Note - GMAN ended up pricing below range at $11. At date of this post 8/20, tradingipos.com is long GMAN.
2010-08-01
GMAN - Gordmans Stores
GMAN - Gordmans Stores plans on offering 6.2 million shares(assuming over-allotments are exercised) at a range of $13-$15. Insiders will be selling 3 million shares in the deal. Piper Jaffray and Wells Fargo are leading the deal, Baird and Stifel co-managing. Post-ipo GMAN will have 18.7 million shares outstanding for a market cap of $262 million on a pricing of $14. Ipo proceeds will be used for debt repayment and general corporate purposes.
Sun Capital Partners will own 67% of GMAN post-ipo. Sun Capital acquired 100% stake in GMAN in 9/08 for total considerations of just $55.7 million. Of this, $32.5 million was debt on the back of GMAN. That debt will be paid off on ipo.
From the prospectus:
'Gordmans is an everyday low price retailer featuring a large selection of the latest brands, fashions and styles at up to 60% off department and specialty store prices every day in a fun, easy-to-shop environment.'
Discount retailer in the Mid-West. 68 stores in 16 Midwestern states. 50,000 square foot stores. 'Upscale discounter' appears to be how GMAN positions themselves.
10 stores in Missouri, 9 in Iowa and 8 in Illinois.
GMAN defines their target as: 'Our primary target shopper is a 25 to 49-year-old mother with children living at home with household incomes from $50,000 to $100,000.'
Apparel 53% of revenues, Home Fashions 29% and Accessories 18%.
GMAN positions themselves as a blend of specialty, department and off-price retailer. Up to 60% off department store prices with a broad selection of fashion-oriented apparel. Also, GMAN keeps mentioning that their stores offer a shopping experience infused with 'fun and entertainment'.
GMAN has beefed up their Home Decor, Juniors and Young Men's sections in an attempt to offer a broader range of selection in these three area than their competitors.
Growth - GMAN opened 23 stores from 2004-2008, but just one in 2009. One store opening in first quarter of 2010. Plan going forward is to increase store base by approximately 10% annually. That would be roughly 7 new store openings a year.
Same store sales increase of 4.6% in 2009 with 4th quarter '09 totaling 9.3%.
***Strong start to 2010 with same store sales increase of 15.4% in first quarter of fiscal year. As we all know, retail comparables against first half of 2009 are quite easy as that period represented the trough of the recent recession...especially the first 3 months of 2009.
Footwear is sold under a licensing agreement with DSW.
All store locations are leased.
Financials
$1 per share in net cash post-ipo.
Fiscal year ends last working day of January annually. FY '10 ends 1/31/11.
FY '09(ending 1/30/10) - Revenues of $457.5 million. 4.6% same store sales growth. Average store sales of $6.9 million. 42.4% gross margins. Operating expense ratio of 36.7%. Operating margins of 5.7%, net margins of 3.8%. Earnings per share of $0.92. Pretty good results considering the shaky consumer spending environment the first half of 2009.
FY '10(ending 1/31/11) - GMAN had a strong first quarter to the fiscal year. In fact, the past two quarters have easily been the strongest operating profit quarters in GMAN history. Impressive here is that GMAN followed up a strong holiday season with a fantastic quarter in what is often a slow one for retailers. The question going forward is whether GMAN can continue this momentum. I've attempted to be conservative and factored in a flat quarter for the 2nd Q of FY '10 and rather conservative growth the back half of the fiscal year.
Total revenues should grow a solid 14% to $520 million. Note that in the first quarter of the fiscal year, GMAN grew revenues year over year by 20%, so again I am factoring in more conservative results rest of fiscal year. Gross margins look as if they will improve to 44%. Operating expense ration should remain similar at 7%. 7% operating margins, 4.6% net margins. Earnings per share of $1.27. On a pricing of $14, GMAN would trade 11 X's FY '10 estimates.
Conclusion - GMAN is being priced in range at similar PE's to discounters such as TGT/ROST/TJX. Those three trade 12-13 X's 2010 estimates. Key differences are 1)GMAN is expected to grow 14% my conservative 2010 estimates, while the other discounters are growing 4%-8%; 2)GMAN only has 68 stores in existence, leaving a lot more room for % store growth than those other discounters.
Solid retailer coming public attractively priced.
August 20, 2010, 7:12 pm
GMAN - Gordmans Stores
August 10, 2010, 2:06 am
NXPI - NXPI Semiconductors
2010-08-01
NXPI - NXPI Semiconductors
NXP - NXPI Semiconductors plans on offering 34 million shares at a range of $18-$21. Credit Suisse, Goldman, Morgan Stanley, BofA Merrill Lynch and Barclays are leading the deal, JP Morgan, KKR, ABN Amro, HSBC and Rabo co-managing. Post-ipo, NXPI will have 249.3 million shares outstanding for a market cap of $4.861 billion on a pricing of $19.50. Ipo proceeds will be used to repay a portion of NXPI's substantial debt.
KKR will own 28% of NXP post-ipo, Bain Capital 24%. Philips Electronics will own 17%. KKR, Bain and others acquired NXP from Philips Electronics in a 2006 leveraged buyout.
***Debt is the issue here. Factoring in debt paid off on ipo, NXP will have $4.5 billion in dept post-ipo. I will never be interested in an ipo coming public with $4.5 billion in debt. It is that simple here. $4.5 billion in debt makes the underlying business irrelevant, I've no interest in this deal at any price.
From the prospectus:
'We are a global semiconductor company and a long-standing supplier in the industry, with over 50 years of innovation and operating history. We provide leading High-Performance Mixed-Signal and Standard Products solutions that leverage our deep application insight and our technology and manufacturing expertise in radio frequency ("RF"
, analog, power management, interface, security and digital processing products.'
NXP produces a variety of mixed signal(analog and digital) and 'standard' semiconductors. The standard semis tend to be the more commoditized, lower margin semiconductors. End markets include automotive, identification, wireless infrastructure, lighting, industrial, mobile, consumer and computing applications.
58% of revenues from Asia-Pacific region.
Large operation here. 68% of of Mixed-signal semis and 80% of 'standard' semis are either the number one or two market position in the world. 14,000 worldwide issued and pending patents.
Top customers include Apple, Bosch, Continental Automotive, Delphi, Ericsson, Harman Becker, Huawei, Nokia, Nokia Siemens Networks, Oberthur, Panasonic, Philips, RIM, Samsung, Sony and Visteon.
The semiconductor sector is highly cyclical. The worldwide recession had a severe impact on operations. This led to a 2008 'redesign' of the company including 1)a focus on higher margin Mixed Signal semiconductors; 2) $650 million in annual costs savings; 3) reduced manufacturing facilities from 14 to 6.
Mixed-signal semi revenues now account for approximately 65% of total revenues. Gross margins for these are 52%, compared to approximately 30% for standard semis.
Financials
$4.5 billion in debt post-ipo. Debt servicing will cost NXPI $1.50 per share annually.
2009 - Revenues declined significantly 30%. Revenues of $3.8 billion. Gross margins of 25%. Negative operating margins. Plugging in debt servicing and folding out one-time charges, losses were a whopping $4.84 annually. Note that a portion of these losses were non-cash amortization charges related to the 2006 leveraged buyout. Cash flow wise plus debt servicing led to a 'more reasonable' loss of $4.40 per share.
2010 - Revenues and margins improving substantially, while NXPI has attempted to also get costs under control. Total revenues should be $4.8 billion, an increase of 26% from 2009. Gross margins should improve to 31%, due to the increase in mixed-signal semi revenues. Operating margins of 7%. Unfortunately debt servicing will eat up all operating profits and then some. Losses should be around $0.25 per share. Note again amortization charges will be pretty steep. Cash flows with debt servicing factored in give us a better idea of the profit picture. There, NXPI should see a small positive overall cash flow in 2010.
Conclusion - The debt levels make NXPI very susceptible to trouble during cyclical low points in the sector. NXPI was fortunate to survive the 2008 slowdown. Actually if revenues had remained depressed for even another year, NXPI may have not been viable. The debt here is issue. NXPI is a large dominant player in the mixed-signal and standard semi space. Unfortunately the debt levels are far too high here. Not interested at any price
NXPI - NXPI Semiconductors
NXP - NXPI Semiconductors plans on offering 34 million shares at a range of $18-$21. Credit Suisse, Goldman, Morgan Stanley, BofA Merrill Lynch and Barclays are leading the deal, JP Morgan, KKR, ABN Amro, HSBC and Rabo co-managing. Post-ipo, NXPI will have 249.3 million shares outstanding for a market cap of $4.861 billion on a pricing of $19.50. Ipo proceeds will be used to repay a portion of NXPI's substantial debt.
KKR will own 28% of NXP post-ipo, Bain Capital 24%. Philips Electronics will own 17%. KKR, Bain and others acquired NXP from Philips Electronics in a 2006 leveraged buyout.
***Debt is the issue here. Factoring in debt paid off on ipo, NXP will have $4.5 billion in dept post-ipo. I will never be interested in an ipo coming public with $4.5 billion in debt. It is that simple here. $4.5 billion in debt makes the underlying business irrelevant, I've no interest in this deal at any price.
From the prospectus:
'We are a global semiconductor company and a long-standing supplier in the industry, with over 50 years of innovation and operating history. We provide leading High-Performance Mixed-Signal and Standard Products solutions that leverage our deep application insight and our technology and manufacturing expertise in radio frequency ("RF"
, analog, power management, interface, security and digital processing products.'NXP produces a variety of mixed signal(analog and digital) and 'standard' semiconductors. The standard semis tend to be the more commoditized, lower margin semiconductors. End markets include automotive, identification, wireless infrastructure, lighting, industrial, mobile, consumer and computing applications.
58% of revenues from Asia-Pacific region.
Large operation here. 68% of of Mixed-signal semis and 80% of 'standard' semis are either the number one or two market position in the world. 14,000 worldwide issued and pending patents.
Top customers include Apple, Bosch, Continental Automotive, Delphi, Ericsson, Harman Becker, Huawei, Nokia, Nokia Siemens Networks, Oberthur, Panasonic, Philips, RIM, Samsung, Sony and Visteon.
The semiconductor sector is highly cyclical. The worldwide recession had a severe impact on operations. This led to a 2008 'redesign' of the company including 1)a focus on higher margin Mixed Signal semiconductors; 2) $650 million in annual costs savings; 3) reduced manufacturing facilities from 14 to 6.
Mixed-signal semi revenues now account for approximately 65% of total revenues. Gross margins for these are 52%, compared to approximately 30% for standard semis.
Financials
$4.5 billion in debt post-ipo. Debt servicing will cost NXPI $1.50 per share annually.
2009 - Revenues declined significantly 30%. Revenues of $3.8 billion. Gross margins of 25%. Negative operating margins. Plugging in debt servicing and folding out one-time charges, losses were a whopping $4.84 annually. Note that a portion of these losses were non-cash amortization charges related to the 2006 leveraged buyout. Cash flow wise plus debt servicing led to a 'more reasonable' loss of $4.40 per share.
2010 - Revenues and margins improving substantially, while NXPI has attempted to also get costs under control. Total revenues should be $4.8 billion, an increase of 26% from 2009. Gross margins should improve to 31%, due to the increase in mixed-signal semi revenues. Operating margins of 7%. Unfortunately debt servicing will eat up all operating profits and then some. Losses should be around $0.25 per share. Note again amortization charges will be pretty steep. Cash flows with debt servicing factored in give us a better idea of the profit picture. There, NXPI should see a small positive overall cash flow in 2010.
Conclusion - The debt levels make NXPI very susceptible to trouble during cyclical low points in the sector. NXPI was fortunate to survive the 2008 slowdown. Actually if revenues had remained depressed for even another year, NXPI may have not been viable. The debt here is issue. NXPI is a large dominant player in the mixed-signal and standard semi space. Unfortunately the debt levels are far too high here. Not interested at any price
August 2, 2010, 12:16 am
CHKM - Chesapeake Midstream Partners
2010-07-24
CHKM - Chesapeake Midstream Partners
CHKM - Chesapeake Midstream Partners plans on offering 24.4 million units at a range of $19-$21. Lot of underwriters on this one. UBS, Citi, Morgan Stanley, BofA Merrill Lynch, Barclays, Credit Suisse, Goldman Sachs, Wells Fargo are all joint book runners. BBVA and BMO co-managing. Post-ipo CHKM will have 142 total units outstanding for a market cap of $2.84 billion on a pricing of $20. 1/2 of the ipo proceeds will be used to repay borrowings, the remainder for capital expenditures.
Chesepeake Energy(CHK) and Global Infrastructure Partners will each own 42% of CHKM post-ipo. CHK will manage CHKM.
From the prospectus:
'We are a limited partnership formed by Chesapeake and GIP to own, operate, develop and acquire natural gas gathering systems and other midstream energy assets. '
Natural gas gathering pipelines. Gathering pipelines are the first segment of midstream energy infrastructure that connects natural gas produced at the wellhead to third-party takeaway pipelines.
CHKM's pipelines service Chesepeake and Total under long-term 20 year contracts.
Gathering systems are primarily in the Barnett Shale region in north-central Texas. 2,800 miles of pipelines servicing 4,000 natural gas wells. In the three months ending 3/31/10, CHKM's pipelines gathering 1.5 Bcf of natural gas per day, making them on of the largest natural gas gatherers in the US.
Chesapeake Energy(CHK) - One of the largest natural gas producers in the U.S. by volume of natural gas produced. The most active driller of natural gas in the US based on number of active rigs. CHK focuses on unconventional shale drilling. CHK plans on dropping down additional gathering assets to CHKM over time. Strong parent here, which is a key to a successful midstream MLP.
CHKM relies on CHK for virtually all revenues.
Commodity risk here is limited as CHKM collects all revenues via long term fixed fee contracts. CHKM does not take ownership of the natural gas flowing through their pipelines. 20 year fixed fee contracts mean solid cash flow projections here.
Growth - Other than future dropdowns from CHK, CHKM expects volumes to increase in their current operations. In early 2010, CHK and Total formed a joint venture agreement in which Total took on a 25% interest in CHK's Barnett Shale assets. Total is providing $2.25 billion in funding to the assets and CHK plans to significantly increase rig count in the region be end of 2010.
Capex - CHKM plans on using 1/2 the ipo proceeds toward an extensive expansion program. In the 12 months ending 6/30/11, CHKM plans on spending $223.5 million on capital expenditures, primarily pipeline expansion to meet CHK's and Total field needs. **Cash on hand from ipo will fully cover this expansion capex. We've seen a few deals lately in which the MLP borrows money to fund capex and distribute yield. In this case, ipo proceeds will be sufficient to fund CHKM's aggressive expansion plans over the next 12 months.
Financials
***Clean balance sheet post-ipo. $1.75 per unit in cash on hand post-ipo. As noted above, this ipo cash will be used for expansion capex over the next 12 months.
Distributions - Quarterly distributions of $0.3375 per unit, 1.35 per unit annually. On a pricing of $20, CHKM would be yielding 6.75% annually.
Historically $350-$400 million in annual revenues.
Forecast for the 12 months ending 6/30/11 - A substantial increase in revenues to $479 million. As noted above, with the partnership with Total, CHK plans on aggressively increasing drilling on their Barnet Shale properties. CHKM is also spending aggressively in pipeline expansion to meet those wells. Strong operating margins of 44%.
***Distribution coverage ratio is expected to be 119%. This includes an additional $70 million in maintenance capex also. Very strong coverage ratio here, CHKM has plenty of cash flows for maintenance capex and yield, good sign.
Quick 'back of the envelope' look at other public MLP gathering pipelines operating in the same general geographic area:
ETP: 7% yield, $6 billion of debt.
XTEX: Over-leveraged, halted distributions while selling off assets. $750 million in current debt, may yield 2.5% over next 12 months best case scenario.
KGS: 7.3% yield, $250 million in debt. KGS looks pretty attractive here actually.
WES: 5.7% yield, $385 million in debt.
RGNC: 6.9% yield, $1 billion in debt.
CHKM on a $20 pricing: 6.75% yield, no debt.
Conclusion - Grade 'A' pipeline ipo here. Strong parent, clean balance sheet. Expect CHKM to utilize the clean balance sheet to acquire dropdown gathering assets from parent CHK which should increase distributions over time. This should work in range short, mid and long term. Recommend strongly.
CHKM - Chesapeake Midstream Partners
CHKM - Chesapeake Midstream Partners plans on offering 24.4 million units at a range of $19-$21. Lot of underwriters on this one. UBS, Citi, Morgan Stanley, BofA Merrill Lynch, Barclays, Credit Suisse, Goldman Sachs, Wells Fargo are all joint book runners. BBVA and BMO co-managing. Post-ipo CHKM will have 142 total units outstanding for a market cap of $2.84 billion on a pricing of $20. 1/2 of the ipo proceeds will be used to repay borrowings, the remainder for capital expenditures.
Chesepeake Energy(CHK) and Global Infrastructure Partners will each own 42% of CHKM post-ipo. CHK will manage CHKM.
From the prospectus:
'We are a limited partnership formed by Chesapeake and GIP to own, operate, develop and acquire natural gas gathering systems and other midstream energy assets. '
Natural gas gathering pipelines. Gathering pipelines are the first segment of midstream energy infrastructure that connects natural gas produced at the wellhead to third-party takeaway pipelines.
CHKM's pipelines service Chesepeake and Total under long-term 20 year contracts.
Gathering systems are primarily in the Barnett Shale region in north-central Texas. 2,800 miles of pipelines servicing 4,000 natural gas wells. In the three months ending 3/31/10, CHKM's pipelines gathering 1.5 Bcf of natural gas per day, making them on of the largest natural gas gatherers in the US.
Chesapeake Energy(CHK) - One of the largest natural gas producers in the U.S. by volume of natural gas produced. The most active driller of natural gas in the US based on number of active rigs. CHK focuses on unconventional shale drilling. CHK plans on dropping down additional gathering assets to CHKM over time. Strong parent here, which is a key to a successful midstream MLP.
CHKM relies on CHK for virtually all revenues.
Commodity risk here is limited as CHKM collects all revenues via long term fixed fee contracts. CHKM does not take ownership of the natural gas flowing through their pipelines. 20 year fixed fee contracts mean solid cash flow projections here.
Growth - Other than future dropdowns from CHK, CHKM expects volumes to increase in their current operations. In early 2010, CHK and Total formed a joint venture agreement in which Total took on a 25% interest in CHK's Barnett Shale assets. Total is providing $2.25 billion in funding to the assets and CHK plans to significantly increase rig count in the region be end of 2010.
Capex - CHKM plans on using 1/2 the ipo proceeds toward an extensive expansion program. In the 12 months ending 6/30/11, CHKM plans on spending $223.5 million on capital expenditures, primarily pipeline expansion to meet CHK's and Total field needs. **Cash on hand from ipo will fully cover this expansion capex. We've seen a few deals lately in which the MLP borrows money to fund capex and distribute yield. In this case, ipo proceeds will be sufficient to fund CHKM's aggressive expansion plans over the next 12 months.
Financials
***Clean balance sheet post-ipo. $1.75 per unit in cash on hand post-ipo. As noted above, this ipo cash will be used for expansion capex over the next 12 months.
Distributions - Quarterly distributions of $0.3375 per unit, 1.35 per unit annually. On a pricing of $20, CHKM would be yielding 6.75% annually.
Historically $350-$400 million in annual revenues.
Forecast for the 12 months ending 6/30/11 - A substantial increase in revenues to $479 million. As noted above, with the partnership with Total, CHK plans on aggressively increasing drilling on their Barnet Shale properties. CHKM is also spending aggressively in pipeline expansion to meet those wells. Strong operating margins of 44%.
***Distribution coverage ratio is expected to be 119%. This includes an additional $70 million in maintenance capex also. Very strong coverage ratio here, CHKM has plenty of cash flows for maintenance capex and yield, good sign.
Quick 'back of the envelope' look at other public MLP gathering pipelines operating in the same general geographic area:
ETP: 7% yield, $6 billion of debt.
XTEX: Over-leveraged, halted distributions while selling off assets. $750 million in current debt, may yield 2.5% over next 12 months best case scenario.
KGS: 7.3% yield, $250 million in debt. KGS looks pretty attractive here actually.
WES: 5.7% yield, $385 million in debt.
RGNC: 6.9% yield, $1 billion in debt.
CHKM on a $20 pricing: 6.75% yield, no debt.
Conclusion - Grade 'A' pipeline ipo here. Strong parent, clean balance sheet. Expect CHKM to utilize the clean balance sheet to acquire dropdown gathering assets from parent CHK which should increase distributions over time. This should work in range short, mid and long term. Recommend strongly.
July 18, 2010, 7:20 pm
RLD - RealD
Following piece was done pre-ipo for subscribers. RLD priced strongly at $16 and traded in a $19-$21 range first day. While I liked this deal mid-teens, I am not a buyer at all $20+.
RLD - RealD plans on offering 12.4 million shares (assuming over-allotments) at a range of $13-$15. Insiders will be selling 6.4 million shares in the deal. JP Morgan and Piper Jaffray are leading the deal, William Blain, Weisel, and BMO co-managing. Post-ipo RLD will have 52.5 million shares outstanding for a market cap of $735 million on a pricing of $14. Note that sharecount includes warrants/options given to movie theater chains as incentives to sell-in RLD's 3-D technology. These options are included as an expense item to fair value on the earnings statement. However as they will eventually be converted to shares it is best to remove the expense item and include those in the sharecount instead.
Ipo proceeds will be used to repay debt and for general corporate purposes.
CEO and Chairman of the Board Michael V. Lewis will own 14% of TLD post-ipo. President Joshua Greer will also own 14% of RLD post-ipo.
From the prospectus:
'We are a leading global licensor of stereoscopic (three-dimensional), or 3D, technologies. Our extensive intellectual property portfolio enables a premium 3D viewing experience in the theater, the home and elsewhere.'
The 'Avatar' ipo essentially. Avatar was such a huge 3-D success, film companies all over the world are now planning on filming and/or converting their big releases into 3-D...and RLD is far and away the worldwide leader in movie theater 3-D technology. The Last Airbender was shot in 2-D with no plans on a 3-D release. Post-Avatar, The Last Airbender was converted into 3-D and grossed $70 million total over the July 4th holiday weekend. Only a percentage of that take was from the 3-D screens, still the trend post-Avatar is to now release a 3-D version of a 'big release' movie. The next Spiderman installment for example is now expected to be in 3-D.
Note that there is a big difference from filming 3-D (as Avatar was filmed) and filming in 2-D and converting in post-production. Either way though, the end result is shown in theaters on RLD's 3-D screens.
Our 2nd 'story stock' ipo of the summer here, this one has better financials than TSLA at least...Although it would be quite difficult to have worse financials than TSLA!
RLD licenses their 'RealD Cinema Systems' to theater chains. In addition, RLD sells their 3-D formant, eyewear and display/gaming technologies to consumer electronics manufacturers and contend providers for 3D viewing in high-def TV's, laptops and displays.</p>
In addition RLD's 3D technology has been used in applications such as piloting the Mars Rover, military jet displays and medical procedures.
***Growth has been ridiculously good over the past few years, reaching critical mass in the 12 months ending 3/31/10. As of 3/31/10, RLD's 3-D technology had 5,321 screens, up from 2,108 on 3/31/09. That is a year over year screen growth of 152%. With the sector trends noted above and this sort of year over year growth and clean balance sheet, this is a recommend in range right here. RLD is not just winning the movie 3-D technology battle, they have won the war.
Main competitor is IMAX. IMAX grew to 438 screens in 3/31/10 from 371 in 3/31/09. By all indications, the IMAX experience is more impressive than RLD. RLD has won on installation cost however as retrofitting existing theater's for RLD 3-D is far less expensive than an IMAX installation. RLD has won on cost.
***Note that growth continues. As of 6/30/10, RLD's systems were on 5,966 screens a sequential quarterly rate growth of 12%. RLD screens are in 51 countries with 64% being in the US. </p>
First RLD 3-D release was Disney's Chicken Little in 2005. With that release, RLD became the first company to enable 3D theater screens using digital projection.
Current licensees include the big chains: AMC, Cinemark and Regal. Revenues are generally on a per-admission basis, although RLD does have fixed-fee and per-motion picture contracts as well. Contracts are excluse five year deals with theater chains. RLD has agreements with the three to install RLD systems in an additional 5,100 screens which would push RLD over the 10,000 screen number.
RLD currently has 75% of the domestic 3D box office market. Avatar was released on 4200 RLD enabled screens.</p>
Growth - From 2005 through 2009, 27 3D motion pictures were released. In 2010 alone, 23 3D motion pictures will be released with 33 more expected in 2011.
Competitors include Dolby, Imax Masterimage and Xpand. As noted above, RLD has won the movie theater 3D war, remains to be seen in consumer electronics.
Financials
$1 per share net cash post-ipo.
Fiscal year ends 3/31. FY '10 ended 3/31/10.
Product revenues(eyewear) accounted for approximately 55% of revenues, licensing per movie revenues 45%.
Gross margins are negatively impacted by the 3D eyewear. Currently RLD sees a negative net margin on eyewear. in Fy '10 RLD began an eyewear recycling program they hope will lower their costs and push eyewear into positive margin territory. Currently this is an issue however and longer term profitability will in part be determined by RLD's ability to gain some margin traction on their eyewear.
Licensing margins are strong as the costs there are minimal. This part of the revenue stream (55% in FY '10) is similar to the Dolby business model. The technology is already there so the cost to RLD is minimal.
***Note that GAAP earnings for FY '10 and FY '11 have been/and will be skewed by theater stock options. A few years back RLD offered, nearly free, 3.6 million stock options total to AMC, Cinemark and Regal as incentive to grow the installed RLD 3D screen base. Those options fluctuate with the implied price of RLD's stock worth. These options will be exercised once screen targets are achieved, so they belong in the sharecount and not on the earnings statement. Because the implied value of RLD's worth grew so much in FY '10, these options accounted for a GAAP drag of $39 million on net revenues. This was not a real cost and gets folded out and those options get put into the sharecount instead.
The above could be a potential drag on the stock price as those theater chain stock options make it appear as if RLD is much less successful on the bottom line than they really are. To date, all the mainstream press articles on RLD note the losses without noting they come from these external stock options.
Two issues, one real and one a GAAP accounting rule. The real issue is RLD's need to improve margins on their eyewear. The licensing model is raking in the cash on top/bottom line, the eyewear is currently killing margins.
FY '10 (ended 3/31/10) - $189 million in revenues, a massive increase from $45 million in FY '09. Drivers here include 1) an increase in RLD 3D screens, 2) more 3D film releases and 3) the massive success of Avatar. Gross margins were 26%. Again the negative margins on the 3D eyewear are hurting overall gross margins. Operating expenses have grown far slower than overall revenues, a good sign. Operating expense margin was 23%, putting operating margins at a slim 3%. Plugging in taxes puts net margins at 2%. Earnings per share of $0.07.
FY '11(ending 3/31/11) - Very difficult to forecast. By the end of the fiscal year, RLD 3D screens should grow by 50%. Factor in the increased slate of 3D releases and it should be another solid revenue growth year. The question mark however is 'The Avatar Factor'. Avatar accounted for a huge chunk of FY '10 licensing revenues, plus eyewear revenues per attendee. It is doubtful there will be another Avatar like performer in FY '11. Toy Story/Shrek were the drivers in the June quarter, each becoming a big hit. Harry Potter should drive revenues in the December quarter.
I would estimate FY '11 revenues in the $260 million range, approximately a 36% increase from FY '10. As usual, I'd rather be a bit conservative here. FY '10 gross margins were impacted by eyewear recycling start-up costs. Folding those out and including some success in that program in FY '11 should push gross margins to 30%. Operating expense ratio should dip to the 20% area, putting operating margins at 10%. Plugging in taxes puts net margins at 6 1/2%. Earnings per share of $0.32. On a pricing of $14, RLD would trade 44 X's FY '11 earnings.
Again, as noted above, GAAP earnings will be negatively impacted by theater chain stock options. I folded those out and placed those options in the sharecount.
Conclusion - Trends here are about as strong as they come. RLD's 3D technology is the standard and by 2011 they should be in over 10,000 screens. In addition, the major film companies are planning approximately 30 3D releases annually the next couple of years. At a pace of over 1 per every two weeks, it should keep those screens lit. The question mark here is whether RLD can convert this swift growth into bottom line growth/profits. Thus far that has not really happened due to negative eyewear margins, and the risk here is that it never will. Growth and the trends are so strong here though that this is an easy recommend in range.
RLD - RealD plans on offering 12.4 million shares (assuming over-allotments) at a range of $13-$15. Insiders will be selling 6.4 million shares in the deal. JP Morgan and Piper Jaffray are leading the deal, William Blain, Weisel, and BMO co-managing. Post-ipo RLD will have 52.5 million shares outstanding for a market cap of $735 million on a pricing of $14. Note that sharecount includes warrants/options given to movie theater chains as incentives to sell-in RLD's 3-D technology. These options are included as an expense item to fair value on the earnings statement. However as they will eventually be converted to shares it is best to remove the expense item and include those in the sharecount instead.
Ipo proceeds will be used to repay debt and for general corporate purposes.
CEO and Chairman of the Board Michael V. Lewis will own 14% of TLD post-ipo. President Joshua Greer will also own 14% of RLD post-ipo.
From the prospectus:
'We are a leading global licensor of stereoscopic (three-dimensional), or 3D, technologies. Our extensive intellectual property portfolio enables a premium 3D viewing experience in the theater, the home and elsewhere.'
The 'Avatar' ipo essentially. Avatar was such a huge 3-D success, film companies all over the world are now planning on filming and/or converting their big releases into 3-D...and RLD is far and away the worldwide leader in movie theater 3-D technology. The Last Airbender was shot in 2-D with no plans on a 3-D release. Post-Avatar, The Last Airbender was converted into 3-D and grossed $70 million total over the July 4th holiday weekend. Only a percentage of that take was from the 3-D screens, still the trend post-Avatar is to now release a 3-D version of a 'big release' movie. The next Spiderman installment for example is now expected to be in 3-D.
Note that there is a big difference from filming 3-D (as Avatar was filmed) and filming in 2-D and converting in post-production. Either way though, the end result is shown in theaters on RLD's 3-D screens.
Our 2nd 'story stock' ipo of the summer here, this one has better financials than TSLA at least...Although it would be quite difficult to have worse financials than TSLA!
RLD licenses their 'RealD Cinema Systems' to theater chains. In addition, RLD sells their 3-D formant, eyewear and display/gaming technologies to consumer electronics manufacturers and contend providers for 3D viewing in high-def TV's, laptops and displays.</p>
In addition RLD's 3D technology has been used in applications such as piloting the Mars Rover, military jet displays and medical procedures.
***Growth has been ridiculously good over the past few years, reaching critical mass in the 12 months ending 3/31/10. As of 3/31/10, RLD's 3-D technology had 5,321 screens, up from 2,108 on 3/31/09. That is a year over year screen growth of 152%. With the sector trends noted above and this sort of year over year growth and clean balance sheet, this is a recommend in range right here. RLD is not just winning the movie 3-D technology battle, they have won the war.
Main competitor is IMAX. IMAX grew to 438 screens in 3/31/10 from 371 in 3/31/09. By all indications, the IMAX experience is more impressive than RLD. RLD has won on installation cost however as retrofitting existing theater's for RLD 3-D is far less expensive than an IMAX installation. RLD has won on cost.
***Note that growth continues. As of 6/30/10, RLD's systems were on 5,966 screens a sequential quarterly rate growth of 12%. RLD screens are in 51 countries with 64% being in the US. </p>
First RLD 3-D release was Disney's Chicken Little in 2005. With that release, RLD became the first company to enable 3D theater screens using digital projection.
Current licensees include the big chains: AMC, Cinemark and Regal. Revenues are generally on a per-admission basis, although RLD does have fixed-fee and per-motion picture contracts as well. Contracts are excluse five year deals with theater chains. RLD has agreements with the three to install RLD systems in an additional 5,100 screens which would push RLD over the 10,000 screen number.
RLD currently has 75% of the domestic 3D box office market. Avatar was released on 4200 RLD enabled screens.</p>
Growth - From 2005 through 2009, 27 3D motion pictures were released. In 2010 alone, 23 3D motion pictures will be released with 33 more expected in 2011.
Competitors include Dolby, Imax Masterimage and Xpand. As noted above, RLD has won the movie theater 3D war, remains to be seen in consumer electronics.
Financials
$1 per share net cash post-ipo.
Fiscal year ends 3/31. FY '10 ended 3/31/10.
Product revenues(eyewear) accounted for approximately 55% of revenues, licensing per movie revenues 45%.
Gross margins are negatively impacted by the 3D eyewear. Currently RLD sees a negative net margin on eyewear. in Fy '10 RLD began an eyewear recycling program they hope will lower their costs and push eyewear into positive margin territory. Currently this is an issue however and longer term profitability will in part be determined by RLD's ability to gain some margin traction on their eyewear.
Licensing margins are strong as the costs there are minimal. This part of the revenue stream (55% in FY '10) is similar to the Dolby business model. The technology is already there so the cost to RLD is minimal.
***Note that GAAP earnings for FY '10 and FY '11 have been/and will be skewed by theater stock options. A few years back RLD offered, nearly free, 3.6 million stock options total to AMC, Cinemark and Regal as incentive to grow the installed RLD 3D screen base. Those options fluctuate with the implied price of RLD's stock worth. These options will be exercised once screen targets are achieved, so they belong in the sharecount and not on the earnings statement. Because the implied value of RLD's worth grew so much in FY '10, these options accounted for a GAAP drag of $39 million on net revenues. This was not a real cost and gets folded out and those options get put into the sharecount instead.
The above could be a potential drag on the stock price as those theater chain stock options make it appear as if RLD is much less successful on the bottom line than they really are. To date, all the mainstream press articles on RLD note the losses without noting they come from these external stock options.
Two issues, one real and one a GAAP accounting rule. The real issue is RLD's need to improve margins on their eyewear. The licensing model is raking in the cash on top/bottom line, the eyewear is currently killing margins.
FY '10 (ended 3/31/10) - $189 million in revenues, a massive increase from $45 million in FY '09. Drivers here include 1) an increase in RLD 3D screens, 2) more 3D film releases and 3) the massive success of Avatar. Gross margins were 26%. Again the negative margins on the 3D eyewear are hurting overall gross margins. Operating expenses have grown far slower than overall revenues, a good sign. Operating expense margin was 23%, putting operating margins at a slim 3%. Plugging in taxes puts net margins at 2%. Earnings per share of $0.07.
FY '11(ending 3/31/11) - Very difficult to forecast. By the end of the fiscal year, RLD 3D screens should grow by 50%. Factor in the increased slate of 3D releases and it should be another solid revenue growth year. The question mark however is 'The Avatar Factor'. Avatar accounted for a huge chunk of FY '10 licensing revenues, plus eyewear revenues per attendee. It is doubtful there will be another Avatar like performer in FY '11. Toy Story/Shrek were the drivers in the June quarter, each becoming a big hit. Harry Potter should drive revenues in the December quarter.
I would estimate FY '11 revenues in the $260 million range, approximately a 36% increase from FY '10. As usual, I'd rather be a bit conservative here. FY '10 gross margins were impacted by eyewear recycling start-up costs. Folding those out and including some success in that program in FY '11 should push gross margins to 30%. Operating expense ratio should dip to the 20% area, putting operating margins at 10%. Plugging in taxes puts net margins at 6 1/2%. Earnings per share of $0.32. On a pricing of $14, RLD would trade 44 X's FY '11 earnings.
Again, as noted above, GAAP earnings will be negatively impacted by theater chain stock options. I folded those out and placed those options in the sharecount.
Conclusion - Trends here are about as strong as they come. RLD's 3D technology is the standard and by 2011 they should be in over 10,000 screens. In addition, the major film companies are planning approximately 30 3D releases annually the next couple of years. At a pace of over 1 per every two weeks, it should keep those screens lit. The question mark here is whether RLD can convert this swift growth into bottom line growth/profits. Thus far that has not really happened due to negative eyewear margins, and the risk here is that it never will. Growth and the trends are so strong here though that this is an easy recommend in range.
June 29, 2010, 6:28 pm
TSLA - Tesla Motors
TSLA - Tesla Motors plans on offering 12.8 million shares (assuming over-allotments) at a range of $14-$16. Insiders will be selling 2.2 million shares in the deal.
In addition, Tesla/Toyata will be conducting a private placement outside of the ipo offering. Toyota will be purchasing $50 million in TSLA stock at ipo price in a concurrent private placement. On a pricing of $15, Toyota will be purchasing 3.33 million shares. This is a big boost to this deal. TSLA is a first mover here with a workable/marketable electric car that can operate on highways and has a 236 mile range. The automakers are spending heavily to catch-up and the concern with this deal is that TSLA will eventually be passed by the major auto manufacturers and left behind. Toyota making a significant investment in TSLA leads to the possibility of a partnership down the line. Really, to me, this private placement with Toyota at ipo price is what allows this deal to work at least in the short run. In addition to the stock purchase, Tesla and Toyota have announced their intention to cooperate on the development of electric vehicles.
Goldman Sachs, Morgan Stanley, JP Morgan and Deutsche Bank are leading the deal.
Post-ipo TSLA will have 95.2 million shares outstanding for a market cap of $1.428 billion on a pricing of $15.
Ipo proceeds will be used to fund capital expenditures and working capital.
Of note, TSLA is setting aside shares in this ipo to be offered to those that have purchased a Tesla Roadster.
**Ceo Elon Musk will own 29% of TSLA post-ipo. Mr. Musk co-founded Paypal.
From the prospectus:
'We design, develop, manufacture and sell high-performance fully electric vehicles and advanced electric vehicle powertrain components.'
Two things of note:
TSLA focuses exclusively on electric automobiles and electric powertrains.
Second, TSLA owns their vehicles sales and services networks. No franchises. As of 6/14/10, TSLA operated 12 Tesla stores in North America and Europe.
This is a tech company from silicon valley, not a traditional car company. Keep that in mind.
**First mover is the key and selling point here. Fully functional electric cars have been on the drawing board for a number of years, TSLA is the first to succeed. From the S-1: 'We are the first and currently only company to commercially produce a federally-compliant highway-capable electric vehicle.'
TSLA currently has one vehicle model, the Tesla Roadster. The Roadster retails for approximately $100,000, can accelerate from zero to 60MPH in 3.9 seconds and has a range of 236 miles on a single charge.
As of 3/31/10, TSLA has sold 1,063 Roadsters. Looking at previous filings sales totaled just 9.7 cars per week in the first quarter of 2010. In contrast, TSLA sold 16-17 cars a week in 2009, their first full year of production.
TSLA has made a splash with a high end vehicle, shifting next into premium sedans with the Model S due in 2012. TSLA plans an annual production of the Model S of 20,000. Model S will be a four door, five passenger sedan and will retail for approximately $50,000. Future vehicles will work off the Model S platform.
Collaboration - In addition to the Toyota stock purchase on ipo, TSLA has an existing collaboration with Daimler AG. In 3/08 TSLA made a deal with Daimler to apply the TSLA battery pack and charger technology for Daimler's electric drive. An affiliate of Daimler owns TSLA stock as well. Daimler currently has a 1,500 battery pack purchase commitment which began shipping in 11/09.
**Going forward TSLA plans on developing and marketing electric powertrain components to both Daimler and Toyota.
In 1/10, TSLA entered into a $465 million long term low interest loan from the US Department of Energy. The loan will be used to finance the manufacturing facility for the S model. Through 6/14/10, TSLA had drawn down $45 million from this loan. In addition, TSLA has been granted $31 million in California tax incentives for the development of the Model S.
Sector - In 2008 electric vehicles and hybrid electric vehicles account for 3% of worldwide vehicle sales. Estimates put this number at 14% annually by 2015.
Financials
Approximately $2.25 in net cash post-ipo. Expect a lot of this cash, as well as the USDOE low interest loans to be utilized in the manufacturing and launch of the Model S.
TSLA has a very unimpressive first quarter compared to 2009. The 'newness' and hype factor of the Roadster launch has obviously worn off. This is a niche car aimed at a relatively small end market and the first movers got theirs soon after launch. Sustaining that early momentum has been difficult.
Losses will be steep over the next 2-3 years as TSLA spends heavily on the production of Model S.
2010 - Assuming the Roadster sales per month have permanently leveled off (and I believe they have), revenues for 2010 should be in the range of 2009 at $110 million. Gross margins of 15% or so. Operating expenses far exceed gross margins. Losses for 2010 should be in the $1 per share range.
Conclusion - Anyone telling you with certainty where TSLA's market cap will be 4-5 years from now is telling stories.
Ideal situation: Tesla is successful in profitably selling their own electric vehicles. They also develop their partnerships and their powertrain and battery technology, which is used in a number of other auto manufacturers electric vehicles. The electric vehicle market takes off and TSLA has a much higher market cap than current.
The risk: Tesla proves to be a fad and can never sell enough of their vehicles at price point to make a profit. The Model S is delayed by a year or more while other auto manufacturers bring fully electric cars to market at more attractive price points. Company bleeds money year after year, stock is near worthless and technology and remains are scooped up by Daimler or Toyota or another of the large auto makers.
Each scenario is in play down the line and I have no idea which will play out...or something in between. Really we will not have much of an idea until TSLA begins producing and selling their $50,000 luxury sedan in 2012. Currently their Roadster has a niche appeal at best. The S model will be going head to head with Mercedes, Lexus, Audi and BMW after a much broader target market. How that plays out, it will tell a lot about the future of Tesla.
This deal works short term though. Why? TSLA has built the first good looking all electric high performance sports car. They beat the worldwide auto manufacturers at their own game. That says a lot about the technology and the potential. One also needs to look at how a potential shift to electric cars over the next 10-20 years would greatly reduce pollution from vehicle emissions. This technology with be favored and promoted by governments worldwide and right now TSLA has the best (and first) mousetrap. Pre-TSLA, all electric vehicles were essentially low power 'around town' vehicles with limited miles per charge range and weak horsepower. Not anymore, and TSLA is the one that beat everyone else to market. That alone is very impressive and gives TSLA some long term hope.
Yes TSLA has been bleeding money since inception. The possibility that this fact never changes is what puts the long term viability of TSLA into question. As noted above, the longer term success/failure range here for TSLA is as wide as I've seen in an ipo. Even knowing that going in, this deal should absolutely work in range short term. Pretty exciting deal.
In addition, Tesla/Toyata will be conducting a private placement outside of the ipo offering. Toyota will be purchasing $50 million in TSLA stock at ipo price in a concurrent private placement. On a pricing of $15, Toyota will be purchasing 3.33 million shares. This is a big boost to this deal. TSLA is a first mover here with a workable/marketable electric car that can operate on highways and has a 236 mile range. The automakers are spending heavily to catch-up and the concern with this deal is that TSLA will eventually be passed by the major auto manufacturers and left behind. Toyota making a significant investment in TSLA leads to the possibility of a partnership down the line. Really, to me, this private placement with Toyota at ipo price is what allows this deal to work at least in the short run. In addition to the stock purchase, Tesla and Toyota have announced their intention to cooperate on the development of electric vehicles.
Goldman Sachs, Morgan Stanley, JP Morgan and Deutsche Bank are leading the deal.
Post-ipo TSLA will have 95.2 million shares outstanding for a market cap of $1.428 billion on a pricing of $15.
Ipo proceeds will be used to fund capital expenditures and working capital.
Of note, TSLA is setting aside shares in this ipo to be offered to those that have purchased a Tesla Roadster.
**Ceo Elon Musk will own 29% of TSLA post-ipo. Mr. Musk co-founded Paypal.
From the prospectus:
'We design, develop, manufacture and sell high-performance fully electric vehicles and advanced electric vehicle powertrain components.'
Two things of note:
TSLA focuses exclusively on electric automobiles and electric powertrains.
Second, TSLA owns their vehicles sales and services networks. No franchises. As of 6/14/10, TSLA operated 12 Tesla stores in North America and Europe.
This is a tech company from silicon valley, not a traditional car company. Keep that in mind.
**First mover is the key and selling point here. Fully functional electric cars have been on the drawing board for a number of years, TSLA is the first to succeed. From the S-1: 'We are the first and currently only company to commercially produce a federally-compliant highway-capable electric vehicle.'
TSLA currently has one vehicle model, the Tesla Roadster. The Roadster retails for approximately $100,000, can accelerate from zero to 60MPH in 3.9 seconds and has a range of 236 miles on a single charge.
As of 3/31/10, TSLA has sold 1,063 Roadsters. Looking at previous filings sales totaled just 9.7 cars per week in the first quarter of 2010. In contrast, TSLA sold 16-17 cars a week in 2009, their first full year of production.
