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 @ Share Investor

Kathmandu IPO: What is it worth?
Kathmandu IPO: Retail Interest High
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Download Kathmandu IPO Prospectus

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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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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 No.1 but IPO should get the Bullet
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Download Kathmandu IPO Prospectus

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Stock of Week: Restaurant Brands Ltd

This weeks Stock of the Week, Restaurant Brands Ltd [RBD.NZ], as I pointed out last week, is a tale of two stocks.

It takes a bit of a leap of faith by current shareholders not to sell and for new shareholders wishing to buy - current fortunes of the company now being at a high and the share price starting to reflect that.

All is not lost though!

This company has rallied from penny dreadful status many times before and has managed to reward shareholders who got in at the early stages and there is probably more upside to come.

From a 52 week low of 58c to the current 52 week high of NZ$1.42 the share price looks likely to rally closer to the 2 dollar mark as it has done before so there is room for a good short term gain if you think the company profit is unsustainable or room for a good long term return if you think the company is on track for more of the same -this would defy company history however.

The dividend has just been raised for the latest results to 4.5 c to give this stock a gross return of slightly over 7.5%, not bad when term investments are getting 4%.

Good luck!


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Restaurant Brands: Buy or Sell?

My regular readers will know I have been critiquing Restaurant Brands [RBD.NZ] for many years and my comments have been far from complimentary at times.

I have been a shareholder in the past and have never lost interest in the mis/fortunes of the company or in the yummy food that KFC serves up.

With the latest half year result for 2009 out Friday I may have to reconsider my stance on what I think about the company and its future.

That result showed a half year better than any they have had in around 10 years and they indicate that this is likely to continue in the second half.

Sales and profit are up but a major indicator of business going well is that margins are up as well. This also hasn't been the case for many years but is on the back of cost savings rather than increased counter prices so clearly indicates good management of shareholder capital in tough times.

The major force behind the recent resurgence of RBD has to be Russel Creedy, the CEO/CFO, brought in during 2007 to revive the companies years of lagging fortunes. He has got to work quicklyand efficiently and most importantly his goals have been indicated to the market and to staff clearly and executed well.

Years of under-performance has largely been forgotten by new shareholders and market watchers who have more than doubled the company share price over the last several months with increased buying and a re-inclusion in the NZX 50.

I have not forgotten however and this is where my big but comes in.

Creedy has done a fine job in turning the fortunes of his company around, when nobody else has been able to do so since it listed but the one thing the company has lacked in terms of performance is consistent profit on a year to year basis or an indication that it has been able to grow profit significantly.

At post NZ$300 million in sales the company should be able to consistently return a minimum profit of $15 million per annum, based on the sectors margins and more if costs and service levels can me maintained.

The company has never been able to achieve this year to year under previous management and are just through their first year of good results under Russel so it remains to be seen whether he can sheppard KFC, Starbucks and Pizza Hut through 2-3 years of good results, a length of time one can expect to give a company such as RBD - whose past has been wracked with poor results, management and a dismal future - to prove to the market and establish itself as a serious business with a good long-term future.

The boost in company fortunes has also been bolstered by the recession, with sales artificially up because punters are heading to cheaper fare when buying ready prepared meals -beware then of a tail off when things look better economically.

So clearly current investors need to make a decision whether to sell at the currently high stock price this company is selling for or hope that the present turnaround will be a sustained one, and they can then reap a decent return as the years unfold.

I have seen the share price do this 3 or 4 times based on a "turnaround" only to head back down to the penny dreadful price it was attracting at the beginning of 2009.

The jury is still out.


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Trying to define an exit strategy

I think I have developed a successful strategy for myself for buying good stocks - buy and hold for 10 years or more - but shouldn't I really decide in a similar way as to when exactly I should sell?

My first answer to that would be a definite yes but on the other hand if I have picked good stocks/companies to invest in in the first place then surely I should hold them "forever" and collect the returns along the life of the company ? - or at the very least my life.

Lets have a closer look at what I could do when, if and why I might want to sell off parts or all of the Share Investor Portfolio.

Lets have a look at some salient points one might look at when deciding when, why or if you should sell up. You will be able to tell from my many different tangents and questions to myself that an exit strategy to me is as foreign to me as soap is to a Green Party supporter.

Please keep in mind I am writing this as it comes into my head, clearly with no planning:

1. No company lasts "forever". Many of the 17 companies I have shares in will not be around in 10 years, either in whole or in part. Some will have been taken over, some will exist in different forms and others will simply be out of business.

2. Companies fortunes are never static. Depending on what sort of company one has invested in most have economic cycles where profit and performance ebbs and flow. Some that are managed better than others are able to get through these cycles unscathed and manage the extremes well - either because of management or design of the business.

The company value will vacillate between these two cycles and in the case of a listed vehicle a good opportunity exists for that shareholder to take the money and run just past the mid point of that economic cycle to get the maximum return for that asset - until the next cycle begins again of course where one may get an even better return if one has the patience.

3. Management plays a big part in deciding whether to get in or out of a company. If it changes and the fortunes change this could be a very valid reason for you to cash in your chips.

4. An individual who invests in a company, either listed on the stockmarket or private is unwise to invest money one cant afford to lose or will need to pull out in the future but sometimes circumstances change and you may have to reassess your position in the stockmarket - clearly not a good exit strategy and one that I am mindful of given my changing family demands and current economic conditions.

It can be very painful to your wallet if you have to sell any asset and I guess planning an exit strategy close to when you buy - along with the usual due diligence - is a good way of ameliorating any negative outcomes.

5. Setting a percentage return, either on an annual basis or over the term you think you might hold your stock might be a good way of exiting a stock - you cant really argue with hard concrete numbers right? After all you are investing to make money!

