright owner of Postie Plus.

At current share prices, in theory at least, she wouldn't have to pay more than $14 million for the remaining 32 million shares in the company. Of course a premium would have to be paid for full control but either way she could probably grab the entire company for less than $20 million.

There is no doubt that Cameron is a canny business woman. She built Kathmandu from a small one store retailer in Melbourne in 1987 to a medium sized outdoor "lifestyle" chain with 46 stores, in Australia, New Zealand and Great Britain.

Given her successful past there must be something that she sees in Posties Plus that makes its future better than it is currently.

Postie Plus has three different brands in its store stable. Postie Plus, Arbuckles and Baby City.

Out of these, Postie Plus is doing satisfactorily, Baby City are doing very well and Arbuckles, the manchester business was sold to Cameron in its entirety on June 10.

I could see how Cameron might be interested in Baby City as a brand to grow. This brand, specializing in baby clothing and accessories, is operating in a sector ripe for more branded chain store competition. Baby City really has only one serious branded competitor in New Zealand in Pumpkin Patch. With a little of Cameron's retailing magic Baby City could be a good place for her to start a much larger brand, although recent revelations that Cameron has bought a 6.3% stake in the Pumpkin might give that sort of speculation a lively twist.

The Postie Plus brand is a chain that has recently undergone a bit of a revamp. From selling conservative clothing to older people, especially women, it has now gone slightly more upmarket with a broader range of goods for a larger customer base. It is still struggling in the current economic downturn but with Cameron's retailing expertise and well known focus on minimising cost it could well do better under her guidance.

It is great to see one of New Zealand's more successful business women take an interest in a company with a beaten down capital value.

She likes to take control of her business interests (who doesn't) and is a very aggressive player.

She currently has a number of different retailing interests. A new one, Nood, a home wares store, is going head to head with Briscoe Group [BGR.NZ] Urban Loft stores. Like most New Zealand retailers, Briscoes is struggling at present.

With Cameron's track record and stake in Postie Plus it will be curious to see what her next move might be.

In October 2009 that question has been answered in that Jan has made a move against her former company Kathmandu, who is currently perusing and IPO, by making public her plans to go into competition with them in the outdoor clothing market.





Jan Cameron @ Share Investor

Jan Cameron ready to move on Postie Plus Group?
Kathmandu's 2011 Results Under Pressure from Jan Cameron
Kathmandu IPO: Jan Cameron lands a blow to IPO
What is Jan Cameron up to?


Kathmandu @ Share Investor

Kathmandu IPO: Prospectus Analysis
Kathmandu IPO: Jan Cameron lands a blow to IPO
Kathmandu IPO: What is it worth?
Kathmandu IPO: Retail Interest HighKathmandu IPO: A tough mountain to climb
Kathmandu No.1 but IPO should get the Bullet
Download the detailed Kathmandu Value Cruncher Report - Requires free registration at Share Investor Forum to download
Download Kathmandu IPO Prospectus

Discuss Kathmandu at Share Investor Forum









c Share Investor 2008