TSLA has made a splash with a high end vehicle, shifting next into premium sedans with the Model S due in 2012. TSLA plans an annual production of the Model S of 20,000. Model S will be a four door, five passenger sedan and will retail for approximately $50,000. Future vehicles will work off the Model S platform.
Collaboration - In addition to the Toyota stock purchase on ipo, TSLA has an existing collaboration with Daimler AG. In 3/08 TSLA made a deal with Daimler to apply the TSLA battery pack and charger technology for Daimler's electric drive. An affiliate of Daimler owns TSLA stock as well. Daimler currently has a 1,500 battery pack purchase commitment which began shipping in 11/09.
**Going forward TSLA plans on developing and marketing electric powertrain components to both Daimler and Toyota.
In 1/10, TSLA entered into a $465 million long term low interest loan from the US Department of Energy. The loan will be used to finance the manufacturing facility for the S model. Through 6/14/10, TSLA had drawn down $45 million from this loan. In addition, TSLA has been granted $31 million in California tax incentives for the development of the Model S.
Sector - In 2008 electric vehicles and hybrid electric vehicles account for 3% of worldwide vehicle sales. Estimates put this number at 14% annually by 2015.
Financials
Approximately $2.25 in net cash post-ipo. Expect a lot of this cash, as well as the USDOE low interest loans to be utilized in the manufacturing and launch of the Model S.
TSLA has a very unimpressive first quarter compared to 2009. The 'newness' and hype factor of the Roadster launch has obviously worn off. This is a niche car aimed at a relatively small end market and the first movers got theirs soon after launch. Sustaining that early momentum has been difficult.
Losses will be steep over the next 2-3 years as TSLA spends heavily on the production of Model S.
2010 - Assuming the Roadster sales per month have permanently leveled off (and I believe they have), revenues for 2010 should be in the range of 2009 at $110 million. Gross margins of 15% or so. Operating expenses far exceed gross margins. Losses for 2010 should be in the $1 per share range.
Conclusion - Anyone telling you with certainty where TSLA's market cap will be 4-5 years from now is telling stories.
Ideal situation: Tesla is successful in profitably selling their own electric vehicles. They also develop their partnerships and their powertrain and battery technology, which is used in a number of other auto manufacturers electric vehicles. The electric vehicle market takes off and TSLA has a much higher market cap than current.
The risk: Tesla proves to be a fad and can never sell enough of their vehicles at price point to make a profit. The Model S is delayed by a year or more while other auto manufacturers bring fully electric cars to market at more attractive price points. Company bleeds money year after year, stock is near worthless and technology and remains are scooped up by Daimler or Toyota or another of the large auto makers.
Each scenario is in play down the line and I have no idea which will play out...or something in between. Really we will not have much of an idea until TSLA begins producing and selling their $50,000 luxury sedan in 2012. Currently their Roadster has a niche appeal at best. The S model will be going head to head with Mercedes, Lexus, Audi and BMW after a much broader target market. How that plays out, it will tell a lot about the future of Tesla.
This deal works short term though. Why? TSLA has built the first good looking all electric high performance sports car. They beat the worldwide auto manufacturers at their own game. That says a lot about the technology and the potential. One also needs to look at how a potential shift to electric cars over the next 10-20 years would greatly reduce pollution from vehicle emissions. This technology with be favored and promoted by governments worldwide and right now TSLA has the best (and first) mousetrap. Pre-TSLA, all electric vehicles were essentially low power 'around town' vehicles with limited miles per charge range and weak horsepower. Not anymore, and TSLA is the one that beat everyone else to market. That alone is very impressive and gives TSLA some long term hope.
Yes TSLA has been bleeding money since inception. The possibility that this fact never changes is what puts the long term viability of TSLA into question. As noted above, the longer term success/failure range here for TSLA is as wide as I've seen in an ipo. Even knowing that going in, this deal should absolutely work in range short term. Pretty exciting deal.
June 21, 2010, 8:07 pm
ONE - Higher One Holdings
2010-06-11
ONE - Higher One Holdings
ONE - Higher One Holdings plans on offering 16.3 million shares (assuming over-allotments are exercised) at a range of $15-$17. Insiders are selling a lot of stock in this deal, 12.5 million shares. Goldman is leading the deal, UBS, Piper, Raymond James, William Blair and JMP are co-managing. Post-ipo ONE will have 56 million shares outstanding for a market cap of $896 million on a pricing of $16. Ipo proceeds will be utilized to pay down debt and for general corporate purposes.
Lightyear Capital will own 23% of ONE post-ipo.
From the prospectus:
'We are a leading provider of technology and payment services to the higher education industry.'
Financial aid disbursement technology/services as well as student banking. Another technology ipo geared towards shifting a historical paper based process (financial aid checks) into an outsourced streamlined electronic process. In reality though, ONE is an on-campus banking system disguised as a student loan processing operation.
Essentially ONE takes over the financial aid disbursement process from higher education institutions. Instead of issuing paper checks, ONE electronically deposits monies into student accounts.
In addition, for students ONE offers an FDIC insured banking account complete with debit ATM cards and the usual banking services. This is actually the key to the business model, called OneAccounts.
ONE links their disbursement payments electronically to students with their banking service (OneAccount) in an attempt to gain student accounts. This linkage is the key to ONE's revenues. Students receiving disbursements via ONE tend to open OneAccounts as the payments are electronically deposited into these checking accounts. Essentially a captive student 'audience'.
***ONE derives the bulk of their revenues from fees on their student OneAccount checking accounts. Fees generated include interchange fees from use of debit cards; ATM fees; non-sufficient fund fees and other assorted fees. College students as a demographic tend to run up more banking fees per capita than other demographics.
ONE also offers payment transaction services allowing higher education institutions to utilize ONE's software themselves. Again, ONE charges fees for transaction over this software payment platform and in turn, again uses these transactions as a selling point for their student OneAccount banking accounts.
Student banking revenues accounted for 80% of revenues for the first quarter of 2010, while revenue from the higher education institutions themselves accounted for less than 10% of revenue.
**Pretty sneaky business model here. The banks for years continue to spend a lot of time and effort in order to gain college student financial accounts (banking/debit/credit etc). ONE sells their student loan outsourcing service on the cheap to higher education institutions (a loss leader), to gain banking access to students receiving financial aid. Those student accounts end up driving revenues, not the disbursement processing/outsourcing service. ONE is a quasi bank disguised as a student loan processor.
This approach has enabled ONE to gain 1.2 million banking customers over the past five or so years. Note that ONE does not hold banking assets, they contract with Bancorp Bank on that end. They gain the accounts for Bancorp via their processing service and then collect the fees generated from that account. Bancorp's compensation are the investment returns on the deposits. Essentially they serve as deposit assets on Bancorp's balance sheet that they can then lend against.
ONE does not originate or manage student loans. They contract with higher education institutions to streamline/outsource the student loan disbursement process at that higher education campus...with the ultimate goal being to utilize this process to gain student banking customers. There were a few student loan originator ipos earlier in the previous decade including FMD/NNI. Each does do loan processing, however their core business models have been to originate student loans and/or service or securitize those loans. Two different business models: ONE integrates the student loan process of specific higher education institutions as a driver for their student banking services, FMD/NNI originate and service and/or securitize student loans.
As of 3/10 there were 402 campuses serving 2.7 million students that had purchased ONE's 'OneDisburse' outsource service and 293 campuses serving 2.2 million students that had contracted for one of more of ONE's software products. In addition ONE had 1.2 million banking accounts.
No single campus accounts for more than 4% of revenues. To date ONE has penetrated 14% of potential higher education campuses, leaving plenty of room for potential growth.
97% retention rate since 2003 among higher education clients. Not surprising as ONE is a nice value proposition for the higher education clients. ONE takes the student loan disbursement process off of the clients’ hands for a relative pittance as the key for ONE is the banking access to students receiving financial aid.
Acquisition - In 2009, ONE acquired higher education payment processing company CashNet for $27 million.
Risk - The big risk here is the legislative interest in reducing banking related fees. We recently saw a pretty significant sell-off in MasterCard/Visa on pending legislation that would create limits on debit card interchange fees. ONE uses Mastercard to process their OneAccount debit cards.
Competition - ONE believes no other competitor offers the full range of services that ONE offers. Others that offer payment software products and services include Sallie Mae, Nelnet, and TouchNet.
Financials
$.50 per share in cash post-ipo, no debt.
Revenues have increased nicely annually as ONE has grown student banking accounts.
2nd quarter (6/30) annually is lowest revenue quarter annually. Fewer student loan disbursements are made in this quarter, resulting in less transaction fees generated from student banking accounts.
2009 - Numbers are proforma assuming a full year of Cashnet. Revenues of $92 million. Gross margins of 61%. Again, ONE is a quasi bank without the actual assets. Instead they make money off the transactions involving those assets/accounts without having the actual accounts on their books. Operating expense ratio of 38%, operating margins of 23%. Net margins of 15%. Earnings per share of $0.25.
2010 - ONE had a monster first quarter of 2010. They continue to add new accounts as they add more higher ed institutions. Also, they tend to increase banking account penetration among student populations in existing higher ed clients. They've been doing a fantastic job of selling in their products and banking accounts. Based on first quarter (and adjusting for 2nd quarter seasonality), total revenues should grow 40% to $155 million.
Gross margins look to be about the same, however there should be a slight operating margin improvement in the back half of 2010. At 61% gross margins and 24% operating margins, net margins would be 16%. Earnings per share of $0.45. On a pricing of $15, ONE would trade 33 X's 2010 earnings.
Conclusion - The PE looks a tad aggressive here for the current ipo climate. Factor in the potential reigning in of interchange fees and on the surface it appears the range here will need to come in on pricing. However, ONE is trending as strongly as any ipo we've seen the past few years. The first quarter was, by far, the best in company history even if you fold out the revenues from their 11/09 acquisition. The key here is ONE's success in turning financial aid disbursements to students into banking accounts from those students. If this trend continues as it has the past two quarters, ONE could be putting up blowout revenue/earnings numbers in the back 1/2 of 2010 and into 2011. My estimates could turn out to be a bit low for 2010. Even if they are on par, it would mean ONE would be on track for another large EPS gain in 2010 as they continue to add banking accounts. This is a very good looking financial services ipo, coming public at a multiple that looks a bit pricey. Hopefully the market will agree and discount this one from $15-$17. As it is, I like this one in range mid-term plus and would be thrilled to be able to get it below range. Definite recommend in range.
ONE - Higher One Holdings
ONE - Higher One Holdings plans on offering 16.3 million shares (assuming over-allotments are exercised) at a range of $15-$17. Insiders are selling a lot of stock in this deal, 12.5 million shares. Goldman is leading the deal, UBS, Piper, Raymond James, William Blair and JMP are co-managing. Post-ipo ONE will have 56 million shares outstanding for a market cap of $896 million on a pricing of $16. Ipo proceeds will be utilized to pay down debt and for general corporate purposes.
Lightyear Capital will own 23% of ONE post-ipo.
From the prospectus:
'We are a leading provider of technology and payment services to the higher education industry.'
Financial aid disbursement technology/services as well as student banking. Another technology ipo geared towards shifting a historical paper based process (financial aid checks) into an outsourced streamlined electronic process. In reality though, ONE is an on-campus banking system disguised as a student loan processing operation.
Essentially ONE takes over the financial aid disbursement process from higher education institutions. Instead of issuing paper checks, ONE electronically deposits monies into student accounts.
In addition, for students ONE offers an FDIC insured banking account complete with debit ATM cards and the usual banking services. This is actually the key to the business model, called OneAccounts.
ONE links their disbursement payments electronically to students with their banking service (OneAccount) in an attempt to gain student accounts. This linkage is the key to ONE's revenues. Students receiving disbursements via ONE tend to open OneAccounts as the payments are electronically deposited into these checking accounts. Essentially a captive student 'audience'.
***ONE derives the bulk of their revenues from fees on their student OneAccount checking accounts. Fees generated include interchange fees from use of debit cards; ATM fees; non-sufficient fund fees and other assorted fees. College students as a demographic tend to run up more banking fees per capita than other demographics.
ONE also offers payment transaction services allowing higher education institutions to utilize ONE's software themselves. Again, ONE charges fees for transaction over this software payment platform and in turn, again uses these transactions as a selling point for their student OneAccount banking accounts.
Student banking revenues accounted for 80% of revenues for the first quarter of 2010, while revenue from the higher education institutions themselves accounted for less than 10% of revenue.
**Pretty sneaky business model here. The banks for years continue to spend a lot of time and effort in order to gain college student financial accounts (banking/debit/credit etc). ONE sells their student loan outsourcing service on the cheap to higher education institutions (a loss leader), to gain banking access to students receiving financial aid. Those student accounts end up driving revenues, not the disbursement processing/outsourcing service. ONE is a quasi bank disguised as a student loan processor.
This approach has enabled ONE to gain 1.2 million banking customers over the past five or so years. Note that ONE does not hold banking assets, they contract with Bancorp Bank on that end. They gain the accounts for Bancorp via their processing service and then collect the fees generated from that account. Bancorp's compensation are the investment returns on the deposits. Essentially they serve as deposit assets on Bancorp's balance sheet that they can then lend against.
ONE does not originate or manage student loans. They contract with higher education institutions to streamline/outsource the student loan disbursement process at that higher education campus...with the ultimate goal being to utilize this process to gain student banking customers. There were a few student loan originator ipos earlier in the previous decade including FMD/NNI. Each does do loan processing, however their core business models have been to originate student loans and/or service or securitize those loans. Two different business models: ONE integrates the student loan process of specific higher education institutions as a driver for their student banking services, FMD/NNI originate and service and/or securitize student loans.
As of 3/10 there were 402 campuses serving 2.7 million students that had purchased ONE's 'OneDisburse' outsource service and 293 campuses serving 2.2 million students that had contracted for one of more of ONE's software products. In addition ONE had 1.2 million banking accounts.
No single campus accounts for more than 4% of revenues. To date ONE has penetrated 14% of potential higher education campuses, leaving plenty of room for potential growth.
97% retention rate since 2003 among higher education clients. Not surprising as ONE is a nice value proposition for the higher education clients. ONE takes the student loan disbursement process off of the clients’ hands for a relative pittance as the key for ONE is the banking access to students receiving financial aid.
Acquisition - In 2009, ONE acquired higher education payment processing company CashNet for $27 million.
Risk - The big risk here is the legislative interest in reducing banking related fees. We recently saw a pretty significant sell-off in MasterCard/Visa on pending legislation that would create limits on debit card interchange fees. ONE uses Mastercard to process their OneAccount debit cards.
Competition - ONE believes no other competitor offers the full range of services that ONE offers. Others that offer payment software products and services include Sallie Mae, Nelnet, and TouchNet.
Financials
$.50 per share in cash post-ipo, no debt.
Revenues have increased nicely annually as ONE has grown student banking accounts.
2nd quarter (6/30) annually is lowest revenue quarter annually. Fewer student loan disbursements are made in this quarter, resulting in less transaction fees generated from student banking accounts.
2009 - Numbers are proforma assuming a full year of Cashnet. Revenues of $92 million. Gross margins of 61%. Again, ONE is a quasi bank without the actual assets. Instead they make money off the transactions involving those assets/accounts without having the actual accounts on their books. Operating expense ratio of 38%, operating margins of 23%. Net margins of 15%. Earnings per share of $0.25.
2010 - ONE had a monster first quarter of 2010. They continue to add new accounts as they add more higher ed institutions. Also, they tend to increase banking account penetration among student populations in existing higher ed clients. They've been doing a fantastic job of selling in their products and banking accounts. Based on first quarter (and adjusting for 2nd quarter seasonality), total revenues should grow 40% to $155 million.
Gross margins look to be about the same, however there should be a slight operating margin improvement in the back half of 2010. At 61% gross margins and 24% operating margins, net margins would be 16%. Earnings per share of $0.45. On a pricing of $15, ONE would trade 33 X's 2010 earnings.
Conclusion - The PE looks a tad aggressive here for the current ipo climate. Factor in the potential reigning in of interchange fees and on the surface it appears the range here will need to come in on pricing. However, ONE is trending as strongly as any ipo we've seen the past few years. The first quarter was, by far, the best in company history even if you fold out the revenues from their 11/09 acquisition. The key here is ONE's success in turning financial aid disbursements to students into banking accounts from those students. If this trend continues as it has the past two quarters, ONE could be putting up blowout revenue/earnings numbers in the back 1/2 of 2010 and into 2011. My estimates could turn out to be a bit low for 2010. Even if they are on par, it would mean ONE would be on track for another large EPS gain in 2010 as they continue to add banking accounts. This is a very good looking financial services ipo, coming public at a multiple that looks a bit pricey. Hopefully the market will agree and discount this one from $15-$17. As it is, I like this one in range mid-term plus and would be thrilled to be able to get it below range. Definite recommend in range.
June 15, 2010, 7:20 pm
CBOE - CBOE Holdings
2010-06-09
CBOE - CBOE Holdings
CBOE - CBOE Holdings plans on offering 13.5 million shares (assuming over-allotments are exercised) at a range of $27 - $29. Insiders will be selling 2.1 million shares in the deal. Post-ipo CBOE will have 104.3 million shares outstanding for a market cap of $2.92 billion on a pricing of $28. Ipo proceeds will be utilized to purchase insider shares in a tender offer to come in two stages, 60 and 120 days post-ipo. Assuming tender offers are fully subscribed, CBOE will have 93.6 million shares outstanding for a market cap of $2.62 billion.
From the prospectus:
'Founded in 1973, the CBOE was the first organized marketplace for the trading of standardized, listed options on equity securities.'
World's first and largest options exchange in the US, based on both contract volume and value of contracts traded.
Hybrid model of open outcry and electronic trading in a single market. Contracts include options on individual equities, market indexes and exchange-traded funds. Not all of CBOE's products currently trade on their electronic platform, notably S&P 500 options. Note that CBOE is planning on launching a second e-platform later in 2010 which will be capable of trading all of CBOE's products. It appears that slowly CBOE is phasing out open outcry.
In 2009 volume of options contracts traded at CBOE was 1.13 billion, or 4.4 million contracts per day. US market share in US listed options was a leading 31.4%. 4.5 million contracts in the 3/10 quarter for a 30% market share. ***Note that as market volatility increased in early May, so did CBOE's volumes. April/May volume averaged 6.08 million contracts per day, well above first quarter 2010 volume of 4.5 million per day. Listed US options volume actually hit an all-time record in May, 2010 so pretty good timing here for the CBOE ipo.
Products:
Equity Options - Put/Call options with terms of up to nine months on 2400 NYSE/Nasdaq/Amex stocks. In addition, CBOE offers LEAP options on 800 equities. Of note, CBOE invented LEAP options. Average transaction fee per contract is 18 cents.
Index Options - Option on 10 different market indexes, including the CBOE developed VIX index. Others include the usual S&P 500, Nasdaq, Russell and Dow Jones Industrials. **CBOE has exclusive rights to list options on the S&P 500, S&P 100 and DJIA indexes. With exclusive rights to the VIX and S&P/DJIA products, average transaction fee for Index options is much higher at 60 cents per contract.
ETF Options - Options on 250 ETFs and LEAPS on 66 ETFs. The ETF options have been a large growth area showing 38% annual growth rate the past 4 years. Average transaction fee is 24 cents.
In most recent quarter (3/10), equity options accounted for 56% of CBOE volume, ETF options 23% and indice options 24%.
Bulk of revenues (74%) are derived from transaction fees, 11% for access fees and 5% for data fees.
Sector - Over the past decade, use of financial derivatives has expanded dramatically, as we are all aware. Exchange traded options are utilized for hedging, speculation and income generation while also providing leverage. 8.8 billion listed options were traded globally, with 3.6 billion traded in the US. 25% annual growth rate in listed options over the past five years. Should be noted the financial havoc in late 2008 resulted in only a 1% growth in US listed options volume in 2009.
Future growth - A potential driver is the transition of over the counter derivatives to an exchange traded model. This is an expected result of the 2008/2009 financial crisis fueled in part by unregulated over the counter derivative products.
**The International Securities Exchange (ISE) has legally challenged CBOE's exclusive license on DJIA/S&P index option products. Actually ISE has challenged the use of exclusive licenses for options in general. Cases are currently pending. A determination in favor of ISE would most likely dent CBOE's market share position in specific index options.
Another risk is a recent SEC proposal to limit transaction fees to 30 cents per contract. CBOE estimates if this proposal is enacted it would have meant a 4.4% revenue hit in 2009.
Post-ipo, CBOE will issue monthly access permits for firms to trade. This will replace the old member or seat status of access to the CBOE. CBOE expects 1,025 permits with fees ranging from $2,500-$7,500 excluding discounts. This should result in approximately $35 million in annual access fee revenues.
Closest competitor is ISE, with 21.5% of listed US options volume. ISE was bought out in 2007. The Philadelphia stock exchange (owned by Nasdaq) has a 20% market share.
Financials
$2 3/4 per share in cash. Note that this assumes 104.3 million sharecount with no shares tendered in CBOE's offer to buy out current shareholders. If tender offer is fully subscribed, cash on hand will be $0.25 per share, but sharecount will be 93.6 million shares.
Dividends - CBOE plans on paying regular quarterly dividends that annually equal to 20%-30% of prior year's net income. In 2009 this would have equaled approximately $0.25 per share. On a pricing of $28, CBOE would yield nearly 1% based on 2009 net income.
2010 - Due to market volatility, 2nd quarter looks to be the best one for CBOE in at least past six quarters. When factoring in increased access fees the second half of 2010, total revenues should be $475 million, a 5% increase over 2009. Operating margins of 40%, very strong. Net margins of 23%. Earnings per share of $1.05. **Assuming stock tender offer is fully subscribed, earnings per share would be $1.14. Lets cut the difference and make it $1.10. On a pricing of $28, CBOE would trade 25 X's 2010 earnings.
As CBOE's primary competitor ISE was bought out a few years ago we do not have a pure comparable. We do have two exchanges that ipo'd this decade CME and ICE. Each are trading 18-22 X's 2010 earnings estimates.
CBOE is a blue chip ipo without a doubt. The issue here is the aggressive valuation considering the lack of growth in 2009 and 2010. CBOE's transaction volume grew just 1% in 2009 and, until a very volatile May 2010, looked to be rather flat again in 2010. With SEC mulling limits on transaction fees and ISE legally questioning CBOE's exclusive index options, CBOE's profit driver is in question. That profit driver is their exclusive index option products, which derives up to twice the transaction fees per contract compared to rest of their products. Future EPS growth will be difficult if those index transaction fees are reigned in, which it appears only to be a matter of time.
Something to consider - Nymex Holdings, CBOT Holdings and International Securities Exchange were all bought within three years of their IPOs. In doing research for this piece, there seems to be a thought that the initial ipo range here consists of a bit of a 'buyout premium' here as a base. I tend to agree and think the initial range here reflects the chance that a buyer will step up over the next few years to purchase CBOE.
Conclusion - A must own in range due to blue chip name and leading position in the US listed options exchange market. There does appear to be a premium here in comparison to other options exchanges and definitely in comparison with stock exchanges traded publicly. Some of that premium may be warranted, but be wary of buying this in the aftermarket up too much from range. If buying this in aftermarket $30+, realize that you are paying a premium here in the sector, and definitely a premium for current market conditions.
Should absolutely work in range short, mid and longer term, this is a very good looking ipo.
Note that until we see the actual access fee revenues post-ipo, they are quite difficult to estimate. I plugged in an annualized $40 million, as CBOE will be discounting these pretty heavily for 2010(and possibly beyond). As usual this is probably slightly conservative.
CBOE - CBOE Holdings
CBOE - CBOE Holdings plans on offering 13.5 million shares (assuming over-allotments are exercised) at a range of $27 - $29. Insiders will be selling 2.1 million shares in the deal. Post-ipo CBOE will have 104.3 million shares outstanding for a market cap of $2.92 billion on a pricing of $28. Ipo proceeds will be utilized to purchase insider shares in a tender offer to come in two stages, 60 and 120 days post-ipo. Assuming tender offers are fully subscribed, CBOE will have 93.6 million shares outstanding for a market cap of $2.62 billion.
From the prospectus:
'Founded in 1973, the CBOE was the first organized marketplace for the trading of standardized, listed options on equity securities.'
World's first and largest options exchange in the US, based on both contract volume and value of contracts traded.
Hybrid model of open outcry and electronic trading in a single market. Contracts include options on individual equities, market indexes and exchange-traded funds. Not all of CBOE's products currently trade on their electronic platform, notably S&P 500 options. Note that CBOE is planning on launching a second e-platform later in 2010 which will be capable of trading all of CBOE's products. It appears that slowly CBOE is phasing out open outcry.
In 2009 volume of options contracts traded at CBOE was 1.13 billion, or 4.4 million contracts per day. US market share in US listed options was a leading 31.4%. 4.5 million contracts in the 3/10 quarter for a 30% market share. ***Note that as market volatility increased in early May, so did CBOE's volumes. April/May volume averaged 6.08 million contracts per day, well above first quarter 2010 volume of 4.5 million per day. Listed US options volume actually hit an all-time record in May, 2010 so pretty good timing here for the CBOE ipo.
Products:
Equity Options - Put/Call options with terms of up to nine months on 2400 NYSE/Nasdaq/Amex stocks. In addition, CBOE offers LEAP options on 800 equities. Of note, CBOE invented LEAP options. Average transaction fee per contract is 18 cents.
Index Options - Option on 10 different market indexes, including the CBOE developed VIX index. Others include the usual S&P 500, Nasdaq, Russell and Dow Jones Industrials. **CBOE has exclusive rights to list options on the S&P 500, S&P 100 and DJIA indexes. With exclusive rights to the VIX and S&P/DJIA products, average transaction fee for Index options is much higher at 60 cents per contract.
ETF Options - Options on 250 ETFs and LEAPS on 66 ETFs. The ETF options have been a large growth area showing 38% annual growth rate the past 4 years. Average transaction fee is 24 cents.
In most recent quarter (3/10), equity options accounted for 56% of CBOE volume, ETF options 23% and indice options 24%.
Bulk of revenues (74%) are derived from transaction fees, 11% for access fees and 5% for data fees.
Sector - Over the past decade, use of financial derivatives has expanded dramatically, as we are all aware. Exchange traded options are utilized for hedging, speculation and income generation while also providing leverage. 8.8 billion listed options were traded globally, with 3.6 billion traded in the US. 25% annual growth rate in listed options over the past five years. Should be noted the financial havoc in late 2008 resulted in only a 1% growth in US listed options volume in 2009.
Future growth - A potential driver is the transition of over the counter derivatives to an exchange traded model. This is an expected result of the 2008/2009 financial crisis fueled in part by unregulated over the counter derivative products.
**The International Securities Exchange (ISE) has legally challenged CBOE's exclusive license on DJIA/S&P index option products. Actually ISE has challenged the use of exclusive licenses for options in general. Cases are currently pending. A determination in favor of ISE would most likely dent CBOE's market share position in specific index options.
Another risk is a recent SEC proposal to limit transaction fees to 30 cents per contract. CBOE estimates if this proposal is enacted it would have meant a 4.4% revenue hit in 2009.
Post-ipo, CBOE will issue monthly access permits for firms to trade. This will replace the old member or seat status of access to the CBOE. CBOE expects 1,025 permits with fees ranging from $2,500-$7,500 excluding discounts. This should result in approximately $35 million in annual access fee revenues.
Closest competitor is ISE, with 21.5% of listed US options volume. ISE was bought out in 2007. The Philadelphia stock exchange (owned by Nasdaq) has a 20% market share.
Financials
$2 3/4 per share in cash. Note that this assumes 104.3 million sharecount with no shares tendered in CBOE's offer to buy out current shareholders. If tender offer is fully subscribed, cash on hand will be $0.25 per share, but sharecount will be 93.6 million shares.
Dividends - CBOE plans on paying regular quarterly dividends that annually equal to 20%-30% of prior year's net income. In 2009 this would have equaled approximately $0.25 per share. On a pricing of $28, CBOE would yield nearly 1% based on 2009 net income.
2010 - Due to market volatility, 2nd quarter looks to be the best one for CBOE in at least past six quarters. When factoring in increased access fees the second half of 2010, total revenues should be $475 million, a 5% increase over 2009. Operating margins of 40%, very strong. Net margins of 23%. Earnings per share of $1.05. **Assuming stock tender offer is fully subscribed, earnings per share would be $1.14. Lets cut the difference and make it $1.10. On a pricing of $28, CBOE would trade 25 X's 2010 earnings.
As CBOE's primary competitor ISE was bought out a few years ago we do not have a pure comparable. We do have two exchanges that ipo'd this decade CME and ICE. Each are trading 18-22 X's 2010 earnings estimates.
CBOE is a blue chip ipo without a doubt. The issue here is the aggressive valuation considering the lack of growth in 2009 and 2010. CBOE's transaction volume grew just 1% in 2009 and, until a very volatile May 2010, looked to be rather flat again in 2010. With SEC mulling limits on transaction fees and ISE legally questioning CBOE's exclusive index options, CBOE's profit driver is in question. That profit driver is their exclusive index option products, which derives up to twice the transaction fees per contract compared to rest of their products. Future EPS growth will be difficult if those index transaction fees are reigned in, which it appears only to be a matter of time.
Something to consider - Nymex Holdings, CBOT Holdings and International Securities Exchange were all bought within three years of their IPOs. In doing research for this piece, there seems to be a thought that the initial ipo range here consists of a bit of a 'buyout premium' here as a base. I tend to agree and think the initial range here reflects the chance that a buyer will step up over the next few years to purchase CBOE.
Conclusion - A must own in range due to blue chip name and leading position in the US listed options exchange market. There does appear to be a premium here in comparison to other options exchanges and definitely in comparison with stock exchanges traded publicly. Some of that premium may be warranted, but be wary of buying this in the aftermarket up too much from range. If buying this in aftermarket $30+, realize that you are paying a premium here in the sector, and definitely a premium for current market conditions.
Should absolutely work in range short, mid and longer term, this is a very good looking ipo.
Note that until we see the actual access fee revenues post-ipo, they are quite difficult to estimate. I plugged in an annualized $40 million, as CBOE will be discounting these pretty heavily for 2010(and possibly beyond). As usual this is probably slightly conservative.
May 11, 2010, 11:56 pm
NKA - Niska Gas Storage Partners
NKA priced this evening at $20 1/2.
2010-05-08
NKA - Niska Gas Storage Partners
NKA - Niska Gas Storage Partners plans on offering 20.1 million units(assuming over-allotments) at a range of $20-$22. Goldman Sachs and Morgan Stanley are leading the deal, eight other firms co-managing. post-ipo NKA will have a total of 71 million units outstanding for a market cap of $1.49 billion on a pricing of $21. Ipo proceeds will be used to repay debt.
Holdco will own 70% of NKA post-ipo as well as incentive distribution rights and managing interest. Holdco is owned by private equity firms Carlyle and Riverstone.
From the prospectus:
'We....own and operate natural gas storage assets.'
Carbon copy deal of recent successful ipo PNG. Both are North American based natural gas storage partnerships.
NKA owns and/or operates 185.5 billion cubic feet(Bcf) of total storage capacity, about four times the size of PNG. NKA is the largest independent owner and operator of natural gas storage assets in North America.
Need - Supply of natural gas throughout the year remains stable, however demand fluctuates seasonally. NKA provides customers with the ability to store gas for resale or use in higher value periods.
Storage facilities are locared in Alberta, Canada, northern California, and Oklahoma.
92% of capacity is utilized by third-parties, however only 68% of revenues are derived from third parties. Third parties contract for storage over long term contracts, averaging 3.3 years.
Proprietary optimization - NKA fills in their capacity gaps by purchased, storing and selling gas for their own account. NKA hedges their own purchases by immediately entering into forward sales contracts for purchased volume. Proprietary purchases historically have accounted for 8% of capacity, but 32% of revenues.
Financials
NKA will have substantial debt post ipo of $915 million. By contrast, PNG came public with $200 million in debt. With the debt levels to available distributable cash, PNG would appear much better positioned to grow yield over the next few years.
Distribution - NKA plans on distributing $0.35 to unitholders quarterly. At an annualized $1.40, NKA would be yielding 6.7% on a pricing of $21.
Sector Yield - Looking at the natural gas only MLP's the average yields currently are in the 5 1/2%-7% range. Recent ipo PNG currently trades at a 5.9% yield. Note that most of the natural gas related MLP's are pipeline oriented and not storage. Some do own both, including SEP and EPD.
Fiscal year ends 3/31 annually. FY '10 ended 3/31/10.
FY '10 - $210 million in revenues. Interest expense ate up 40% of operating profits. Earnings per share of $0.19. Earnings per share are not as important here as distributable cash flows. Should be noted however that NKA is saddled with good size debt on ipo.
NKA did have sufficient cash flows to have covered the $1.40 2009 distribution per unit, only when borrowings were included. ***Folding out borrowings, NKA would not have had sufficient cash flows in 2009 to fund distributions and capital expenditures. This indicates that any future capital expenditures will need to be funded by debt. Coverage here is pretty much 1:1.
FY '11 - Indeed to 1) fund capital expansion and 2) meet debt servicing obligations, NKA plans on borrowing $76 million in FY '11(ending 3/31/11). A red flag here is NKA plans on borrowing monies to service debt. Not ideal. NKA simply cannot fund their operations and distribute $1.40 annually without borrowing more money. Current debt servicing is killing cash flows. This is not a good structure for unitholders.
Risk - NKA makes a disproportionate amount of revenues on proprietary natural gas purchasing/storing/selling. While only 8% of capacity is used on this, 32% of revenues come from their own gas trading. For a partnership heavily leveraged without sufficient cash flows to fund operations, this brings a whole new level of risk. We've seen a few MLP's 'blow-up' due to management proprietary trading activities. NKA relies heavily on this sort of activity for 1/3 of revenue stream annually.
conclusion - Largest gas storage operator in North America yielding 6.7% on ipo. That should be a good combination. Note however again that just to meet operational/debt servicing obligations, NKA plans on increasing borrowing in FY '11 by $76 million. Annual distributions are pegged at $96 million, so in essence NKA is borrowing 75%-80% of their distribution in FY '11. They shift things around to make it appear otherwise, but the reality is NKA's operations and debt levels do not justify a $1.40 annual payout. Factor in too the risk of proprietary gas trading and this is a pass in range.
Structure here is poor for public unitholders. Much higher quality natural gas partnerships out there yielding similar. Operations seem fine, structure of the public NKA looks risky.
2010-05-08
NKA - Niska Gas Storage Partners
NKA - Niska Gas Storage Partners plans on offering 20.1 million units(assuming over-allotments) at a range of $20-$22. Goldman Sachs and Morgan Stanley are leading the deal, eight other firms co-managing. post-ipo NKA will have a total of 71 million units outstanding for a market cap of $1.49 billion on a pricing of $21. Ipo proceeds will be used to repay debt.
Holdco will own 70% of NKA post-ipo as well as incentive distribution rights and managing interest. Holdco is owned by private equity firms Carlyle and Riverstone.
From the prospectus:
'We....own and operate natural gas storage assets.'
Carbon copy deal of recent successful ipo PNG. Both are North American based natural gas storage partnerships.
NKA owns and/or operates 185.5 billion cubic feet(Bcf) of total storage capacity, about four times the size of PNG. NKA is the largest independent owner and operator of natural gas storage assets in North America.
Need - Supply of natural gas throughout the year remains stable, however demand fluctuates seasonally. NKA provides customers with the ability to store gas for resale or use in higher value periods.
Storage facilities are locared in Alberta, Canada, northern California, and Oklahoma.
92% of capacity is utilized by third-parties, however only 68% of revenues are derived from third parties. Third parties contract for storage over long term contracts, averaging 3.3 years.
Proprietary optimization - NKA fills in their capacity gaps by purchased, storing and selling gas for their own account. NKA hedges their own purchases by immediately entering into forward sales contracts for purchased volume. Proprietary purchases historically have accounted for 8% of capacity, but 32% of revenues.
Financials
NKA will have substantial debt post ipo of $915 million. By contrast, PNG came public with $200 million in debt. With the debt levels to available distributable cash, PNG would appear much better positioned to grow yield over the next few years.
Distribution - NKA plans on distributing $0.35 to unitholders quarterly. At an annualized $1.40, NKA would be yielding 6.7% on a pricing of $21.
Sector Yield - Looking at the natural gas only MLP's the average yields currently are in the 5 1/2%-7% range. Recent ipo PNG currently trades at a 5.9% yield. Note that most of the natural gas related MLP's are pipeline oriented and not storage. Some do own both, including SEP and EPD.
Fiscal year ends 3/31 annually. FY '10 ended 3/31/10.
FY '10 - $210 million in revenues. Interest expense ate up 40% of operating profits. Earnings per share of $0.19. Earnings per share are not as important here as distributable cash flows. Should be noted however that NKA is saddled with good size debt on ipo.
NKA did have sufficient cash flows to have covered the $1.40 2009 distribution per unit, only when borrowings were included. ***Folding out borrowings, NKA would not have had sufficient cash flows in 2009 to fund distributions and capital expenditures. This indicates that any future capital expenditures will need to be funded by debt. Coverage here is pretty much 1:1.
FY '11 - Indeed to 1) fund capital expansion and 2) meet debt servicing obligations, NKA plans on borrowing $76 million in FY '11(ending 3/31/11). A red flag here is NKA plans on borrowing monies to service debt. Not ideal. NKA simply cannot fund their operations and distribute $1.40 annually without borrowing more money. Current debt servicing is killing cash flows. This is not a good structure for unitholders.
Risk - NKA makes a disproportionate amount of revenues on proprietary natural gas purchasing/storing/selling. While only 8% of capacity is used on this, 32% of revenues come from their own gas trading. For a partnership heavily leveraged without sufficient cash flows to fund operations, this brings a whole new level of risk. We've seen a few MLP's 'blow-up' due to management proprietary trading activities. NKA relies heavily on this sort of activity for 1/3 of revenue stream annually.
conclusion - Largest gas storage operator in North America yielding 6.7% on ipo. That should be a good combination. Note however again that just to meet operational/debt servicing obligations, NKA plans on increasing borrowing in FY '11 by $76 million. Annual distributions are pegged at $96 million, so in essence NKA is borrowing 75%-80% of their distribution in FY '11. They shift things around to make it appear otherwise, but the reality is NKA's operations and debt levels do not justify a $1.40 annual payout. Factor in too the risk of proprietary gas trading and this is a pass in range.
Structure here is poor for public unitholders. Much higher quality natural gas partnerships out there yielding similar. Operations seem fine, structure of the public NKA looks risky.
April 24, 2010, 5:55 pm
4/19 Week in Review
IPO Week in Review.
The week of 4/19, with eight deals pricings, was the busiest ipo week since the fall of 2007. Was a very average group overall and the pricing and initial aftermarket performance reinforced that case.
Ipo fallacy: 'It is all about the initial pop and the only way to make money is getting the deal and flipping on open'. Wrong, wrong wrong. Yes that case a decade ago, when the market was frothy and an ipo pricing at $13 routinely would open at $55. Quick fact: The initial ipo 'pop' from pricing since 1/1/09: 5 1/2%. The average gain(based on Friday's close) for ipos since 1/1/09: 13%. Most of the gains have been made in the aftermarket as was the case during the last bull run of 2003-2006. The first day is really not all that important, the key to making money over time with ipos is to find a deal that is overlooked and has the potential to appreciate over time.
A quick look at this week's deals with my thoughts.
EXL - Excel Trust: Priced 15 million shares at $14. Opened pretty much broken and closed down 5% at $13.30. EXL is a REIT focused on acquiring and owning retail community centers(strip malls essentially). Plan is to leverage up on mortgage debt to increase return to shareholders. Management has a solid track record, key here is whether one believes commercial real estate has bottomed. Minimal operations to date, this is one to look at down the line after a year or so to see how things are progressing. No interest in this deal.
ALIM - Alimera Sciences: Priced 6.6 million shares at $11. Closed Friday at $11.01, flat from pricing. ALIM is a development stage pharmaceutical focused on retina disease. Expected to have first candidate commercialized n early 2011. Question marks here include acceptance of their product as well as size of end market here. No interest in this deal either.
CDXS - Codexis: Priced 6 million shares at $13. Closed Friday at 14.04 for an 8% gain from pricing. Biocatalysts for biofuel and pharma. Large collaboration with Shell to develop biofuels. Not close to commercialization in biofuel segment, working initially as a 'green' and 'clean' fuel ipo. Highly speculative, will either be a home run or a below $5 stock in 2-3 years. I'd put odds on the latter, still too early to jump in here. No interest, although if CDXS/Shell are successful this has 'home run' potential.
DVOX - Dynavox: Priced 9.4 million shares at $15. Closed Friday at $15.18 a 1.2% increase over pricing. DVOX is the dominant market leader in assisted speech technology and devices. Makes products that speaks for those that cannot. Profitable since at least 2005, strong gross(75%) and operating margins(25%), should book a 35%+ revenue gain in FY '10 and earn $.63. I like this one a lot and believe it got lost in the shuffle of 'average' deals this week. The only ipo of the week I am currently long, this one has the potential to be a long term winner if they continue to execute. I see DVOX and FNGN(Financial Engines) as the two top deals of 2010 as far as appreciation potential from pricing 1-2 years out.
DHRM - Dehaier Medical Systems: 1.5 million shares priced at $8. This was an 'as offered' deal that was nearly impossible to get on ipo. I know of one person that was able to get 1,000 shares and that is it. Opened $10.25 and closed Friday at $12.49 for a massive 56% gain from pricing. China Medical equipment distributor. Is it really this good? No, not at all. This was a case of a very small float controlled by the underwriter in a deal designed to make the underwriter and clients a quick buck. Not a bad company, I liked this one a bit at $8 actually although there was not chance to get it there. This is one of those a year from now will most likely be back solidly into single digits and we will take a look at it at that point.
GGS - Global Geophyscial: Priced 7.5 million shares at $12. Closed Friday at $12. Priced well below range, probably found a level it can sustain here at $12. Seismic operations for the oil and gas industry. Very high capital intensive business has meant GGS has been able to put little on the bottom line. Had a massive one off deal in 2009, meaning 2010 will see a decline in revenues. There is value in here somewhere, but not interested currently.
MITL - Mitel Networks: Priced 10.5 million shares at $14. Closed Friday at $12.07 a 14% drop from pricing. Original range here was $18-$20, this was mispriced the whole way. IP based communications for small and medium business. Nothing at all here to be interested in, I panned this deal pretty vigorously at original $18-$20 range and it could even hold a slashed $14 pricing. Not a bad company, in a business with hefty competition and no real technology advantage. There would be value here $10 or below longer term, but currently no interest here.
SPSC - SPS Commerce: Priced 4.1 million shares at $12. Closed Friday at $13.91, a 16% gain. Micro cap on demand supply chain management software company. Nice little micro-cap in a spot(retail) that has been working in the market. Looks pretty fully valued here, would be interested on a pull back to pricing levels.
Pre-ipo I recommended in range DVOX and DHRM, with a 'neutral' on SPSC and a 'pass' on all the others. At current prices, DVOX is the one that appears to look most attractive going out the next year or so. I would look at SPSC and DHRM on a bit of a pullback. Yes a very busy week in ipoland, unfortunately most of the deals were just not that enticing.
The week of 4/19, with eight deals pricings, was the busiest ipo week since the fall of 2007. Was a very average group overall and the pricing and initial aftermarket performance reinforced that case.
Ipo fallacy: 'It is all about the initial pop and the only way to make money is getting the deal and flipping on open'. Wrong, wrong wrong. Yes that case a decade ago, when the market was frothy and an ipo pricing at $13 routinely would open at $55. Quick fact: The initial ipo 'pop' from pricing since 1/1/09: 5 1/2%. The average gain(based on Friday's close) for ipos since 1/1/09: 13%. Most of the gains have been made in the aftermarket as was the case during the last bull run of 2003-2006. The first day is really not all that important, the key to making money over time with ipos is to find a deal that is overlooked and has the potential to appreciate over time.
A quick look at this week's deals with my thoughts.
EXL - Excel Trust: Priced 15 million shares at $14. Opened pretty much broken and closed down 5% at $13.30. EXL is a REIT focused on acquiring and owning retail community centers(strip malls essentially). Plan is to leverage up on mortgage debt to increase return to shareholders. Management has a solid track record, key here is whether one believes commercial real estate has bottomed. Minimal operations to date, this is one to look at down the line after a year or so to see how things are progressing. No interest in this deal.
ALIM - Alimera Sciences: Priced 6.6 million shares at $11. Closed Friday at $11.01, flat from pricing. ALIM is a development stage pharmaceutical focused on retina disease. Expected to have first candidate commercialized n early 2011. Question marks here include acceptance of their product as well as size of end market here. No interest in this deal either.