6. Look at the returns you might be getting from a comparable business and decide if your company can do better.

7. Consult a financial adviser - nah just kidding, do your own thinking. Only you know what is best for you financially and your exit point will be different to someone elses.

8. Related to the above, do some of your own research about exit strategies, talk to others with more experience in the stockmarket and take the points applicable to you and only you and jettison the rest.

For the life of me even after writing this I am still in more than two minds about when to decide just when to sell. There is so much to take into account when there is money involved and as I said above I am 99.9% sure of my entry strategy but probably 50/50 on when to head to the hills.

My head says I must hold indefinitely because I am pig headed about decisions, I think I made the right initial company choices so why wouldn't I hold until I curl up and die as long as the companies are making moola and then pass on the hopefully much bigger mantle to my little girl? That is very clear in my my head, so I think I will end where I began.

With the intention of holding "forever".

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Rob Fyfe's "Environmental Extremism"

A reader of mine brought this subject up, of sorts, yesterday. That is, the folly of investing in companies that base their business on airy fairy ideas like "green technology" based on the man made global warming myth or in companies whose grip on their business is so tenuous they will sink to the depths of using this kind of bullshit on competitors in the hope they make them look bad.

In my not so humble opinion Air New Zealand [AIR.NZ] is one of those companies.

Rob Fyfe, Air New Zealand CEO has recently labeled Emirates Airline alleged running of "empty planes" across the Tasman as "Environmental Extremism"

"For this competitor, the Tasman sectors are an easy add-on to their long haul flying and an opportunity to earn revenue at only marginal cost and load factors down around 50 per cent seem to be of no consequence," Read more

Fyfe told a gab fest of Global Warming zealots at the Green Skies meeting in Hong Kong.

Now using junk science to attack a competitor is one thing but Rob and the boys and girls down at Air NZ head office have been busy over a number of years spending 10s of millions of shareholder dollars developing nonsense bio-aviation fuels and asking customers to pay extra for their "carbon credit" deficit because of the naughty way they pollute when they choose to fly with the largely Kiwi taxpayer owned airline.

So it is in Robs best interest to attack competitors who don't appear to "care" as much about how filthy flying is because he is spending shareholder money in the hope this will give our airline an edge over the competition and to justify the spending of shareholder dollars - I think the Green Party call it Greenwash.

So Mr Fyfe's stance on the evil of flying is simply a race to the bottom where the eventual winner will be the first to award themselves a gong for being green in the hope it is good for business.

Ultimately though the reckless use of Air New Zealand shareholder money to pursue the bogus notion that every time one flies it is an affront to the environment and by setting your company up as a bastion of virtue above competitors by using this to attack them is environmental extremism itself and will ultimately end in tears and lost shareholder dollars when the whole Global Warming myth unravels.

Stand by for the fallout.


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Investment Property Taxes a boon for the Stockmarket

There has been allot of talk about taxes in relation to investment property recently. There has been a government task force looking into the idea of capital gains taxes on investment property, principally a capital gains tax.

It appears our "business friendly" National Government are trying to shake down its citizens for even more taxes to fund the continued high spending of our Government.

I don't remember them in their pre-election campaigning that they were going to implement new taxes but be that as it may it looks likely some kind of tax on investment property is likely.

I don't agree with this at all, taxes kill economies and make Governments bigger and we know that aint good.

As I wrote last month the best thing to do to put investment property on an even keel with other classes of investments is to remove taxes from those other classes, not add another wallet numbing penalty to property investors.

Either way though if there are taxes applied to investment property, and I think there will be, this is going to be a minor boon for the New Zealand Stockmarket.

The withholding tax applied to dividends by Labour in 2007 further put stockmarket investors on the back foot and any move to even the score with property investment is a win for New Zealand.

The Nats probably wont raise taxes on investment property by a significant amount because of the obvious political ramifications, but any move that hamstrings the investment property market is going to be good for those of us investing in real productive companies that are either listed on the Stockmarket or indeed private ones.

About time us wise ones we got a break.

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c Share Investor 2009

Michael Hill Makeover kicks off

The next step in the Michael Hill International story[MHI.NZ] has happened with the opening of their new format store in Auckland's Queen Street yesterday.

A move towards a more sophisticated look inside and out is designed to take the company towards the higher end of the jewelry market and then hopefully higher margins.

This particular outlet is what the boffins call a "flagship" store and its charcoal and grey colours, along with its new lighting design is designed specifically to get those higher end punters in the door -revamps of retail stores tend to get more punters through the door, not this shopper though.

From Michael Hill himself on the reasons for the change:

“As the original high-end retailer in this part of Queen St, we’re delighted to be delivering a contemporary shopping experience to our customers.

“It’s important to move with the retail environment. As our customers evolve so too must we. This new store design has become the benchmark for all stores going forward, Hill said.



On the purchase his company made last year of bankrupt jewelry retailer Whitehall Jewelers:

"When you're opening in a new market and opening in a place like Chicago that has been particularly depressed you can't just roll out the old thing and expect it to work. It's really when you have to do things that you come up with your best."

Hill has himself said that the Chicago purchase was a mistake (listen to Michael Hill interview - You need to register first ) because of the price paid for it so it is either a very positive move by him to spend millions on the 17 United States stores or throwing good shareholder money after bad - I tend to think he knows what he is doing but having said that the US is a particularly hard market for outsiders to crack. Pumpkin Patch Ltd [PPL.NZ] has also had recent difficulties with its US operations, incurring significant losses, so this is a very tough market, especially in the current economic conditions.

The revamp of the company image comes in a year where underlying 2009 profit has been down by more than 45% and its share price hit because of the overall retail downturn.

Michael Hill shares closed even at NZ 72c yesterday.


Disclosure I own Michael Hill International shares in the Share Investor Portfolio.


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c Share Investor 2009