Friday, April 23, 2010

Ecoya IPO: A Closer Look

It is great to have promising new companies joining the NZX and while the IPO of Ecoya Ltd [ECO.NZ] is promising it is pitched at the riskier end of the investing scale.

The valuation of the company also looks overenthusiastic on the part of the current Ecoya Owners.

With pro-forma revenue of around NZ$2.5 million for the year ended 31 March 2010 and projected income of around $3.9 million for 2010 (of itself a massive leap in sales and not comparable with any prior year because of pro-forma figures) the valuation of the IPO is $13 million. This figure is comprised of 10 million ordinary shares at $1 and a facility to offer over-subscriptions of 3 million shares.

The valuation is then inflated by the existence of 33 million further shares held by the current owners who were allocated them through various trades and sales within the Ecoya company, associated directors, family trusts and "The Bakery", an investment vehicle through which Ecoya has been operated and funded pre-IPO and an an entity which will receive substantial annual payments from Ecoya for "management expertise". There was mention in the prospectus that the 33 million shares were issued to The Bakery for "shareholder advances" made to Ecoya over the last 2 years but it looks like the total allocation was made for an investment of around $4 million.

A NZ$46 million valuation for a company with slightly more than $3.9 million in current revenue (and a more than $2 million loss) is cheeky to say the least.

The proceeds from the IPO are going to be used to expand the business, hire more staff, pay off a $1 million loan , $ 1.2 million in IPO costs, and provide nearly $800,000 in interest-free loans for directors to buy shares in Ecoya. This is explained as an "incentive" for these directors - nice work if you can get it.

Ecoya is going to operate in a sector that has many competitors, large and small, start-ups and established players and therefore has little competitive advantage. Its place in the body and bath and home fragrance business is apparently going to achieve the prospectus' aggressive stated sales growth by branding and marketing the company in the high end of this sector.

Whether this is achievable is of course a moot point but this is not a long-term investment for those interested in the IPO. The company was founded and is to be floated with the express purpose of eventually finding a buyer down the track sometime.

The Ecoya model is based on the reasonably successful float and eventual sale of 42 Below to Bacardi several years ago.

This IPO is for investors with a high risk profile, along the lines of the aforementioned 42 Below and the company Burger Fuel Worldwide [BFW.NZ] whose IPO was in June 2007.

I will not be touching it but good luck to you if you do.

Ecoya @ Share Investor

Ecoya IPO lights only one end of the candle
Ecoya Prospectus Requires free registration

Discuss ECO @ Share Investor Forum


Every Bastard Says No: The 42 Below  Story

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c Share Investor 2010

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