CDXS - Codexis: Priced 6 million shares at $13. Closed Friday at 14.04 for an 8% gain from pricing. Biocatalysts for biofuel and pharma. Large collaboration with Shell to develop biofuels. Not close to commercialization in biofuel segment, working initially as a 'green' and 'clean' fuel ipo. Highly speculative, will either be a home run or a below $5 stock in 2-3 years. I'd put odds on the latter, still too early to jump in here. No interest, although if CDXS/Shell are successful this has 'home run' potential.
DVOX - Dynavox: Priced 9.4 million shares at $15. Closed Friday at $15.18 a 1.2% increase over pricing. DVOX is the dominant market leader in assisted speech technology and devices. Makes products that speaks for those that cannot. Profitable since at least 2005, strong gross(75%) and operating margins(25%), should book a 35%+ revenue gain in FY '10 and earn $.63. I like this one a lot and believe it got lost in the shuffle of 'average' deals this week. The only ipo of the week I am currently long, this one has the potential to be a long term winner if they continue to execute. I see DVOX and FNGN(Financial Engines) as the two top deals of 2010 as far as appreciation potential from pricing 1-2 years out.
DHRM - Dehaier Medical Systems: 1.5 million shares priced at $8. This was an 'as offered' deal that was nearly impossible to get on ipo. I know of one person that was able to get 1,000 shares and that is it. Opened $10.25 and closed Friday at $12.49 for a massive 56% gain from pricing. China Medical equipment distributor. Is it really this good? No, not at all. This was a case of a very small float controlled by the underwriter in a deal designed to make the underwriter and clients a quick buck. Not a bad company, I liked this one a bit at $8 actually although there was not chance to get it there. This is one of those a year from now will most likely be back solidly into single digits and we will take a look at it at that point.
GGS - Global Geophyscial: Priced 7.5 million shares at $12. Closed Friday at $12. Priced well below range, probably found a level it can sustain here at $12. Seismic operations for the oil and gas industry. Very high capital intensive business has meant GGS has been able to put little on the bottom line. Had a massive one off deal in 2009, meaning 2010 will see a decline in revenues. There is value in here somewhere, but not interested currently.
MITL - Mitel Networks: Priced 10.5 million shares at $14. Closed Friday at $12.07 a 14% drop from pricing. Original range here was $18-$20, this was mispriced the whole way. IP based communications for small and medium business. Nothing at all here to be interested in, I panned this deal pretty vigorously at original $18-$20 range and it could even hold a slashed $14 pricing. Not a bad company, in a business with hefty competition and no real technology advantage. There would be value here $10 or below longer term, but currently no interest here.
SPSC - SPS Commerce: Priced 4.1 million shares at $12. Closed Friday at $13.91, a 16% gain. Micro cap on demand supply chain management software company. Nice little micro-cap in a spot(retail) that has been working in the market. Looks pretty fully valued here, would be interested on a pull back to pricing levels.
Pre-ipo I recommended in range DVOX and DHRM, with a 'neutral' on SPSC and a 'pass' on all the others. At current prices, DVOX is the one that appears to look most attractive going out the next year or so. I would look at SPSC and DHRM on a bit of a pullback. Yes a very busy week in ipoland, unfortunately most of the deals were just not that enticing.
April 22, 2010, 4:44 pm
DVOX - Dynavox
2010-04-15
DVOX - Dynavox
DVOX - Dynavox plans on offering 9.375 million shares at a range of $15-$17. Assuming over-allotments, the deal size will be 10.8 million shares. Piper Jaffray and Jefferies are leading the deal, William Blair and Wells Fargo are co-managing. Post-ipo DVOX will have 31 million shares outstanding for a market cap of $496 million on a pricing of $16. 1/3 of the proceeds will go to debt repayment, the remainder will go to insiders.
Vestar will own 35% of DVOX post-ipo and will control voting interests via a separate share class.
From the prospectus:
'We develop and market industry-leading software, devices and content to assist people in overcoming their speech, language or learning disabilities. Our proprietary software is the result of decades of research and development and our trademark- and copyright-protected symbol sets are more widely used than any other in our industry.'
DVOX is a leader in two areas for assistive technologies: speech generating technologies and special education software.
DVOX is the largest provider of speech generating technology. Users communicate through synthesized or digitized recorded speech. Users are those who are unable to speak, such as adults with amyotrophic lateral sclerosis, or ALS, often referred to as Lou Gehrig's disease, strokes or traumatic brain injuries and children with cerebral palsy, autism or other disorders. Devices can be controlled/used via touch or even via tongue, head or eye movements. 82% of revenues are derived from DVOX's speech generating products.
Special Education software - 18% of revenues. Used by children with cognitive challenges, such as those caused by autism, Down syndrome or brain injury; physical challenges, such as those caused by cerebral palsy or other neuromuscular disorders; as well as by children with learning disabilities, such as severe dyslexia. DVOX's proprietary symbol sets are the most widely used for creating symbol-based activities and materials in the industry. Funding generally comes from federal sources.
I like this statement in the S-1: 'We believe that our speech generating technologies can transform the lives of those who have significant speech, language, physical or learning challenges by enabling their communication.'
Two most recent products are the EyeMax eye-tracking accessory and the highly portable Xpress speech generating device.
Speech generating products are sold via a direct sales force focused on speech language pathologists. Special education software is sold via internet and direct mail.
Products are sold in the US, Canada and Great Britain.
Sectors
Speech Generating - 20 million adults and children in the US suffer from conditions that may lead to speech impairment. DVOX believes the annual new market for speech products is $1.8 billion in their geographic market. DVOX does believe this potential end market is currently under penetrated. Growth driver include a growing awareness among speech pathologists and the underserved population. DVOX believes speech generating products are only now achieving mass awareness. A big reason for this are technological advances making the products far more accurate and user friendly.
***I have a feeling that speech generating products are only now beginning to reach 'tipping point' stage. With the aging US population coupled with technological advances in the products themselves, this is a fantastic growth spot over the next 10+ years...and DVOX is far and away the market leader. Assuming the financials look at least okay, this is a very unique, interesting and strong ipo.
Special Education Software - In the US 6 million students are deemed to require special education with a market opportunity of $1 billion+ annually. DVOX believes higher education standards coupled with increased special education funding are the growth drivers for their Special Ed software.
Risks - A large chunk of DVOX's revenues are derived from the public school system as well as Medicaid and Medicare. With budget shortfalls, each of the preceding is finding itself in 'cutback' mode. This could stall growth somewhat, particularly in DVOX's special education segment. I doubt very much that funding cutbacks are going to effect the speech generating segment however as there are few voice communication alternatives out there currently for those without speech.
Competition: From the S-1: 'Within our particular areas of speech generating technology and interactive software for students with special educational needs, we believe we are the largest player and have no dominant competitors.' Rarely do you see in a prospectus a statement this strong when describing the competition.
Financials
$30 million in net debt post-ipo. Expect DVOX to pay this down via cash flows going forward. Debt not enough to impede operations.
Fiscal year ends 6/30 annually. FY '10 ends 6/30/10.
Revenues have increased annually for at least five years in a row. DVOX has been profitable since at least FY '05.
Seasonality - Revenues are stronger in the back half of the fiscal year, with the 4th quarter(6/30) being the strongest. In FY '09 33% of revenues were derived in the 4th quarter of the fiscal year.
FY '09(ended 6/30/09) - Revenues of $91 million, a 12% increase over FY '08. Gross margins were strong at 73%. Operating expense ratio of 52%, operating margins of 21%. Solid margins here. Plugging in debt servicing and full taxes, net margins were 11 1/2%. EPS of $0.34.
FY '10 - Strong start to the fiscal year for DVOX through the first 2 quarters of the fiscal year. Keep in mind that DVOX's strongest quarters are to come and DVOX should post a strong number in the 6/30/10 quarter.
***Revenues should grow a strong 37% to $125 million. As I noted above, DVOX's speech generating products appear to be hitting critical mass as revenues in that spot are accelerating strongly here in FY '10.
Gross margins are improving as are operating expense ration, although the latter only slightly. Gross margins should be 75%. Operating expense ratio of 51%, putting operating margins at a quite healty 24%.
Debt servicing should eat up 9% of revenue, well below my 20% threshold. Again, I would expect this debt to be erased altogether sometime in FY '11.
Net after tax/debt margins of 15%. Earnings per share of $0.63. On a pricing of $16, DVOX would trade 25 X's FY '10 earnings.
FY '11 - Really is just a guess here until we see the 6/30 quarter, which will set the tone for FY '11. Let us take a guess though. I do not expect another 30%+ quarter as some of that strength is due to easy recession year comparisons in FY '09. Note though that even in a tough economic climate, DVOX grew FY '09 revenues 11%. I would peg FY '11 growth around 20%, a conservative number. Gross margins have gone about as far as they can I think at 75%. Operating margins should improve slightly as should net margins. On 16 1/2% net margins and 20% revenues growth, DVOX would earn $0.80 per share. On a pricing of $16, DVOX would trade 20 X's FY '11 earnings.
Conclusion - Market leader in what should be a nice growth area over the next decade. Strong recommend in range here, I like this ipo quite a bit. DVOX looks poised to have a great future, very reasonable market cap in range when we take into account the potential here going forward. This one has the potential and the look of a long term winner
DVOX - Dynavox
DVOX - Dynavox plans on offering 9.375 million shares at a range of $15-$17. Assuming over-allotments, the deal size will be 10.8 million shares. Piper Jaffray and Jefferies are leading the deal, William Blair and Wells Fargo are co-managing. Post-ipo DVOX will have 31 million shares outstanding for a market cap of $496 million on a pricing of $16. 1/3 of the proceeds will go to debt repayment, the remainder will go to insiders.
Vestar will own 35% of DVOX post-ipo and will control voting interests via a separate share class.
From the prospectus:
'We develop and market industry-leading software, devices and content to assist people in overcoming their speech, language or learning disabilities. Our proprietary software is the result of decades of research and development and our trademark- and copyright-protected symbol sets are more widely used than any other in our industry.'
DVOX is a leader in two areas for assistive technologies: speech generating technologies and special education software.
DVOX is the largest provider of speech generating technology. Users communicate through synthesized or digitized recorded speech. Users are those who are unable to speak, such as adults with amyotrophic lateral sclerosis, or ALS, often referred to as Lou Gehrig's disease, strokes or traumatic brain injuries and children with cerebral palsy, autism or other disorders. Devices can be controlled/used via touch or even via tongue, head or eye movements. 82% of revenues are derived from DVOX's speech generating products.
Special Education software - 18% of revenues. Used by children with cognitive challenges, such as those caused by autism, Down syndrome or brain injury; physical challenges, such as those caused by cerebral palsy or other neuromuscular disorders; as well as by children with learning disabilities, such as severe dyslexia. DVOX's proprietary symbol sets are the most widely used for creating symbol-based activities and materials in the industry. Funding generally comes from federal sources.
I like this statement in the S-1: 'We believe that our speech generating technologies can transform the lives of those who have significant speech, language, physical or learning challenges by enabling their communication.'
Two most recent products are the EyeMax eye-tracking accessory and the highly portable Xpress speech generating device.
Speech generating products are sold via a direct sales force focused on speech language pathologists. Special education software is sold via internet and direct mail.
Products are sold in the US, Canada and Great Britain.
Sectors
Speech Generating - 20 million adults and children in the US suffer from conditions that may lead to speech impairment. DVOX believes the annual new market for speech products is $1.8 billion in their geographic market. DVOX does believe this potential end market is currently under penetrated. Growth driver include a growing awareness among speech pathologists and the underserved population. DVOX believes speech generating products are only now achieving mass awareness. A big reason for this are technological advances making the products far more accurate and user friendly.
***I have a feeling that speech generating products are only now beginning to reach 'tipping point' stage. With the aging US population coupled with technological advances in the products themselves, this is a fantastic growth spot over the next 10+ years...and DVOX is far and away the market leader. Assuming the financials look at least okay, this is a very unique, interesting and strong ipo.
Special Education Software - In the US 6 million students are deemed to require special education with a market opportunity of $1 billion+ annually. DVOX believes higher education standards coupled with increased special education funding are the growth drivers for their Special Ed software.
Risks - A large chunk of DVOX's revenues are derived from the public school system as well as Medicaid and Medicare. With budget shortfalls, each of the preceding is finding itself in 'cutback' mode. This could stall growth somewhat, particularly in DVOX's special education segment. I doubt very much that funding cutbacks are going to effect the speech generating segment however as there are few voice communication alternatives out there currently for those without speech.
Competition: From the S-1: 'Within our particular areas of speech generating technology and interactive software for students with special educational needs, we believe we are the largest player and have no dominant competitors.' Rarely do you see in a prospectus a statement this strong when describing the competition.
Financials
$30 million in net debt post-ipo. Expect DVOX to pay this down via cash flows going forward. Debt not enough to impede operations.
Fiscal year ends 6/30 annually. FY '10 ends 6/30/10.
Revenues have increased annually for at least five years in a row. DVOX has been profitable since at least FY '05.
Seasonality - Revenues are stronger in the back half of the fiscal year, with the 4th quarter(6/30) being the strongest. In FY '09 33% of revenues were derived in the 4th quarter of the fiscal year.
FY '09(ended 6/30/09) - Revenues of $91 million, a 12% increase over FY '08. Gross margins were strong at 73%. Operating expense ratio of 52%, operating margins of 21%. Solid margins here. Plugging in debt servicing and full taxes, net margins were 11 1/2%. EPS of $0.34.
FY '10 - Strong start to the fiscal year for DVOX through the first 2 quarters of the fiscal year. Keep in mind that DVOX's strongest quarters are to come and DVOX should post a strong number in the 6/30/10 quarter.
***Revenues should grow a strong 37% to $125 million. As I noted above, DVOX's speech generating products appear to be hitting critical mass as revenues in that spot are accelerating strongly here in FY '10.
Gross margins are improving as are operating expense ration, although the latter only slightly. Gross margins should be 75%. Operating expense ratio of 51%, putting operating margins at a quite healty 24%.
Debt servicing should eat up 9% of revenue, well below my 20% threshold. Again, I would expect this debt to be erased altogether sometime in FY '11.
Net after tax/debt margins of 15%. Earnings per share of $0.63. On a pricing of $16, DVOX would trade 25 X's FY '10 earnings.
FY '11 - Really is just a guess here until we see the 6/30 quarter, which will set the tone for FY '11. Let us take a guess though. I do not expect another 30%+ quarter as some of that strength is due to easy recession year comparisons in FY '09. Note though that even in a tough economic climate, DVOX grew FY '09 revenues 11%. I would peg FY '11 growth around 20%, a conservative number. Gross margins have gone about as far as they can I think at 75%. Operating margins should improve slightly as should net margins. On 16 1/2% net margins and 20% revenues growth, DVOX would earn $0.80 per share. On a pricing of $16, DVOX would trade 20 X's FY '11 earnings.
Conclusion - Market leader in what should be a nice growth area over the next decade. Strong recommend in range here, I like this ipo quite a bit. DVOX looks poised to have a great future, very reasonable market cap in range when we take into account the potential here going forward. This one has the potential and the look of a long term winner
April 13, 2010, 2:05 am
CELM - Anatomy of a trade
I've not ever done this before. However it seems that most 'ipo experts' out there do nothing but plug themselves even though most do not even trade or own ipos. At tradingipos.com we put our money where our analysis is. Here is a little self-promotion:
We liked CELM on ipo quite a bit, especially with the slashed $4.50 pricing. We owned a large position in the stock, which we sold the last of today at $7.70. We post real-time trades on the forum in our subscribers section, and have been for five years.
We consistently make money at tradingipos and have been fortunate to make a nice living for a decade now exclusively trading these ipos. As important, we help subscribers make money.
Before posting the pre-ipo piece on CELM, here are the timestamps/comments on CELM from the forum on our subscribers section. All, but the last are from me"
Posted: 28 Jan 2010 11:40 am Post subject:
CELM..just looked at prospectus, appears same number of shares outstanding to with new range, so this is a nice reduction in market cap and valuation. at $4.50, it is priced to work.
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Posted: 29 Jan 2010 08:01 am Post subject:
celm added 4.64 on open..no stop.
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Posted: 03 Mar 2010 08:58 am Post subject:
celm, yep we all here know this is going to run, most likely to at least 7ish...just a matter of time after amcf popped. haven't been this sure of something in a long time
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Posted: 09 Mar 2010 07:24 am Post subject:
CELM, yes $8 target. As I have been saying, this thing should hit at least $7 and that is the area I am looking to take some off.
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Posted: 16 Mar 2010 07:36 am Post subject:
celm, am already loaded in the name..my avg right around 4.85-4.90.
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Posted: 12 Apr 2010 12:57 pm Post subject:
celm, playing out perfectly here although it is setting up for blow-off gap up in morning...I am out here of all 7.7's for final 1/3. nearly 60% gain on that last 1/3
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and this post today from a subscriber:
Posted: 12 Apr 2010 07:03 am Post subject: CELM
just wanted to thank you guys for your input on CELM and Bill for your analysis. Even though I sold a bit early last week I still managed to make my year with it by taking oversized positions on the 2 runs from sub $5 to low to mid $6.
eric
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Following is the analysis piece I did on CELM for subscribers back in January pre-ipo. These pieces are the basis for my trades...trades/positions I've posted in the subscriber section of tradingipos.com for 5 years now.
Okay, the self-promotion is over...Anyone publishing the CELM analysis piece below, please do so with the above. The piece is now a bit dated as CELM has moved so much and it is now intended as a companion piece to the live trading comments posted above. Thanks.
2010-01-22
CELM - China Electric Motor
CELM - China Electric Motor plans on offering 6.7 million shares at a range of $5.50-$6.50. Insiders will be selling 2.5 million shares in the deal. If over-allotments are exercised, the deal size will be 7.5 million shares. Note that in addition to the shares being offered, CELM is giving the underwriters warrants for an additional 425k of stock. Roth and Westpark are leading the deal. Post-ipo, CELM will have 20 million shares outstanding for a market cap of $120 million on a pricing of $6.
Ipo proceeds will be used to increase manufacturing capacity, to purchase more industrial space, to modernize factory equipment and for other general corporate purposes.
To Chau Sum will own 50% of CELM post-ipo. He is not listed as a company officer, however CELM's CFO and Chairman are also involved in To Chau Sum's investment and operation arms. While not operating CELM day to day, he appears to be the 'money guy' behind the creation of CELM and fully in control of management. CELM was once a shell symbol and there are a myriad of transactions with subsidiaries of China Electric, To Chau Sum's investment vehicles and WestPark Capital.
Westpark Capital founder Richard Rappaport will own 6% of CELM post-ipo. Mr. Rappaport also owns a similar % stake in recent ipo ZSTN and has already filed to sell that stake. Expect similar here with an insider secondary coming a few months after ipo.
**Private Placement - CELM did a private placement 10/6/09 at $2.08 per share. The ipo price mid-range is nearly triple this private placement price just 3 1/2 months later.
From the prospectus:
'We engage in the design, production, marketing and sale of micro-motor products. Our products, which are incorporated into consumer electronics, automobiles, power tools, toys and household appliances, are sold under our "Sunna" brand name.'
Micro-motors for consumer products. Produces both AC and DC motors, CELM notes that micro-motors are 'simple to control, easy to operate and are generally very reliable.'
Motors for home appliances account for approximately 65% of revenues, motors for automobiles 22%.
Automobile uses for micro-motors include automated car seats, windows, trunks, door locks, mirrors, sliding doors and roofs.
Home appliance uses include including hairdryers, air conditioners, paper shredders, soy milk makers, juice makers, electric fans, heaters and massagers.
As micro-motors are used in consumer appliances and newer model autos, CELM is a direct play on 1) growing middle class in China; and 2) the continued shift to China for the manufacture of small electronic appliances and micro-motor products. The latter being driven by lower cost manufacturing base in China as well as a growing end market in China and surrounding countries.
Motors sold directly to OEM's and distributors. CELM produces 28 different series of motors with 1,200 different product specs. Majority of CELM's revenues are derived from custom products as only 6.5% of sales are for stock 'off the shelves' motors.
Top seven customers account for over 50% of revenues.
Financials
With any technology manufacturer, gross margins indicate where on the 'tech scale' the company sits. The higher the margins, the 'higher tech' the company which generally leads to a higher than average multiple. Conversely lower margins indicate a 'commoditized' type tech sector which generally lead to lower multiples. CELM resides in the lower margin area of the tech ladder. Through the first nine months of 2009, CELM's gross margins were 28%.
Approximately $1 per share net cash post-ipo.
CELM has no real accounts receivables issues. They've had no receivables on the books for over 30 days for the past few years.
2009 - Through the first nine months, total revenues look to be on track for $88 million, a 65% increase over 2008. Gross margins as noted of 28%. Operating expense ratio of 10%, putting operating margins at 18%. As is becoming the norm in China, tax rate is right around 25%, putting net margins at 14%. Earnings per share should be $0.62. On a pricing of $6, CELM would trade 9 1/2 X's 2009 earnings.
2010 - CELM's growth in 2009 was a little deceiving as their quarter to quarter revenues were flat through the first 3 quarters of '09 at $19 million, $22 million and $22 million. CELM had a huge revenues jump the first quarter of 2009 and maintained that new level throughout the year. Actually this is similar to their previous two years as it appears their new contracts kick in with the new year. We'll have a much clearer picture of CELM's 2010 revenue story after the first quarter. I would be surprised if CELM is able to grow revenues in 2010 much more than 30%. I am far more comfortable plugging in 25% revenue growth here. The good news is that CELM's gross margins do appear to be improving a bit due to product mix. At a $110 million run rate in 2010, with 30% gross margins CELM should earn $0.90. This may prove to be a bit conservative, but with a micro cap I'd rather err on the conservative side. On a pricing of $6, CELM would trade 6 1/2 X's 2010 earnings.
A quick look here at CELM and HRBN. HRBN produces all sorts of motors, while CELM focuses exclusively on micro-motors. HRBN - $569 million market cap. Currently trading 9 X's 2010 earnings estimates with a projected 90% revenue growth rate. Note that a large chunk of HRBN's 2010 revenue growth is expected to be driven by a significant 2009 acquisition. CELM - $120 million on a pricing of $6. Would be trading 6 X's conservative 2010 estimates with a 25% revenue growth rate. We have a growth and margin comparable here in recent ipo, ZSTN - both ZSTN and CELM are lower margin and similar 2010 growth rates; however, very different tech sector. I do believe CELM is much more viable growth story longer term than ZSTN. CELM has better gross margins than ZSTN, actually much better at a 2009 28% compared to ZSTN's 16%. In addition, CELM appears to be slightly increasing gross margins, while ZSTN's are faltering. Each expected to grow 25% in 2010. ZSTN currently trades 8 1./2 X's 2010 estimates, so simply on that basis it appears there could be appreciation here for CELM in range.
Conclusion - Somewhat commoditized Chinese tech microcap coming at an attractive multiple. CELM has shown strong growth in a difficult 2009. CELM has been operating cash flow positive since 2006 and has improved those cash flows each of the past three years. That is a key here as we have seen numerous China microcap ipos that have been GAAP positive but operating cash flow negative. CELM has not only been operating cash flow positive for 4 years, they've increased those cash flows annually. That is a nice positive in an obscure microcap. The lower gross margins here means we should not get too excited, however in range this deal looks priced to work. Below range it is a no-brainer.
We liked CELM on ipo quite a bit, especially with the slashed $4.50 pricing. We owned a large position in the stock, which we sold the last of today at $7.70. We post real-time trades on the forum in our subscribers section, and have been for five years.
We consistently make money at tradingipos and have been fortunate to make a nice living for a decade now exclusively trading these ipos. As important, we help subscribers make money.
Before posting the pre-ipo piece on CELM, here are the timestamps/comments on CELM from the forum on our subscribers section. All, but the last are from me"
Posted: 28 Jan 2010 11:40 am Post subject:
CELM..just looked at prospectus, appears same number of shares outstanding to with new range, so this is a nice reduction in market cap and valuation. at $4.50, it is priced to work.
_____________________________________________
Posted: 29 Jan 2010 08:01 am Post subject:
celm added 4.64 on open..no stop.
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Posted: 03 Mar 2010 08:58 am Post subject:
celm, yep we all here know this is going to run, most likely to at least 7ish...just a matter of time after amcf popped. haven't been this sure of something in a long time
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Posted: 09 Mar 2010 07:24 am Post subject:
CELM, yes $8 target. As I have been saying, this thing should hit at least $7 and that is the area I am looking to take some off.
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Posted: 16 Mar 2010 07:36 am Post subject:
celm, am already loaded in the name..my avg right around 4.85-4.90.
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Posted: 12 Apr 2010 12:57 pm Post subject:
celm, playing out perfectly here although it is setting up for blow-off gap up in morning...I am out here of all 7.7's for final 1/3. nearly 60% gain on that last 1/3
______________________________________________________
and this post today from a subscriber:
Posted: 12 Apr 2010 07:03 am Post subject: CELM
just wanted to thank you guys for your input on CELM and Bill for your analysis. Even though I sold a bit early last week I still managed to make my year with it by taking oversized positions on the 2 runs from sub $5 to low to mid $6.
eric
____________________________________________________
Following is the analysis piece I did on CELM for subscribers back in January pre-ipo. These pieces are the basis for my trades...trades/positions I've posted in the subscriber section of tradingipos.com for 5 years now.
Okay, the self-promotion is over...Anyone publishing the CELM analysis piece below, please do so with the above. The piece is now a bit dated as CELM has moved so much and it is now intended as a companion piece to the live trading comments posted above. Thanks.
2010-01-22
CELM - China Electric Motor
CELM - China Electric Motor plans on offering 6.7 million shares at a range of $5.50-$6.50. Insiders will be selling 2.5 million shares in the deal. If over-allotments are exercised, the deal size will be 7.5 million shares. Note that in addition to the shares being offered, CELM is giving the underwriters warrants for an additional 425k of stock. Roth and Westpark are leading the deal. Post-ipo, CELM will have 20 million shares outstanding for a market cap of $120 million on a pricing of $6.
Ipo proceeds will be used to increase manufacturing capacity, to purchase more industrial space, to modernize factory equipment and for other general corporate purposes.
To Chau Sum will own 50% of CELM post-ipo. He is not listed as a company officer, however CELM's CFO and Chairman are also involved in To Chau Sum's investment and operation arms. While not operating CELM day to day, he appears to be the 'money guy' behind the creation of CELM and fully in control of management. CELM was once a shell symbol and there are a myriad of transactions with subsidiaries of China Electric, To Chau Sum's investment vehicles and WestPark Capital.
Westpark Capital founder Richard Rappaport will own 6% of CELM post-ipo. Mr. Rappaport also owns a similar % stake in recent ipo ZSTN and has already filed to sell that stake. Expect similar here with an insider secondary coming a few months after ipo.
**Private Placement - CELM did a private placement 10/6/09 at $2.08 per share. The ipo price mid-range is nearly triple this private placement price just 3 1/2 months later.
From the prospectus:
'We engage in the design, production, marketing and sale of micro-motor products. Our products, which are incorporated into consumer electronics, automobiles, power tools, toys and household appliances, are sold under our "Sunna" brand name.'
Micro-motors for consumer products. Produces both AC and DC motors, CELM notes that micro-motors are 'simple to control, easy to operate and are generally very reliable.'
Motors for home appliances account for approximately 65% of revenues, motors for automobiles 22%.
Automobile uses for micro-motors include automated car seats, windows, trunks, door locks, mirrors, sliding doors and roofs.
Home appliance uses include including hairdryers, air conditioners, paper shredders, soy milk makers, juice makers, electric fans, heaters and massagers.
As micro-motors are used in consumer appliances and newer model autos, CELM is a direct play on 1) growing middle class in China; and 2) the continued shift to China for the manufacture of small electronic appliances and micro-motor products. The latter being driven by lower cost manufacturing base in China as well as a growing end market in China and surrounding countries.
Motors sold directly to OEM's and distributors. CELM produces 28 different series of motors with 1,200 different product specs. Majority of CELM's revenues are derived from custom products as only 6.5% of sales are for stock 'off the shelves' motors.
Top seven customers account for over 50% of revenues.
Financials
With any technology manufacturer, gross margins indicate where on the 'tech scale' the company sits. The higher the margins, the 'higher tech' the company which generally leads to a higher than average multiple. Conversely lower margins indicate a 'commoditized' type tech sector which generally lead to lower multiples. CELM resides in the lower margin area of the tech ladder. Through the first nine months of 2009, CELM's gross margins were 28%.
Approximately $1 per share net cash post-ipo.
CELM has no real accounts receivables issues. They've had no receivables on the books for over 30 days for the past few years.
2009 - Through the first nine months, total revenues look to be on track for $88 million, a 65% increase over 2008. Gross margins as noted of 28%. Operating expense ratio of 10%, putting operating margins at 18%. As is becoming the norm in China, tax rate is right around 25%, putting net margins at 14%. Earnings per share should be $0.62. On a pricing of $6, CELM would trade 9 1/2 X's 2009 earnings.
2010 - CELM's growth in 2009 was a little deceiving as their quarter to quarter revenues were flat through the first 3 quarters of '09 at $19 million, $22 million and $22 million. CELM had a huge revenues jump the first quarter of 2009 and maintained that new level throughout the year. Actually this is similar to their previous two years as it appears their new contracts kick in with the new year. We'll have a much clearer picture of CELM's 2010 revenue story after the first quarter. I would be surprised if CELM is able to grow revenues in 2010 much more than 30%. I am far more comfortable plugging in 25% revenue growth here. The good news is that CELM's gross margins do appear to be improving a bit due to product mix. At a $110 million run rate in 2010, with 30% gross margins CELM should earn $0.90. This may prove to be a bit conservative, but with a micro cap I'd rather err on the conservative side. On a pricing of $6, CELM would trade 6 1/2 X's 2010 earnings.
A quick look here at CELM and HRBN. HRBN produces all sorts of motors, while CELM focuses exclusively on micro-motors. HRBN - $569 million market cap. Currently trading 9 X's 2010 earnings estimates with a projected 90% revenue growth rate. Note that a large chunk of HRBN's 2010 revenue growth is expected to be driven by a significant 2009 acquisition. CELM - $120 million on a pricing of $6. Would be trading 6 X's conservative 2010 estimates with a 25% revenue growth rate. We have a growth and margin comparable here in recent ipo, ZSTN - both ZSTN and CELM are lower margin and similar 2010 growth rates; however, very different tech sector. I do believe CELM is much more viable growth story longer term than ZSTN. CELM has better gross margins than ZSTN, actually much better at a 2009 28% compared to ZSTN's 16%. In addition, CELM appears to be slightly increasing gross margins, while ZSTN's are faltering. Each expected to grow 25% in 2010. ZSTN currently trades 8 1./2 X's 2010 estimates, so simply on that basis it appears there could be appreciation here for CELM in range.
Conclusion - Somewhat commoditized Chinese tech microcap coming at an attractive multiple. CELM has shown strong growth in a difficult 2009. CELM has been operating cash flow positive since 2006 and has improved those cash flows each of the past three years. That is a key here as we have seen numerous China microcap ipos that have been GAAP positive but operating cash flow negative. CELM has not only been operating cash flow positive for 4 years, they've increased those cash flows annually. That is a nice positive in an obscure microcap. The lower gross margins here means we should not get too excited, however in range this deal looks priced to work. Below range it is a no-brainer.
April 7, 2010, 5:47 pm
HTHT - China Lodging Group
tradingipos.com piece done for subscribers pre-ipo.
2010-03-23
HTHT - China Lodging Group
HTHT - China Lodging Group plans on offering 9 million ADS at a range of $10.25-$12.25. Assuming over-allotments are exercised, the deal size will be 10.35 million shares. Goldman Sachs and Morgan Stanley are leading the deal, Oppenheimer co-managing. Post-ipo HTHT will have 60.25 million ADS equivalent shares outstanding for a market cap of $678 million on a pricing of $11.25. Ipo proceeds will be used to fund expansion.
*** Founder, Executive Chairman of the Board of Directors Qi Ji will own 46% of HTHT post-ipo. Qi Ji also co-founded HMIN and CTRP and served as CEO of each. Qi Ji currently site on the Board of Directors of CTRP. CTRP and HMIN are two of the most successful China ipos of the past decade. In addition CTRP will be purchasing an 8% stake in HTHT on ipo at ipo pricing.
From the prospectus:
'We operate a leading economy hotel chain in China.'
HTHT commenced operations in 2005.
In '08 and '09 HTHT had the highest revenues generated per available room, or RevPAR, and the highest occupancy rate in China.
HTHT operates under the HanTing Express Hotel, HanTing Seasons Hotel and HanTing Hi Inn.
In 2009 approximately 68% of room nights were sold to members of HTHT's HanTing Club loyalty program.
HTHT utilizes a lease and operate model, directly operating the majority of their branded hotels. HTHT does franchise and manage hotels as well. As of 12/3109, HTHT had 173 leased-and-operated hotels and 63 franchised-and-managed hotels. In addition, as of the same date, HTHT had 21 leased-and-operated hotels and 123 franchised-and-managed hotels under development. HTHT currently operates in 39 cities with 28,360 total rooms.
2009 occupancy rate was strong at 94%. Average daily room rate was approximately $25 US with RevPAR at a shade over $23 per day.
Sector - We've seen two ipos this decade in this sector, HMIN and SVN. The lodging industry in China consists of upscale luxury hotels such as four and five star hotels and other accommodations such as one, two and three star hotels and guest houses. The industry grew from approximately 237,800 hotels in 2003 to approximately 315,900 hotels in 2008, and 20.1 million rooms in 2003 to 27.3 million rooms in 2008.
Seasonality - 1'st quarter annually tends to be HTHT's lightest.
HTHT plans to add approximately 90 hotels in 2010, the majority of which will be franchised as opposed to leased and managed. This is key as HTHT's franchised hotels bring in less revenue per hotel than HTHT's leased and managed hotels.
Financials
$2.25 in net cash post-ipo.
HTHT moved into operational profitability in 2009.
97% of 2009 revenues were derived from leased and operated hotels.
2009 - $185 in revenues, a 65% increase over 2008. Growth was driven by an increase in hotels and rooms as RevPAR and occupancy remained stable. Gross margins were 21%. Operating margins 6%. HTHT's tax rate is approximately 25%, putting net margins at approximately 4%. Earnings per share were $0.13. On a pricing of $11.25, HTHT would trade 86 X's 2009 earnings.
2010 - HTHT outgrew both SVN/HMIN in 2009 and that should continue in 2010 with the aggressive growth plan. Revenues however will not come close to the 65% increase in 2009 though due to the mix of new hotels leaning towards franchised as well as the flat revenues the back half of 2009. I would plug in 30% revenue growth in 2011, for a total of $240 million. Gross margins should improve to 25%, operating margins 11%. Net margins after tax of 8.25%. Earnings per share of $0.33. On a pricing of $11.25, HTHT would trade 34 X's 2010 earnings.
Quick comparison with SVN and HMIN:
SVN - $320 million market cap. Trading 1 1/2 X's '10 revenues and 33 X's '10 estimates with a 28% revenue growth rate.
HMIN - $1.33 billion market cap. Trading 3 X's '10 revenues and trading 38 X's '10 estimates with a 23% '10 revenue growth rate.
HTHT - $678 million market cap on $11.25. Would trade 2.8 X's '10 revenues and 34 X's '10 earnings with a 30% revenue growth rate in '10.
Conclusion - All three of these(HMIN/HTHT/SVN) are sacrificing shorter term bottom line growth in a race to grow locations and rooms. The problem with this strategy is any appreciation for HTHT over pricing range makes them look awfully pricey when put beside nearly every other China stock across all sectors. That is a perceived valuation issue for this group currently as top line growth should be strong, but bottom line results continue to make the sector look pricey. This deal is a recommend in range for one big reason: HTHT's founder & CEO has also co-founded and was CEO of two very successful Chinese ipos this decade CTRP and HMIN. Factor in that CTRP is purchasing a nice chunk of HTHT on ipo pricing and this is a deal that should work shorter term in range. Mid-term, all depends on what multiple the market wants to give this sector. This is a very competitive group and pricing power(or lack of) will come into play as the economy hotel market becomes better covered and saturated.
Recommend shorter term in range.
2010-03-23
HTHT - China Lodging Group
HTHT - China Lodging Group plans on offering 9 million ADS at a range of $10.25-$12.25. Assuming over-allotments are exercised, the deal size will be 10.35 million shares. Goldman Sachs and Morgan Stanley are leading the deal, Oppenheimer co-managing. Post-ipo HTHT will have 60.25 million ADS equivalent shares outstanding for a market cap of $678 million on a pricing of $11.25. Ipo proceeds will be used to fund expansion.
*** Founder, Executive Chairman of the Board of Directors Qi Ji will own 46% of HTHT post-ipo. Qi Ji also co-founded HMIN and CTRP and served as CEO of each. Qi Ji currently site on the Board of Directors of CTRP. CTRP and HMIN are two of the most successful China ipos of the past decade. In addition CTRP will be purchasing an 8% stake in HTHT on ipo at ipo pricing.
From the prospectus:
'We operate a leading economy hotel chain in China.'
HTHT commenced operations in 2005.
In '08 and '09 HTHT had the highest revenues generated per available room, or RevPAR, and the highest occupancy rate in China.
HTHT operates under the HanTing Express Hotel, HanTing Seasons Hotel and HanTing Hi Inn.
In 2009 approximately 68% of room nights were sold to members of HTHT's HanTing Club loyalty program.
HTHT utilizes a lease and operate model, directly operating the majority of their branded hotels. HTHT does franchise and manage hotels as well. As of 12/3109, HTHT had 173 leased-and-operated hotels and 63 franchised-and-managed hotels. In addition, as of the same date, HTHT had 21 leased-and-operated hotels and 123 franchised-and-managed hotels under development. HTHT currently operates in 39 cities with 28,360 total rooms.
2009 occupancy rate was strong at 94%. Average daily room rate was approximately $25 US with RevPAR at a shade over $23 per day.
Sector - We've seen two ipos this decade in this sector, HMIN and SVN. The lodging industry in China consists of upscale luxury hotels such as four and five star hotels and other accommodations such as one, two and three star hotels and guest houses. The industry grew from approximately 237,800 hotels in 2003 to approximately 315,900 hotels in 2008, and 20.1 million rooms in 2003 to 27.3 million rooms in 2008.
Seasonality - 1'st quarter annually tends to be HTHT's lightest.
HTHT plans to add approximately 90 hotels in 2010, the majority of which will be franchised as opposed to leased and managed. This is key as HTHT's franchised hotels bring in less revenue per hotel than HTHT's leased and managed hotels.
Financials
$2.25 in net cash post-ipo.
HTHT moved into operational profitability in 2009.
97% of 2009 revenues were derived from leased and operated hotels.
2009 - $185 in revenues, a 65% increase over 2008. Growth was driven by an increase in hotels and rooms as RevPAR and occupancy remained stable. Gross margins were 21%. Operating margins 6%. HTHT's tax rate is approximately 25%, putting net margins at approximately 4%. Earnings per share were $0.13. On a pricing of $11.25, HTHT would trade 86 X's 2009 earnings.
2010 - HTHT outgrew both SVN/HMIN in 2009 and that should continue in 2010 with the aggressive growth plan. Revenues however will not come close to the 65% increase in 2009 though due to the mix of new hotels leaning towards franchised as well as the flat revenues the back half of 2009. I would plug in 30% revenue growth in 2011, for a total of $240 million. Gross margins should improve to 25%, operating margins 11%. Net margins after tax of 8.25%. Earnings per share of $0.33. On a pricing of $11.25, HTHT would trade 34 X's 2010 earnings.
Quick comparison with SVN and HMIN:
SVN - $320 million market cap. Trading 1 1/2 X's '10 revenues and 33 X's '10 estimates with a 28% revenue growth rate.
HMIN - $1.33 billion market cap. Trading 3 X's '10 revenues and trading 38 X's '10 estimates with a 23% '10 revenue growth rate.
HTHT - $678 million market cap on $11.25. Would trade 2.8 X's '10 revenues and 34 X's '10 earnings with a 30% revenue growth rate in '10.
Conclusion - All three of these(HMIN/HTHT/SVN) are sacrificing shorter term bottom line growth in a race to grow locations and rooms. The problem with this strategy is any appreciation for HTHT over pricing range makes them look awfully pricey when put beside nearly every other China stock across all sectors. That is a perceived valuation issue for this group currently as top line growth should be strong, but bottom line results continue to make the sector look pricey. This deal is a recommend in range for one big reason: HTHT's founder & CEO has also co-founded and was CEO of two very successful Chinese ipos this decade CTRP and HMIN. Factor in that CTRP is purchasing a nice chunk of HTHT on ipo pricing and this is a deal that should work shorter term in range. Mid-term, all depends on what multiple the market wants to give this sector. This is a very competitive group and pricing power(or lack of) will come into play as the economy hotel market becomes better covered and saturated.
Recommend shorter term in range.
March 29, 2010, 3:05 am
FIBK - First Interstate BancSystem
2010-03-20
FIBK - First Interstate BancSystem
FIBK - First Interstate BancSystem plans on offering 8.7 million shares at a range of $14-$16. Assuming over-allotments are exercised the deal size will be 10 million shares. Barclays is leading the deal, Davidson, KBW and Sandler O'Neill co-managing. Post-ipo FIBK will have 41.2 million shares outstanding for a market cap of $618 million on a pricing of $15. Ipo proceeds will be utilized to support growth efforts, pay off remaining long term debt and for general corporate purposes.
FIBK's controlling family, led by Chairman Thomas Scott and Vice Chairman James Scott, will own 33% of FIBK post-ipo.
Dividends - FIBK has regularly issued dividends to shareholders. Over the past year dividends have been $0.11 per quarter. Assuming these levels continue post-ipo, FIBK would be paying holders $0.44 per share annually. Annual yield at $15 would be 2.9%.
From the prospectus:
'We are a financial and bank holding company headquartered in Billings, Montana...We currently operate 72 banking offices in 42 communities located in Montana, Wyoming and western South Dakota.'
As of 12/31/09, FIBK had assets of $7.1 billion, deposits of $5.8 billion, and loans of $4.5 billion.
Company was established by Homer Scott in 1968 with a focus on serving the communities of Wyoming and Montana. Currently FIBK has 72 locations in 42 communities. FIBK is the largest banking presence in over 1/2 of their communities. Overall, FIBK is ranked first in deposits in Montana and second in Wyoming. 50% of deposits are in Montana, 36% in Wyoming and 14% in South Dakota.
Acquisition: In 1/08 FIBK entered South Dakota with the purchase of First Western Bank and their 18 locations.
Strengths - The biggest strength here is that FIBK has not been operating community banks the past few years in Nevada, California or Florida. The three states in which FIBK does operate(Montana, Wyoming and South Dakota), have seen a more stable real estate valuation as well as a relatively stronger economy overall. Unemployment rates as of 12/09: Montana at 6.7%, Wyoming at 7.5% and South Dakota at 4.7%. Each is well below national 10% average. Economy in FIBK's area driven by agriculture and energy.
FIBK has remained profitable and growing through the tough banking cycle of the past few years. 22 consecutive years of profitability.
Community model - Each of FIBK's local bank presidents have discretion and responsibility for loan deposit decisions. Loans and assets are funded directly from local deposits.
Future expansion to be funded via organic growth and potential acquisitions, including FDIC assisted acquisitions.
Financials
Bulk of net revenues are derived from the interest rate spread between loan interest earned and deposit interest paid out. FIBK has been able to retain steady spreads of 4-4 1/2% points over the past 4 years.
FIBK has not leveraged their deposits, on 12/31/09 the loan to deposit ratio was 78%. This is well below the historical 85%-90%, a result of tightening loan standards as well as writing off a number of loans in 2008 and 2009. Loan write-offs have been in the 1% of total loan dollars each of the past two years. While historically this is a pretty large bump up for FIBK it is far below many community banks elsewhere in the US.
Operating income decreased in '08 and '09 due to the increase in loan write-offs. 2010 should continue to see a significant loan write-off amount, most likely again in that 1% of loans outstanding ballpark. Why? FIBK's under-performing loans were at 3% of all loans outstanding as of 12/31/09. We can pretty safely assume FIBK will write-off at least 1/3 of those in 2010. This is significant in that it will be difficult for FIBK to increase the bottom line strongly until under-performing loan levels decrease.
65% of loan portfolio is real estate related. Approximately 50% of loan portfolio are commercial loans.
**On a pricing of $15, FIBK would be coming public at 1.3 X's tangible book value.
As FIBK has tightened loan issuance, cash on hand has grown significantly. With a loan book of $4.5 billion, cash on hand sits at $623 million well above FIBK's $163 million under-performing loan levels. Unless those troubled loans increase significantly, it does appear FIBK's cash reserves are strong enough to handle the write-offs and still maintain adequate capital.
2009 - $197 million in net interest income after writing off $45 million in loan losses. Total revenues were $298 million. Operating income was was 27%, net margins 18%. Note that these are a tad skewed as we are using net revenues after written off loans for margins. Earnings per share were $1.31. On a pricing of $15, FIBK would trade 11-12 X's 2009 earnings.
**Note that FIBK's operating income decreased quarterly throughout 2009. Loan write-offs and tightening of loans given out were to blame along with non-interest income. FIBK is going to have a very difficult time even matching 2009's $1.31 eps. Loan write-offs should increase slightly in 2010, while the rest of FIBK's operations should remain relatively stable. I would expect a net here in 2010 in the $1.25 ballpark net of any future acquisitions.
GBCI is probably the closest public comparable. FIBK and GBCI both with a shade over 3% in under-performing loans and each right around 1.3-1.4 X's book value. GBCI is posting much stronger interest spreads at 4.8% to FIBK's 4%. Reason is simple: GBCI is leveraging their deposits to the tune of 2 1/2 times deposits(2.5) while FIBK does not with loans at 77%(0.77) of deposits. FIBK would seem to be the more conservative of the two.
Conclusion - Solid community bank coming pretty fully valued for 2010. FIBK appears in no danger of running into liquidity and/or operational troubles. However, outside of acquisitions, growth is going to be difficult to come by over the next year due to increases in doubtful loans and the needed cash horde to sustain any write-off increases. If cash is sitting on the balance sheet, it impacts the interest rate spreads in which FIBK puts money on the bottom line, Indeed spreads in 2009 shrank to just over 4%, from the historical norm of 4.5%(since 2005). Reason is 100% combination of loan write-offs and the large amount of cash on hand. Neutral in range here, would become very interested if pricing occurs closer to tangible book value. Solid conservatively run community bank operating in a region driven by agriculture and energy.
FIBK - First Interstate BancSystem
FIBK - First Interstate BancSystem plans on offering 8.7 million shares at a range of $14-$16. Assuming over-allotments are exercised the deal size will be 10 million shares. Barclays is leading the deal, Davidson, KBW and Sandler O'Neill co-managing. Post-ipo FIBK will have 41.2 million shares outstanding for a market cap of $618 million on a pricing of $15. Ipo proceeds will be utilized to support growth efforts, pay off remaining long term debt and for general corporate purposes.
FIBK's controlling family, led by Chairman Thomas Scott and Vice Chairman James Scott, will own 33% of FIBK post-ipo.
Dividends - FIBK has regularly issued dividends to shareholders. Over the past year dividends have been $0.11 per quarter. Assuming these levels continue post-ipo, FIBK would be paying holders $0.44 per share annually. Annual yield at $15 would be 2.9%.
From the prospectus:
'We are a financial and bank holding company headquartered in Billings, Montana...We currently operate 72 banking offices in 42 communities located in Montana, Wyoming and western South Dakota.'
As of 12/31/09, FIBK had assets of $7.1 billion, deposits of $5.8 billion, and loans of $4.5 billion.
Company was established by Homer Scott in 1968 with a focus on serving the communities of Wyoming and Montana. Currently FIBK has 72 locations in 42 communities. FIBK is the largest banking presence in over 1/2 of their communities. Overall, FIBK is ranked first in deposits in Montana and second in Wyoming. 50% of deposits are in Montana, 36% in Wyoming and 14% in South Dakota.
Acquisition: In 1/08 FIBK entered South Dakota with the purchase of First Western Bank and their 18 locations.
Strengths - The biggest strength here is that FIBK has not been operating community banks the past few years in Nevada, California or Florida. The three states in which FIBK does operate(Montana, Wyoming and South Dakota), have seen a more stable real estate valuation as well as a relatively stronger economy overall. Unemployment rates as of 12/09: Montana at 6.7%, Wyoming at 7.5% and South Dakota at 4.7%. Each is well below national 10% average. Economy in FIBK's area driven by agriculture and energy.
FIBK has remained profitable and growing through the tough banking cycle of the past few years. 22 consecutive years of profitability.
Community model - Each of FIBK's local bank presidents have discretion and responsibility for loan deposit decisions. Loans and assets are funded directly from local deposits.
Future expansion to be funded via organic growth and potential acquisitions, including FDIC assisted acquisitions.
Financials
Bulk of net revenues are derived from the interest rate spread between loan interest earned and deposit interest paid out. FIBK has been able to retain steady spreads of 4-4 1/2% points over the past 4 years.
FIBK has not leveraged their deposits, on 12/31/09 the loan to deposit ratio was 78%. This is well below the historical 85%-90%, a result of tightening loan standards as well as writing off a number of loans in 2008 and 2009. Loan write-offs have been in the 1% of total loan dollars each of the past two years. While historically this is a pretty large bump up for FIBK it is far below many community banks elsewhere in the US.
Operating income decreased in '08 and '09 due to the increase in loan write-offs. 2010 should continue to see a significant loan write-off amount, most likely again in that 1% of loans outstanding ballpark. Why? FIBK's under-performing loans were at 3% of all loans outstanding as of 12/31/09. We can pretty safely assume FIBK will write-off at least 1/3 of those in 2010. This is significant in that it will be difficult for FIBK to increase the bottom line strongly until under-performing loan levels decrease.
65% of loan portfolio is real estate related. Approximately 50% of loan portfolio are commercial loans.
**On a pricing of $15, FIBK would be coming public at 1.3 X's tangible book value.
As FIBK has tightened loan issuance, cash on hand has grown significantly. With a loan book of $4.5 billion, cash on hand sits at $623 million well above FIBK's $163 million under-performing loan levels. Unless those troubled loans increase significantly, it does appear FIBK's cash reserves are strong enough to handle the write-offs and still maintain adequate capital.
2009 - $197 million in net interest income after writing off $45 million in loan losses. Total revenues were $298 million. Operating income was was 27%, net margins 18%. Note that these are a tad skewed as we are using net revenues after written off loans for margins. Earnings per share were $1.31. On a pricing of $15, FIBK would trade 11-12 X's 2009 earnings.
**Note that FIBK's operating income decreased quarterly throughout 2009. Loan write-offs and tightening of loans given out were to blame along with non-interest income. FIBK is going to have a very difficult time even matching 2009's $1.31 eps. Loan write-offs should increase slightly in 2010, while the rest of FIBK's operations should remain relatively stable. I would expect a net here in 2010 in the $1.25 ballpark net of any future acquisitions.
GBCI is probably the closest public comparable. FIBK and GBCI both with a shade over 3% in under-performing loans and each right around 1.3-1.4 X's book value. GBCI is posting much stronger interest spreads at 4.8% to FIBK's 4%. Reason is simple: GBCI is leveraging their deposits to the tune of 2 1/2 times deposits(2.5) while FIBK does not with loans at 77%(0.77) of deposits. FIBK would seem to be the more conservative of the two.
Conclusion - Solid community bank coming pretty fully valued for 2010. FIBK appears in no danger of running into liquidity and/or operational troubles. However, outside of acquisitions, growth is going to be difficult to come by over the next year due to increases in doubtful loans and the needed cash horde to sustain any write-off increases. If cash is sitting on the balance sheet, it impacts the interest rate spreads in which FIBK puts money on the bottom line, Indeed spreads in 2009 shrank to just over 4%, from the historical norm of 4.5%(since 2005). Reason is 100% combination of loan write-offs and the large amount of cash on hand. Neutral in range here, would become very interested if pricing occurs closer to tangible book value. Solid conservatively run community bank operating in a region driven by agriculture and energy.
March 16, 2010, 2:00 pm
FNGN - Financial Engines
2010-03-13
FNGN - Financial Engines
FNGN - Financial Engines plans to offer 10.6 million shares at a range of $9-$11. Insiders will be selling 4.7 million shares in the deal. Assuming over-allotments are exercised, the deal size will be 12.2 million shares with insider sales remaining the same at 4.7 million shares. Goldman Sachs and UBS are leading the deal, Cowen and Piper Jaffray are co-managing. Post-ipo FNGN will have 41.1 million shares outstanding for a market cap of $410 million on a pricing of $10. Ipo proceeds will be used for general corporate purposes.
Note that FNGN does have a significant amount of option shares that will be exercised over the next few years. Currently FNGN has 11.6 million shares in the form of granted options at an exercise price of $6.07 average.
Foundation Capital will own 14% of FNGN post-ipo, Enterprise Associates 11% and Oak Hill Capital 7%. None of these three entities are selling any shares on ipo.
From the prospectus:
'We are a leading provider of independent, technology-enabled portfolio management services, investment advice and retirement help to participants in employer-sponsored defined contribution retirement plans, such as 401(k) plans.'
Investment advice for the 'common man' focusing on assisting those in retirement plans, notably workplace 401k plans. FNGN focuses on the mass market 401k and other retirement plans via automated web based technology platforms. One can imagine the labor expenses if the approach were actually a 1-to-1, face-to-face or voice-to-voice investment advice business plan focusing on the millions of employees with 401k's and/or other similar retirement plans. FNGN's solution is web based auto-generated advice. Who developed this auto-generated advice?
Financial Engines’ web-based advice is generated using portfolio-analysis programs designed by its co-founder, Nobel laureate William F. Sharpe. FNGN's automated analysis offers specific advice including whether to buy or sell certain funds available under the 401k plan while evaluating investments on factors including asset mix, fund expense, manager performance, risk and tax efficiency.
Approximately half of users have less than $20,000 of retirement assets. This is mass retirement investment advice running counter to most advisor outfits which offer specific fee based advice to higher net worth clients. For FNGN this means one thing: Volume, Volume and...Volume. FNGN needs many 401k accounts to significantly grow their assets under management and in turn grow fees. Growth here is driven by selling in their services to large companies with many employees under the 401k umbrella.
FNGN's three services:
Professional Management - Managed account service designed for plan participants who want affordable, personalized and professional portfolio management services, investment advice and retirement help from an independent investment advisor without the conflicts of interest that can arise when an advisor offers proprietary products. This is FNGN's growth area. When a company's 401k plan offers FNGN's services, plan participants can elect to remove themselves from the decision making/allocation process and have FNGN make those decisions for them. It is portfolio management for the 'little guy' essentially. FNGN currently has 391,000 managed accounts totaling $25.7 billion in assets. **Professional management accounted for 62% of 2009 revenues.
Online Advice - Internet-based service that offers personalized advice to plan participants who wish to take a more active role in personally managing their retirement portfolios.
Retirement Evaluation - Highlights specific risks in a plan participant’s retirement account and assess the likelihood of achieving the plan participant’s retirement income goals.
Customers include 116 of the Fortune 500 and 8 of the Fortune 20. FNGN currently has 354 plan sponsors utilizing all three services above totaling 3.9 million participants and $269 billion in assets under management. **9.5% of these assets are under FNGN's direct professional management.
Since 2004, Financial Engines has retained 97% of its contracted 401(k) sponsors each year.
**This is an easily scalable business here. FNGN has built their proprietary web platforms and can easily scale them to however many plan participants they add. This point may be the strongest pull to this deal. FNGN has already spent significant capital building their platform and are well ahead of competitors in their core business. Fidelity is really the only pension plan selling FNGN's services that also competes with them in a fashion. Other direct competitors include Morningstar (MORN) GuidedChoice and ProManage. Note that investment management for MORN accounts for only 20% or so of their revenues.
Revenues are primarily derived from management fees based on the value of assets managed (assets under management) for plan participants. In addition FNGN derives revenues from recurring subscription platform fees for access to FNGN''s services. A strength here is that revenues are recurring and are also based on 401k's which themselves tend to have recurring regular contributions.
Sales into sponsors are made either directly or through one of eight retirement plan providers. These are ACS, Fidelity, Hewitt, ING, JPMorgan, Mercer, T. Rowe Price and Vanguard. JPMorgan, Vanguard and ING directly accounted for approximately 18%, 10% and 8% of 2009 revenues.
FNGN's selling point - US companies have shifted from a defined pension plan system to a defined contribution (401k/IRA) retirement system. The result is that most baby boomers and generation X'ers are not remotely close to a retirement nest egg and will be seeking ways to maximize retirement plan assets going forward. FNGN offers independent and unconflicted advice, as FNGN is not recommending buying and/or selling anything they also manage.
Proprietary technology - It appears FNGN's technology platforms incorporate a version of 'Modern Portfolio Theory' used by many large pensions and institutions. They consist of the following:
Optimization Engine - Makes personalized investment recommendations, chosen from the investment options available within each plan. In addition FNGN recommends a level of savings to reach retirement goals.
Simulation Engine - Model the risk and return characteristics of more than 30,000 securities taking into account factors such as asset class exposures, expenses, turnover, manager performance, active management risk, stock specific risk and the security’s tax-efficiency.
Advice Engine - Appears to exist to minimize the risk of holding too much exposure in company stock as opposed to spreading the risk to other assets. Think Enron or Lehman employees here whom held most of their retirement in their company stock and watched it all disappear.
**Okay we have a proprietary technology platform already built and easily scalable to huge numbers of users if needed. We've a recurring revenue model which also is based on contributions that tend to be recurring themselves. FNGN has 8 large pension plans selling in their services which include simply web-based advice all the way to active technology/automated driven 401k portfolio management. This is one heck of a business model here, about as good as it gets. In 2008, the stock and bond markets (outside of US Treasuries that is) took a beating as we are all well aware. Many mutual funds saw assets under management decline by massive amounts. With their strong business model and the fact they do not manage funds themselves, FNGN's assets under management declined by only 4% in 2008. That is very significant in a year in which asset managers across the spectrum took a sound beating.
We should also note that FNGN is the sole provider of services offered in each of the 354 plan sponsors which offer the full suite of FNGN's services. There is no competition once FNGN sells into a sponsor.
Risks here are fairly obvious. If one of the retirement plans stops offering FNGN's services (notably JP Morgan, Vanguard or ING), growth would be stymied going forward. Also if a large company drops FNGN from their plans, revenues would take a hit. This recently happened with competitor Morningstar.
Financials
Approximately $1 1/2 per share in net cash post-ipo.
**Assets under professional active management grew 65% in 2009 after dipping just 4% in 2008. These directly managed assets accounted for 62% of 2009 revenues. All of FNGN's growth is coming from this segment.
As of 12/31/09, assets under FNGN's active management were:
Cash 5%
Bonds 25%
Domestic Equity 50%
International Equity 20%
2009 - Revenues were $85 million, a 20% increase over 2008. Operating expense ratio was 92%, operating margins 8%. While at first glance this looks very thin, FNGN is moving swiftly into solid operating profits. In 2009, while revenues grew by 20%, operating expenses grew just 5.5%. Most of that growth in expenses was stock compensation related due to the implied rise in FNGN's share value. Fold that out post-ipo and operating expenses are flat here. Again this is the power of FNGN's business model and technology platform. FNGN has extensive loss carry-forwards as 2009 was their first year of operating profits. Post-ipo the tax rate for 2010 appears as if it will be in the 25% ballpark, so that what we will plug in for 2009. Net margins for '09 were 5.7%, eps $0.12.
2010 - FNGN had a sharp rise in assets under management the fourth quarter of 2009. This should translate into solid growth for 2010 as the bulk of revenues are derived as a percentage of assets under management. Total revenues should be in the $115-$120 million ballpark, a 43% increase over 2009. The stronger growth is due to the easy first half of 2009 comparables. Operating expense ratio should dip from 90% to 80%. Again FNGN is growing revenues far quicker than expenses creating a strong economy of scale here. Plugging in 25% tax rate, net margins should be 10%. Earnings per share should be $0.40-$0.45. On a pricing of $10, FNGN would trade 23 X's 2010 estimates.
MORN is FNGN's closest public comparable. Keep in mind that MORN derives 20% of annual revenues from investment management, FNGN 60%.
MORN - $2.4 billion market cap projecting 11% revenue growth in 2010 currently trading 22 X's '10 estimates. $7 per share in cash on hand.
FNGN - $410 million market cap on a $10 pricing. 43% revenue growth in 2010 trading 23 X's 2010 estimates. $1 1/2 per share in cash on hand.
Conclusion - Fantastic business plan and solid execution past two years. If FNGN continues on current pace, the bottom line will continue to expand quickly. Strong recommend in range.
FNGN - Financial Engines
FNGN - Financial Engines plans to offer 10.6 million shares at a range of $9-$11. Insiders will be selling 4.7 million shares in the deal. Assuming over-allotments are exercised, the deal size will be 12.2 million shares with insider sales remaining the same at 4.7 million shares. Goldman Sachs and UBS are leading the deal, Cowen and Piper Jaffray are co-managing. Post-ipo FNGN will have 41.1 million shares outstanding for a market cap of $410 million on a pricing of $10. Ipo proceeds will be used for general corporate purposes.
Note that FNGN does have a significant amount of option shares that will be exercised over the next few years. Currently FNGN has 11.6 million shares in the form of granted options at an exercise price of $6.07 average.
Foundation Capital will own 14% of FNGN post-ipo, Enterprise Associates 11% and Oak Hill Capital 7%. None of these three entities are selling any shares on ipo.
From the prospectus:
'We are a leading provider of independent, technology-enabled portfolio management services, investment advice and retirement help to participants in employer-sponsored defined contribution retirement plans, such as 401(k) plans.'
Investment advice for the 'common man' focusing on assisting those in retirement plans, notably workplace 401k plans. FNGN focuses on the mass market 401k and other retirement plans via automated web based technology platforms. One can imagine the labor expenses if the approach were actually a 1-to-1, face-to-face or voice-to-voice investment advice business plan focusing on the millions of employees with 401k's and/or other similar retirement plans. FNGN's solution is web based auto-generated advice. Who developed this auto-generated advice?
Financial Engines’ web-based advice is generated using portfolio-analysis programs designed by its co-founder, Nobel laureate William F. Sharpe. FNGN's automated analysis offers specific advice including whether to buy or sell certain funds available under the 401k plan while evaluating investments on factors including asset mix, fund expense, manager performance, risk and tax efficiency.
Approximately half of users have less than $20,000 of retirement assets. This is mass retirement investment advice running counter to most advisor outfits which offer specific fee based advice to higher net worth clients. For FNGN this means one thing: Volume, Volume and...Volume. FNGN needs many 401k accounts to significantly grow their assets under management and in turn grow fees. Growth here is driven by selling in their services to large companies with many employees under the 401k umbrella.
FNGN's three services:
Professional Management - Managed account service designed for plan participants who want affordable, personalized and professional portfolio management services, investment advice and retirement help from an independent investment advisor without the conflicts of interest that can arise when an advisor offers proprietary products. This is FNGN's growth area. When a company's 401k plan offers FNGN's services, plan participants can elect to remove themselves from the decision making/allocation process and have FNGN make those decisions for them. It is portfolio management for the 'little guy' essentially. FNGN currently has 391,000 managed accounts totaling $25.7 billion in assets. **Professional management accounted for 62% of 2009 revenues.
Online Advice - Internet-based service that offers personalized advice to plan participants who wish to take a more active role in personally managing their retirement portfolios.
Retirement Evaluation - Highlights specific risks in a plan participant’s retirement account and assess the likelihood of achieving the plan participant’s retirement income goals.
Customers include 116 of the Fortune 500 and 8 of the Fortune 20. FNGN currently has 354 plan sponsors utilizing all three services above totaling 3.9 million participants and $269 billion in assets under management. **9.5% of these assets are under FNGN's direct professional management.
Since 2004, Financial Engines has retained 97% of its contracted 401(k) sponsors each year.
**This is an easily scalable business here. FNGN has built their proprietary web platforms and can easily scale them to however many plan participants they add. This point may be the strongest pull to this deal. FNGN has already spent significant capital building their platform and are well ahead of competitors in their core business. Fidelity is really the only pension plan selling FNGN's services that also competes with them in a fashion. Other direct competitors include Morningstar (MORN) GuidedChoice and ProManage. Note that investment management for MORN accounts for only 20% or so of their revenues.
Revenues are primarily derived from management fees based on the value of assets managed (assets under management) for plan participants. In addition FNGN derives revenues from recurring subscription platform fees for access to FNGN''s services. A strength here is that revenues are recurring and are also based on 401k's which themselves tend to have recurring regular contributions.
Sales into sponsors are made either directly or through one of eight retirement plan providers. These are ACS, Fidelity, Hewitt, ING, JPMorgan, Mercer, T. Rowe Price and Vanguard. JPMorgan, Vanguard and ING directly accounted for approximately 18%, 10% and 8% of 2009 revenues.
FNGN's selling point - US companies have shifted from a defined pension plan system to a defined contribution (401k/IRA) retirement system. The result is that most baby boomers and generation X'ers are not remotely close to a retirement nest egg and will be seeking ways to maximize retirement plan assets going forward. FNGN offers independent and unconflicted advice, as FNGN is not recommending buying and/or selling anything they also manage.
Proprietary technology - It appears FNGN's technology platforms incorporate a version of 'Modern Portfolio Theory' used by many large pensions and institutions. They consist of the following:
Optimization Engine - Makes personalized investment recommendations, chosen from the investment options available within each plan. In addition FNGN recommends a level of savings to reach retirement goals.
Simulation Engine - Model the risk and return characteristics of more than 30,000 securities taking into account factors such as asset class exposures, expenses, turnover, manager performance, active management risk, stock specific risk and the security’s tax-efficiency.
Advice Engine - Appears to exist to minimize the risk of holding too much exposure in company stock as opposed to spreading the risk to other assets. Think Enron or Lehman employees here whom held most of their retirement in their company stock and watched it all disappear.
**Okay we have a proprietary technology platform already built and easily scalable to huge numbers of users if needed. We've a recurring revenue model which also is based on contributions that tend to be recurring themselves. FNGN has 8 large pension plans selling in their services which include simply web-based advice all the way to active technology/automated driven 401k portfolio management. This is one heck of a business model here, about as good as it gets. In 2008, the stock and bond markets (outside of US Treasuries that is) took a beating as we are all well aware. Many mutual funds saw assets under management decline by massive amounts. With their strong business model and the fact they do not manage funds themselves, FNGN's assets under management declined by only 4% in 2008. That is very significant in a year in which asset managers across the spectrum took a sound beating.
We should also note that FNGN is the sole provider of services offered in each of the 354 plan sponsors which offer the full suite of FNGN's services. There is no competition once FNGN sells into a sponsor.
Risks here are fairly obvious. If one of the retirement plans stops offering FNGN's services (notably JP Morgan, Vanguard or ING), growth would be stymied going forward. Also if a large company drops FNGN from their plans, revenues would take a hit. This recently happened with competitor Morningstar.
Financials
Approximately $1 1/2 per share in net cash post-ipo.
**Assets under professional active management grew 65% in 2009 after dipping just 4% in 2008. These directly managed assets accounted for 62% of 2009 revenues. All of FNGN's growth is coming from this segment.
As of 12/31/09, assets under FNGN's active management were:
Cash 5%
Bonds 25%
Domestic Equity 50%
International Equity 20%
2009 - Revenues were $85 million, a 20% increase over 2008. Operating expense ratio was 92%, operating margins 8%. While at first glance this looks very thin, FNGN is moving swiftly into solid operating profits. In 2009, while revenues grew by 20%, operating expenses grew just 5.5%. Most of that growth in expenses was stock compensation related due to the implied rise in FNGN's share value. Fold that out post-ipo and operating expenses are flat here. Again this is the power of FNGN's business model and technology platform. FNGN has extensive loss carry-forwards as 2009 was their first year of operating profits. Post-ipo the tax rate for 2010 appears as if it will be in the 25% ballpark, so that what we will plug in for 2009. Net margins for '09 were 5.7%, eps $0.12.
2010 - FNGN had a sharp rise in assets under management the fourth quarter of 2009. This should translate into solid growth for 2010 as the bulk of revenues are derived as a percentage of assets under management. Total revenues should be in the $115-$120 million ballpark, a 43% increase over 2009. The stronger growth is due to the easy first half of 2009 comparables. Operating expense ratio should dip from 90% to 80%. Again FNGN is growing revenues far quicker than expenses creating a strong economy of scale here. Plugging in 25% tax rate, net margins should be 10%. Earnings per share should be $0.40-$0.45. On a pricing of $10, FNGN would trade 23 X's 2010 estimates.
MORN is FNGN's closest public comparable. Keep in mind that MORN derives 20% of annual revenues from investment management, FNGN 60%.
MORN - $2.4 billion market cap projecting 11% revenue growth in 2010 currently trading 22 X's '10 estimates. $7 per share in cash on hand.
FNGN - $410 million market cap on a $10 pricing. 43% revenue growth in 2010 trading 23 X's 2010 estimates. $1 1/2 per share in cash on hand.
Conclusion - Fantastic business plan and solid execution past two years. If FNGN continues on current pace, the bottom line will continue to expand quickly. Strong recommend in range.
February 17, 2010, 4:18 pm
CHC - China Hydroelectric
2010-01-13
CHC - China Hydroelectric
CHC/CHCW - China Hydroelectric plans on offering 3.125 million units at a range of $15-$17. Each unit will consist of one ADS and one warrant.
The warrants will be exercisable upon ipo settlement at a price of $15. The ADS and warrants will trade separately post-ipo with the warrants under the ticker CHC and the warrants under the ticker CHCW. The warrants are exercisable for a period of up to four years post-ipo. They have value only if CHC is trading above $15 as that is the exercise price of all warrants.
Broadband Capital is leading the deal, i-Bankers, Morgan Joseph and Pail co-managing. Note that Broadband Capital also was the lead underwriter for the(thus far) very successful 2009 LIWA ipo.
Post-ipo, assuming all warrants will eventually be exercised, CHC will have 52.1 million ADS equivalent shares outstanding for a market cap of $834 million on a pricing of $16.
Ipo proceeds will be utilized for hydroelectric company acquisitions.
Vicis Capital Management will own 30% of CHC post-ipo, CPI Ballpark Investments 21%.
From the prospectus:
'We are a fast-growing consolidator, operator and developer of hydropower plants in China, led by an international management team. We were formed in July 2006 to acquire existing small hydroelectric assets in China and aim to become the PRC’s largest independent small hydroelectric power producer.'
CHC was formed in 2006 and since2007 has purchased 11 small hydropower plants located in four Chinese provinces. Installed capacity currently is 376.6 MW. CHC generates revenues by selling electricity generated by hydropower capacity to local power grids.
Sector - Hydropower is largest source or renewable energy in China. Electricity generated from hydropower in China has grown at annual rate of 12% over the past decade.
Growth plan is to continue to acquire small hydropower plants. CHC has recently acquired two plants, one of which has yet to begin construction.
**With a roll-up growth strategy, ideally you want to see a clean balance sheet on ipo. Unfortunately that is not the case here. Post-ipo, CHC will have net debt of $194 million. Through the first nine months of 2009 debt servicing ate up 74% of operating profits. There is sort of a double whammy in effect here. CHC has done private stock placements to raise cash. They've also given equity considerations(in preferred shares) in a few of their acquisitions. This has led to a high share count on ipo leading to a sizable $800+ million market cap on a $16 pricing. However they've still run up sizable debt in their acquisitions. So sizable, that at least for the present, the debt load is eating into nearly all operating profits. This is not what you want to see in a roll-up strategy, not at all. Going forward CHC will continue acquiring and will need to do so by adding more debt to the bottom line as the cash flows are simply not there due to the current debt load. I do realize that revenues from recently acquired plants will grow year over year as CHC operates them for a full fiscal year. The point is not that CHC will not increase revenues or grow, it is that they are in a precarious balance sheet situation for a company implementing a roll-up acquisition strategy.
This is a very interesting niche with substantial potential. However this particular company is coming public with one hand already tied behind it's back. I would expect substantial share dilution here going forward simply due to the fact CHC still needs to raise a lot of money post-ipo.
Accounts receivables - Nearly 50% of CHC's revenue growth the first nine months of 2009 is sitting in the 'accounts receivables' line. Put another way, 30% of 2009's revenues have yet to be actually collected. Some of this very well may be a timing issue, however something to keep in mind and follow over the next few quarters. Along these lines, CHC GAAP wise shows a nice operating profit through the first nine months of 2009, however actually cash flows are negative.
**CHC ipo looks to be the 'wrong' deal in the 'right' sector. Hydropower in China is a growth business as the PRC looks to expand clean/renewable energy projects. Unfortunately, CHC's balance sheet gives me pause here as I have reservations about their ability to execute their growth plans over the coming years. This is a high risk deal that has a better than average possibility of 'blowing up' sometime in the future. Best case scenario here is ipo investors get massively diluted over the coming years as CHC does multiple equity offerings to fulfill roll-up growth strategy and clean the balance sheet.
2009 - Through the first nine months, full year revenues appeared on track for $42 million. Gross margins should be 63%, operating margins 43%. Plugging in debt servicing and taxes, net margins should be 9%. Earnings per share of $0.07.
Conclusion - The low EPS here does not bother me, the growth plan coupled with the balance sheet and debt servicing costs do. I am interested in this sector, however with this particular deal I am not interested in range
CHC - China Hydroelectric
CHC/CHCW - China Hydroelectric plans on offering 3.125 million units at a range of $15-$17. Each unit will consist of one ADS and one warrant.
The warrants will be exercisable upon ipo settlement at a price of $15. The ADS and warrants will trade separately post-ipo with the warrants under the ticker CHC and the warrants under the ticker CHCW. The warrants are exercisable for a period of up to four years post-ipo. They have value only if CHC is trading above $15 as that is the exercise price of all warrants.
Broadband Capital is leading the deal, i-Bankers, Morgan Joseph and Pail co-managing. Note that Broadband Capital also was the lead underwriter for the(thus far) very successful 2009 LIWA ipo.
Post-ipo, assuming all warrants will eventually be exercised, CHC will have 52.1 million ADS equivalent shares outstanding for a market cap of $834 million on a pricing of $16.
Ipo proceeds will be utilized for hydroelectric company acquisitions.
Vicis Capital Management will own 30% of CHC post-ipo, CPI Ballpark Investments 21%.
From the prospectus:
'We are a fast-growing consolidator, operator and developer of hydropower plants in China, led by an international management team. We were formed in July 2006 to acquire existing small hydroelectric assets in China and aim to become the PRC’s largest independent small hydroelectric power producer.'
CHC was formed in 2006 and since2007 has purchased 11 small hydropower plants located in four Chinese provinces. Installed capacity currently is 376.6 MW. CHC generates revenues by selling electricity generated by hydropower capacity to local power grids.
Sector - Hydropower is largest source or renewable energy in China. Electricity generated from hydropower in China has grown at annual rate of 12% over the past decade.
Growth plan is to continue to acquire small hydropower plants. CHC has recently acquired two plants, one of which has yet to begin construction.
**With a roll-up growth strategy, ideally you want to see a clean balance sheet on ipo. Unfortunately that is not the case here. Post-ipo, CHC will have net debt of $194 million. Through the first nine months of 2009 debt servicing ate up 74% of operating profits. There is sort of a double whammy in effect here. CHC has done private stock placements to raise cash. They've also given equity considerations(in preferred shares) in a few of their acquisitions. This has led to a high share count on ipo leading to a sizable $800+ million market cap on a $16 pricing. However they've still run up sizable debt in their acquisitions. So sizable, that at least for the present, the debt load is eating into nearly all operating profits. This is not what you want to see in a roll-up strategy, not at all. Going forward CHC will continue acquiring and will need to do so by adding more debt to the bottom line as the cash flows are simply not there due to the current debt load. I do realize that revenues from recently acquired plants will grow year over year as CHC operates them for a full fiscal year. The point is not that CHC will not increase revenues or grow, it is that they are in a precarious balance sheet situation for a company implementing a roll-up acquisition strategy.
This is a very interesting niche with substantial potential. However this particular company is coming public with one hand already tied behind it's back. I would expect substantial share dilution here going forward simply due to the fact CHC still needs to raise a lot of money post-ipo.
Accounts receivables - Nearly 50% of CHC's revenue growth the first nine months of 2009 is sitting in the 'accounts receivables' line. Put another way, 30% of 2009's revenues have yet to be actually collected. Some of this very well may be a timing issue, however something to keep in mind and follow over the next few quarters. Along these lines, CHC GAAP wise shows a nice operating profit through the first nine months of 2009, however actually cash flows are negative.
**CHC ipo looks to be the 'wrong' deal in the 'right' sector. Hydropower in China is a growth business as the PRC looks to expand clean/renewable energy projects. Unfortunately, CHC's balance sheet gives me pause here as I have reservations about their ability to execute their growth plans over the coming years. This is a high risk deal that has a better than average possibility of 'blowing up' sometime in the future. Best case scenario here is ipo investors get massively diluted over the coming years as CHC does multiple equity offerings to fulfill roll-up growth strategy and clean the balance sheet.
2009 - Through the first nine months, full year revenues appeared on track for $42 million. Gross margins should be 63%, operating margins 43%. Plugging in debt servicing and taxes, net margins should be 9%. Earnings per share of $0.07.
Conclusion - The low EPS here does not bother me, the growth plan coupled with the balance sheet and debt servicing costs do. I am interested in this sector, however with this particular deal I am not interested in range
February 17, 2010, 4:16 pm
AMCF - solid little China microcap
2010-01-08
AMCF - Andatee China Marine Fuel Services
AMCF - Andatee China Marine Fuel Services plans on offering 2.5 million shares at a range of $6-$8. With over-allotments the deal size will be 2.875 million shares. Rodman & Renshaw is leading the deal Newbridge co-managing. Rodman & Renshaw recently brought ZSTN public. Post-ipo AMCF will have 8.875 million shares outstanding for a market cap of $62.1 million on a pricing of $7. Ipo proceeds will be used for capital improvement, sales and marketing, research and development, funding possible future acquisitions as well as for general working capital purposes. Chairman, President and CEO An Fengbin will own 60% of AMCF post-ipo.
From the prospectus:
'We are engaged in the production, storage, distribution and wholesale purchases and sales of blended marine fuel oil for cargo and fishing vessels with operations mainly in Liaoning, Shandong and Zhejiang Provinces in the PRC.'
Chinese marine fuel stations. Facilities include storage tanks, vessels berths, marine fuel pumps, blending facilities and tankers. Note that AMCF refines their own fuel blends as well as sells them. AMCF's blend is a close substitute for diesel. Primary raw materials for AMCF's blended fuels are oil refinery by-products.
Marine oil for fishing boats account for 70%-80% of revenues, with marine oil for cargo vessels accounting for the other 20%-30%.
AMCF generally is able to pass-through oil price fluctuations to end customers. Total revenues will be impacted by the fluctuations in the price of oil, however margins should remain relatively consistent assuming AMCF remains successful passing through those fluctuations.
AMCF's primary business lies in the historical fishing towns of northern China, Dandong, Shidao and Shipu. AMCF has a 25% market share in the Bohai Bay.
As is customary in Chinese business, most of AMCF's revenues are derived from distributors who then sell to the end customers. Approximately 15%-30% of AMCF's revenues are derived from direct sales to retail customers, the rest is derived via sales to distributors. AMCF's margins are higher on direct sales, lower on sales to distributors.
Sector - Fragmented market in servicing fuel needs of small and medium size vessels. Characterized by intense price competition and uneven product/service quality. AMCF's own research has concluded that vessel operators are willing to pay a premium to berth with a service provider with consistently high fuel quality. AMCF believes they charge a premium for their consistent services.
Providing fuel has always been a low margin business and fuel to fishing/cargo vessels in China is no different. Gross margins through the first nine months of '09 were 12%.
Seasonality - The Chinese government prohibits fishing vessels from fishing from 6/15-9/15 annually, the breeding season for many fish. AMCF annually sees a 15% or so drop in revenues during this three month period. Due to this, 3rd quarter annually is the the weakest.
Growth - AMCF expects to grow primarily via acquisitions. As this sector is highly fragmented, expect AMCF to acquire a number of smaller competitors over the next few years. AMCF is setting aside 35% of ipo monies for future acquisitions. Notably AMCF plans to explore future growth in Southern China, an area they've just recently entered in 12/08.
Financials
AMCF will have approximately $1 per share in net cash on hand post-ipo. This number takes into account the $10 million short term debt AMCF has on the books post-ipo.
VAT - AMCF's fuel sales are subject to a value-added tax(VAT) of 17% across the board. AMCF's reported revenues are net after this VAT.
AMCF has no accounts receivables issues. They generally get paid upon purchase and delivery of fuel.
2010 fuel volumes increased an impressive 64% driven by acquisitions into southern China and expansion in their core market, Bohai Bay. Fuel volume is the metric to keep an eye on here more so than revenues. Revenues for AMCF will fluctuate with the price of oil, however margins on volume should stay rather consistent due to pricing pass throughs. A jump in volumes will lead to more net earnings, more so than a jump in revenues from just a rise in the price of oil.
AMCF is committed to investing in growth via acquisitions. As such, expect much of AMCF's operating cash flows to be used to invest in and expand the business.
2009 - Based on first nine months, revenues should be $118 million. Again the key metric here is that AMCF increased fuel volumes strongly in 2009, 64%. Gross margins 12%. As noted above this is a rather low margin business. With the volume increases, AMCF was able to improve gross margins significantly in 2009. Operating expense ratio of 4%, operating margins 8%. Taxes are in the 25% ballpark. Plugging in taxes, short term debt and non-controlling interests, net margins should be 5 1/2%. Earnings per share of $0.73. On a pricing of $7, AMCF would trade 9 1/2 X's 2009 earnings.
2010 - With the ipo, AMCF has cash on hand to continue growing business via small acquisitions. I would fully expect fuel volumes to increase nicely in 2010, even in a sluggish cargo ship environment. Keep in mind the bulk of revenues here are derived from fueling fishing vessels. As I tend to do, I want to be conservative here when plugging in volume growth. As AMCF's large recent acquisitions occurred in 12'08, I would not expect another 64% fuel volume increase in 2010. However I would expect at least a 25% increase directly due to expansion/acquisitions. The overall revenue number will depend on the price of oil/fuel, but a 25% volume increase along with small margin increases would put 2010 eps in the range of $1 per share.
Conclusion - 2009 was not an ideal year for fueling ships anywhere in the world. The economic slowdown impacted marine vessels worldwide, including the cargo industry in China. AMCF also notes that the fishing industry in China was also negatively impacted by the worldwide economic slowdown, although that sector is less economically sensitive than cargo. Still, AMCF was able to expand their business, open operations in the south of China and impressively grow volumes and expand the bottom line. This is another solid looking China microcap ipo that looks good in range. Coming 7 X's 2010 estimates(on a pricing of $7) with a good balance sheet, this one should work in range.
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January 24, 2010, 7:49 pm
SYA - Symetra Financial
Disclosure - We've no position in SYA currently. Piece was available to subscribers of tradingipos.com 1/16/10.
2010-01-16
SYA - Symetra Financial
SYA - Symetra Financial plans on offering 28 million shares at a range of $12-$14. Insiders are selling 9.7 million shares in the deal. BofA Merrill Lynch, JP Morgan, Goldman Sachs and Barclays are leading the deal, UBS, Wells Fargo, Dowling, KBW, Sandler O'Neill and Sterne Agee co-managing. Post-ipo SYA will have 114.1 million shares outstanding for a market cap of $1.483 billion on a pricing of $13.
Ipo proceeds will be used for general corporate purposes, including contributions of capital to insurance business.
Berkshire Hathaway will own 21% of SYA post-ipo.
From the prospectus:
'We are a life insurance company focused on profitable growth in select group health, retirement, life insurance and employee benefits markets. Our operations date back to 1957 and many of our agency and distribution relationships have been in place for decades.'
SYA is coming public right about at book value. Return on equity for the 12 months ending 9/30/09 was 13.9%.
SYA operates through four segments:
Group - Medical stop-loss insurance, limited medical benefit plans, group life insurance, accidental death and dismemberment insurance and disability insurance mainly to employer groups of 50 to 5,000 individuals.
Retirement Services - Fixed and variable deferred annuities, including tax sheltered annuities, individual retirement accounts, or IRAs, and group annuities to qualified retirement plans.
Income Annuities - single premium immediate annuities, or SPIAs, to customers seeking a reliable source of retirement income and structured settlement annuities to fund third party personal injury settlements.
Individual - Term, universal and variable life insurance as well as bank-owned life insurance, or BOLI.
Annuity and life insurance products are distributed through approximately 16,000 independent agents, 26 key financial institutions and 4,300 independent employee benefits brokers. SYA was a top-five seller of fixed annuities through banks in the first nine months of 2009.
Ratings by the credit agencies are solid across the board.
Market opportunities:
1 - Increasing need for retirement savings and income. 76.8 million baby boomers are approaching retirement age. In addition there 61.6 million Generation X'ers, most of whom will be funding retirement from personal savings/plans.
2 - Continued demand for affordable health insurance. Health insurance premiums in the United States increased 131% from 1999 to 2009. 75 million people in the United States under the age of 65 receive their benefits through self-funded plans, including 47% of workers in smaller firms and 76% of workers in midsize firms. SYA plans to grow their business by offering affordable health plans through employer-sponsored limited benefit employee health plans and by offering group medical stop-loss insurance to medium and large businesses that self-fund their medical plans.
SYA's asset portfolio has little subprime exposure, less than 1% invested in Alt-A mortgages and no exposure to ARM's.
SYA's strategy is to provide simple to understand products without adding product features that create liability-side balance sheet volatility.
Financials
SYA plans on paying a $0.05 dividend per quarter. On an annualized $0.20, SYA would yield 1.7% on a pricing of $13.
$20 billion in investments, $22 billion in assets.
**Book value of $12.42 on ipo. SYA is going to be priced right around book value which should allow this deal to price/work in range.
As with most financial institutions, 2008 was a disaster for SYA with $158 million in net realized investment losses. SYA did manage a bottom line gain in 2008 however. 2009's numbers appear as if SYA is heading back on track to normalized investment gains/losses with net investment losses of $29 million through 9/30. Historically these are still quite large, compared to 2008 though a vast improvement.
Big risk here is the obvious - Potential for future investment losses. SYA really does not invest much of their asset base in Treasuries, instead preferring corporate securities. These include corporate bonds, equities, preferred shares and private placements. Fully 2/3's of their investments are in corporate securities leaving SYA vulnerable to the broader economy as a whole. That they survived the 2008 meltdown intact is a positive here as it is doubtful a similar situation will arise again in the near term. Real estate risk: SYA does have 20% of their investments in residential mortgage backed securities and 10% in commercial mortgage backed securities. SYA sums it up well in the prospectus: 'If the current economic environment were to deteriorate further, it could lead to increased credit defaults, and additional write-downs of our securities for other-than-temporary impairments.'
2009 saw growth in SYA's fixed deferred annuity products and sales in single premium life insurance products.
In 2009, SYA's Group insurance line had a 92% ratio, anything below 100% indicates profitability.
2009:
Through the first nine months total 2009 revenues appear on track for $1.75 billion. This number does include writedowns and net investment losses. Operating expense ratio of 89%, operating profits 11%. Operating expenses include policyholder benefits/claims, interest credited to accounts, policy amortization, interest expense and general operating expenses. Net income 7 1/4%. Earnings per share of $1.10. On a pricing of $13, SYA would trade 12 X's 2009 earnings.
2010 - Assuming SYA's investment losses subside and performance of investment portfolio returns to normalcy, SYA should be able to add to the bottom line. The wild cards are numerous: 1) The current Federal government health plan overhaul and effect on health insurance plans are still unknown; 2) The performance of corporate bonds in 2010, of which SYA is heavily invested; 3) The performance of residential and commercial real estate, of which SYA has approximately 30% of investments.
A few things to keep in mind here. While the bulk of SYA's investment's are marketable/fixed and do have fair value pricings and/or pricing methods, SYA does have alternative and/or hard to price investments. We are in a position of 'taking SYA's word' for the value and impairments of those investments.
Conclusion - Overall a solid and well rounded insurance and retirement company. Coming book value(assuming SYA's investment marks on on target), SYA was able to generate positive cash flows in a difficult 2008 environment and appears poised to do quite well assuming a 'normalization' of the US economy and financial system. The key here is SYA's investment portfolio, and as long as those investments perform as SVA expects this deal should work short term and longer term. Priced to work in range
2010-01-16
SYA - Symetra Financial
SYA - Symetra Financial plans on offering 28 million shares at a range of $12-$14. Insiders are selling 9.7 million shares in the deal. BofA Merrill Lynch, JP Morgan, Goldman Sachs and Barclays are leading the deal, UBS, Wells Fargo, Dowling, KBW, Sandler O'Neill and Sterne Agee co-managing. Post-ipo SYA will have 114.1 million shares outstanding for a market cap of $1.483 billion on a pricing of $13.
Ipo proceeds will be used for general corporate purposes, including contributions of capital to insurance business.
Berkshire Hathaway will own 21% of SYA post-ipo.
From the prospectus:
'We are a life insurance company focused on profitable growth in select group health, retirement, life insurance and employee benefits markets. Our operations date back to 1957 and many of our agency and distribution relationships have been in place for decades.'
SYA is coming public right about at book value. Return on equity for the 12 months ending 9/30/09 was 13.9%.
SYA operates through four segments:
Group - Medical stop-loss insurance, limited medical benefit plans, group life insurance, accidental death and dismemberment insurance and disability insurance mainly to employer groups of 50 to 5,000 individuals.
Retirement Services - Fixed and variable deferred annuities, including tax sheltered annuities, individual retirement accounts, or IRAs, and group annuities to qualified retirement plans.
Income Annuities - single premium immediate annuities, or SPIAs, to customers seeking a reliable source of retirement income and structured settlement annuities to fund third party personal injury settlements.
Individual - Term, universal and variable life insurance as well as bank-owned life insurance, or BOLI.
Annuity and life insurance products are distributed through approximately 16,000 independent agents, 26 key financial institutions and 4,300 independent employee benefits brokers. SYA was a top-five seller of fixed annuities through banks in the first nine months of 2009.
Ratings by the credit agencies are solid across the board.
Market opportunities:
1 - Increasing need for retirement savings and income. 76.8 million baby boomers are approaching retirement age. In addition there 61.6 million Generation X'ers, most of whom will be funding retirement from personal savings/plans.
2 - Continued demand for affordable health insurance. Health insurance premiums in the United States increased 131% from 1999 to 2009. 75 million people in the United States under the age of 65 receive their benefits through self-funded plans, including 47% of workers in smaller firms and 76% of workers in midsize firms. SYA plans to grow their business by offering affordable health plans through employer-sponsored limited benefit employee health plans and by offering group medical stop-loss insurance to medium and large businesses that self-fund their medical plans.
SYA's asset portfolio has little subprime exposure, less than 1% invested in Alt-A mortgages and no exposure to ARM's.
SYA's strategy is to provide simple to understand products without adding product features that create liability-side balance sheet volatility.
Financials
SYA plans on paying a $0.05 dividend per quarter. On an annualized $0.20, SYA would yield 1.7% on a pricing of $13.
$20 billion in investments, $22 billion in assets.
**Book value of $12.42 on ipo. SYA is going to be priced right around book value which should allow this deal to price/work in range.
As with most financial institutions, 2008 was a disaster for SYA with $158 million in net realized investment losses. SYA did manage a bottom line gain in 2008 however. 2009's numbers appear as if SYA is heading back on track to normalized investment gains/losses with net investment losses of $29 million through 9/30. Historically these are still quite large, compared to 2008 though a vast improvement.
Big risk here is the obvious - Potential for future investment losses. SYA really does not invest much of their asset base in Treasuries, instead preferring corporate securities. These include corporate bonds, equities, preferred shares and private placements. Fully 2/3's of their investments are in corporate securities leaving SYA vulnerable to the broader economy as a whole. That they survived the 2008 meltdown intact is a positive here as it is doubtful a similar situation will arise again in the near term. Real estate risk: SYA does have 20% of their investments in residential mortgage backed securities and 10% in commercial mortgage backed securities. SYA sums it up well in the prospectus: 'If the current economic environment were to deteriorate further, it could lead to increased credit defaults, and additional write-downs of our securities for other-than-temporary impairments.'
2009 saw growth in SYA's fixed deferred annuity products and sales in single premium life insurance products.
In 2009, SYA's Group insurance line had a 92% ratio, anything below 100% indicates profitability.
2009:
Through the first nine months total 2009 revenues appear on track for $1.75 billion. This number does include writedowns and net investment losses. Operating expense ratio of 89%, operating profits 11%. Operating expenses include policyholder benefits/claims, interest credited to accounts, policy amortization, interest expense and general operating expenses. Net income 7 1/4%. Earnings per share of $1.10. On a pricing of $13, SYA would trade 12 X's 2009 earnings.
2010 - Assuming SYA's investment losses subside and performance of investment portfolio returns to normalcy, SYA should be able to add to the bottom line. The wild cards are numerous: 1) The current Federal government health plan overhaul and effect on health insurance plans are still unknown; 2) The performance of corporate bonds in 2010, of which SYA is heavily invested; 3) The performance of residential and commercial real estate, of which SYA has approximately 30% of investments.
A few things to keep in mind here. While the bulk of SYA's investment's are marketable/fixed and do have fair value pricings and/or pricing methods, SYA does have alternative and/or hard to price investments. We are in a position of 'taking SYA's word' for the value and impairments of those investments.
Conclusion - Overall a solid and well rounded insurance and retirement company. Coming book value(assuming SYA's investment marks on on target), SYA was able to generate positive cash flows in a difficult 2008 environment and appears poised to do quite well assuming a 'normalization' of the US economy and financial system. The key here is SYA's investment portfolio, and as long as those investments perform as SVA expects this deal should work short term and longer term. Priced to work in range
December 26, 2009, 7:21 pm
TMH - Team Health Holdings
This piece was done for subscripers on 12/8. TMH eventually priced below range at $12. Disclosure: I am currently long TMH at an average price of approximately $12.6.
2009-12-08
TMH - Team Health Holdings
TMH - Team Health Holdings plans on offering 20 million shares at a range of $14-$16. BofA Merrill Lynch, Goldman Sachs, Citi and Barclays are leading the deal, five firms co-managing. Insiders(Blackstone) will be selling 9.3 million shares in the deal. Post-ipo TMH will have 61.4 million shares outstanding for a market cap of 921 million on a pricing of $15. Ipo proceeds will be used to repay debt.
Post-ipo Blackstone will own 54% of TMH post-ipo. Yet another private equity related ipo. Blackstone purchased TMH in 2005 in a leveraged buyout. The deal laid substantial debt onto the back of TMH, most of which will still be in place post-ipo. TMH will have $400 million in net debt on the books post-ipo. Note too that not only is Blackstone selling 9.3 million shares in the deal, they are also grabbing $33 million in cash off the balance sheet on ipo.
From the prospectus:
'We believe we are one of the largest suppliers of outsourced healthcare professional staffing and administrative services to hospitals and other healthcare providers in the United States.'
TMH serves approximately 550 hospital clients and their affiliated clinics in 46 states with a team of approximately 6,100 healthcare professionals, including physicians, physician assistants and nurse practitioners.
Traditionally TMH has focused on staffing hospital emergency rooms and also branched out to include staffing services for hospital medicine (hospitalist), radiology, and pediatrics. Emergency rooms and hospitalist staffing accounted for 79% of 2008 revenues.
**Essentially a combination outsourced emergency room management company coupled with a hospitalist operator akin to recent ipo IPCM.
In 2008 TMH provided services to over 7.6 million emergency room patients. Emergency rooms are a growth business within hospitals, TMH has seen 9% annual revenue growth from their emergency rooms over the past 5 years. TMH focuses on high volume larger hospital emergency rooms which tend to be in larger urban areas.
Most recent 12 month hospital emergency department renewal rate was 98% with a 95% physician retention rate.
TMH's services include:
*recruiting, scheduling and credential coordination for clinical and non-clinical medical professionals. This include providing medical directors;
*coding, billing and collection of fees for services provided by medical professionals;
*administrative support services, such as payroll, professional liability insurance coverage, continuing medical education services and management training;
Sector - Outsourced healthcare staffing is estimated at $50 billion. Emergency departments represent a majority of admissions for key medical services. TMH believes the numbers of emergency room visits is increasing as the overall number of emergency rooms across the US is decreasing. As the baby boomers and older generations above 55 years represent a larger percentage of the population (approximately 23% in 2008 and projected to be approximately 29% in 2020, according to the U.S. Census Bureau), the demand for ED services is likely to increase.
Growth strategy - Other than winning new contracts, TMH expects to grow via acquisitions. TMH estimates that 75% of emergency department outsourcing is done by smaller regional companies leading to many potential acquisitions targets among the regional outsourcing providers.
CMS - For 2009 the CMS total increase for emergency room reimbursement was 4% for services most commonly provided by emergency physicians. Currently it appears emergency room physicians may be seeing a hefty cut in Medicare reimbursement in 2010. The final rule for 2010 includes a 21.2% rate reduction in the Medicare Physician Fee Schedule for 2010. There is a chance Congress will roll this hefty cut back before implementation in 2010. If not, TMH will not be growing revenues in 2010. Note that TMH will pass through much of the cuts to physicians themselves, however a 21% cut in physician reimbursements would mean TMH will feel the effects on the top and bottom line to some degree. **Note that 22% of 2008 revenues were derived from Medicare.
Florida and Tennessee account for approximately 16% and 17% or revenues respectively.
67% of emergency rooms outsource to a national, regional or local emergency physician group. Of these hospitals that outsource, approximately 52% contract with a local provider, approximately 23% contract with a regional provider and approximately 25% contract with a national provider.
Financials
Approximately $397 million in net debt-post ipo. TMH will have $475 million of debt on the books post-ipo and $78 million in cash. Expect TMH to utilize their cash to acquite smaller companies.
12% of revenues are derived from contracts with the military. TMH recently won a renewal on their military contracts for 2010.
Uncollectables run about 8%-9% annually.
Revenue growth has been driven by new business, organic growth in emergency room visits and acquisitions.
2009 - Revenues should be $1.43 billion, a 7.5% increase over 2008. As a 'middle man' operation, margins are not particularly strong. Gross margins should be 23%. Operating expense ratio of 12%, operating margins of 11%. Debt servicing should eat up 18% of operating profits in 2009. Plugging in taxes(38%), net margins should be 5 1/2%. Earnings per share should be $1.25. On a pricing of $15, TMH would trade 12 X's 2009 earnings.
Primary public comparable is Emergency Medical Services(EMS). We'll take a quick look at EMS as well as recent hospitalist ipo IPCM.
2010 - Tricky to forecast as the forecast CMS cuts loom. Odds are Congress will push out those cuts, however they have yet to do so. I will instead take a cue from the analysts estimates on competitor EMS forecasting growth similar to 2009. TMH will most likely make an acquisition or two the first half of 2009 and has shown an ability to win new contracts. Revenue growth the past three years has been 9%, 12% and 7.5%. 7% revenue growth for 2010 appears to be nicely conservative. If the 21% cuts to Medicare physician reimbursement stay, revenue growth would be cut in at east half down to 3% or so. 7% revenue growth would be $1.53 billion. Margins should remain consistent to slightly lower, with debt servicing eating up 17% of operating profits putting net margins in the same 5 1/2% ballpark. Earnings per share would be $1.40. On a pricing of $15, TMH would trade 11 X's 2010 earnings.
EMS - $2.04 billion market cap with $120 million in net debt. Currently trades 17 X's 2010 earnings with an expected 6% revenue growth rate. Net margins slightly lower than TMH due to lower margin emergency transportation segment.
IPCM - $511 million market cap with a small net cash position on books. Currently trades 22 X's 2010 earnings with an expected 20% revenue growth rate. Net margins with slightly better net margins than TMH.
Conclusion - Seems priced to work. Large successful company with strong cash flows operating in a growth segment of the health and medical field. Negatives here the LBO related debt on the books and the looming potential large cuts in Medicare physician reimbursement. However at just 11 X's 2010 earnings, this deal is priced to work mid-term. I usually avoid LBO related ipos, however the debt servicing is below the 20% 'avoid' threshold here and the multiple for a strong operation is cheap. I like this deal.
Note - Blackstone has announced plans to ipo at least eight of their portfolio companies in the near future. As TMH is the first in the pipeline it appears to me Blackstone wants a successful offering and has agreed to set the range at a level that should work short and mid-term.
2009-12-08
TMH - Team Health Holdings
TMH - Team Health Holdings plans on offering 20 million shares at a range of $14-$16. BofA Merrill Lynch, Goldman Sachs, Citi and Barclays are leading the deal, five firms co-managing. Insiders(Blackstone) will be selling 9.3 million shares in the deal. Post-ipo TMH will have 61.4 million shares outstanding for a market cap of 921 million on a pricing of $15. Ipo proceeds will be used to repay debt.
Post-ipo Blackstone will own 54% of TMH post-ipo. Yet another private equity related ipo. Blackstone purchased TMH in 2005 in a leveraged buyout. The deal laid substantial debt onto the back of TMH, most of which will still be in place post-ipo. TMH will have $400 million in net debt on the books post-ipo. Note too that not only is Blackstone selling 9.3 million shares in the deal, they are also grabbing $33 million in cash off the balance sheet on ipo.
From the prospectus:
'We believe we are one of the largest suppliers of outsourced healthcare professional staffing and administrative services to hospitals and other healthcare providers in the United States.'
TMH serves approximately 550 hospital clients and their affiliated clinics in 46 states with a team of approximately 6,100 healthcare professionals, including physicians, physician assistants and nurse practitioners.
Traditionally TMH has focused on staffing hospital emergency rooms and also branched out to include staffing services for hospital medicine (hospitalist), radiology, and pediatrics. Emergency rooms and hospitalist staffing accounted for 79% of 2008 revenues.
**Essentially a combination outsourced emergency room management company coupled with a hospitalist operator akin to recent ipo IPCM.
In 2008 TMH provided services to over 7.6 million emergency room patients. Emergency rooms are a growth business within hospitals, TMH has seen 9% annual revenue growth from their emergency rooms over the past 5 years. TMH focuses on high volume larger hospital emergency rooms which tend to be in larger urban areas.
Most recent 12 month hospital emergency department renewal rate was 98% with a 95% physician retention rate.
TMH's services include:
*recruiting, scheduling and credential coordination for clinical and non-clinical medical professionals. This include providing medical directors;
*coding, billing and collection of fees for services provided by medical professionals;
*administrative support services, such as payroll, professional liability insurance coverage, continuing medical education services and management training;
Sector - Outsourced healthcare staffing is estimated at $50 billion. Emergency departments represent a majority of admissions for key medical services. TMH believes the numbers of emergency room visits is increasing as the overall number of emergency rooms across the US is decreasing. As the baby boomers and older generations above 55 years represent a larger percentage of the population (approximately 23% in 2008 and projected to be approximately 29% in 2020, according to the U.S. Census Bureau), the demand for ED services is likely to increase.
Growth strategy - Other than winning new contracts, TMH expects to grow via acquisitions. TMH estimates that 75% of emergency department outsourcing is done by smaller regional companies leading to many potential acquisitions targets among the regional outsourcing providers.
CMS - For 2009 the CMS total increase for emergency room reimbursement was 4% for services most commonly provided by emergency physicians. Currently it appears emergency room physicians may be seeing a hefty cut in Medicare reimbursement in 2010. The final rule for 2010 includes a 21.2% rate reduction in the Medicare Physician Fee Schedule for 2010. There is a chance Congress will roll this hefty cut back before implementation in 2010. If not, TMH will not be growing revenues in 2010. Note that TMH will pass through much of the cuts to physicians themselves, however a 21% cut in physician reimbursements would mean TMH will feel the effects on the top and bottom line to some degree. **Note that 22% of 2008 revenues were derived from Medicare.
Florida and Tennessee account for approximately 16% and 17% or revenues respectively.
67% of emergency rooms outsource to a national, regional or local emergency physician group. Of these hospitals that outsource, approximately 52% contract with a local provider, approximately 23% contract with a regional provider and approximately 25% contract with a national provider.
Financials
Approximately $397 million in net debt-post ipo. TMH will have $475 million of debt on the books post-ipo and $78 million in cash. Expect TMH to utilize their cash to acquite smaller companies.
12% of revenues are derived from contracts with the military. TMH recently won a renewal on their military contracts for 2010.
Uncollectables run about 8%-9% annually.
Revenue growth has been driven by new business, organic growth in emergency room visits and acquisitions.
2009 - Revenues should be $1.43 billion, a 7.5% increase over 2008. As a 'middle man' operation, margins are not particularly strong. Gross margins should be 23%. Operating expense ratio of 12%, operating margins of 11%. Debt servicing should eat up 18% of operating profits in 2009. Plugging in taxes(38%), net margins should be 5 1/2%. Earnings per share should be $1.25. On a pricing of $15, TMH would trade 12 X's 2009 earnings.
Primary public comparable is Emergency Medical Services(EMS). We'll take a quick look at EMS as well as recent hospitalist ipo IPCM.
2010 - Tricky to forecast as the forecast CMS cuts loom. Odds are Congress will push out those cuts, however they have yet to do so. I will instead take a cue from the analysts estimates on competitor EMS forecasting growth similar to 2009. TMH will most likely make an acquisition or two the first half of 2009 and has shown an ability to win new contracts. Revenue growth the past three years has been 9%, 12% and 7.5%. 7% revenue growth for 2010 appears to be nicely conservative. If the 21% cuts to Medicare physician reimbursement stay, revenue growth would be cut in at east half down to 3% or so. 7% revenue growth would be $1.53 billion. Margins should remain consistent to slightly lower, with debt servicing eating up 17% of operating profits putting net margins in the same 5 1/2% ballpark. Earnings per share would be $1.40. On a pricing of $15, TMH would trade 11 X's 2010 earnings.
EMS - $2.04 billion market cap with $120 million in net debt. Currently trades 17 X's 2010 earnings with an expected 6% revenue growth rate. Net margins slightly lower than TMH due to lower margin emergency transportation segment.
IPCM - $511 million market cap with a small net cash position on books. Currently trades 22 X's 2010 earnings with an expected 20% revenue growth rate. Net margins with slightly better net margins than TMH.
Conclusion - Seems priced to work. Large successful company with strong cash flows operating in a growth segment of the health and medical field. Negatives here the LBO related debt on the books and the looming potential large cuts in Medicare physician reimbursement. However at just 11 X's 2010 earnings, this deal is priced to work mid-term. I usually avoid LBO related ipos, however the debt servicing is below the 20% 'avoid' threshold here and the multiple for a strong operation is cheap. I like this deal.
Note - Blackstone has announced plans to ipo at least eight of their portfolio companies in the near future. As TMH is the first in the pipeline it appears to me Blackstone wants a successful offering and has agreed to set the range at a level that should work short and mid-term.
December 2, 2009, 6:23 pm
SVN - 7 Days Group
2009-11-15
SVN - 7 Days Group
SVN - 7 Days Group Holding plans on offering 10 million ADS at a range of $9-$11. If the over-allotment is exercised the total deal size will be 11.6 million ADS. JP Morgan and Citi are leading the deal, Oppenheimer is co-managing. Post-ipo SVN will has an ADS equivalent of 50.6 million shares for a market cap of $506 million on a pricing of $10. Ipo proceeds will be utilized toi repay debt and for general corporate purposes.
Founder and Chairman of the Board Boquan He will own 25% of SVN post-ipo.
From the prospectus:
'We are a leading and fast growing national economy hotel chain based in China. We convert and operate limited service economy hotels across major metropolitan areas in China under our award-winning "7 Days Inn" brand.'
Hotels focusing on value-conscious business and leisure travelers.
Third largest economy hotel chain in China with 283 hotels in operation, 48 of which were managed hotels, with 28,266 hotel rooms in 41 cities, and an additional 77 hotels with 7,476 hotel rooms under conversion. Once those hotels are completed, SVN will have a presence in 59 cities. SVN has eight million people registered with their rewards '7 Days Club'. SVN also has the top ranked website for Internet traffic among Chinese economy hotel chains.
As opposed to new construction, growth has been spurred by leasing and converting existing properties into 7 Days Inns. SVN does not own the property of any of their hotels. Growth has been swift: 5 hotels in 2 cities as of the end of 2005, to 24 hotels in 7 cities as of the end of 2006, to 106 hotels in 20 cities as of the end of 2007, to 223 hotels in 33 cities as of the end of 2008 and to 283 hotels in 41 cities as of September 30, 2009.
Leading city locations are Beijing (34 hotels), Guangzhou (31 hotels), Shenzhen (31 hotels), Shanghai(23 hotels), and Wuhan (17 hotels).
Average occupancy rates were 88.1% and 88.4% for the year ended December 31, 2008 and the nine months ended September 30, 2009, respectively. Revenue per available room approximately $20 US.
Sector - China's lodging industry has grown an average of 16% annually the past four years. The economy hotel niche has grown much swifter with 80% annual growth this decade. The top ten economy hotel operators in Chinahad opened 1,736 hotels with 213,789 hotel rooms by the end of 2008. SVN believes there is still plenty of room for growth with 0.3 economy hotel rooms per 1,000 people in China in 2008, as compared to 2.5 economy hotel rooms per 1,000 people in the United States.
Financials
By paying debt off on ipo, SVN will have approximately $0.50 per share in net cash post-ipo.
Tax rate appears as if it will be in the 25% ballpark.
2009 - Numbers are pro forma as if SVN used ipo monies to pay down debt on 12/31/08. This gives us a better idea of how SVN is performing as they will look post-ipo. Revenues should be $170 million, a strong 66% increase over 2008. Growth is being fueled by aggressive growth in number of hotels under operation. Operating margins should be 8%, net margins 6%. Earnings per share should be in the $0.20 ballpark.
SVN is trending strong, improving operating expense ratios quarterly as they grow revenues through new hotels. 2010 is shaping up to be a solid year for SVN.
2010 - Revenues should grow to approximately $235 million, a 38% increase over 2009. Operating margins should improve sharply to 13%. Net margins plugging in a 25% tax rate should be a shade under 10%. Earnings per share should be $0.45. On a pricing of $10, SVN would trade 22 X's 2010 earnings.
Main public comparable here is HMIN. A quick look at each.
HMIN - $1.41 billion market cap. Currently trading 45 X's 2010 estimates with a 20% revenue growth rate.
SVN - $506 million market cap at $10. Would trade 22 X's 2010 earnings with a 38% revenue growth rate.
SVN really helped themselves paying off substantially all debt on ipo. By removing debt servicing we get a much clearer picture of an operating trending very well into ipo. Revenue are growing nicely, SVN is expanding without harming occupancy rates and margins are improving quarterly. SVN looks to be coming public very reasonably valued compared to public rival HMIN, one of the more successful China ipos this decade. Easy recommend in range, SVN should be a good deal and work short and mid-term off of range.
SVN - 7 Days Group
SVN - 7 Days Group Holding plans on offering 10 million ADS at a range of $9-$11. If the over-allotment is exercised the total deal size will be 11.6 million ADS. JP Morgan and Citi are leading the deal, Oppenheimer is co-managing. Post-ipo SVN will has an ADS equivalent of 50.6 million shares for a market cap of $506 million on a pricing of $10. Ipo proceeds will be utilized toi repay debt and for general corporate purposes.
Founder and Chairman of the Board Boquan He will own 25% of SVN post-ipo.
From the prospectus:
'We are a leading and fast growing national economy hotel chain based in China. We convert and operate limited service economy hotels across major metropolitan areas in China under our award-winning "7 Days Inn" brand.'
Hotels focusing on value-conscious business and leisure travelers.
Third largest economy hotel chain in China with 283 hotels in operation, 48 of which were managed hotels, with 28,266 hotel rooms in 41 cities, and an additional 77 hotels with 7,476 hotel rooms under conversion. Once those hotels are completed, SVN will have a presence in 59 cities. SVN has eight million people registered with their rewards '7 Days Club'. SVN also has the top ranked website for Internet traffic among Chinese economy hotel chains.
As opposed to new construction, growth has been spurred by leasing and converting existing properties into 7 Days Inns. SVN does not own the property of any of their hotels. Growth has been swift: 5 hotels in 2 cities as of the end of 2005, to 24 hotels in 7 cities as of the end of 2006, to 106 hotels in 20 cities as of the end of 2007, to 223 hotels in 33 cities as of the end of 2008 and to 283 hotels in 41 cities as of September 30, 2009.
Leading city locations are Beijing (34 hotels), Guangzhou (31 hotels), Shenzhen (31 hotels), Shanghai(23 hotels), and Wuhan (17 hotels).
Average occupancy rates were 88.1% and 88.4% for the year ended December 31, 2008 and the nine months ended September 30, 2009, respectively. Revenue per available room approximately $20 US.
Sector - China's lodging industry has grown an average of 16% annually the past four years. The economy hotel niche has grown much swifter with 80% annual growth this decade. The top ten economy hotel operators in Chinahad opened 1,736 hotels with 213,789 hotel rooms by the end of 2008. SVN believes there is still plenty of room for growth with 0.3 economy hotel rooms per 1,000 people in China in 2008, as compared to 2.5 economy hotel rooms per 1,000 people in the United States.
Financials
By paying debt off on ipo, SVN will have approximately $0.50 per share in net cash post-ipo.
Tax rate appears as if it will be in the 25% ballpark.
2009 - Numbers are pro forma as if SVN used ipo monies to pay down debt on 12/31/08. This gives us a better idea of how SVN is performing as they will look post-ipo. Revenues should be $170 million, a strong 66% increase over 2008. Growth is being fueled by aggressive growth in number of hotels under operation. Operating margins should be 8%, net margins 6%. Earnings per share should be in the $0.20 ballpark.
SVN is trending strong, improving operating expense ratios quarterly as they grow revenues through new hotels. 2010 is shaping up to be a solid year for SVN.
2010 - Revenues should grow to approximately $235 million, a 38% increase over 2009. Operating margins should improve sharply to 13%. Net margins plugging in a 25% tax rate should be a shade under 10%. Earnings per share should be $0.45. On a pricing of $10, SVN would trade 22 X's 2010 earnings.
Main public comparable here is HMIN. A quick look at each.
HMIN - $1.41 billion market cap. Currently trading 45 X's 2010 estimates with a 20% revenue growth rate.
SVN - $506 million market cap at $10. Would trade 22 X's 2010 earnings with a 38% revenue growth rate.
SVN really helped themselves paying off substantially all debt on ipo. By removing debt servicing we get a much clearer picture of an operating trending very well into ipo. Revenue are growing nicely, SVN is expanding without harming occupancy rates and margins are improving quarterly. SVN looks to be coming public very reasonably valued compared to public rival HMIN, one of the more successful China ipos this decade. Easy recommend in range, SVN should be a good deal and work short and mid-term off of range.
November 13, 2009, 1:26 am
H - Hyatt Hotels
Piece was available to subscribers: 11-01-2009
H - Hyatt Hotels
H - Hyatt Hotels plans on offering 38 million shares at a range of $23-$26. Insiders are selling all shares in the deal. If over-allotments are exercised H will be selling 5.7 million shares and the total deal size will be 43.7 million shares. Goldman Sachs is lead managing the deal, nine firms are co-managing. If the over-allotment is exercised, H will utilize the ipo proceeds for working capital and other general corporate purposes. Post-ipo H will have 173.7 million shares outstanding for a market cap of $4.256 billion on a pricing of $24.5.
Thomas J. Pritzker, H's Executive Chairman, and his family will own 60% of H post ipo. Mr. Pritzker is the selling shareholder in this deal. **Note there will be separate share classes here to ensure the Pritzker family retains controlling voting interest in H even if their interests drop below 50%. Expect to see a secondary here sometime the first year. The Pritzker family has agreed not to sell more than 10 million shares the first year public and will still having voting control even if they own only 15% of outstanding shares. This ipo appears to me to be an exit strategy for the Pritzker family, while still retaining voting control over H. The structure of the voting shares is really unfair for non Pritzker Family shareholders. Expect a number of secondaries here over the next few years as the Pritzker family divests stock while still controlling H.
Goldman Sachs will own 7% of H post-ipo. Goldman invested their stake approximately two years ago, and on paper, have lost half that investment on an ipo pricing of $24.5.
History - Hyatt was founded by Jay Pritzker in 1957 when he purchased the Hyatt House motel adjacent to the Los Angeles International Airport. Over the following decade, Jay Pritzker and his brother Donald Pritzker, working together with other Pritzker family business interests, grew the company into a North American management and hotel ownership company, which became a public company in 1962. In 1968, Hyatt International was formed and subsequently became a separate public company. Hyatt Corporation and Hyatt International Corporation were taken private by the Pritzker family business interests in 1979 and 1982, respectively.
From the prospectus:
'We are a global hospitality company with widely recognized, industry leading brands and a tradition of innovation developed over our more than fifty-year history.'
Hyatt Hotels, pretty self explanatory we do not need a long definition of what H does. H's full service hotels operate under four brand names: Park Hyatt, Grand Hyatt, Hyatt Regency and Hyatt. H recently introduced a 5th brand, Andaz.
Grand Hyatt - Features large-scale, distinctive hotels in major gateway cities and resort destinations. Presence around the world and critical mass in Asia.
Hyatt Regency - Full range of services and facilities tailored to serve the needs of conventions, business travelers and resort vacationers. Properties range in size from 200 to over 2,000 rooms.
Hyatt - Smaller-sized properties located in secondary markets in the United States, ranging from 150 to 350 rooms.
As of 6/30/09 H's worldwide portfolio consisted of 413 Hyatt-branded properties (119,509 rooms and units) in 45 countries, including:
* 158 managed properties (60,934 rooms), all of which H operates under management agreements with third-party property owners;
* 100 franchised properties (15,322 rooms), all of which are owned by third parties that have franchise agreements with H and are operated by third parties;
* 96 owned properties(25,786 rooms) and 6 leased properties (2,851 rooms), all of which H manages;
A little surprised H owns outright only 96 of the 413 Hyatt branded properties. 38% of Hyatt properties are owned by third parties and managed by H.
Properties in which H manages for third party owners: H derives management fee revenues and a percentage of profits, usually under 20%
Franchised: H does not share in profits of these properties, instead collects franchise and royalty fees.
80% of revenues are derived from United States properties. 54 properties received the AAA four diamond lodging award in 2009. H operates in 20 of the 25 most populous urban centers around the globe.
In addition to four full service brands, H also operates Hyatt Summerfield Suites an extended stay brand.
Through first nine months of 2009, daily revenues per available room were $101, with international rooms having $116 per available daily room. **Note that this is a dip of approximately 20% from 2008. Reason for drop has been the worldwide economic slowdown. Should also note that for the quarter ending 9/30/09, both overall revenues per room and international revenues per room increased slightly from 2009 average.
Expansion - For a mature hotel chain, H actually has a solid balance sheet. Post-ipo H will have $1.34 billion in cash with $858 million in debt. Balance sheet wise H has plenty of flexibility to acquire and/or develop new properties. I would expect them to do so going forward. H can use cash, credit line, stock or a combination of all three to go after acquisitions or new property development once public. Expect H to be fairly aggressive in looking to acquire properties going forward, especially as a number of other brands currently have credit issues. H expects to focus expansion efforts on India, China, Russia and Brazil, where there is a large and growing middle class along with a meaningful number of local business travelers.
Cyclical - H has seen revenues decrease sharply each of the past two recessions('01-'02 & '09). H notes that their revenue per available room decreased more sharply during this recent slowdown than in 2001 and 1991.
Debt defaults - H not only manages Hyatt properties owned by third parties, they also have financed a number of third party Hyatt facilities. For example in 2008 H made a $278 million loan to an entity in order to finance its purchase of the Hyatt Regency Waikiki Beach Resort and Spa. As hotels have seen less revenue in 2009 than forecasts, default can be a possibility.
Financials
With $1.34 billion in cash post-ipo and $858 million in debt, H will have slightly less than $3 in net cash per share post-ipo.
H does not plan on paying dividends.
As noted above, H has seen a significant decline in revenues in 2009. Revenue per available room dropped 20%+ in 2009 as compared to 2008. Total revenues decreased 18% for the 6 months ending 6/30/09 compared to the six months ending 6/30/08.
Owned and leased hotels account for 53% of revenues, management/franchises account for 41%.
Occupancy rates for all US properties the first 6 months of 2009 was 64%, for international properties 57%.
**H is coming public in range below book value.
2009 - Revenues should be approximately $3.3 billion, an expected 13% drop from 2008. Operating expense ratio should be 96%, a drop from 2008's 91%. H has attempted to cut costs in 2008, however occupancy rates and room rates declined so significantly it severely impacted operating expense ratio. Operating margins should be 4%. There are a few one-time charges here that need to be folded out so the eps below will differ from GAAP for 2009. Factoring in non-operating charges and income plus taxes, net margins should be 3%. Earnings per share should be approximately $0.60. On a pricing of $24.5, H would trade 41 X's 2009 estimates. Note that in the previous five years, H earned substantially more on the bottom line than '09 estimates. While the P/E ratio looks pricey here, this is a bit of a 'trough valuation' on ipo assuming the bottom line will pick-up once again beginning in 2010. Until we begin to see a pick-up again in operating margins, forecasting 2010 here is quite difficult.
Marriott(MAT) and Starwood(HOT) are H's two closest public comparables. A quick look at all three.
H - $4.26 billion market cap at a pricing of $24.5. Below book value with a little under $3 in net cash per share on hand. Revenues of $3.3 billion trading $41 X's '09 estimates with an expected 13% annual revenue decline.
MAT - $6.9 billion market cap. 2.7 X's book value with $650 million in net debt. Revenues of $5.44 billion trading 15 X's '09's expected estimates with an 8% revenue decrease.
HOT - $5.69 billion market cap. 3 X's book value with $3.7 billion in net debt. $4.7 billion in expected revenues trading 45 X's '09 estimates with a 20% expected decrease in revenues.
Conclusion - Brand name coming book value with net cash in the bank has to be a recommend in range. A few issues here also though that prevent this from being an enthusiastic recommend. First of all the company structure is awful for new investors as it favors the Pritzker family heavily. The issue here is that the Pritzker family can unload a large percentage of their holdings onto the market over the next few years and still control H as long as they retain a 15% overall interest. Second, again here we are seeing a large ipo coming public without fully discounting the nasty recession and operational slowdown. In essence we still are not seeing 'deals' in the ipo market that reflect the economic reality of the past year. H is being priced/valued as if business will return to normal sometime in 2010. If it doesn't, H is not being priced at a rock bottom valuation. Having written that, I do like their balance sheet is in much better shape than the competition and they are coming public right around book value. Recommend here in range.
H - Hyatt Hotels
H - Hyatt Hotels plans on offering 38 million shares at a range of $23-$26. Insiders are selling all shares in the deal. If over-allotments are exercised H will be selling 5.7 million shares and the total deal size will be 43.7 million shares. Goldman Sachs is lead managing the deal, nine firms are co-managing. If the over-allotment is exercised, H will utilize the ipo proceeds for working capital and other general corporate purposes. Post-ipo H will have 173.7 million shares outstanding for a market cap of $4.256 billion on a pricing of $24.5.
Thomas J. Pritzker, H's Executive Chairman, and his family will own 60% of H post ipo. Mr. Pritzker is the selling shareholder in this deal. **Note there will be separate share classes here to ensure the Pritzker family retains controlling voting interest in H even if their interests drop below 50%. Expect to see a secondary here sometime the first year. The Pritzker family has agreed not to sell more than 10 million shares the first year public and will still having voting control even if they own only 15% of outstanding shares. This ipo appears to me to be an exit strategy for the Pritzker family, while still retaining voting control over H. The structure of the voting shares is really unfair for non Pritzker Family shareholders. Expect a number of secondaries here over the next few years as the Pritzker family divests stock while still controlling H.
Goldman Sachs will own 7% of H post-ipo. Goldman invested their stake approximately two years ago, and on paper, have lost half that investment on an ipo pricing of $24.5.
History - Hyatt was founded by Jay Pritzker in 1957 when he purchased the Hyatt House motel adjacent to the Los Angeles International Airport. Over the following decade, Jay Pritzker and his brother Donald Pritzker, working together with other Pritzker family business interests, grew the company into a North American management and hotel ownership company, which became a public company in 1962. In 1968, Hyatt International was formed and subsequently became a separate public company. Hyatt Corporation and Hyatt International Corporation were taken private by the Pritzker family business interests in 1979 and 1982, respectively.
From the prospectus:
'We are a global hospitality company with widely recognized, industry leading brands and a tradition of innovation developed over our more than fifty-year history.'
Hyatt Hotels, pretty self explanatory we do not need a long definition of what H does. H's full service hotels operate under four brand names: Park Hyatt, Grand Hyatt, Hyatt Regency and Hyatt. H recently introduced a 5th brand, Andaz.
Grand Hyatt - Features large-scale, distinctive hotels in major gateway cities and resort destinations. Presence around the world and critical mass in Asia.
Hyatt Regency - Full range of services and facilities tailored to serve the needs of conventions, business travelers and resort vacationers. Properties range in size from 200 to over 2,000 rooms.
Hyatt - Smaller-sized properties located in secondary markets in the United States, ranging from 150 to 350 rooms.
As of 6/30/09 H's worldwide portfolio consisted of 413 Hyatt-branded properties (119,509 rooms and units) in 45 countries, including:
* 158 managed properties (60,934 rooms), all of which H operates under management agreements with third-party property owners;
* 100 franchised properties (15,322 rooms), all of which are owned by third parties that have franchise agreements with H and are operated by third parties;
* 96 owned properties(25,786 rooms) and 6 leased properties (2,851 rooms), all of which H manages;
A little surprised H owns outright only 96 of the 413 Hyatt branded properties. 38% of Hyatt properties are owned by third parties and managed by H.
Properties in which H manages for third party owners: H derives management fee revenues and a percentage of profits, usually under 20%
Franchised: H does not share in profits of these properties, instead collects franchise and royalty fees.
80% of revenues are derived from United States properties. 54 properties received the AAA four diamond lodging award in 2009. H operates in 20 of the 25 most populous urban centers around the globe.
In addition to four full service brands, H also operates Hyatt Summerfield Suites an extended stay brand.
Through first nine months of 2009, daily revenues per available room were $101, with international rooms having $116 per available daily room. **Note that this is a dip of approximately 20% from 2008. Reason for drop has been the worldwide economic slowdown. Should also note that for the quarter ending 9/30/09, both overall revenues per room and international revenues per room increased slightly from 2009 average.
Expansion - For a mature hotel chain, H actually has a solid balance sheet. Post-ipo H will have $1.34 billion in cash with $858 million in debt. Balance sheet wise H has plenty of flexibility to acquire and/or develop new properties. I would expect them to do so going forward. H can use cash, credit line, stock or a combination of all three to go after acquisitions or new property development once public. Expect H to be fairly aggressive in looking to acquire properties going forward, especially as a number of other brands currently have credit issues. H expects to focus expansion efforts on India, China, Russia and Brazil, where there is a large and growing middle class along with a meaningful number of local business travelers.
Cyclical - H has seen revenues decrease sharply each of the past two recessions('01-'02 & '09). H notes that their revenue per available room decreased more sharply during this recent slowdown than in 2001 and 1991.
Debt defaults - H not only manages Hyatt properties owned by third parties, they also have financed a number of third party Hyatt facilities. For example in 2008 H made a $278 million loan to an entity in order to finance its purchase of the Hyatt Regency Waikiki Beach Resort and Spa. As hotels have seen less revenue in 2009 than forecasts, default can be a possibility.
Financials
With $1.34 billion in cash post-ipo and $858 million in debt, H will have slightly less than $3 in net cash per share post-ipo.
H does not plan on paying dividends.
As noted above, H has seen a significant decline in revenues in 2009. Revenue per available room dropped 20%+ in 2009 as compared to 2008. Total revenues decreased 18% for the 6 months ending 6/30/09 compared to the six months ending 6/30/08.
Owned and leased hotels account for 53% of revenues, management/franchises account for 41%.
Occupancy rates for all US properties the first 6 months of 2009 was 64%, for international properties 57%.
**H is coming public in range below book value.
2009 - Revenues should be approximately $3.3 billion, an expected 13% drop from 2008. Operating expense ratio should be 96%, a drop from 2008's 91%. H has attempted to cut costs in 2008, however occupancy rates and room rates declined so significantly it severely impacted operating expense ratio. Operating margins should be 4%. There are a few one-time charges here that need to be folded out so the eps below will differ from GAAP for 2009. Factoring in non-operating charges and income plus taxes, net margins should be 3%. Earnings per share should be approximately $0.60. On a pricing of $24.5, H would trade 41 X's 2009 estimates. Note that in the previous five years, H earned substantially more on the bottom line than '09 estimates. While the P/E ratio looks pricey here, this is a bit of a 'trough valuation' on ipo assuming the bottom line will pick-up once again beginning in 2010. Until we begin to see a pick-up again in operating margins, forecasting 2010 here is quite difficult.
Marriott(MAT) and Starwood(HOT) are H's two closest public comparables. A quick look at all three.
H - $4.26 billion market cap at a pricing of $24.5. Below book value with a little under $3 in net cash per share on hand. Revenues of $3.3 billion trading $41 X's '09 estimates with an expected 13% annual revenue decline.
MAT - $6.9 billion market cap. 2.7 X's book value with $650 million in net debt. Revenues of $5.44 billion trading 15 X's '09's expected estimates with an 8% revenue decrease.
HOT - $5.69 billion market cap. 3 X's book value with $3.7 billion in net debt. $4.7 billion in expected revenues trading 45 X's '09 estimates with a 20% expected decrease in revenues.
Conclusion - Brand name coming book value with net cash in the bank has to be a recommend in range. A few issues here also though that prevent this from being an enthusiastic recommend. First of all the company structure is awful for new investors as it favors the Pritzker family heavily. The issue here is that the Pritzker family can unload a large percentage of their holdings onto the market over the next few years and still control H as long as they retain a 15% overall interest. Second, again here we are seeing a large ipo coming public without fully discounting the nasty recession and operational slowdown. In essence we still are not seeing 'deals' in the ipo market that reflect the economic reality of the past year. H is being priced/valued as if business will return to normal sometime in 2010. If it doesn't, H is not being priced at a rock bottom valuation. Having written that, I do like their balance sheet is in much better shape than the competition and they are coming public right around book value. Recommend here in range.
October 26, 2009, 9:13 pm
RA - RailAmerica
2009-10-07
RA - RailAmerica
RA - RailAmerica plans on offering 21 million shares at a range of $16-$18. Majority owner Fortress will be selling 10.5 million shares in the deal. If over-allotments are exercised, the deal size will be 24.15 million shares. JP Morgan, Citi, Deutsche Bank, and Morgan Stanley are leading the deal, Wells Fargo, Dahlman Rose, Lazard, Stifel and Williams Trading co-managing. Post-ipo RA will have 56 million shares outstanding for a market cap of $952 million on a pricing of $17. IPO proceeds will be utilized primarily to repay debt.
Private equity firm Fortress will own 53% of RA post-ipo. Fortress purchased RA in a 2006 leveraged buyout of $1.1 billion. At the time RailAmerica was a publicly traded company. It appears the Fortress led buyout doubled RA's debt levels, par for the course during the LBO heydays of 2003-2007. As a result of that leveraged buyout frenzy we are seeing solid businesses come public loaded with debt. RA is the latest.
Assuming RA utilizes all ipo proceeds to repay debt, there will be approximately $550 million in debt on the books post-ipo. Plugging in debt paid off on ipo, debt servicing the first 6 months of 2009 ate up a whopping 58% of operating profits.
From the prospectus:
'We believe that we are the largest owner and operator of short line and regional freight railroads in North America, measured in terms of total track-miles, operating a portfolio of 40 individual railroads with approximately 7,500 miles of track in 27 U.S. states and three Canadian provinces.'
In 2008 RA's railroads transported over one million carloads of freight for approximately 1,800 customers. For the six months ended June 30, 2009, coal, agricultural products and chemicals accounted for 22%, 14% and 10%, respectively, of RA carloads. RA's 40 railroads are located fairly evenly across all regions of the US.
Short-line railroad: railroads that transport freight between a customer’s facility or plant and a connection point with a Class I railroad. Essentially short lines are the connectors from a company to a long haul railroad. In North America there are 550 short line and regional railroads operating approximately 45,800 miles of track. Short line railroads make up just 4% of railroad revenues in the US.
That RA's railroads are often integrated into their customer's facilities meaning leading to a stable and predictable customer base. The only issue is volume. RA has seen a pretty significant dip in usage of their railroads the past year due to the economic slowdown.
Railroads carry more freight tonnage wise than any other mode of transportation in North America. In 2006, railroads carried 43% of total ton-miles (one ton of freight shipped one mile) of freight transported in the U.S.
Freight revenues make up 87% of total revenues with non-freight revenues making up 13%. Non-freight revenues include switching (or managing and positioning railcars within a customer’s facility), storing customers’ excess or idle railcars on inactive portions of our rail lines, third party railcar repair, and car hire and demurrage.
Financials
$550 million in net debt post-ipo, assuming all ipo proceeds are utilized to pay down debt.
In the first six months of 2009 freight revenues decreased 25% from first 6 months of 2008. This was primarily due to a decrease in carloads. Total carloads during the six month period ending June 30, 2009 decreased 25.6% to 414,303 in 2009, from 556,689 in the six months ended June 30, 2008. In contrast non-freight revenues grew 25% the first 6 months of 2009, primarily as a result of storing customers unused freight cars. RA makes a lot more off of freightcars hauling on their tracks than they do storing those unused freightcars so this is not an ideal trend.
Through first 6 months of 2009 fuel costs were 7% of revenues.
Slim margin operation as operational expense ratio was 83% in 2008 and 78% through the first 6 months of 2009. Combination of hefty debt and low margins is never ideal.
Taxes - RA has substantial tax loss carry-forward, $120 million not expiring until 2020-2027. RA also has $95 million in short line tax credits available through the next 20 years. RA's tax rate looks to be approximately 15%-20% for the foreseeable future.
RA does not plan on paying a dividend. This is a bit unusual as this is a classic low growth, predictable cash flow type business. RA however is not planning on returning any cash flows to shareholder, most likely due to the high debt levels. I would expect RA to use any cash flows to pay down debt levels.
2008 - Revenues were $508 million. Operating margins 17%. Debt servicing(adjusted for post-ipo) ate up over 50% of operating profits. Plugging in 15%-20% taxes, net margins were 7 1/2%. Earnings per share were $0.65-$0.70.
2009 - RA has had a difficult past 9 months. This is reflected in the '09 results through 6/30. Lower economic activity means less tonnage passing along rail lines. RA should pick up earnings per share in either 2010 or 2011, so the key here is not the high PE on ipo. The key here unfortunately is debt servicing eating up a very large portion of a fairly slim margins business to begin with. Revenues for the full year should be approximately $440 million, a 13% decrease from 2008. A portion of this decrease is due to lower fuel costs, however as noted above carloads decreased 25% year over ear through 6/30/09. Operating margins should improve to 21%. A portion of this is due to lower pass through of fuel costs, although RA does not management has created efficiencies to combat economic slowdown. After plugging in debt servicing and 20% taxes, net margins should be 9% Earnings per share should be $0.70. On a pricing of $17, RA would trade 24 X's 2009 earnings.
Conclusion - Much like recent ipos EDMC and SEP, RA is a former public company taken private past five years via a leveraged buyout. The newly public RA, much like SEP/EDMC, will simply have too much debt. Operationally 2009 should be as bad a year as RA will have over the next few years. I would expect earnings per share to tick up in both 2010 and 2011. Even so, with debt servicing eating up so much operating profit here, RA looks fully valued to me in range. Skip this deal
RA - RailAmerica
RA - RailAmerica plans on offering 21 million shares at a range of $16-$18. Majority owner Fortress will be selling 10.5 million shares in the deal. If over-allotments are exercised, the deal size will be 24.15 million shares. JP Morgan, Citi, Deutsche Bank, and Morgan Stanley are leading the deal, Wells Fargo, Dahlman Rose, Lazard, Stifel and Williams Trading co-managing. Post-ipo RA will have 56 million shares outstanding for a market cap of $952 million on a pricing of $17. IPO proceeds will be utilized primarily to repay debt.
Private equity firm Fortress will own 53% of RA post-ipo. Fortress purchased RA in a 2006 leveraged buyout of $1.1 billion. At the time RailAmerica was a publicly traded company. It appears the Fortress led buyout doubled RA's debt levels, par for the course during the LBO heydays of 2003-2007. As a result of that leveraged buyout frenzy we are seeing solid businesses come public loaded with debt. RA is the latest.
Assuming RA utilizes all ipo proceeds to repay debt, there will be approximately $550 million in debt on the books post-ipo. Plugging in debt paid off on ipo, debt servicing the first 6 months of 2009 ate up a whopping 58% of operating profits.
From the prospectus:
'We believe that we are the largest owner and operator of short line and regional freight railroads in North America, measured in terms of total track-miles, operating a portfolio of 40 individual railroads with approximately 7,500 miles of track in 27 U.S. states and three Canadian provinces.'
In 2008 RA's railroads transported over one million carloads of freight for approximately 1,800 customers. For the six months ended June 30, 2009, coal, agricultural products and chemicals accounted for 22%, 14% and 10%, respectively, of RA carloads. RA's 40 railroads are located fairly evenly across all regions of the US.
Short-line railroad: railroads that transport freight between a customer’s facility or plant and a connection point with a Class I railroad. Essentially short lines are the connectors from a company to a long haul railroad. In North America there are 550 short line and regional railroads operating approximately 45,800 miles of track. Short line railroads make up just 4% of railroad revenues in the US.
That RA's railroads are often integrated into their customer's facilities meaning leading to a stable and predictable customer base. The only issue is volume. RA has seen a pretty significant dip in usage of their railroads the past year due to the economic slowdown.
Railroads carry more freight tonnage wise than any other mode of transportation in North America. In 2006, railroads carried 43% of total ton-miles (one ton of freight shipped one mile) of freight transported in the U.S.
Freight revenues make up 87% of total revenues with non-freight revenues making up 13%. Non-freight revenues include switching (or managing and positioning railcars within a customer’s facility), storing customers’ excess or idle railcars on inactive portions of our rail lines, third party railcar repair, and car hire and demurrage.
Financials
$550 million in net debt post-ipo, assuming all ipo proceeds are utilized to pay down debt.
In the first six months of 2009 freight revenues decreased 25% from first 6 months of 2008. This was primarily due to a decrease in carloads. Total carloads during the six month period ending June 30, 2009 decreased 25.6% to 414,303 in 2009, from 556,689 in the six months ended June 30, 2008. In contrast non-freight revenues grew 25% the first 6 months of 2009, primarily as a result of storing customers unused freight cars. RA makes a lot more off of freightcars hauling on their tracks than they do storing those unused freightcars so this is not an ideal trend.
Through first 6 months of 2009 fuel costs were 7% of revenues.
Slim margin operation as operational expense ratio was 83% in 2008 and 78% through the first 6 months of 2009. Combination of hefty debt and low margins is never ideal.
Taxes - RA has substantial tax loss carry-forward, $120 million not expiring until 2020-2027. RA also has $95 million in short line tax credits available through the next 20 years. RA's tax rate looks to be approximately 15%-20% for the foreseeable future.
RA does not plan on paying a dividend. This is a bit unusual as this is a classic low growth, predictable cash flow type business. RA however is not planning on returning any cash flows to shareholder, most likely due to the high debt levels. I would expect RA to use any cash flows to pay down debt levels.
2008 - Revenues were $508 million. Operating margins 17%. Debt servicing(adjusted for post-ipo) ate up over 50% of operating profits. Plugging in 15%-20% taxes, net margins were 7 1/2%. Earnings per share were $0.65-$0.70.
2009 - RA has had a difficult past 9 months. This is reflected in the '09 results through 6/30. Lower economic activity means less tonnage passing along rail lines. RA should pick up earnings per share in either 2010 or 2011, so the key here is not the high PE on ipo. The key here unfortunately is debt servicing eating up a very large portion of a fairly slim margins business to begin with. Revenues for the full year should be approximately $440 million, a 13% decrease from 2008. A portion of this decrease is due to lower fuel costs, however as noted above carloads decreased 25% year over ear through 6/30/09. Operating margins should improve to 21%. A portion of this is due to lower pass through of fuel costs, although RA does not management has created efficiencies to combat economic slowdown. After plugging in debt servicing and 20% taxes, net margins should be 9% Earnings per share should be $0.70. On a pricing of $17, RA would trade 24 X's 2009 earnings.
Conclusion - Much like recent ipos EDMC and SEP, RA is a former public company taken private past five years via a leveraged buyout. The newly public RA, much like SEP/EDMC, will simply have too much debt. Operationally 2009 should be as bad a year as RA will have over the next few years. I would expect earnings per share to tick up in both 2010 and 2011. Even so, with debt servicing eating up so much operating profit here, RA looks fully valued to me in range. Skip this deal
October 16, 2009, 1:55 pm
VRSK - Verisk Analytics
As always, piece was available to subscribers well before pricing and open.
VRSK - Verisk Analytics plans on offering 85.25 million shares in a range of $19-$21. Insiders will be selling all of the shares in this deal, VRSK will receive no monies. If over-allotments are exercised, insiders will be offering 12.75 million shares bringing the total deal size to 98 million shares. BofA/Merrill Lynch and Morgan Stanley are leading the deal, JP Morgan, Wells Fargo, William Blair, Fox-Pitt Kelton and KBW co-managing. Post-ipo VRSK will have 180 million shares outstanding for a market cap of $3.6 billion on a pricing of $20.
Travelers Insurance will own 15% of VRSK post-ipo, Berhshire Hathaway 10%. A number of insurance companies own a piece of VRSK stock. In addition VRSK's employee stock ownership plan will own 20% of VRSK post-ipo.
From the prospectus:
'We enable risk-bearing businesses to better understand and manage their risks. We provide value to our customers by supplying proprietary data that, combined with our analytic methods, creates embedded decision support solutions.'
VRSK is the largest aggregator and provider of detailed actuarial and underwriting data pertaining to U.S. property and casualty, or P&C, insurance risks. Insurers utilize VRSK to make better risk decisions and to price risk appropriately.
VRSK insurance risk management framework: 1)Prediction of Loss; 2)Selection and Pricing of Risk; 3)Detection and Prevention of Fraud, and 4)Quantification of Loss.
Two segments Risk Assessment and Decision Analytics.
Risk Assessment - The leading provider of statistical, actuarial and underwriting data for the U.S. P&C insurance industry. Largest P&C insurance database includes over 14 billion records, and, in each of the past three years, VRSK updated the database with over 2 billion validated new records. VRSK uses this data to create industry standard policy language and proprietary risk classifications and to generate prospective loss cost estimates used to price insurance policies. </p>
Decision Analytics - VRSK has a data set that includes over 600 million P&C insurance claims, historic natural catastrophe data covering more than 50 countries, data from more than 13 million applications for mortgage loans and over 312 million U.S. criminal records. Customers utilize this data, along with VRSK's proprietary algorithms, to predict potential loss events, ranging from hurricanes and earthquakes to unanticipated healthcare claims. VRSK is at the leading developer of catastrophe and extreme event models.
**Not only are nearly all the major US property & casualty insurers shareholders, VRSK's solutions are actually embedded into their customer's critical decision processes. VRSK is pretty much the only game in town when it comes to risk management for US property and casualty insurance firms. Would be an understatement here to state barriers to entry are high.
VRSK also has a large presence outside of property and casualty:</p>
U.S. customers included all of the top 100 P&C insurance providers, four of the 10 largest Blue Cross Blue Shield plans, four of the six leading mortgage insurers, 14 of the top 20 mortgage lenders, and the 10 largest global reinsurers. Over the past three years, VRSK has retained 98% of all customers.
97% of top 100 customers had been customers for each of the past five years. VRSK's revenue growth from these top 100 customers has averaged 12% annually the past five years.
72% of revenues are derived from annual subscriptions or long-term agreements, which are typically pre-paid. 60% of revenues are from the US P&C insurance industry.
Acquisitions - VRSK has made 9 acquisitions over the past three years, all in their Decisions Analytics segment. the acquired companies provide fraud identification and detection, loss prediction and selection solutions to the healthcare market. **VRSK's fraud identification and detection business is their fastest growing niche.
**Large, very successful insurance risk management operation embedded in the US P&C insurance sector with large proprietary databases, datasets and algorithms. Really the issue here is not whether VRSK is investable, it is 100% a matter of valuation on ipo. We'll take a look at this below.
Financials
Debt - There is a bit of net debt here post-ipo, $689 million. It appears much of the debt has been taken on as a result of the 9 acquisitions over the previous three years.
VRSK has steadily grown annually over the past five year. This has been a result of organic growth coupled with acquisitions. Revenues have grown quarterly for at least 8 Q's in a row.
Gross margins and operating expense ratios have remained steady the past 4 years. Result is VRSK is filtering revenue growth to the bottom line at roughly the same dollar for dollar amount over the years.
2008 - Revenues were $893 million. Gross margins were 57%. Operating expense ratio 22%. Operating margins a strong 35%, indicative of an automated/embedded type operation. Debt-servicing ate up 10% of operating profits. Plugging in taxes, net margins were 19%. Earnings per share were $0.92.
2009 - through first 1/2 of year, revenues appear on track for $1.04 billion, a strong 16% increase over 2008. Gross margins look to be 56%-57%, operating expense ratio 21%. Operating margins should once again be in the 35% ballpark. Debt servicing should eat up close to 9% of operating profits. After tax net margins should be 19.5%. Earnings per share should be approximately $1.10. On a pricing of $20, VRSK would trade 18 X's 2009 revenues.
Conclusion - Blue chip ipo coming at a very attractive valuation. Years of revenue growth, strong operating margins and extremely high barriers to entry. This is a large 98 million share deal(assuming over-allotments) with all shares coming from insiders. Because of this, VRSK may trade a bit heavy early on any opening pop. Anywhere near $19-$21 range however and this is a keeper. Strong recommend here in range for mid-term.
VRSK - Verisk Analytics plans on offering 85.25 million shares in a range of $19-$21. Insiders will be selling all of the shares in this deal, VRSK will receive no monies. If over-allotments are exercised, insiders will be offering 12.75 million shares bringing the total deal size to 98 million shares. BofA/Merrill Lynch and Morgan Stanley are leading the deal, JP Morgan, Wells Fargo, William Blair, Fox-Pitt Kelton and KBW co-managing. Post-ipo VRSK will have 180 million shares outstanding for a market cap of $3.6 billion on a pricing of $20.
Travelers Insurance will own 15% of VRSK post-ipo, Berhshire Hathaway 10%. A number of insurance companies own a piece of VRSK stock. In addition VRSK's employee stock ownership plan will own 20% of VRSK post-ipo.
From the prospectus:
'We enable risk-bearing businesses to better understand and manage their risks. We provide value to our customers by supplying proprietary data that, combined with our analytic methods, creates embedded decision support solutions.'
VRSK is the largest aggregator and provider of detailed actuarial and underwriting data pertaining to U.S. property and casualty, or P&C, insurance risks. Insurers utilize VRSK to make better risk decisions and to price risk appropriately.
VRSK insurance risk management framework: 1)Prediction of Loss; 2)Selection and Pricing of Risk; 3)Detection and Prevention of Fraud, and 4)Quantification of Loss.
Two segments Risk Assessment and Decision Analytics.
Risk Assessment - The leading provider of statistical, actuarial and underwriting data for the U.S. P&C insurance industry. Largest P&C insurance database includes over 14 billion records, and, in each of the past three years, VRSK updated the database with over 2 billion validated new records. VRSK uses this data to create industry standard policy language and proprietary risk classifications and to generate prospective loss cost estimates used to price insurance policies. </p>
Decision Analytics - VRSK has a data set that includes over 600 million P&C insurance claims, historic natural catastrophe data covering more than 50 countries, data from more than 13 million applications for mortgage loans and over 312 million U.S. criminal records. Customers utilize this data, along with VRSK's proprietary algorithms, to predict potential loss events, ranging from hurricanes and earthquakes to unanticipated healthcare claims. VRSK is at the leading developer of catastrophe and extreme event models.
**Not only are nearly all the major US property & casualty insurers shareholders, VRSK's solutions are actually embedded into their customer's critical decision processes. VRSK is pretty much the only game in town when it comes to risk management for US property and casualty insurance firms. Would be an understatement here to state barriers to entry are high.
VRSK also has a large presence outside of property and casualty:</p>
U.S. customers included all of the top 100 P&C insurance providers, four of the 10 largest Blue Cross Blue Shield plans, four of the six leading mortgage insurers, 14 of the top 20 mortgage lenders, and the 10 largest global reinsurers. Over the past three years, VRSK has retained 98% of all customers.
97% of top 100 customers had been customers for each of the past five years. VRSK's revenue growth from these top 100 customers has averaged 12% annually the past five years.
72% of revenues are derived from annual subscriptions or long-term agreements, which are typically pre-paid. 60% of revenues are from the US P&C insurance industry.
Acquisitions - VRSK has made 9 acquisitions over the past three years, all in their Decisions Analytics segment. the acquired companies provide fraud identification and detection, loss prediction and selection solutions to the healthcare market. **VRSK's fraud identification and detection business is their fastest growing niche.
**Large, very successful insurance risk management operation embedded in the US P&C insurance sector with large proprietary databases, datasets and algorithms. Really the issue here is not whether VRSK is investable, it is 100% a matter of valuation on ipo. We'll take a look at this below.
Financials
Debt - There is a bit of net debt here post-ipo, $689 million. It appears much of the debt has been taken on as a result of the 9 acquisitions over the previous three years.
VRSK has steadily grown annually over the past five year. This has been a result of organic growth coupled with acquisitions. Revenues have grown quarterly for at least 8 Q's in a row.
Gross margins and operating expense ratios have remained steady the past 4 years. Result is VRSK is filtering revenue growth to the bottom line at roughly the same dollar for dollar amount over the years.
2008 - Revenues were $893 million. Gross margins were 57%. Operating expense ratio 22%. Operating margins a strong 35%, indicative of an automated/embedded type operation. Debt-servicing ate up 10% of operating profits. Plugging in taxes, net margins were 19%. Earnings per share were $0.92.
2009 - through first 1/2 of year, revenues appear on track for $1.04 billion, a strong 16% increase over 2008. Gross margins look to be 56%-57%, operating expense ratio 21%. Operating margins should once again be in the 35% ballpark. Debt servicing should eat up close to 9% of operating profits. After tax net margins should be 19.5%. Earnings per share should be approximately $1.10. On a pricing of $20, VRSK would trade 18 X's 2009 revenues.
Conclusion - Blue chip ipo coming at a very attractive valuation. Years of revenue growth, strong operating margins and extremely high barriers to entry. This is a large 98 million share deal(assuming over-allotments) with all shares coming from insiders. Because of this, VRSK may trade a bit heavy early on any opening pop. Anywhere near $19-$21 range however and this is a keeper. Strong recommend here in range for mid-term.
September 24, 2009, 4:42 pm
VITC - Vitacost.com
Note: piece was available to subscribers 9/17. Tradingipos.com is currently long VITC at an avg price of $11.40
VITC - Vitacost.com plans on offering 11 million shares at a range of $11-$13. Insiders will be selling 6.6 million shares in the offering. If the over-allotments are exercised the deal size will be 12.6 million shares offered with insiders selling 7.6 million shares. Jefferies and Oppenheimer are leading the deal with Needham and Roth Capital co-managing. Post-ipo VITC will have 28.1 million shares outstanding for a market cap of $337 million on a pricing of $12. Approximately 50% of ipo proceeds will be used for capital expenditures, the remainder for debt repayment and general corporate purposes.
Founder and former CEO Wayne Gorsek will own 17% of VITC post-ipo. Mr. Gorsek is selling approximately 40% of his stake in the company on ipo. Note that the SEC found Mr. Gorsek liable for security fraud in 2003 in connection with the promotion of penny stocks. For VITC to be listed on the Nasdaq, Mr. Gorsek had to give up his role of CEO and Chairman of the Board. Mr. Gorsek is still a paid consultant for VITC. </p>
From the prospectus:
'We are a leading online retailer and direct marketer, based on annual sales volume, of health and wellness products, including dietary supplements such as vitamins, minerals, herbs or other botanicals, amino acids and metabolites (which we refer to as "vitamins and dietary supplements", as well as cosmetics, organic body and personal care products, sports nutrition and health foods.'
Online discount vitamin and health & wellness product retailer. </p>
Founded in 1994 as a catalog third-party retailer of vitamins. In 1999 VITC launched website Vitacost.com and since has done bulk of sales via that site.
VITC offers 23,000 SKUs from over 1,000 third-party brands, such as New Chapter, Atkins, Nature’s Way, Twinlab, Burt’s Bees and Kashi. In addition VITC has their own brands Nutraceutical Sciences Institute (NSI), Cosmeceutical Sciences Institute (CSI), Best of All, Smart Basics and Walker Diet. VITC completed construction of manufacturing facility in North Carolina and now manufactures most of their own labeled products.
VITC claims prices on their website are 30%-60% lower than manufacturers suggested retail prices. While technically this may be true, a quick run through their website would seem to indicate third party products are roughly in-line with the big box stores. In this day and age it is hard to undercut the large grocery chains, Target and Wal-Mart. What VITC does offer is a large selection in one online spot with click to buy ordering as well as their own label brands.
As of 6/30/09, VITC has approximately 957,000 active customers, an increase of 37% year over year. VITC defines 'active customer' as a customer who has made a purchase from VITC in the prior 12 month period. On average, active customers make purchases 2-3 times a year with average ticket between $72-$77. Approximately 50% of visitors to Vitacost.com arrive via non-paid sources. average conversion rate per visitor to site in 2008 was 15%, which seems to me to be rather solid.
VITC's margins are far stronger on sales of their own label products. Sales of VITC labels had gross margins in '08 of 53% on while gross margins were just 24% on sales of third-party products.
Sector - Even as the US economy slowed, online sales continued to grow as more and more people become comfortable with ordering/purchasing online. US online retail sales were $141 billion in 2008 and expected to grow 11% in 2009. Also US sales overall of dietary supplements are expected to grow 5% year over year through 2013. Sales of dietary supplements through the Internet grew 24.8% in 2007 and are expected to grow double digits over the next few years.
86% of orders placed online via VITC's website. 98% of revenues are generated from US customers.
Customer acquisition costs are $10.16. In 2008, 74% of orders were from repeat customers.
VITC has the capability to ship 20,000 orders per day. 93% of orders are shipped same day.
Competition is fierce. Retailers include GNC, Vitamin World, Vitamin Shoppe,Walgreen’s, CVS, RiteAid, Wal-Mart, Target and supermarket chains. Online competitors include Amazon.com and Drugstore.com.
Financials
$1 per share in cash (minus debt) post ipo.
Revenue growth has been very strong. VITC even notes in the prospectus: 'To date, we have not been adversely effected by the current recession and resulting downturn in consumer confidence and discretionary spending.' Quarterly revenues have shown a sequential increase for at least eight quarters in a row.
VITC's own label products accounted for 33% of product sales through the first six months of 2009.
VITC has been operationally profitable since 2006. In 2009 however VITC has been able to increase the bottom line significantly due to growing customer base and very solid operating expense management. In a very competitive landscape, VITC has done an excellent job increasing revenues and profits.
2008 - Revenues were $143.6 million. Gross margins were 26.5%. Operating expense ratio was 25%. Operating margins were 1 1/2%. Net margins(after tax and debt interest) were 1/2 of 1%. EPS was $0.02.
2009 - VITC has had a fantastic first half of 2009 as they've increased revenues and margins sharply. Full year revenues should be $196 million, a 36% increase over 2009. VITC should achieve this growth while keeping sales/marketing expenses flat compared to 2008. For an online retailer this is impressive organic growth. Normally when you see sharp growth from an online retailer, it also comes with sharp increase in sales and marketing expenses notably internet advertising. That isn't the case here at all as it appears returning customers are creating a nice economy of scale here. VITC seems to be providing a quality service based on the numbers here. Gross margins should be 32%. Operating expense ratio should be 19%, putting operating margins at 13%. Net margins should be 8%. Earnings per share should be $0.56. On a pricing of $12, VITC would trade 21 X's 2009 earnings.
conclusion - The trends look strong for VITC. Nothing proprietary here but VITC is doing a very nice job of increasing customer base while holding down expenses. The result is a nice move into profitability in 2009, which should lead to increased EPS for '10. Customer base here has grown from 270,000 at the end of 2005 to approximately 957,000 as of June 30, 2009. This growth has come without ramping operating expenses. Solid vitamin/supplement manufacturer and online retailer definite recommend in range.
VITC - Vitacost.com plans on offering 11 million shares at a range of $11-$13. Insiders will be selling 6.6 million shares in the offering. If the over-allotments are exercised the deal size will be 12.6 million shares offered with insiders selling 7.6 million shares. Jefferies and Oppenheimer are leading the deal with Needham and Roth Capital co-managing. Post-ipo VITC will have 28.1 million shares outstanding for a market cap of $337 million on a pricing of $12. Approximately 50% of ipo proceeds will be used for capital expenditures, the remainder for debt repayment and general corporate purposes.
Founder and former CEO Wayne Gorsek will own 17% of VITC post-ipo. Mr. Gorsek is selling approximately 40% of his stake in the company on ipo. Note that the SEC found Mr. Gorsek liable for security fraud in 2003 in connection with the promotion of penny stocks. For VITC to be listed on the Nasdaq, Mr. Gorsek had to give up his role of CEO and Chairman of the Board. Mr. Gorsek is still a paid consultant for VITC. </p>
From the prospectus:
'We are a leading online retailer and direct marketer, based on annual sales volume, of health and wellness products, including dietary supplements such as vitamins, minerals, herbs or other botanicals, amino acids and metabolites (which we refer to as "vitamins and dietary supplements"
, as well as cosmetics, organic body and personal care products, sports nutrition and health foods.'Online discount vitamin and health & wellness product retailer. </p>
Founded in 1994 as a catalog third-party retailer of vitamins. In 1999 VITC launched website Vitacost.com and since has done bulk of sales via that site.
VITC offers 23,000 SKUs from over 1,000 third-party brands, such as New Chapter, Atkins, Nature’s Way, Twinlab, Burt’s Bees and Kashi. In addition VITC has their own brands Nutraceutical Sciences Institute (NSI), Cosmeceutical Sciences Institute (CSI), Best of All, Smart Basics and Walker Diet. VITC completed construction of manufacturing facility in North Carolina and now manufactures most of their own labeled products.
VITC claims prices on their website are 30%-60% lower than manufacturers suggested retail prices. While technically this may be true, a quick run through their website would seem to indicate third party products are roughly in-line with the big box stores. In this day and age it is hard to undercut the large grocery chains, Target and Wal-Mart. What VITC does offer is a large selection in one online spot with click to buy ordering as well as their own label brands.
As of 6/30/09, VITC has approximately 957,000 active customers, an increase of 37% year over year. VITC defines 'active customer' as a customer who has made a purchase from VITC in the prior 12 month period. On average, active customers make purchases 2-3 times a year with average ticket between $72-$77. Approximately 50% of visitors to Vitacost.com arrive via non-paid sources. average conversion rate per visitor to site in 2008 was 15%, which seems to me to be rather solid.
VITC's margins are far stronger on sales of their own label products. Sales of VITC labels had gross margins in '08 of 53% on while gross margins were just 24% on sales of third-party products.
Sector - Even as the US economy slowed, online sales continued to grow as more and more people become comfortable with ordering/purchasing online. US online retail sales were $141 billion in 2008 and expected to grow 11% in 2009. Also US sales overall of dietary supplements are expected to grow 5% year over year through 2013. Sales of dietary supplements through the Internet grew 24.8% in 2007 and are expected to grow double digits over the next few years.
86% of orders placed online via VITC's website. 98% of revenues are generated from US customers.
Customer acquisition costs are $10.16. In 2008, 74% of orders were from repeat customers.
VITC has the capability to ship 20,000 orders per day. 93% of orders are shipped same day.
Competition is fierce. Retailers include GNC, Vitamin World, Vitamin Shoppe,Walgreen’s, CVS, RiteAid, Wal-Mart, Target and supermarket chains. Online competitors include Amazon.com and Drugstore.com.
Financials
$1 per share in cash (minus debt) post ipo.
Revenue growth has been very strong. VITC even notes in the prospectus: 'To date, we have not been adversely effected by the current recession and resulting downturn in consumer confidence and discretionary spending.' Quarterly revenues have shown a sequential increase for at least eight quarters in a row.
VITC's own label products accounted for 33% of product sales through the first six months of 2009.
VITC has been operationally profitable since 2006. In 2009 however VITC has been able to increase the bottom line significantly due to growing customer base and very solid operating expense management. In a very competitive landscape, VITC has done an excellent job increasing revenues and profits.
2008 - Revenues were $143.6 million. Gross margins were 26.5%. Operating expense ratio was 25%. Operating margins were 1 1/2%. Net margins(after tax and debt interest) were 1/2 of 1%. EPS was $0.02.
2009 - VITC has had a fantastic first half of 2009 as they've increased revenues and margins sharply. Full year revenues should be $196 million, a 36% increase over 2009. VITC should achieve this growth while keeping sales/marketing expenses flat compared to 2008. For an online retailer this is impressive organic growth. Normally when you see sharp growth from an online retailer, it also comes with sharp increase in sales and marketing expenses notably internet advertising. That isn't the case here at all as it appears returning customers are creating a nice economy of scale here. VITC seems to be providing a quality service based on the numbers here. Gross margins should be 32%. Operating expense ratio should be 19%, putting operating margins at 13%. Net margins should be 8%. Earnings per share should be $0.56. On a pricing of $12, VITC would trade 21 X's 2009 earnings.
conclusion - The trends look strong for VITC. Nothing proprietary here but VITC is doing a very nice job of increasing customer base while holding down expenses. The result is a nice move into profitability in 2009, which should lead to increased EPS for '10. Customer base here has grown from 270,000 at the end of 2005 to approximately 957,000 as of June 30, 2009. This growth has come without ramping operating expenses. Solid vitamin/supplement manufacturer and online retailer definite recommend in range.
July 20, 2009, 2:25 pm
MDSO - Medidata Solutions
2009-06-15
MDSO - Medidata Solutions
MDSO - Medidata Solutions plans on offering 6.3 million shares at a range of $11-$13. All of the shares are being sold by MDSO. If the over-allotments is exercised however, insiders will be selling 945,000 shares. Citi and Credit Suisse are leading the deal, Jefferies and Needham co-managing. Post-ipo MDSO will have 22.4 million shares outstanding for a market cap of $269 million on a pricing of $12. IPO proceeds will be used to repay outstanding debt and for general corporate purposes.
Insight Venture Partners will own 21% of MDSO post-ipo. Insight also owned a significant chunk of recent ipo SolarWinds.
From the prospectus:
'We are a leading global provider of hosted clinical development solutions that enhance the efficiency of our customers’ clinical development processes and optimize their research and development investments. Our customers include pharmaceutical, biotechnology and medical device companies, academic institutions, contract research organizations, or CROs, and other organizations engaged in clinical trials to bring innovative medical products to market and explore new indications for existing medical products.'
On demand software platform for clinical trial data management. MDSO's software platform is designed to migrate clinical study data into one comprehensive online electronic point.
Customer base includes 22 of the top 25 global pharmaceutical companies. Since 2007, largest customers have been Johnson & Johnson, AstraZeneca, Amgen, Astellas Pharma and Takeda Pharmaceutical.
Medidata Rave is MDSO's principal revenue driving platform. MDSO derives the bulk of their revenues via multi-study arrangements from customers for a defined number of studies. The Rave platform integrates electronic data capture with a clinical data management system in a single solution that replaces traditional paper-based methods of capturing and managing clinical data. Designed for clinical trials of all sizes and phases, including those involving substantial numbers of clinical sites and patients worldwide.
Sector - Traditionally paper based manual entries into computerized form has been the primary data collection techniques in clinical trials. MDSO believes that while electronic data capture has become widely accepted, currently the majority of clinical trials still employ a form of paper based manual entry techniques. MDSO estimates that the total potential market for clinical trial electronic data capture is $1.4 billion annually worldwide.
The clinical trial space showed explosive growth from 2000-2007. Pharmaceuticals, biotechs and life science companies easily obtained the funding necessary to conduct clinical trials during this period. Access to public market funding was open, private equity firms and venture capital funds flowed and debt financing was easy to secure. Easy funding and the aging of Europe and North America led to unprecedented clinical trial testing for prospective new drugs. That came to a stop in 2008. One look at the charts and continued estimate cuts in the contract service organizations involved in clinical trials(CVD/PPDI/KNDL etc...) shows a trail of tears over the past year. Some of the stocks in the sector gave back nearly all of a 7+ year huge bull run. It has not been an easy sector backdrop for a company such as MDSO the past year or so. We shall see below how MDSO weathered this worldwide clinical trial slowdown.
MDSO solution - MDSO lists all the advantages of their software platform. We could delve into that for a few paragraphs I suppose. However essentially MDSO can be summed up as this: Real-time data from clinical trials from inception thru stages I, II, III and IV all on a single scalable electronic platform. A key feature is the ability to show real-time date for a clinical trial comprised of many different locations throughout the globe. Also MDSO's platform can be used in multiple languages simultaneously.
Hosting - MDSO hosts all client/customer data in one dedicated facility. MDSO is another example of the growing 'on demand' software and e-platform segment of the software business. This time with a data center twist. Client information is accessible online without the need to install extensive software at various sites worldwide.
Top 5 customers accounted for 46% of revenues in 2008. AstraZeneca accounted for 11% of '08 revenues and Johnson & Johnson 10%. For the first three months of '09, Takeda Pharmaceutical accounted for approximately 12% of revenues. Approximately 30% of revenues the past 13 quarters were from international clients.
Legal - Recently MDSO settled a patent infringement lawsuit claim for $2.2 million. The infringement suit was not directed toward MDSO, however it was directed to a company whose technology MDSO incorporated into their platform.
Accounting - pre-ipo, MDSO discovered their revenue recognition practices were not in line with approved accounting policies. This caused the restatement of 2006-2008 earnings statements. While this is fairly common with pre-ipo companies with small accounting staff, MDSO appears to have had more issues than is the norm.
Competitors include BioClinica, etrials Worldwide, eResearch, ClinPhone, Datatrak, Omnicom, Oracle Clinical and Phase Forward.
Financials
$2.50 per share in net cash post-ipo. Note that financials below assume debt on the books will be paid off on ipo, removing all debt expenses. With $2.50 in net cash post-ipo, MDSO will begin to have net interest revenues going forward instead of interest expenses.
In 3/08, MDSO acquired FastTrack a provider of clinical trial planning solutions. Purchase price was $18.1 million. The acquisition included substantial goodwill and intangible assets, the effect being added amortization and depreciation non-cash flow charges to MDSO's earnings statement the past four quarters. In addition to the GAAP charges going forward related to this purchase, MDSO also invested heavily in their data center capacity in 2006-2007. As MDSO will have $2.50 in net cash on the balance sheet post-ipo, these depreciation/amortization charges are not really pertinent to cash flows as there will be no debt drag from the investments. This is one of the rare cases in which I feel folding out this expense line gives a better idea as to the state of the operation.
Customer base has grown from 33 at 1/1/06 to 153 at 3/31/09. Customer retention rate was 87% in 2008. **MDSO did not lose any customer in the first three months of 2009.
MDSO recognizes their backlog as 'expected to be realized in current year' backlog. Backlog as of 1/1/09 was $116.7 million. As of 3/31/09, expected to be realized in '09 backlog was $91.6 million.
Impressive revenue growth since the first quarter of 2008. Revenues in the 12/07 quarter were $17,609 In the five quarters since beginning in 3/08 and ending in 3/09 revenues have been $20,979; $25,753; $27,810; $31,182; $33,602. This quarterly revenue growth performance is very impressive considering the dreary global economic climate over this period. At a sub $300 million market cap on ipo, a company laying on 10%+ quarter to quarter revenue growth is almost an automatic recommend. Factor in the very difficult clinical trial environment due to funding issues over the past year, and MDSO's rapid revenue growth is even more impressive. The issue here is not the growth, it is the bottom line.
Revenue growth is directly tied to substantial customer gains in 2008 and first quarter of 2009. MDSO either has a superior platform or they are significantly undercutting the competition in price.
The 12/08 quarter was MDSO's first profitable quarter on GAAP operational earnings. Again, MDSO's actual cash flows will be a bit stronger each quarter than GAAP earnings due to the amortization and depreciation charges from the FastTrack purchase. While MDSO booked a substantial GAAP loss in 2008, total cash flows were slightly positive.
MDSO has significant tax loss carryforwards and should pay minimal taxes in 2009-2011.
Approximately 70% of revenues is high margin application services revenues, 30% low margin professional services revenues. Think of the higher margins side as the software revenues and the lower margin side as the data service revenues.
2008 - Revenues were $105.7 million, a 68% increase over 2007. While MDSO did make an acquisition in 2008, nearly all the growth was organic and a result of increased customer base. Gross margins were 52%, an increase from 2007's 27%. Gross margins would be low for the software segment, except MDSO is not really a software operation. They are a combination on-demand software, data center, and electronic platform company. Operating expenses were staggering at 67% of revenues, an increase from 2007's 63%. If depreciation and amortization are removed, operating expense ratio was 59%. Folding out debt expense(as there will be no net debt post-ipo), MDSO's loss in 2007 was approximately $0.70 per share. This includes all depreciation, amortization and stock compensation expenses. As noted above, MDSO was slightly cash flow positive in 2009 overall, so this loss is a shade misleading. **To get a clearer picture here, one should fold out the depreciation and amortization expenses. Doing so, puts the net loss at $0.25 per share.
2009 - MDSO gives a very good '09 blueprint thanks to their 'expected to realize in '09' backlog count. Using that and first quarter results, total revenues for 2009 should be in the $140 - $150 million ballpark. This would be a strong 38% increase over 2008. MDSO continues to improve gross margins in their lower margin 'professional services' side as they add customers. Gross margins should increase to 64% for 2009, an increase from '08's 52%. As revenues have increased strongly, operating costs have remained flat the past four quarters. This is a nice positive as MDSO has been running 'hot' on GSA expenses the past few years as they've invested in growing their business. Total operating expense margin(including depreciation & amortization) should be 56%, a nice decrease from '08's 67%. Operating margins should be in the 8% ballpark. Due to the loss carryforwards noted above, MDSO's tax rate will be approximately 10%. Net margins should be 7% with earnings per share of $0.45. On a pricing of $12, MDSO would trade 27 X's 2009 earnings.
As noted previously, this to me is a case in which folding out depreciation and amortization charges give us a better idea of overall cash flows. Folding out those charges(but keeping in stock compensation), earnings per share would be $0.88. If we normalized taxes (instead of the 10% rate), earnings per share folding out these charges would be $0.64. To me this number gives us a better picture of MDSO's 2009 operations.
MDSO is sort of a stealth ipo. Growth has been phenomenal over the past year amidst a sharp overall slowdown in the worldwide clinical trials segment. The GAAP earnings though look horrific for 2007 and 2008. However, MDSO is trending strongly in revenues, gross margins, operating margins and net margins each and every quarter and is quickly approaching a spot in which net earnings should look far better than the past. Factor in their actual cash flows are disguised a bit due to non-cash flow charges and this one has strong sleeper potential.
Biggest negative here is that the sector has not been strong and on the surface, first glance MDSO looks unimpressive.
Quick glance at MDSO's closest public comparable PFWD. PFWD is not a true pureplay comparable as their clinical trial offerings are just a segment of the overall business. Also ERES has a segment that competes with MDSO, however ERES has seen their business falter significantly overall the past few quarters unlike PFWD/MDSO.
PFWD - $675 million market cap. $3.5 per share in cash. PFWD currently trades 30 X's 2009 earnings estimates with an expected revenue growth rate of 24%.
Conclusion - I like this ipo. MDSO is trending very strongly on all metrics the past 6 quarters in a difficult environment for the clinical trials sector. If trends continue (and the sector just normalizes) MDSO will have a banner 2010. As always, this is a young company that spends heavily on operating expenses each quarter so any hiccup will be greatly magnified. However cash flows here are increasing impressively each quarter, and at a sub $300 million market cap, this is an easy recommend in range. Stealth ipo, looks unimpressive first glance but is trending very nicely into ipo.
MDSO - Medidata Solutions
MDSO - Medidata Solutions plans on offering 6.3 million shares at a range of $11-$13. All of the shares are being sold by MDSO. If the over-allotments is exercised however, insiders will be selling 945,000 shares. Citi and Credit Suisse are leading the deal, Jefferies and Needham co-managing. Post-ipo MDSO will have 22.4 million shares outstanding for a market cap of $269 million on a pricing of $12. IPO proceeds will be used to repay outstanding debt and for general corporate purposes.
Insight Venture Partners will own 21% of MDSO post-ipo. Insight also owned a significant chunk of recent ipo SolarWinds.
From the prospectus:
'We are a leading global provider of hosted clinical development solutions that enhance the efficiency of our customers’ clinical development processes and optimize their research and development investments. Our customers include pharmaceutical, biotechnology and medical device companies, academic institutions, contract research organizations, or CROs, and other organizations engaged in clinical trials to bring innovative medical products to market and explore new indications for existing medical products.'
On demand software platform for clinical trial data management. MDSO's software platform is designed to migrate clinical study data into one comprehensive online electronic point.
Customer base includes 22 of the top 25 global pharmaceutical companies. Since 2007, largest customers have been Johnson & Johnson, AstraZeneca, Amgen, Astellas Pharma and Takeda Pharmaceutical.
Medidata Rave is MDSO's principal revenue driving platform. MDSO derives the bulk of their revenues via multi-study arrangements from customers for a defined number of studies. The Rave platform integrates electronic data capture with a clinical data management system in a single solution that replaces traditional paper-based methods of capturing and managing clinical data. Designed for clinical trials of all sizes and phases, including those involving substantial numbers of clinical sites and patients worldwide.
Sector - Traditionally paper based manual entries into computerized form has been the primary data collection techniques in clinical trials. MDSO believes that while electronic data capture has become widely accepted, currently the majority of clinical trials still employ a form of paper based manual entry techniques. MDSO estimates that the total potential market for clinical trial electronic data capture is $1.4 billion annually worldwide.
The clinical trial space showed explosive growth from 2000-2007. Pharmaceuticals, biotechs and life science companies easily obtained the funding necessary to conduct clinical trials during this period. Access to public market funding was open, private equity firms and venture capital funds flowed and debt financing was easy to secure. Easy funding and the aging of Europe and North America led to unprecedented clinical trial testing for prospective new drugs. That came to a stop in 2008. One look at the charts and continued estimate cuts in the contract service organizations involved in clinical trials(CVD/PPDI/KNDL etc...) shows a trail of tears over the past year. Some of the stocks in the sector gave back nearly all of a 7+ year huge bull run. It has not been an easy sector backdrop for a company such as MDSO the past year or so. We shall see below how MDSO weathered this worldwide clinical trial slowdown.
MDSO solution - MDSO lists all the advantages of their software platform. We could delve into that for a few paragraphs I suppose. However essentially MDSO can be summed up as this: Real-time data from clinical trials from inception thru stages I, II, III and IV all on a single scalable electronic platform. A key feature is the ability to show real-time date for a clinical trial comprised of many different locations throughout the globe. Also MDSO's platform can be used in multiple languages simultaneously.
Hosting - MDSO hosts all client/customer data in one dedicated facility. MDSO is another example of the growing 'on demand' software and e-platform segment of the software business. This time with a data center twist. Client information is accessible online without the need to install extensive software at various sites worldwide.
Top 5 customers accounted for 46% of revenues in 2008. AstraZeneca accounted for 11% of '08 revenues and Johnson & Johnson 10%. For the first three months of '09, Takeda Pharmaceutical accounted for approximately 12% of revenues. Approximately 30% of revenues the past 13 quarters were from international clients.
Legal - Recently MDSO settled a patent infringement lawsuit claim for $2.2 million. The infringement suit was not directed toward MDSO, however it was directed to a company whose technology MDSO incorporated into their platform.
Accounting - pre-ipo, MDSO discovered their revenue recognition practices were not in line with approved accounting policies. This caused the restatement of 2006-2008 earnings statements. While this is fairly common with pre-ipo companies with small accounting staff, MDSO appears to have had more issues than is the norm.
Competitors include BioClinica, etrials Worldwide, eResearch, ClinPhone, Datatrak, Omnicom, Oracle Clinical and Phase Forward.
Financials
$2.50 per share in net cash post-ipo. Note that financials below assume debt on the books will be paid off on ipo, removing all debt expenses. With $2.50 in net cash post-ipo, MDSO will begin to have net interest revenues going forward instead of interest expenses.
In 3/08, MDSO acquired FastTrack a provider of clinical trial planning solutions. Purchase price was $18.1 million. The acquisition included substantial goodwill and intangible assets, the effect being added amortization and depreciation non-cash flow charges to MDSO's earnings statement the past four quarters. In addition to the GAAP charges going forward related to this purchase, MDSO also invested heavily in their data center capacity in 2006-2007. As MDSO will have $2.50 in net cash on the balance sheet post-ipo, these depreciation/amortization charges are not really pertinent to cash flows as there will be no debt drag from the investments. This is one of the rare cases in which I feel folding out this expense line gives a better idea as to the state of the operation.
Customer base has grown from 33 at 1/1/06 to 153 at 3/31/09. Customer retention rate was 87% in 2008. **MDSO did not lose any customer in the first three months of 2009.
MDSO recognizes their backlog as 'expected to be realized in current year' backlog. Backlog as of 1/1/09 was $116.7 million. As of 3/31/09, expected to be realized in '09 backlog was $91.6 million.
Impressive revenue growth since the first quarter of 2008. Revenues in the 12/07 quarter were $17,609 In the five quarters since beginning in 3/08 and ending in 3/09 revenues have been $20,979; $25,753; $27,810; $31,182; $33,602. This quarterly revenue growth performance is very impressive considering the dreary global economic climate over this period. At a sub $300 million market cap on ipo, a company laying on 10%+ quarter to quarter revenue growth is almost an automatic recommend. Factor in the very difficult clinical trial environment due to funding issues over the past year, and MDSO's rapid revenue growth is even more impressive. The issue here is not the growth, it is the bottom line.
Revenue growth is directly tied to substantial customer gains in 2008 and first quarter of 2009. MDSO either has a superior platform or they are significantly undercutting the competition in price.
The 12/08 quarter was MDSO's first profitable quarter on GAAP operational earnings. Again, MDSO's actual cash flows will be a bit stronger each quarter than GAAP earnings due to the amortization and depreciation charges from the FastTrack purchase. While MDSO booked a substantial GAAP loss in 2008, total cash flows were slightly positive.
MDSO has significant tax loss carryforwards and should pay minimal taxes in 2009-2011.
Approximately 70% of revenues is high margin application services revenues, 30% low margin professional services revenues. Think of the higher margins side as the software revenues and the lower margin side as the data service revenues.
2008 - Revenues were $105.7 million, a 68% increase over 2007. While MDSO did make an acquisition in 2008, nearly all the growth was organic and a result of increased customer base. Gross margins were 52%, an increase from 2007's 27%. Gross margins would be low for the software segment, except MDSO is not really a software operation. They are a combination on-demand software, data center, and electronic platform company. Operating expenses were staggering at 67% of revenues, an increase from 2007's 63%. If depreciation and amortization are removed, operating expense ratio was 59%. Folding out debt expense(as there will be no net debt post-ipo), MDSO's loss in 2007 was approximately $0.70 per share. This includes all depreciation, amortization and stock compensation expenses. As noted above, MDSO was slightly cash flow positive in 2009 overall, so this loss is a shade misleading. **To get a clearer picture here, one should fold out the depreciation and amortization expenses. Doing so, puts the net loss at $0.25 per share.
2009 - MDSO gives a very good '09 blueprint thanks to their 'expected to realize in '09' backlog count. Using that and first quarter results, total revenues for 2009 should be in the $140 - $150 million ballpark. This would be a strong 38% increase over 2008. MDSO continues to improve gross margins in their lower margin 'professional services' side as they add customers. Gross margins should increase to 64% for 2009, an increase from '08's 52%. As revenues have increased strongly, operating costs have remained flat the past four quarters. This is a nice positive as MDSO has been running 'hot' on GSA expenses the past few years as they've invested in growing their business. Total operating expense margin(including depreciation & amortization) should be 56%, a nice decrease from '08's 67%. Operating margins should be in the 8% ballpark. Due to the loss carryforwards noted above, MDSO's tax rate will be approximately 10%. Net margins should be 7% with earnings per share of $0.45. On a pricing of $12, MDSO would trade 27 X's 2009 earnings.
As noted previously, this to me is a case in which folding out depreciation and amortization charges give us a better idea of overall cash flows. Folding out those charges(but keeping in stock compensation), earnings per share would be $0.88. If we normalized taxes (instead of the 10% rate), earnings per share folding out these charges would be $0.64. To me this number gives us a better picture of MDSO's 2009 operations.
MDSO is sort of a stealth ipo. Growth has been phenomenal over the past year amidst a sharp overall slowdown in the worldwide clinical trials segment. The GAAP earnings though look horrific for 2007 and 2008. However, MDSO is trending strongly in revenues, gross margins, operating margins and net margins each and every quarter and is quickly approaching a spot in which net earnings should look far better than the past. Factor in their actual cash flows are disguised a bit due to non-cash flow charges and this one has strong sleeper potential.
Biggest negative here is that the sector has not been strong and on the surface, first glance MDSO looks unimpressive.
Quick glance at MDSO's closest public comparable PFWD. PFWD is not a true pureplay comparable as their clinical trial offerings are just a segment of the overall business. Also ERES has a segment that competes with MDSO, however ERES has seen their business falter significantly overall the past few quarters unlike PFWD/MDSO.
PFWD - $675 million market cap. $3.5 per share in cash. PFWD currently trades 30 X's 2009 earnings estimates with an expected revenue growth rate of 24%.
Conclusion - I like this ipo. MDSO is trending very strongly on all metrics the past 6 quarters in a difficult environment for the clinical trials sector. If trends continue (and the sector just normalizes) MDSO will have a banner 2010. As always, this is a young company that spends heavily on operating expenses each quarter so any hiccup will be greatly magnified. However cash flows here are increasing impressively each quarter, and at a sub $300 million market cap, this is an easy recommend in range. Stealth ipo, looks unimpressive first glance but is trending very nicely into ipo.
June 29, 2009, 5:38 pm
DGW - Duoyuan Global Water
As has been the case for 4+ years now, we've a detailed analysis report on every deal before pricing/open at http://www.tradingipos.com
2009-06-16
DGW - Duoyuan Global Water
DGW - Duoyuan Global Water plans on offering 5 million ADS at a range of $13-$15. The offering will be 5.75 million ADS if the over-allotment is exercised. Piper Jaffray is leading the deal, Oppenhemier and Janney Montgomery co-managing. Post-ipo, DGW will have 21.3 million ADS equivalent shares outstanding for a market cap of $298.2 million on a pricing of $14. IPO proceeds will be used to build and upgrade manufacturing facilities and production lines as well as R&D.
Director, Chairman and CEO Wenhua Guo will own 58% of DGW post-ipo.
From the prospectus:
'We are a leading China-based domestic water treatment equipment supplier. Our product offerings focus on addressing the key steps in the water treatment process, such as filtration, water softening, water-sediment separation, aeration, disinfection and reverse osmosis.'
Water treatment products in China. Customers include wastewater treatment plants, water works facilities, manufacturing plants, commercial businesses, residential communities and individual customers.
DGW offers 80 products in three categories. 35 of these products were introduced in 2008.
Circulating Water Treatment Equipment - Electronic water conditioners, fully automatic filters, circulating water central processors, cyclone filters and water softeners, used in the process of treating water and removing buildup in circulating water systems. DGW derived 41% of their 2008 revenues from this segment.
Water Purification Equipment - Products for residential and commercial end-users utilizing ultraviolet, ozone, membrane-based and electrodeionization, or EDI, technologies. 21% of 2008 revenues were derived from this segment.
Wastewater Treatment Equipment - Products to treat municipal sewage and industrial and agricultural wastewater. DGW derived 38% of their 2008 revenues from this segment.
As with most companies in China selling a product, DGW utilizes distributors and not a direct sales staff. DGW's distribution network consists of over 80 distributors in 28 Chinese provinces.
Sector - As China becomes more industrial and urban, clean non-polluted water has become a precious commodity. China's government has promoted and investing in water treatment projects turning the sector into a growth industry in the country. The demand for water treatment products in China is estimated to increase nearly 15.5% annually through 2012. Growth drivers are rapid population growth, industrialization and urbanization, and more recently, the economic stimulus plan being implemented by the Chinese government.
Seasonality - DGW derives lower revenues in the winter months due to slowdown in construction as well as Chinese New Year. The 3rd quarter of the year tends to be the strongest, with the first quarter the weakest.
Financials
$4 per share in cash post-ipo. Note that DGW plans on spending a significant chunk of this cash on capacity expansion, including building new manufacturing facilities and production lines. In addition DGW plans on spending $10 million on a new R&D facility.
DGW has been profitable since at least 2005.
Taxes - DGW will be taxed at a 25% rate beginning 2009.
Gross margins were 45% in 2008 a strong improvement over 2007's 37%. The increase was due to the sharp drop in commodity prices the back half of 2008. DGW expects favorable pricing on their commodity purchases in 2009 due to long term supply agreements. Expect 2009 gross margins to remain in the 45% ballpark.
2008 - Revenues grew 40% in '08 to $86.8 million. As noted above, gross margins were 45%. Operating expense ratio was 15%, putting operating margins at 30%. Plugging in the 25% post-ipo tax rate, net margins were 22.5%. Earnings per share were $0.91. On a pricing of $14, DGW would trade 15 X's 2008 earnings.
2009:
First quarter is DGW's slowest annually. However DGW grew revenues by approximately 38% year over year in the 3/09 quarter keeping pace with 2008 growth rates.With continued strong gross margins due to supply agreements in place through '09, DGW is off to a solid start for 2009. DGW has also done a nice job keeping expenses in line the past two years, allowing for economies of scale. They appear to be selling more with roughly the same expense outlays.
Revenues for 2009 should be in the $110 million range, a 26% increase over 2008. I was conservative here in estimating as DGW had a huge 3rd quarter of 2008 that may be difficult to duplicate. If the third quarter inproves year over year on the '08 Q, the $110 million estimates will be a little low.
Gross margins should be 45%. Operating expense ratio should dip to 13%, putting operating margins at 32%. Plugging in a 25% tax rate, net margins should improve to 24%. Earnings per share should be $1.25. On a pricing of $14, DGW would trade 11 X's 2009 earnings. Note too that these are 25% taxed earnings and not the usual China ipo low to no taxed earnings per share.
Conclusion - Nothing real proprietary here it appears, although DGW does devote substantial resources to R&D to stay current with worldwide water treatment technologies. I have seen this compared to ERII, but not quite. ERII is a water tech company that is involved in large water projects worldwide. DGW is a pureplay on Chinese population, infrastructure and urbanization growth which brings about a greater demand for clean water. Growth here has been very strong and the multiple does not look extreme at all. Good growth, low multiple, wind at back due to China internals, plus factor in the huge recent China stimulus package. DGW should not be a high multiple stock due to it 'nuts and bolts' type business. However the multiple here with the strong growth makes for an easy recommend in range. good growth and low multiple = strong recommend in range.
2009-06-16
DGW - Duoyuan Global Water
DGW - Duoyuan Global Water plans on offering 5 million ADS at a range of $13-$15. The offering will be 5.75 million ADS if the over-allotment is exercised. Piper Jaffray is leading the deal, Oppenhemier and Janney Montgomery co-managing. Post-ipo, DGW will have 21.3 million ADS equivalent shares outstanding for a market cap of $298.2 million on a pricing of $14. IPO proceeds will be used to build and upgrade manufacturing facilities and production lines as well as R&D.
Director, Chairman and CEO Wenhua Guo will own 58% of DGW post-ipo.
From the prospectus:
'We are a leading China-based domestic water treatment equipment supplier. Our product offerings focus on addressing the key steps in the water treatment process, such as filtration, water softening, water-sediment separation, aeration, disinfection and reverse osmosis.'
Water treatment products in China. Customers include wastewater treatment plants, water works facilities, manufacturing plants, commercial businesses, residential communities and individual customers.
DGW offers 80 products in three categories. 35 of these products were introduced in 2008.
Circulating Water Treatment Equipment - Electronic water conditioners, fully automatic filters, circulating water central processors, cyclone filters and water softeners, used in the process of treating water and removing buildup in circulating water systems. DGW derived 41% of their 2008 revenues from this segment.
Water Purification Equipment - Products for residential and commercial end-users utilizing ultraviolet, ozone, membrane-based and electrodeionization, or EDI, technologies. 21% of 2008 revenues were derived from this segment.
Wastewater Treatment Equipment - Products to treat municipal sewage and industrial and agricultural wastewater. DGW derived 38% of their 2008 revenues from this segment.
As with most companies in China selling a product, DGW utilizes distributors and not a direct sales staff. DGW's distribution network consists of over 80 distributors in 28 Chinese provinces.
Sector - As China becomes more industrial and urban, clean non-polluted water has become a precious commodity. China's government has promoted and investing in water treatment projects turning the sector into a growth industry in the country. The demand for water treatment products in China is estimated to increase nearly 15.5% annually through 2012. Growth drivers are rapid population growth, industrialization and urbanization, and more recently, the economic stimulus plan being implemented by the Chinese government.
Seasonality - DGW derives lower revenues in the winter months due to slowdown in construction as well as Chinese New Year. The 3rd quarter of the year tends to be the strongest, with the first quarter the weakest.
Financials
$4 per share in cash post-ipo. Note that DGW plans on spending a significant chunk of this cash on capacity expansion, including building new manufacturing facilities and production lines. In addition DGW plans on spending $10 million on a new R&D facility.
DGW has been profitable since at least 2005.
Taxes - DGW will be taxed at a 25% rate beginning 2009.
Gross margins were 45% in 2008 a strong improvement over 2007's 37%. The increase was due to the sharp drop in commodity prices the back half of 2008. DGW expects favorable pricing on their commodity purchases in 2009 due to long term supply agreements. Expect 2009 gross margins to remain in the 45% ballpark.
2008 - Revenues grew 40% in '08 to $86.8 million. As noted above, gross margins were 45%. Operating expense ratio was 15%, putting operating margins at 30%. Plugging in the 25% post-ipo tax rate, net margins were 22.5%. Earnings per share were $0.91. On a pricing of $14, DGW would trade 15 X's 2008 earnings.
2009:
First quarter is DGW's slowest annually. However DGW grew revenues by approximately 38% year over year in the 3/09 quarter keeping pace with 2008 growth rates.With continued strong gross margins due to supply agreements in place through '09, DGW is off to a solid start for 2009. DGW has also done a nice job keeping expenses in line the past two years, allowing for economies of scale. They appear to be selling more with roughly the same expense outlays.
Revenues for 2009 should be in the $110 million range, a 26% increase over 2008. I was conservative here in estimating as DGW had a huge 3rd quarter of 2008 that may be difficult to duplicate. If the third quarter inproves year over year on the '08 Q, the $110 million estimates will be a little low.
Gross margins should be 45%. Operating expense ratio should dip to 13%, putting operating margins at 32%. Plugging in a 25% tax rate, net margins should improve to 24%. Earnings per share should be $1.25. On a pricing of $14, DGW would trade 11 X's 2009 earnings. Note too that these are 25% taxed earnings and not the usual China ipo low to no taxed earnings per share.
Conclusion - Nothing real proprietary here it appears, although DGW does devote substantial resources to R&D to stay current with worldwide water treatment technologies. I have seen this compared to ERII, but not quite. ERII is a water tech company that is involved in large water projects worldwide. DGW is a pureplay on Chinese population, infrastructure and urbanization growth which brings about a greater demand for clean water. Growth here has been very strong and the multiple does not look extreme at all. Good growth, low multiple, wind at back due to China internals, plus factor in the huge recent China stimulus package. DGW should not be a high multiple stock due to it 'nuts and bolts' type business. However the multiple here with the strong growth makes for an easy recommend in range. good growth and low multiple = strong recommend in range.
May 19, 2009, 12:54 pm
DGI - DigitalGlobe
2009-05-04
DGI - DigitalGlobe
DGI - DigitalGlobe plans on offering 17 million shares(assuming over-allotments are exercised) at a range of $16-$18. **Note that insiders are selling 13.33 million shares in this deal, DGI will be selling only 3.6 million shares in this 17 million share deal. Morgan Stanley and JP Morgan are leading the deal, Citi, Merrill Lynch and Jefferies co-managing. Post-ipo DGI will have 47 million shares outstanding for a market cap of $799 million on a pricing of $17. IPO proceeds will be utilized for general corporate purposes.
Morgan Stanley, the lead underwriter in this deal, will own 30% of DGI post-ipo.
**DGI will have $200 million in net debt post-ipo. Actual debt will be $341 million, while cash on hand post-ipo will equal $140 million assuming over-allotments exercised. DGI would be a much stronger company post-ipo were insiders not making up the bulk of this deal. DGI participates in a hefty capital expenditure sector, launching and operating satellites. I would much prefer to see a debt free DGI post-ipo than one with debt on the books. Had insiders waited until the lock-up to begin selling, it would have allowed DGI to offer the bulk of shares in this deal and pay off some of the debt on the books. That is not the case however.
From the prospectus:
'We are a leading global provider of commercial high resolution earth imagery products and services. Our products and services support a wide variety of uses, such as defense and intelligence initiatives, mapping and analysis, environmental monitoring, oil and gas exploration, and infrastructure management.'
High resolution satellite operator helping companies and governments map the physical world.
DGI currently operates two high resolution imagery satellites which produce DGI's earth imagery content which allows customers to map, monitor, analyze and navigate the physical world. DGI's imagery is currently used in location based applications including Google Maps and Microsoft Virtual Earth, and mobile devices from vendors such as Garmin and Nokia. DGI's satellites take both black and white, and multi-spectral imagery, which shows visible color and non-visible light, such as infrared. One million square kilometers of imagery is added/updated daily to DGI's image library. The image library currently houses more than 660 million square kilometers of high resolution earth imagery, an area greater than four times the earth’s land mass. **DGI believes their image library is the largest, most up-to-date and comprehensive archive of high resolution earth imagery commercially available.
**DGI will be launching their third satellite, WorldView-2, in October '09. The WorldView-2 will nearly double DGI's collection capabilities to nearly two million square kilometers per day. In addition it will enable intra-day revisits to a specific geographic area, including collecting up-to-date imagery in those areas of greatest interest to customers. The WorldView-2 will be the only commercial earth imagery satellite with 8-band multi-spectral capability, which has a more robust color palette and enables enhanced analysis of non-visible characteristics of the earth’s surface and underwater. It reads as if the WorldView-2 launch is designed to expand their governmental defense and intelligence based business.
Sector - Estimates peg the 'earth imagery' sector at $1.9 billion in 2007 with expectations of $3.2 billion in annual revenues by 2012. DGI would appear to have approximately a 10%-15% total market share in this segment. Growth drivers include: 1)increase in government reliance on unclassified earth imaging; 2) Growth of imagery usage to monitor economic development; 3) Consumer application growth including internet and GPS.
Barriers to entry are significant. DGI estimates launching a high resolution imagery satellite is a four year endeavor. Factor in the prohibitive cost of launching and maintaining the satellites, the licenses needed, and the inability to quickly replicate DGI's historical image library and you have a pretty significant entry barrier for new competitors. DGI does have one publicly trading pure-play competitor in GeoEye(GEOY). In the financials section, we will compare the two.
DGI's largest customer is the US government in the form of the National Geospatial-Intelligence Agency, or NGA. NGA accounted for 58% of 2007 revenues and 74% of 2008 revenues. 17% of revenues were derived internationally. Approximately 80% of 2008 revenues were derived from government defense and intelligence agencies, 20% from commercial clients. The bulk of DGI's government revenues comes from tasking orders. These would be up to date data directly from the satellites, often following specific directions from the agencies. Only 12% of government revenues are derived from use of DGI's image library. By contrast approximately 80% of DGI's commercial revenues are derived from their image library.
Capital expenditures - As one would surmise, this is a hefty capital expenditure sector. In the past three years, DGI has had capital expenditures of: $83 million in 2006; $238 million in 2007; $142 million in 2008.
Risks - Two large ones here:
1) The loss of government revenues. As most of the competition in the high res imagery satellite sector is non-US based, there is only one company that poses a serious threat to DGI's government related revenues stream. That one company is GeoEye, who recently commissioned a multi-spectral satellite into operations. GEOY's new multi-spectral satellite is anticipated to derive more US government business than their predecessor satellites. **Note** - It appears the US government remains intent on utilizing both GEOY and DGI's imagery. In fact in a recent long term plan from the Obama administration the government will increase its use of imagery from each of the two companies. Currently it appears to this analyst as if there is plenty of revenues from the NGA for both DGI and GEOY. In fact it seems the NGA prefers using two satellite imagery providers and not relying on one company. Of note, the US government has made a mess of their own plans to launch satellites, which has opened the door for strong revenues growth for both GEOY and DGI. There are long-range plans for the US government owned imagery satellites, however nothing is imminent at this time. That alone makes DGI/GEOY interesting public companies.
2) Failure of a timely launch for the WorldView-2 satellite. As DGI will be a public company when the launch is scheduled, any delay or launch mishap would harm the stock price. Should be noted that GEOY's recent satellite launch was delayed a number of times. DGI's first satellite is due to be decommissioned in 2010. Their second satellite(WorldView-I in operation since 11/07) is expected to remain operational until 2018.
Financials
A significant amount of debt on the books at $341 million. Post-ipo, DGI will also have a substantial amount of cash on hand, approximately $140-$150 million. Much of this cash will be utilized the remainder of 2009 on the launch of their new satellite Worldview-2. Most likely come early 2010, DGI will have $300+ million in net debt, compared to $200 million net debt post-ipo.
***Even with the substantial net debt on hand, DGI will only book $3-$5 million in net debt expense in 2009. Most of the current interest expenses will be capitalized under the construction of the new WorldView-2 satellite and will be expensed over the expected life of the satellite under depreciation & amortization. Once the satellite is launched and commissioned and final expenses are in however, future annual interest expenses will revert to that line item. Expect the interest expense line item to grow substantially by 2011.
Revenues have grown swiftly, kicking into another gear after the late 2007 launch of WorldView-1. Revenues in 2006 were $107 million, in 2007 $152 million and in 2008 $275 million. The swift 2008 growth was nearly all spurred by the US defense and intelligence agencies as commercial revenues only grew by 10% on the year. The launch of WorldView-2 in late 2009 should kick start 2010 revenues similarly. The issue with DGI however is 2009.
DGI became operationally profitable in 2006.
2008 - Revenues were $275 million, a whopping 81% increase from 2007. The reason as noted was the commissioning of the WorldView-2 satellite which brought with it a large increase in US government contractual revenues. Gross margins were 90%. The high gross margins are due to capital expenditures going on the depreciation & amortization line to be expensed down over the life of the satellites. Operational expense ratio was 56%, split evenly between depreciation & amortization and GSA expenses. Operating margins were a strong 35%. Factoring in normalized taxes and interest expense, net margins were 21%. **Note that DGI's taxes were at a higher rate in 2008 than they will be as a public company. It appears this was due in part to DGI taking a large tax credit in 2007. In 2008, DGI was actually a bit more GAAP profitable than the numbers appear. Earnings per share were $1.22 in 2008. On a pricing of $17, DGI would trade 14 X's 2008 earnings.
A couple of comments. First of all, DGI is able to legally hide a chunk of their interest expense annually by capitalizing it into the costs of their satellite launches. Unless the company plans another launch sometime in the 2011-2013 window, beginning in 2011 DGI will get hit with an increase in interest expense on their debt. In fact since much of their interest the past two years has been folded into their satellite costs, come 2011 they will be expensing actual debt servicing as well as the depreciating expense on 2007-2010 debt servicing. This is something that should serve to put a bit of a drag on those strong margins come 2011.
Also as DGI actually spent a far greater amount in 2007-2008 in actual capital expenditures than the depreciation & amortization expense lines, the GAAP earnings numbers look much better than actual cash flows. DGI is GAAP profitable, but due to these two accounting rules, DGI's margins look far stronger than the actual cash flows. This is a hefty capital expenditure business and launching two satellites in two years will have cost DGI over $600 million in actual monies. By spreading out the expenses over the expected life of the satellites, come 2011 DGI will actually have stronger cash flows than their GAAP numbers. Currently however, in their launch phase, the GAAP numbers are better than cash flows.
2009 - 2009 is going to be a small step back for DGI. The economic slowdown has slowed their non-contractual government business. Operating expenses however will grow briskly as DGI prepares for the launch and commissioning of their WorldView-2 satellite. While the first quarter 2009 numbers were not yet ready, DGI expects 1) a sequential decrease in quarterly revenues for the March '09 quarter; 2) A year over year decrease for the March '09 quarter; 3) lower profits for the March '09 quarter. In addition DGI is forecasting no revenue growth in 2009, but forecasting increased operating expenses. Yes, the reason is understandable. 2009 for DGI will be the 'in-between' year not benefiting from the commissioning of a new satellite as 2008 was and 2010 will be. I suspect however that the coming lackluster results for DGI in 2009 may be a surprise to some shareholders expecting continued growth. They just will not be seeing it this year. The good news is, the valuation in range factors this in as DGI is not overly pricey at all in range. A quick forecast for 2009:
Revenues should be stagnant again in the $275 million range. Gross margins should again be strong. DGI will see an increase in GSA and depreciation & amortization knocking operating margins to approximately 31%. Factoring in net interest expense and taxes, net margins should be 18 1/2%. Earnings per share for 2009 should be in the $1.05-$1.10 range. On a pricing of $17, DGI would trade 16 x's 2009 earnings.
A quick look at DGI and competitor GEOY.
GEOY: $492 million market cap with $250 million in debt. In 2009 GEOY expects revenues of $262 million and earnings per share of $0.78. GEOY currently trades at 34 X's 2009 earnings. GEOY recently launched/commissioned a new satellite and expects 2010 to be the year that revenues from said satellite begin to spur EPS growth.
DGI: $799 million market cap with $340 million in debt. DGI should have revenues of approximately $275 million in 2009 and earnings per share of $1.05-$1.10. On a pricing of $17, DGI would trade 16 X's 2009 earnings.
While DGI looks a bit hefty in comparison to GEOY on a price to revenue basis, DGI does sport better overall margins. Part of this may be explained by the difference in accounting as GEOY has opted for more a straight line 'expense as you go' approach while DGI has opted to capitalize and depreciate their direct satellite costs over the expected lifespan of that satellite. Both GEOY and DGI should post strong 2010 eps growth and an argument could be made each should trade at a similar market cap and not the disparity we should see if DGI prices in $16-$18 range.
Conclusion - 2009 should be a rather flat year of performance as the company prepares to launch and commission their new state of the art imagery satellite. Investors expecting continued swift growth in 2009 may be disappointed as DGI will go from 80% revenue growth in 2008 to stagnant revenue growth in 2009. The question here is whether or not that is built into the valuation in range. I believe it is, however be prepared for a potential cool reception to DGI's first few earnings reports in 2009 as they should lag 2008's earnings power. DGI is going to have a difficult 2009, however once the WorldView-2 is commissioned, the revenue and earnings picture in 2010 should resemble 2008's impressive year.
Yes debt is a drag here and I would far prefer DGI pay off debt on ipo than insiders cashing out. That is a significant negative here. The flat 2009 is another negative. However, for the potential payoff in 2010 and beyond, the valuation in range here does not appear out of line. This is an interesting ipo and a recommend in range. Note however, this is not an ipo to pay up for as there very well may be a negative reaction at some point this year to DGI's lackluster 2009 operational performance.
Even with the negatives noted, a unique ipo with hefty barriers to entry and a solid future trading 16 X's current year earnings is a definite recommend in range....shareholders though should definitely expect a choppy ride over the next year.
DGI - DigitalGlobe
DGI - DigitalGlobe plans on offering 17 million shares(assuming over-allotments are exercised) at a range of $16-$18. **Note that insiders are selling 13.33 million shares in this deal, DGI will be selling only 3.6 million shares in this 17 million share deal. Morgan Stanley and JP Morgan are leading the deal, Citi, Merrill Lynch and Jefferies co-managing. Post-ipo DGI will have 47 million shares outstanding for a market cap of $799 million on a pricing of $17. IPO proceeds will be utilized for general corporate purposes.
Morgan Stanley, the lead underwriter in this deal, will own 30% of DGI post-ipo.
**DGI will have $200 million in net debt post-ipo. Actual debt will be $341 million, while cash on hand post-ipo will equal $140 million assuming over-allotments exercised. DGI would be a much stronger company post-ipo were insiders not making up the bulk of this deal. DGI participates in a hefty capital expenditure sector, launching and operating satellites. I would much prefer to see a debt free DGI post-ipo than one with debt on the books. Had insiders waited until the lock-up to begin selling, it would have allowed DGI to offer the bulk of shares in this deal and pay off some of the debt on the books. That is not the case however.
From the prospectus:
'We are a leading global provider of commercial high resolution earth imagery products and services. Our products and services support a wide variety of uses, such as defense and intelligence initiatives, mapping and analysis, environmental monitoring, oil and gas exploration, and infrastructure management.'
High resolution satellite operator helping companies and governments map the physical world.
DGI currently operates two high resolution imagery satellites which produce DGI's earth imagery content which allows customers to map, monitor, analyze and navigate the physical world. DGI's imagery is currently used in location based applications including Google Maps and Microsoft Virtual Earth, and mobile devices from vendors such as Garmin and Nokia. DGI's satellites take both black and white, and multi-spectral imagery, which shows visible color and non-visible light, such as infrared. One million square kilometers of imagery is added/updated daily to DGI's image library. The image library currently houses more than 660 million square kilometers of high resolution earth imagery, an area greater than four times the earth’s land mass. **DGI believes their image library is the largest, most up-to-date and comprehensive archive of high resolution earth imagery commercially available.
**DGI will be launching their third satellite, WorldView-2, in October '09. The WorldView-2 will nearly double DGI's collection capabilities to nearly two million square kilometers per day. In addition it will enable intra-day revisits to a specific geographic area, including collecting up-to-date imagery in those areas of greatest interest to customers. The WorldView-2 will be the only commercial earth imagery satellite with 8-band multi-spectral capability, which has a more robust color palette and enables enhanced analysis of non-visible characteristics of the earth’s surface and underwater. It reads as if the WorldView-2 launch is designed to expand their governmental defense and intelligence based business.
Sector - Estimates peg the 'earth imagery' sector at $1.9 billion in 2007 with expectations of $3.2 billion in annual revenues by 2012. DGI would appear to have approximately a 10%-15% total market share in this segment. Growth drivers include: 1)increase in government reliance on unclassified earth imaging; 2) Growth of imagery usage to monitor economic development; 3) Consumer application growth including internet and GPS.
Barriers to entry are significant. DGI estimates launching a high resolution imagery satellite is a four year endeavor. Factor in the prohibitive cost of launching and maintaining the satellites, the licenses needed, and the inability to quickly replicate DGI's historical image library and you have a pretty significant entry barrier for new competitors. DGI does have one publicly trading pure-play competitor in GeoEye(GEOY). In the financials section, we will compare the two.
DGI's largest customer is the US government in the form of the National Geospatial-Intelligence Agency, or NGA. NGA accounted for 58% of 2007 revenues and 74% of 2008 revenues. 17% of revenues were derived internationally. Approximately 80% of 2008 revenues were derived from government defense and intelligence agencies, 20% from commercial clients. The bulk of DGI's government revenues comes from tasking orders. These would be up to date data directly from the satellites, often following specific directions from the agencies. Only 12% of government revenues are derived from use of DGI's image library. By contrast approximately 80% of DGI's commercial revenues are derived from their image library.
Capital expenditures - As one would surmise, this is a hefty capital expenditure sector. In the past three years, DGI has had capital expenditures of: $83 million in 2006; $238 million in 2007; $142 million in 2008.
Risks - Two large ones here:
1) The loss of government revenues. As most of the competition in the high res imagery satellite sector is non-US based, there is only one company that poses a serious threat to DGI's government related revenues stream. That one company is GeoEye, who recently commissioned a multi-spectral satellite into operations. GEOY's new multi-spectral satellite is anticipated to derive more US government business than their predecessor satellites. **Note** - It appears the US government remains intent on utilizing both GEOY and DGI's imagery. In fact in a recent long term plan from the Obama administration the government will increase its use of imagery from each of the two companies. Currently it appears to this analyst as if there is plenty of revenues from the NGA for both DGI and GEOY. In fact it seems the NGA prefers using two satellite imagery providers and not relying on one company. Of note, the US government has made a mess of their own plans to launch satellites, which has opened the door for strong revenues growth for both GEOY and DGI. There are long-range plans for the US government owned imagery satellites, however nothing is imminent at this time. That alone makes DGI/GEOY interesting public companies.
2) Failure of a timely launch for the WorldView-2 satellite. As DGI will be a public company when the launch is scheduled, any delay or launch mishap would harm the stock price. Should be noted that GEOY's recent satellite launch was delayed a number of times. DGI's first satellite is due to be decommissioned in 2010. Their second satellite(WorldView-I in operation since 11/07) is expected to remain operational until 2018.
Financials
A significant amount of debt on the books at $341 million. Post-ipo, DGI will also have a substantial amount of cash on hand, approximately $140-$150 million. Much of this cash will be utilized the remainder of 2009 on the launch of their new satellite Worldview-2. Most likely come early 2010, DGI will have $300+ million in net debt, compared to $200 million net debt post-ipo.
***Even with the substantial net debt on hand, DGI will only book $3-$5 million in net debt expense in 2009. Most of the current interest expenses will be capitalized under the construction of the new WorldView-2 satellite and will be expensed over the expected life of the satellite under depreciation & amortization. Once the satellite is launched and commissioned and final expenses are in however, future annual interest expenses will revert to that line item. Expect the interest expense line item to grow substantially by 2011.
Revenues have grown swiftly, kicking into another gear after the late 2007 launch of WorldView-1. Revenues in 2006 were $107 million, in 2007 $152 million and in 2008 $275 million. The swift 2008 growth was nearly all spurred by the US defense and intelligence agencies as commercial revenues only grew by 10% on the year. The launch of WorldView-2 in late 2009 should kick start 2010 revenues similarly. The issue with DGI however is 2009.
DGI became operationally profitable in 2006.
2008 - Revenues were $275 million, a whopping 81% increase from 2007. The reason as noted was the commissioning of the WorldView-2 satellite which brought with it a large increase in US government contractual revenues. Gross margins were 90%. The high gross margins are due to capital expenditures going on the depreciation & amortization line to be expensed down over the life of the satellites. Operational expense ratio was 56%, split evenly between depreciation & amortization and GSA expenses. Operating margins were a strong 35%. Factoring in normalized taxes and interest expense, net margins were 21%. **Note that DGI's taxes were at a higher rate in 2008 than they will be as a public company. It appears this was due in part to DGI taking a large tax credit in 2007. In 2008, DGI was actually a bit more GAAP profitable than the numbers appear. Earnings per share were $1.22 in 2008. On a pricing of $17, DGI would trade 14 X's 2008 earnings.
A couple of comments. First of all, DGI is able to legally hide a chunk of their interest expense annually by capitalizing it into the costs of their satellite launches. Unless the company plans another launch sometime in the 2011-2013 window, beginning in 2011 DGI will get hit with an increase in interest expense on their debt. In fact since much of their interest the past two years has been folded into their satellite costs, come 2011 they will be expensing actual debt servicing as well as the depreciating expense on 2007-2010 debt servicing. This is something that should serve to put a bit of a drag on those strong margins come 2011.
Also as DGI actually spent a far greater amount in 2007-2008 in actual capital expenditures than the depreciation & amortization expense lines, the GAAP earnings numbers look much better than actual cash flows. DGI is GAAP profitable, but due to these two accounting rules, DGI's margins look far stronger than the actual cash flows. This is a hefty capital expenditure business and launching two satellites in two years will have cost DGI over $600 million in actual monies. By spreading out the expenses over the expected life of the satellites, come 2011 DGI will actually have stronger cash flows than their GAAP numbers. Currently however, in their launch phase, the GAAP numbers are better than cash flows.
2009 - 2009 is going to be a small step back for DGI. The economic slowdown has slowed their non-contractual government business. Operating expenses however will grow briskly as DGI prepares for the launch and commissioning of their WorldView-2 satellite. While the first quarter 2009 numbers were not yet ready, DGI expects 1) a sequential decrease in quarterly revenues for the March '09 quarter; 2) A year over year decrease for the March '09 quarter; 3) lower profits for the March '09 quarter. In addition DGI is forecasting no revenue growth in 2009, but forecasting increased operating expenses. Yes, the reason is understandable. 2009 for DGI will be the 'in-between' year not benefiting from the commissioning of a new satellite as 2008 was and 2010 will be. I suspect however that the coming lackluster results for DGI in 2009 may be a surprise to some shareholders expecting continued growth. They just will not be seeing it this year. The good news is, the valuation in range factors this in as DGI is not overly pricey at all in range. A quick forecast for 2009:
Revenues should be stagnant again in the $275 million range. Gross margins should again be strong. DGI will see an increase in GSA and depreciation & amortization knocking operating margins to approximately 31%. Factoring in net interest expense and taxes, net margins should be 18 1/2%. Earnings per share for 2009 should be in the $1.05-$1.10 range. On a pricing of $17, DGI would trade 16 x's 2009 earnings.
A quick look at DGI and competitor GEOY.
GEOY: $492 million market cap with $250 million in debt. In 2009 GEOY expects revenues of $262 million and earnings per share of $0.78. GEOY currently trades at 34 X's 2009 earnings. GEOY recently launched/commissioned a new satellite and expects 2010 to be the year that revenues from said satellite begin to spur EPS growth.
DGI: $799 million market cap with $340 million in debt. DGI should have revenues of approximately $275 million in 2009 and earnings per share of $1.05-$1.10. On a pricing of $17, DGI would trade 16 X's 2009 earnings.
While DGI looks a bit hefty in comparison to GEOY on a price to revenue basis, DGI does sport better overall margins. Part of this may be explained by the difference in accounting as GEOY has opted for more a straight line 'expense as you go' approach while DGI has opted to capitalize and depreciate their direct satellite costs over the expected lifespan of that satellite. Both GEOY and DGI should post strong 2010 eps growth and an argument could be made each should trade at a similar market cap and not the disparity we should see if DGI prices in $16-$18 range.
Conclusion - 2009 should be a rather flat year of performance as the company prepares to launch and commission their new state of the art imagery satellite. Investors expecting continued swift growth in 2009 may be disappointed as DGI will go from 80% revenue growth in 2008 to stagnant revenue growth in 2009. The question here is whether or not that is built into the valuation in range. I believe it is, however be prepared for a potential cool reception to DGI's first few earnings reports in 2009 as they should lag 2008's earnings power. DGI is going to have a difficult 2009, however once the WorldView-2 is commissioned, the revenue and earnings picture in 2010 should resemble 2008's impressive year.
Yes debt is a drag here and I would far prefer DGI pay off debt on ipo than insiders cashing out. That is a significant negative here. The flat 2009 is another negative. However, for the potential payoff in 2010 and beyond, the valuation in range here does not appear out of line. This is an interesting ipo and a recommend in range. Note however, this is not an ipo to pay up for as there very well may be a negative reaction at some point this year to DGI's lackluster 2009 operational performance.
Even with the negatives noted, a unique ipo with hefty barriers to entry and a solid future trading 16 X's current year earnings is a definite recommend in range....shareholders though should definitely expect a choppy ride over the next year.
April 16, 2009, 9:33 pm
RST - Rosetta Stone
2009-04-06
RST - Rosetta Stone
RST - Rosetta Stone plans on offering 7.25 million shares (assuming overallotments exercised) at a range of $15-$17. Insiders will be selling 4.125 million shares in the deal. Morgan Stanley and William Blair are leading the deal; Jefferies, Robert Baird, and Piper Jaffray co-managing. Post-ipo RST will have 20.3 million shares outstanding for a market cap of $325 million on a pricing of $16. The bulk of ipo proceeds will be used for general corporate purposes.
ABS Capital will own 25% post-ipo..ABS Capital is also the majority shareholder of 2007 ipo APEI.
From the prospectus:
'We are a leading provider of technology-based language learning solutions. We develop, market and sell language learning solutions consisting of software, online services and audio practice tools primarily under our Rosetta Stone brand.'
RST's language learning approach does not utilize the traditional second language approach of translation or grammar explanation. Instead RST utilizes audio & video to replicate the natural language learning ability that children use to learn their native language. RST calls their proprietary language learning approach 'Dynamic Inversion'. RST currently offers their self-study language learning programs in 31 languages.
Language Learning - Children learn their native language without using rote memorization or adult analytical abilities for grammatical understanding. They learn at their own pace through their immersion in the language spoken around them and using trial and error. They do not rely on translation. Traditionally the majority of second language learning programs in/out of the classroom have focused instead on translation, grammar and rote memorization. The majority of alternative second language courses have focused on in-country immersion and private study, both expensive alternatives to the traditional memorization approach. RST's solution brings the immersion approach to ones computer.
Rosetta Stone solution - As noted above, RST aims to replicate the process in which children learn their native language. The student learns at their own pace. The RST content library consists of more than 25,000 individual photographic images and more than 400,000 recorded sound files. Each language has 1-3 proficiency levels which can be purchased individually or bundled. Individual proficiency's (such as Spanish I) retail for approximately $250 while the complete language bundle (Spanish I, Spanish II, & Spanish III) retails for approximately $550. Each proficiency level offers approximately 40 hours of instruction. In addition RST offers an online peer-to-peer practice environment called SharedTalk, at www.sharedtalk.com, where registered language learners meet for language exchange to practice their foreign language skills. During 2008, RST had more than 100,000 active SharedTalk users.
Effectiveness - According to a self-commissioned study, after 55 hours of Spanish study using Rosetta Stone, the learning was sufficient to fulfill the requirements for one semester of university study.
Sector - RST generates 95% of revenues in the US. The US language learning industry generated $5 billion in revenues in 2007, of which $2 billion was for self-study. Assuming these numbers are correct, RST has approximately a 10% share of the self-study revenues in the US and is the far and away leader in their niche.
Customers:
Consumer sales accounted for approximately 80% of 2008 revenues. Direct-to-consumer channel sales accounted for 58% of consumer sales. These are sales made via RST's website or or call centers. RST's 145 retail kiosks (located in airports and malls) accounted for 22% of consumer revenues and sales to retailers accounted for 21% of consumer revenues. The bulk of retailer sales were to Apple, Barnes & Noble, and Borders.
Institutional sales accounted for 20% of 2008 revenues. Primary/secondary schools represented 44% on institutional sales, government & armed forces 19%, homes schools 20% and businesses 10% and non-profits 5%.
60% of RST customers earn more than $75,000 annually with 44% earnings more than $100,000. In a self-commissioned study, 92% of respondents expressed satisfaction with RST products and 76% have recommended Rosetta Stone to others.
Growth potential - RST feels their growth prospects going forward lie in the international markets. In 2008, just 5% of RST's revenues were derived outside the US.
Risk - 80% of RST's revenues are derived from US consumers. The big risk here would be a recession negatively impacting consumer discretionary spending coupled with a slowdown in international travel. We've certainly seen the first with consumer discretionary spending falling off a cliff in mid-September 2008. As RST is the first consumer discretionary ipo in quite awhile, this is a definite concern. Lets look at RST's 4th quarter of 2008 and see if revenues were impacted. In the 4th quarter of 2008, RST booked their best quarter in operating history in terms of revenues while maintaining gross margins and dropping sales and marketing expense in terms of percentage of revenues(a positive). Now seasonality plays a factor here as the 4th quarter annually has been RST's strongest due to holiday spending. RST however booked very solid revenue growth in the 4th quarter of 2008, much as they did a year prior in the 4th quarter of 2007. Quarter to quarter revenue growth in the 4th quarter of 2008 was a strong 11%, compared to 4th quarter of 2007 quarter to quarter revenue growth of 24%. Factoring in a near doubling of the revenue base in 2008 coupled with the difficult consumer spending environment in late 2008, the 4th quarter of 2008 for RST looks strong to me.
Returns - RST offers a 6 months 'no questions asked' money back guarantee on their products. In 2008 approximately 6% of all revenues were returned.
Competition - Berlitz International, Simon & Schuster, Inc. (Pimsleur), Random House,(Living Language), Disney Publishing Worldwide and McGraw-Hill Education. There is no pure public comparable to RST.
Risk – As mentioned, 80% of customer base in 2008 were individuals. As a result RST revenues could be affected by any trend changes in discretionary consumer spending and retail shopping patterns. Slowdown in international travel too carries a risk due to sales from airport kiosks forming almost a fifth of consumer driven revenues.
Financials
$2.67 in cash per share post-ipo, no debt.
Growth has been very strong in the past two years. As is often the case with software related ipos, gross margins are also impressive. Revenue growth was 50% in 2007 and actually increased in 2008 by 52% more. Rarely do you see a company deriving significant revenues ($209 million in 200
and accelerating revenue growth year to year. That RST did so in a tough consumer 2008 environment is very impressive. The revenue growth here the past two years with back to back 50%+ growth is easily reason enough to recommend this ipo.
Seasonality - RST's best quarter tends to be the 4th quarter annually as they derive holiday related revenues.
RST's first profitable year was 2007.
2008 - Revenues were $209.3 million, a 52% increase over 2008. Gross margins were fat at 86%. As one would expect, sales and marketing expenses make up the bulk of RST's operating expenses. While in 2008 sales & marketing expense ratio was 45%, it did mark a decrease from 2007's 48% and 2006's 50%. Good sign, all things being equal you want to see sales and marketing expenses growing slower than actual revenues, allowing a company to filter more of those revenues to the bottom line. Operating expense ratio is also decreasing annually, exactly what one wants to see. Fast growing revenues and declining operating expense ratios are the ingredients of a top notch ipo. Operating expense ratio in 2008 was 72%, compared to 79% in 2007 and 80% in 2006. This number is still quite high in 2008, however the trends are improving and if RST can continue at this pace over the next 2-3 years, they will become a very profitable operation.
2008 operating margins were 14%. Plugging in anticipated post-ipo tax rate of 37%, net margins were 9%. Earnings per share were $0.91. On a pricing of $16, RST would trade at 17-18 X's trailing earnings with a 50% trailing revenue growth.
2009 - I just do not feel comfortable forecasting another 50%+ jump in annual revenue for 2009. Having written that, RST is poised to have a very strong 2009. In what was a difficult environment in 2008 with consumer discretionary spending falling precipitously overall, RST shined. Looking at quarter to quarter revenue growth at the end of 2008 and factoring in seasonality with a much slow first half of the year for RST historically....I would project very conservatively that RST can grow revenues 20% in 2009 to approximately $250 million. Gross margins should remain strong and I would project operating expense ratios to continue to decline, increasing operating and net margins. On a $250 million run rate, with 86% gross margins, 16% operating margins and 10% net margins, RST would earn $1.23 in 2009. On a pricing of $16, RST would trade 13 X's 2009 earnings.
Conclusion
How has RST thus far managed to sidestep a massive consumer spending slowdown? 22% of RST buyers responded in a survey they did so based on the personal recommendation of another. That is pretty powerful word of mouth marketing when annual revenue tops $200 million. Digging into this ipo, the one constant appears to be customer satisfaction driving growth. You really could not ask for much more with a consumer based ipo. RST looks poised to grow strongly in 2009 and is trending well in every facet of their business. If RST is able to build on their United States success globally over the next few years, this could be a huge long term winner coming public at just a $325 million market cap (based on a $16 pricing).
RST is a unique, and difficult to value sector leader with fast growing revenues, strong gross margins and improving operating expense ratios. All this equals a top-notch ipo. If RST can continue current trends for even another 2-3 quarters, the range of $15-$17 here is far too low. This is a strong recommend in range and one to pay up for if need be. The CEO describes his company as a 'disruptive value proposition' in language learning. I agree
RST - Rosetta Stone
RST - Rosetta Stone plans on offering 7.25 million shares (assuming overallotments exercised) at a range of $15-$17. Insiders will be selling 4.125 million shares in the deal. Morgan Stanley and William Blair are leading the deal; Jefferies, Robert Baird, and Piper Jaffray co-managing. Post-ipo RST will have 20.3 million shares outstanding for a market cap of $325 million on a pricing of $16. The bulk of ipo proceeds will be used for general corporate purposes.
ABS Capital will own 25% post-ipo..ABS Capital is also the majority shareholder of 2007 ipo APEI.
From the prospectus:
'We are a leading provider of technology-based language learning solutions. We develop, market and sell language learning solutions consisting of software, online services and audio practice tools primarily under our Rosetta Stone brand.'
RST's language learning approach does not utilize the traditional second language approach of translation or grammar explanation. Instead RST utilizes audio & video to replicate the natural language learning ability that children use to learn their native language. RST calls their proprietary language learning approach 'Dynamic Inversion'. RST currently offers their self-study language learning programs in 31 languages.
Language Learning - Children learn their native language without using rote memorization or adult analytical abilities for grammatical understanding. They learn at their own pace through their immersion in the language spoken around them and using trial and error. They do not rely on translation. Traditionally the majority of second language learning programs in/out of the classroom have focused instead on translation, grammar and rote memorization. The majority of alternative second language courses have focused on in-country immersion and private study, both expensive alternatives to the traditional memorization approach. RST's solution brings the immersion approach to ones computer.
Rosetta Stone solution - As noted above, RST aims to replicate the process in which children learn their native language. The student learns at their own pace. The RST content library consists of more than 25,000 individual photographic images and more than 400,000 recorded sound files. Each language has 1-3 proficiency levels which can be purchased individually or bundled. Individual proficiency's (such as Spanish I) retail for approximately $250 while the complete language bundle (Spanish I, Spanish II, & Spanish III) retails for approximately $550. Each proficiency level offers approximately 40 hours of instruction. In addition RST offers an online peer-to-peer practice environment called SharedTalk, at www.sharedtalk.com, where registered language learners meet for language exchange to practice their foreign language skills. During 2008, RST had more than 100,000 active SharedTalk users.
Effectiveness - According to a self-commissioned study, after 55 hours of Spanish study using Rosetta Stone, the learning was sufficient to fulfill the requirements for one semester of university study.
Sector - RST generates 95% of revenues in the US. The US language learning industry generated $5 billion in revenues in 2007, of which $2 billion was for self-study. Assuming these numbers are correct, RST has approximately a 10% share of the self-study revenues in the US and is the far and away leader in their niche.
Customers:
Consumer sales accounted for approximately 80% of 2008 revenues. Direct-to-consumer channel sales accounted for 58% of consumer sales. These are sales made via RST's website or or call centers. RST's 145 retail kiosks (located in airports and malls) accounted for 22% of consumer revenues and sales to retailers accounted for 21% of consumer revenues. The bulk of retailer sales were to Apple, Barnes & Noble, and Borders.
Institutional sales accounted for 20% of 2008 revenues. Primary/secondary schools represented 44% on institutional sales, government & armed forces 19%, homes schools 20% and businesses 10% and non-profits 5%.
60% of RST customers earn more than $75,000 annually with 44% earnings more than $100,000. In a self-commissioned study, 92% of respondents expressed satisfaction with RST products and 76% have recommended Rosetta Stone to others.
Growth potential - RST feels their growth prospects going forward lie in the international markets. In 2008, just 5% of RST's revenues were derived outside the US.
Risk - 80% of RST's revenues are derived from US consumers. The big risk here would be a recession negatively impacting consumer discretionary spending coupled with a slowdown in international travel. We've certainly seen the first with consumer discretionary spending falling off a cliff in mid-September 2008. As RST is the first consumer discretionary ipo in quite awhile, this is a definite concern. Lets look at RST's 4th quarter of 2008 and see if revenues were impacted. In the 4th quarter of 2008, RST booked their best quarter in operating history in terms of revenues while maintaining gross margins and dropping sales and marketing expense in terms of percentage of revenues(a positive). Now seasonality plays a factor here as the 4th quarter annually has been RST's strongest due to holiday spending. RST however booked very solid revenue growth in the 4th quarter of 2008, much as they did a year prior in the 4th quarter of 2007. Quarter to quarter revenue growth in the 4th quarter of 2008 was a strong 11%, compared to 4th quarter of 2007 quarter to quarter revenue growth of 24%. Factoring in a near doubling of the revenue base in 2008 coupled with the difficult consumer spending environment in late 2008, the 4th quarter of 2008 for RST looks strong to me.
Returns - RST offers a 6 months 'no questions asked' money back guarantee on their products. In 2008 approximately 6% of all revenues were returned.
Competition - Berlitz International, Simon & Schuster, Inc. (Pimsleur), Random House,(Living Language), Disney Publishing Worldwide and McGraw-Hill Education. There is no pure public comparable to RST.
Risk – As mentioned, 80% of customer base in 2008 were individuals. As a result RST revenues could be affected by any trend changes in discretionary consumer spending and retail shopping patterns. Slowdown in international travel too carries a risk due to sales from airport kiosks forming almost a fifth of consumer driven revenues.
Financials
$2.67 in cash per share post-ipo, no debt.
Growth has been very strong in the past two years. As is often the case with software related ipos, gross margins are also impressive. Revenue growth was 50% in 2007 and actually increased in 2008 by 52% more. Rarely do you see a company deriving significant revenues ($209 million in 200
and accelerating revenue growth year to year. That RST did so in a tough consumer 2008 environment is very impressive. The revenue growth here the past two years with back to back 50%+ growth is easily reason enough to recommend this ipo.Seasonality - RST's best quarter tends to be the 4th quarter annually as they derive holiday related revenues.
RST's first profitable year was 2007.
2008 - Revenues were $209.3 million, a 52% increase over 2008. Gross margins were fat at 86%. As one would expect, sales and marketing expenses make up the bulk of RST's operating expenses. While in 2008 sales & marketing expense ratio was 45%, it did mark a decrease from 2007's 48% and 2006's 50%. Good sign, all things being equal you want to see sales and marketing expenses growing slower than actual revenues, allowing a company to filter more of those revenues to the bottom line. Operating expense ratio is also decreasing annually, exactly what one wants to see. Fast growing revenues and declining operating expense ratios are the ingredients of a top notch ipo. Operating expense ratio in 2008 was 72%, compared to 79% in 2007 and 80% in 2006. This number is still quite high in 2008, however the trends are improving and if RST can continue at this pace over the next 2-3 years, they will become a very profitable operation.
2008 operating margins were 14%. Plugging in anticipated post-ipo tax rate of 37%, net margins were 9%. Earnings per share were $0.91. On a pricing of $16, RST would trade at 17-18 X's trailing earnings with a 50% trailing revenue growth.
2009 - I just do not feel comfortable forecasting another 50%+ jump in annual revenue for 2009. Having written that, RST is poised to have a very strong 2009. In what was a difficult environment in 2008 with consumer discretionary spending falling precipitously overall, RST shined. Looking at quarter to quarter revenue growth at the end of 2008 and factoring in seasonality with a much slow first half of the year for RST historically....I would project very conservatively that RST can grow revenues 20% in 2009 to approximately $250 million. Gross margins should remain strong and I would project operating expense ratios to continue to decline, increasing operating and net margins. On a $250 million run rate, with 86% gross margins, 16% operating margins and 10% net margins, RST would earn $1.23 in 2009. On a pricing of $16, RST would trade 13 X's 2009 earnings.
Conclusion
How has RST thus far managed to sidestep a massive consumer spending slowdown? 22% of RST buyers responded in a survey they did so based on the personal recommendation of another. That is pretty powerful word of mouth marketing when annual revenue tops $200 million. Digging into this ipo, the one constant appears to be customer satisfaction driving growth. You really could not ask for much more with a consumer based ipo. RST looks poised to grow strongly in 2009 and is trending well in every facet of their business. If RST is able to build on their United States success globally over the next few years, this could be a huge long term winner coming public at just a $325 million market cap (based on a $16 pricing).
RST is a unique, and difficult to value sector leader with fast growing revenues, strong gross margins and improving operating expense ratios. All this equals a top-notch ipo. If RST can continue current trends for even another 2-3 quarters, the range of $15-$17 here is far too low. This is a strong recommend in range and one to pay up for if need be. The CEO describes his company as a 'disruptive value proposition' in language learning. I agree
April 2, 2009, 2:36 pm
CYOU - Changyou.com
2009-03-26
CYOU - Changyou.com
CYOU - Changyou.com plans on offering 7.5 million ADS at a range of $14-$16. Note that 1/2 the ADS in this offering will be sold by parent company Sohu.com (SOHU). Credit Suisse and Merrill Lynch are leading the deal, Citi and Susquehanna Financial are co-managing. Post-ipo CYOU will have 51.25 million ADS equivalent shares outstanding for a market cap of $769 million on a pricing of $15. Ipo proceeds will be utilized for general corporate purposes.
SOHU will own 71% of CYOU post-ipo. CYOU's CEO Tao Wang will own 15% of CYOU post-ipo. Note that post-ipo CYOU will be paying SOHU a one-time dividend of $96 million.
SOHU - A Chinese internet portal operating since 1998. Sohu has a current market cap of $1.56 billion and currently has over 250 million registered accounts.
From the prospectus:
"We are a leading online game developer and operator in China as measured by the popularity of our game Tian Long Ba Bu, or TLBB. TLBB, which was launched in May 2007, was ranked by International Data Corporation, or IDC, for 2007 as the third most popular online game overall in China and the second most popular online game in China among locally-developed online games."
On-line multi-player role playing game company, this CYOU ipo is similar in that fashion to this decade’s ipos of SNDA/NCTY/PWRD/GA. Below we'll do a comparison of those four with CYOU.
Tian Long Ba Bu(TLBB) was developed and launched in house at CYOU, then a part of SOHU. In addition to TLBB, CYOO also has licensed and operated Blade Online (BO). For the three months ending 12/31/08, TLBB had 1.8 million active paying accounts and BO had 159,000 active paying accounts.
Tian Long Ba Bu - 2.5D martial arts game was launched in May of 2007. Multi-player means literally over a million players/characters can inhabit the game playing universe at the same time. In 3/09, peak concurrent users exceeded 800,000. CYOU has also licensed this game to third party operators who run the game in Taiwan, Hong Kong, Vietnam, Malaysia and Singapore. Game players may play for free, however they must purchase pre-paid game cards to buy virtual items such as gems, pets, fashion items, magic medicine, riding animals, hierograms, skill books and fireworks. As is customary in China, pre-paid game cards are sold through regional third party distributors who then distribute to Internet cafes and various websites, newsstands, software stores, book stores and retail stores.
Pipeline - CYOU has three games in various stages of development: Duke of Mount Deer, or DMD, Immortal Faith, or IF, and the Legend of the Ancient World, or LAW. Duke of Mount Deer is another martial arts game and is being developed in-house. The other two will be licensed properties. Rollout of DMD will be 4th quarter of 2009 with the other two coming in 2009 and 2010 respectively. It would appear CYOU is banking on Duke of Mount Deer to be their next hit and hoping that this release will pick up the slack from the eventual player slowdown in TLBB.
Market segment - China's online game players numbered an estimated 40 million in 2007 with revenues of $1.4 billion. Online game revenues are expected to continue to grow to $3.4 billion in 2012 at a compound annual growth rate, or CAGR, of 19.9%.
Growth - 94% of CYOU's revenues in 2008 were from the game Tian Long Ba Bu(TLBB). Launched less than two years ago, TLBB has been a huge success generating over $180 million in revenues in 2008 alone. This ipo is based completely on the success of this one game. While TLBB has generated massive revenues and profitability, online video games tend to have a distinct lifespan and popularity curve. TLBB's popularity seems to have peaked in late 2008, so future growth is going to depend on CYOU's pipeline of coming games. TLBB in the 12/08 quarter had 1,822 paying accounts which was down slightly from the 9/08 quarter. Quarterly revenue growth from TLBB has gone from stratospheric to somewhat flat. Beginning with the 12/07 quarter, following is the quarter to quarter revenue growth of TLBB: 12/07 +102%; 3/08 +76%; 6/08 +13%; 9/08 +11%; 12/08 +6%. Looking at the slowing growth from TLBB, we can clearly see that CYOU will have difficulty growing going forward without their 4th quarter 2009 launch of Duke of Mount Deer becoming a big hit. In fact I would expect TLBB to book negative revenue growth quarter to quarter by the end of 2009 just as their next in-house game is launched.
Risk - the obvious risk here is a significant market cap on ipo of $769 million (assuming a $15 pricing) is based on one on-line game. Looking at the above slowing quarter to quarter growth trends of this one game and the risk here is that unless CYOU's next in-house game (due to hit in late 2009) is a big hit, revenues and earnings power will decline significantly as TLBB sees its popularity wane. This is a significant risk, especially as their new in-house game has yet to have a track record. For me, this large a market cap based on one game carries enough risk that I can only be, at best, neutral on this deal in range as the popularity of TLBB is already baked into the market cap in range.
Financials
After paying SOHU a $96 million dividend, CYOU will have slightly under $2 per share in cash post-ipo with no debt.
Revenue growth has been swift since the release of the Tian Long Ba Bu game. Revenues in 2006 were $8.5 million, in 2007 $42 million and in 2008 $201.8 million.
2008 - Revenues were $201.8 million, a massive increase over 2007. Tian Long Ba Bu accounted for 94% of those revenues. Gross margins were an impressive 93%. Operating expense ratio was 36%. Operating profits were 57%. In 2008 Tian Long Ba Bu was a money making machine. Normalizing CYOU's tax rate as it will appear post-ipo, net margins were 50%. Earnings per share were $1.97. On a pricing of $15, CYOU would trade 7-8 X's trailing earnings.
2009 - As noted above, quarter to quarter growth will slow dramatically from 2007 and 2008. CYOU's money making game TLBB appears as if it has peaked in popularity, or at least should see much more constrained revenue growth. As CYOU's next in-house developed game will not hit until late 2009, CYOU's revenues should be rather stagnant on a quarter to quarter basis throughout 2009. Projected revenues for 2009 should be in the $230 million ballpark, an increase of 15% over 2008. Much of this growth will be due to favorable comparables in the 3/09 quarter compared to 3/08 period. Gross margins look to continue to be 90%+. Operating expense ratios should be slightly higher as CYOU ramps up product development and sales/marketing efforts to promote new games. Lets plug in a 37% operating expense ratio. Operating margins should be 55%. It appears that for 2009-2011, CYOU will have an approximate tax rate of 12.5%. Net margins then should be approximately 42.5%. Earnings per share should be approximately $2 per share. On a pricing of $15, CYOU would trade 7 1/2 X's 2009 earnings.
Lets take a glance at CYOU's public competitors.
SNDA - $2.6 billion market cap. Currently trading 13 X's '09 estimates with an anticipated revenue growth of 25%.
NCTY - $370 million market cap. Currently trading 9 X's '09 estimates with an anticipated revenue growth of 9%.
PWRD - $789 million market cap. Currently trading 7 X's '09 estimates with an anticipated revenue growth of 22%.
GA - $1.6 billion market cap. Currently trading 12 X's '09 estimates with an anticipated revenue growth of 5%
Stacking CYOU up with these four, it does appear to be priced within the valuations of the above. A positive for CYOU is that they do have an extremely popular game. The downside is that nearly all revenues are derived from this one game and, at this point, we do not know whether CYOU will be successful in diversifying their game base and revenue stream.
Conclusion
On a trailing basis the CYOU ipo looks dirt cheap. The problem however is the ipo and market cap are based on the huge success of their game TLBB. It appears to me that TLBB has, at the very least, come close to peaking by late 2008. With their next in house game not launching until late 2009, I would project CYOU to see pretty flat revenues for '09 actually. Looking forward this is a pretty hefty market cap for reliance on one single game which saw its best year in 2008 and should decline somewhat in popularity going forward. The valuation is not out of line however and if CYOU's next in house game is another big it, there is potential for share price appreciation. Problem however is currently we have no idea how CYOU's future games will be received. We do know that the current success of TLBB is most definitely in the market cap on ipo. Neutral here in range. Swift growth in '08 and reasonable PE ratio is appealing, the lack of revenue diversification however is a pretty big sticking point for me.
CYOU - Changyou.com
CYOU - Changyou.com plans on offering 7.5 million ADS at a range of $14-$16. Note that 1/2 the ADS in this offering will be sold by parent company Sohu.com (SOHU). Credit Suisse and Merrill Lynch are leading the deal, Citi and Susquehanna Financial are co-managing. Post-ipo CYOU will have 51.25 million ADS equivalent shares outstanding for a market cap of $769 million on a pricing of $15. Ipo proceeds will be utilized for general corporate purposes.
SOHU will own 71% of CYOU post-ipo. CYOU's CEO Tao Wang will own 15% of CYOU post-ipo. Note that post-ipo CYOU will be paying SOHU a one-time dividend of $96 million.
SOHU - A Chinese internet portal operating since 1998. Sohu has a current market cap of $1.56 billion and currently has over 250 million registered accounts.
From the prospectus:
"We are a leading online game developer and operator in China as measured by the popularity of our game Tian Long Ba Bu, or TLBB. TLBB, which was launched in May 2007, was ranked by International Data Corporation, or IDC, for 2007 as the third most popular online game overall in China and the second most popular online game in China among locally-developed online games."
On-line multi-player role playing game company, this CYOU ipo is similar in that fashion to this decade’s ipos of SNDA/NCTY/PWRD/GA. Below we'll do a comparison of those four with CYOU.
Tian Long Ba Bu(TLBB) was developed and launched in house at CYOU, then a part of SOHU. In addition to TLBB, CYOO also has licensed and operated Blade Online (BO). For the three months ending 12/31/08, TLBB had 1.8 million active paying accounts and BO had 159,000 active paying accounts.
Tian Long Ba Bu - 2.5D martial arts game was launched in May of 2007. Multi-player means literally over a million players/characters can inhabit the game playing universe at the same time. In 3/09, peak concurrent users exceeded 800,000. CYOU has also licensed this game to third party operators who run the game in Taiwan, Hong Kong, Vietnam, Malaysia and Singapore. Game players may play for free, however they must purchase pre-paid game cards to buy virtual items such as gems, pets, fashion items, magic medicine, riding animals, hierograms, skill books and fireworks. As is customary in China, pre-paid game cards are sold through regional third party distributors who then distribute to Internet cafes and various websites, newsstands, software stores, book stores and retail stores.
Pipeline - CYOU has three games in various stages of development: Duke of Mount Deer, or DMD, Immortal Faith, or IF, and the Legend of the Ancient World, or LAW. Duke of Mount Deer is another martial arts game and is being developed in-house. The other two will be licensed properties. Rollout of DMD will be 4th quarter of 2009 with the other two coming in 2009 and 2010 respectively. It would appear CYOU is banking on Duke of Mount Deer to be their next hit and hoping that this release will pick up the slack from the eventual player slowdown in TLBB.
Market segment - China's online game players numbered an estimated 40 million in 2007 with revenues of $1.4 billion. Online game revenues are expected to continue to grow to $3.4 billion in 2012 at a compound annual growth rate, or CAGR, of 19.9%.
Growth - 94% of CYOU's revenues in 2008 were from the game Tian Long Ba Bu(TLBB). Launched less than two years ago, TLBB has been a huge success generating over $180 million in revenues in 2008 alone. This ipo is based completely on the success of this one game. While TLBB has generated massive revenues and profitability, online video games tend to have a distinct lifespan and popularity curve. TLBB's popularity seems to have peaked in late 2008, so future growth is going to depend on CYOU's pipeline of coming games. TLBB in the 12/08 quarter had 1,822 paying accounts which was down slightly from the 9/08 quarter. Quarterly revenue growth from TLBB has gone from stratospheric to somewhat flat. Beginning with the 12/07 quarter, following is the quarter to quarter revenue growth of TLBB: 12/07 +102%; 3/08 +76%; 6/08 +13%; 9/08 +11%; 12/08 +6%. Looking at the slowing growth from TLBB, we can clearly see that CYOU will have difficulty growing going forward without their 4th quarter 2009 launch of Duke of Mount Deer becoming a big hit. In fact I would expect TLBB to book negative revenue growth quarter to quarter by the end of 2009 just as their next in-house game is launched.
Risk - the obvious risk here is a significant market cap on ipo of $769 million (assuming a $15 pricing) is based on one on-line game. Looking at the above slowing quarter to quarter growth trends of this one game and the risk here is that unless CYOU's next in-house game (due to hit in late 2009) is a big hit, revenues and earnings power will decline significantly as TLBB sees its popularity wane. This is a significant risk, especially as their new in-house game has yet to have a track record. For me, this large a market cap based on one game carries enough risk that I can only be, at best, neutral on this deal in range as the popularity of TLBB is already baked into the market cap in range.
Financials
After paying SOHU a $96 million dividend, CYOU will have slightly under $2 per share in cash post-ipo with no debt.
Revenue growth has been swift since the release of the Tian Long Ba Bu game. Revenues in 2006 were $8.5 million, in 2007 $42 million and in 2008 $201.8 million.
2008 - Revenues were $201.8 million, a massive increase over 2007. Tian Long Ba Bu accounted for 94% of those revenues. Gross margins were an impressive 93%. Operating expense ratio was 36%. Operating profits were 57%. In 2008 Tian Long Ba Bu was a money making machine. Normalizing CYOU's tax rate as it will appear post-ipo, net margins were 50%. Earnings per share were $1.97. On a pricing of $15, CYOU would trade 7-8 X's trailing earnings.
2009 - As noted above, quarter to quarter growth will slow dramatically from 2007 and 2008. CYOU's money making game TLBB appears as if it has peaked in popularity, or at least should see much more constrained revenue growth. As CYOU's next in-house developed game will not hit until late 2009, CYOU's revenues should be rather stagnant on a quarter to quarter basis throughout 2009. Projected revenues for 2009 should be in the $230 million ballpark, an increase of 15% over 2008. Much of this growth will be due to favorable comparables in the 3/09 quarter compared to 3/08 period. Gross margins look to continue to be 90%+. Operating expense ratios should be slightly higher as CYOU ramps up product development and sales/marketing efforts to promote new games. Lets plug in a 37% operating expense ratio. Operating margins should be 55%. It appears that for 2009-2011, CYOU will have an approximate tax rate of 12.5%. Net margins then should be approximately 42.5%. Earnings per share should be approximately $2 per share. On a pricing of $15, CYOU would trade 7 1/2 X's 2009 earnings.
Lets take a glance at CYOU's public competitors.
SNDA - $2.6 billion market cap. Currently trading 13 X's '09 estimates with an anticipated revenue growth of 25%.
NCTY - $370 million market cap. Currently trading 9 X's '09 estimates with an anticipated revenue growth of 9%.
PWRD - $789 million market cap. Currently trading 7 X's '09 estimates with an anticipated revenue growth of 22%.
GA - $1.6 billion market cap. Currently trading 12 X's '09 estimates with an anticipated revenue growth of 5%
Stacking CYOU up with these four, it does appear to be priced within the valuations of the above. A positive for CYOU is that they do have an extremely popular game. The downside is that nearly all revenues are derived from this one game and, at this point, we do not know whether CYOU will be successful in diversifying their game base and revenue stream.
Conclusion
On a trailing basis the CYOU ipo looks dirt cheap. The problem however is the ipo and market cap are based on the huge success of their game TLBB. It appears to me that TLBB has, at the very least, come close to peaking by late 2008. With their next in house game not launching until late 2009, I would project CYOU to see pretty flat revenues for '09 actually. Looking forward this is a pretty hefty market cap for reliance on one single game which saw its best year in 2008 and should decline somewhat in popularity going forward. The valuation is not out of line however and if CYOU's next in house game is another big it, there is potential for share price appreciation. Problem however is currently we have no idea how CYOU's future games will be received. We do know that the current success of TLBB is most definitely in the market cap on ipo. Neutral here in range. Swift growth in '08 and reasonable PE ratio is appealing, the lack of revenue diversification however is a pretty big sticking point for me.
November 26, 2008, 11:03 pm
LOPE - Grand Canyon Education
disclosure - at date of posting for non-subscribers(11/26) tradingipos.com does have a position in LOPE from an average price of $10.60.
2008-11-15
LOPE - Grand Canyon Education
LOPE - Grand Canyon Education plans on offering 10.5 million shares at a range of $14-$16. Credit Suisse and Merrill Lynch are leading the deal, BMO, William Blair and Piper Jaffray are co-managing. Post-ipo LOPE will have 43.1 million shares outstanding for a market cap of $646 million on a pricing of $15. The bulk of ipo proceeds will go towards paying a special distribution to corporate directors and pre-ipo shareholders. Very little of the ipo proceeds will find their way to LOPE's balance sheet post-ipo.
Endeavour Capital Fund will own 22% of LOPE post-ipo. Four venture capital firms combined will own approximately 50% of LOPE post-ipo.
From the prospectus:
'We are a regionally accredited provider of online postsecondary education services focused on offering graduate and undergraduate degree programs in our core disciplines of education, business, and healthcare. In addition to our online programs, we offer ground programs at our traditional campus in Phoenix, Arizona and onsite at the facilities of employers.'
Online university focusing on post-graduate degrees education, business, and healthcare for working professionals. LOPE has increased enrollment from 3,000 students at the end of 2003 to approximately 22,000 students on 9/30/08. 62% of students enrolled were seeking masters degrees with 92% of students 25 or older.
LOPE began as a campus based college approximately 60 years ago. In February of 2004, investors turned LOPE into a for-profit university and focused on growing the online program. Currently 87% of enrolled students were in the on-line program with just 13% traditional on-campus students.
Tuition - Tuition for a full program would equate to approximately $15,000 for an online master’s program (non-MBA), approximately $47,000 for a full four-year online bachelor’s program, and approximately $62,000 for a full four-year bachelor’s program taken on campus. The eMBA program tuition is $44,000. LOPE raised tuition an average of 5% for the 2008/2009 academic year.
Sector - Approximately 18 million people are enrolled in postsecondary institutions generating approximately $385 billion in revenues. In the past decade online post-secondary education has been a nicely growing area as many working adults prefer the flexible schedules of an online accredited degree granting institution.
Approximately 70% of LOPE's revenues are derived from tuition financed under federal student financial aid programs. These programs include a myriad of federally funded and/or backed grants and loans.
Recession/Credit issues - We've two competing drivers here. During previous economic slowdowns we've seen post-secondary enrollments from adults (25+) rise as people go back to school to retrain and/or work towards a degree to compete in a slowing competitive economy. This current slowdown however is coupled with a freeze in available credit, including private student loans. 40% of full-time postsecondary students receive student loans. With LOPE's eMBA program costing $44,000, student loans are an important component in LOPE's revenues. While a portion of the student loan market is backed by low-interest government backed loans, as tuition costs have risen the private loan market has been an increasingly relied on method of paying for post-secondary education. In 2007, private student loans accounted for over 5% of LOPE's revenue. Also as credit conditions have tightened, fewer banks are participating in the Federal student loan program itself, making obtaining even these loans potentially more difficult. We've two competing trends here - 1) economic slowdown is generally good for postsecondary education with 2) tight credit making student loans more difficult to obtain. While the education group tends to be a nice counter cyclical play, the current credit issues mitigate somewhat the usual counter-economy trend.
Investigation - The Department of Education has issued subpoenas (8/0 to LOPE in an apparent investigation into whether LOPE improperly compensated enrollment counselors/managers in violation of Federal regulations. Investigation is still in infancy stage. LOPE is also facing a lawsuit by a former employer relating to incentive based compensation to enrollment counselors/managers.
Competitors - As more brick and mortar universities offer online programs, LOPE's competition includes thousands of on-line programs across the United States. There are however a few publicly traded on-line for-profit universities. These include CPLA, APOL, CECO, COCO, DV and ESI. Recent successful ipos LRN and APEI are also on-line education related, although neither is a direct comparable to LOPE. Below we look at how LOPE stacks up financially with those in this group.
Financials
$1 in cash, no appreciable debt.
Revenues have grown strongly while margins remain slim and net profits constrained. LOPE has been very aggressive in student recruiting the past two years and it has been reflected in overall enrollment and revenues. LOPE quadrupled enrollment counselor staff over the past two years.
Revenues in 2005 were $52 million, in 2006 $72 million, in 2007 $99 million and through 3 quarters on pace for $154 million in 2008.
Selling expenses have grown as a percentage of revenue, each of the past 3 years. This can indicate competition for new students has consistently grown as annually LOPE is paying more as a percentage of revenue to recruit a student, this even with the annual tuition increases. Even so, LOPE's revenue increase is impressive and a direct reflection of their success in expanding degree programs and recruiting students to fill these newer programs.
LOPE has been profitable since 2006.
Seasonality - LOPE's strongest quarters are the 3rd and 4th quarter annually. The 3rd quarter markets the beginning of their campus semester while online programs generally begin their academic year in both the 3rd and 4th quarter. 4th quarter annually has had the strongest revenues and margins.
2008 - Note that LOPE will be taking a nearly $9 million charge in the 4th quarter due to ipo related compensation charges. I have folded this out of projections as well as other post-ipo non-recurring charges and dividends. Revenues should be in the $154 million ballpark assuming LOPE has a strong 4th quarter as anticipated. Operational costs are high as instructional costs eat up approximately 32% of revenues and selling (student recruitment) eats up approximately 40% of revenues. Total operating expenses account for 89% of revenues, leaving operating margins for 2008 at a slim 11%. This is actually an improvement over 2007's 8%-9% as LOPE has kept their other non-selling costs in check. Factoring in short term debt/interest income as well as taxes, net margins should be in the 6% ballpark. Earnings per share for 2008 should be in the $0.20-$0.25 range. On a pricing of $15, LOPE would trade 66 X's 2008 earnings.
2009 - LOPE will increase revenues 55% in 2008. The big question here is this: Can LOPE continue their massive 2008 revenues growth? I suspect LOPE will not be able to approach 2008 revenue gains as this period coincided with regulatory approval that allowed LOPE to increase enrollments. Lets assume a more muted growth in the 25% range, which may be conservative. However two things should constrain rapid 2009 revenue growth- 1) the slowing economy should constrain tuition increases in 2009 from 2008's record 5% increase; 2) the ongoing credit issues may mute enrollment growth for the foreseeable future. A 25% revenue increase in 2009, would still put LOPE above the sector average. LOPE will never have strong operating margins due to operating expenses. They should be able to increase net margins slightly around the edges however. If we assume a $190-$200 million revenues run rate with slight margin expansion, LOPE should earn approximately $0.35 in 2009. This is a ballpark number and I would not be surprised be a number 10 cents to either side. The problem here is the very high sales expense that is preventing strong bottom line growth. That isn't going to change, so LOPE will most likely filter down revenue growth on a 1:1 level going forward, don't expect an economy of scale here on revenue growth. On a pricing of $15, LOPE would trade 42 X's 2009 earnings.
The online education sector has been a safe port in the 2008 market storm. comparable companies are performing relatively well with DV upon the year, APOL flat, CPLA down 23%, LRN down 10%, APEI flat, and COCO flat. Only CECO has underperformed the overall market. Even with the potential credit issues hampering growth, this sector has indeed been a counter-cyclical play in 2008 with online education stocks outperforming the market as a whole. **Just as important, forward earnings estimates for this group have remained stable throughout 2008, one of the few groups to do so.
Comparisons:
LOPE - $646 million market cap on a $15 pricing. Growing revenues a very strong 55% in 2008 and coming public 66 X's 2008 earnings.
CPLA - $842 million market cap. Growing revenues 22% in 2008 and trading at 31 X's 2008 earnings.
APOL (which includes the largest US online university, University of Phoenix) - $10.8 billion market cap with 16% revenues growth in 2008 and trading 19 X's 2008 earnings.
APEI (not directly comparable due to focus on military veterans) - $690 million market cap with 53% revenues growth in 2008 and trading 48 X's 2008 earnings.
Conclusion - LOPE is a good candidate to break the ipo drought. Post-secondary education has traditionally been counter-cyclical, enjoying enrollment growth during difficult economic times. We certainly have difficult economic times. Looking at stock performance in 2008 for the on-line education group, they've most certainly heavily outperformed the market as a whole. In addition LOPE's revenue growth is impressive and, while growth should slow going forward, LOPE looks to outgrow the sector as a whole in 2009. Caution here for the following however: 1) IPOs in 2009 have performed abysmally and in this climate you do not want to pay up for anything; 2) Margins are slim here. They are on par with CPLA, but behind the rest of the group. With strong growth and lower margins, it appears LOPE is 'buying' some of their revenue growth. 3) PE ratio for this current climate appears high. With the revenue growth, a high pe is not a major concern. What is a concern is the market not willing to pay high multiples currently.
Slight recommend here in range. I like the sector here and I like LOPE's growth and prospects. There is enough for caution here and the lower LOPE prices, the more I am interested. Ideally I would like to see a pricing below range or at the low end of the pricing range. Two online education ipos in the past year have each not only held pricing, but are up nearly 100% (APEI) and 15% (LRN). In this ipo market, that is unusual and makes LOPE a good candidate to break the ipo drought and also hold a reasonable pricing.
2008-11-15
LOPE - Grand Canyon Education
LOPE - Grand Canyon Education plans on offering 10.5 million shares at a range of $14-$16. Credit Suisse and Merrill Lynch are leading the deal, BMO, William Blair and Piper Jaffray are co-managing. Post-ipo LOPE will have 43.1 million shares outstanding for a market cap of $646 million on a pricing of $15. The bulk of ipo proceeds will go towards paying a special distribution to corporate directors and pre-ipo shareholders. Very little of the ipo proceeds will find their way to LOPE's balance sheet post-ipo.
Endeavour Capital Fund will own 22% of LOPE post-ipo. Four venture capital firms combined will own approximately 50% of LOPE post-ipo.
From the prospectus:
'We are a regionally accredited provider of online postsecondary education services focused on offering graduate and undergraduate degree programs in our core disciplines of education, business, and healthcare. In addition to our online programs, we offer ground programs at our traditional campus in Phoenix, Arizona and onsite at the facilities of employers.'
Online university focusing on post-graduate degrees education, business, and healthcare for working professionals. LOPE has increased enrollment from 3,000 students at the end of 2003 to approximately 22,000 students on 9/30/08. 62% of students enrolled were seeking masters degrees with 92% of students 25 or older.
LOPE began as a campus based college approximately 60 years ago. In February of 2004, investors turned LOPE into a for-profit university and focused on growing the online program. Currently 87% of enrolled students were in the on-line program with just 13% traditional on-campus students.
Tuition - Tuition for a full program would equate to approximately $15,000 for an online master’s program (non-MBA), approximately $47,000 for a full four-year online bachelor’s program, and approximately $62,000 for a full four-year bachelor’s program taken on campus. The eMBA program tuition is $44,000. LOPE raised tuition an average of 5% for the 2008/2009 academic year.
Sector - Approximately 18 million people are enrolled in postsecondary institutions generating approximately $385 billion in revenues. In the past decade online post-secondary education has been a nicely growing area as many working adults prefer the flexible schedules of an online accredited degree granting institution.
Approximately 70% of LOPE's revenues are derived from tuition financed under federal student financial aid programs. These programs include a myriad of federally funded and/or backed grants and loans.
Recession/Credit issues - We've two competing drivers here. During previous economic slowdowns we've seen post-secondary enrollments from adults (25+) rise as people go back to school to retrain and/or work towards a degree to compete in a slowing competitive economy. This current slowdown however is coupled with a freeze in available credit, including private student loans. 40% of full-time postsecondary students receive student loans. With LOPE's eMBA program costing $44,000, student loans are an important component in LOPE's revenues. While a portion of the student loan market is backed by low-interest government backed loans, as tuition costs have risen the private loan market has been an increasingly relied on method of paying for post-secondary education. In 2007, private student loans accounted for over 5% of LOPE's revenue. Also as credit conditions have tightened, fewer banks are participating in the Federal student loan program itself, making obtaining even these loans potentially more difficult. We've two competing trends here - 1) economic slowdown is generally good for postsecondary education with 2) tight credit making student loans more difficult to obtain. While the education group tends to be a nice counter cyclical play, the current credit issues mitigate somewhat the usual counter-economy trend.
Investigation - The Department of Education has issued subpoenas (8/0
to LOPE in an apparent investigation into whether LOPE improperly compensated enrollment counselors/managers in violation of Federal regulations. Investigation is still in infancy stage. LOPE is also facing a lawsuit by a former employer relating to incentive based compensation to enrollment counselors/managers. Competitors - As more brick and mortar universities offer online programs, LOPE's competition includes thousands of on-line programs across the United States. There are however a few publicly traded on-line for-profit universities. These include CPLA, APOL, CECO, COCO, DV and ESI. Recent successful ipos LRN and APEI are also on-line education related, although neither is a direct comparable to LOPE. Below we look at how LOPE stacks up financially with those in this group.
Financials
$1 in cash, no appreciable debt.
Revenues have grown strongly while margins remain slim and net profits constrained. LOPE has been very aggressive in student recruiting the past two years and it has been reflected in overall enrollment and revenues. LOPE quadrupled enrollment counselor staff over the past two years.
Revenues in 2005 were $52 million, in 2006 $72 million, in 2007 $99 million and through 3 quarters on pace for $154 million in 2008.
Selling expenses have grown as a percentage of revenue, each of the past 3 years. This can indicate competition for new students has consistently grown as annually LOPE is paying more as a percentage of revenue to recruit a student, this even with the annual tuition increases. Even so, LOPE's revenue increase is impressive and a direct reflection of their success in expanding degree programs and recruiting students to fill these newer programs.
LOPE has been profitable since 2006.
Seasonality - LOPE's strongest quarters are the 3rd and 4th quarter annually. The 3rd quarter markets the beginning of their campus semester while online programs generally begin their academic year in both the 3rd and 4th quarter. 4th quarter annually has had the strongest revenues and margins.
2008 - Note that LOPE will be taking a nearly $9 million charge in the 4th quarter due to ipo related compensation charges. I have folded this out of projections as well as other post-ipo non-recurring charges and dividends. Revenues should be in the $154 million ballpark assuming LOPE has a strong 4th quarter as anticipated. Operational costs are high as instructional costs eat up approximately 32% of revenues and selling (student recruitment) eats up approximately 40% of revenues. Total operating expenses account for 89% of revenues, leaving operating margins for 2008 at a slim 11%. This is actually an improvement over 2007's 8%-9% as LOPE has kept their other non-selling costs in check. Factoring in short term debt/interest income as well as taxes, net margins should be in the 6% ballpark. Earnings per share for 2008 should be in the $0.20-$0.25 range. On a pricing of $15, LOPE would trade 66 X's 2008 earnings.
2009 - LOPE will increase revenues 55% in 2008. The big question here is this: Can LOPE continue their massive 2008 revenues growth? I suspect LOPE will not be able to approach 2008 revenue gains as this period coincided with regulatory approval that allowed LOPE to increase enrollments. Lets assume a more muted growth in the 25% range, which may be conservative. However two things should constrain rapid 2009 revenue growth- 1) the slowing economy should constrain tuition increases in 2009 from 2008's record 5% increase; 2) the ongoing credit issues may mute enrollment growth for the foreseeable future. A 25% revenue increase in 2009, would still put LOPE above the sector average. LOPE will never have strong operating margins due to operating expenses. They should be able to increase net margins slightly around the edges however. If we assume a $190-$200 million revenues run rate with slight margin expansion, LOPE should earn approximately $0.35 in 2009. This is a ballpark number and I would not be surprised be a number 10 cents to either side. The problem here is the very high sales expense that is preventing strong bottom line growth. That isn't going to change, so LOPE will most likely filter down revenue growth on a 1:1 level going forward, don't expect an economy of scale here on revenue growth. On a pricing of $15, LOPE would trade 42 X's 2009 earnings.
The online education sector has been a safe port in the 2008 market storm. comparable companies are performing relatively well with DV upon the year, APOL flat, CPLA down 23%, LRN down 10%, APEI flat, and COCO flat. Only CECO has underperformed the overall market. Even with the potential credit issues hampering growth, this sector has indeed been a counter-cyclical play in 2008 with online education stocks outperforming the market as a whole. **Just as important, forward earnings estimates for this group have remained stable throughout 2008, one of the few groups to do so.
Comparisons:
LOPE - $646 million market cap on a $15 pricing. Growing revenues a very strong 55% in 2008 and coming public 66 X's 2008 earnings.
CPLA - $842 million market cap. Growing revenues 22% in 2008 and trading at 31 X's 2008 earnings.
APOL (which includes the largest US online university, University of Phoenix) - $10.8 billion market cap with 16% revenues growth in 2008 and trading 19 X's 2008 earnings.
APEI (not directly comparable due to focus on military veterans) - $690 million market cap with 53% revenues growth in 2008 and trading 48 X's 2008 earnings.
Conclusion - LOPE is a good candidate to break the ipo drought. Post-secondary education has traditionally been counter-cyclical, enjoying enrollment growth during difficult economic times. We certainly have difficult economic times. Looking at stock performance in 2008 for the on-line education group, they've most certainly heavily outperformed the market as a whole. In addition LOPE's revenue growth is impressive and, while growth should slow going forward, LOPE looks to outgrow the sector as a whole in 2009. Caution here for the following however: 1) IPOs in 2009 have performed abysmally and in this climate you do not want to pay up for anything; 2) Margins are slim here. They are on par with CPLA, but behind the rest of the group. With strong growth and lower margins, it appears LOPE is 'buying' some of their revenue growth. 3) PE ratio for this current climate appears high. With the revenue growth, a high pe is not a major concern. What is a concern is the market not willing to pay high multiples currently.
Slight recommend here in range. I like the sector here and I like LOPE's growth and prospects. There is enough for caution here and the lower LOPE prices, the more I am interested. Ideally I would like to see a pricing below range or at the low end of the pricing range. Two online education ipos in the past year have each not only held pricing, but are up nearly 100% (APEI) and 15% (LRN). In this ipo market, that is unusual and makes LOPE a good candidate to break the ipo drought and also hold a reasonable pricing.
July 28, 2008, 10:58 pm
ERII - Energy Recovery Devices
Following piece was available to subscribers on 6/28/08 at http://www.tradingipos.com
2008-06-28
ERII - Energy Recovery Devices
ERII - Energy Recovery Devices plans on offering 14 million shares at a range of $7-$9. Insiders are selling 6 million shares in the deal. Citi and Credit Suisse are lead managing the deal, HSBC, Janney Montgomery and SEB Enskilda are co-managing. Post-ipo ERII will have 49.9 million shares outstanding for a market cap of $399 million on a pricing of $8. IPO proceeds will be used for working capital and general corporate purposes.
Arvarius will own 20% of ERII post-ipo. Arvarius (a Norwegian company) is selling 2 million shares on ipo.
From the prospectus:
'We are a leading global developer and manufacturer of highly efficient energy recovery devices utilized in the rapidly growing water desalination industry.'
Water desalination definition: 'The removal of salt, esp. from sea water to make it drinkable.'
ERII operates in the sea water reverse osmosis (SWRO) segment. With SWRO, high pressure is used to drive sea water through filtering membranes to produce fresh water. Historically this has been a very expensive endeavor, however technology is improving to make desalination more cost competitive. Companies such as ERII are driving the technology that recovers the energy used in the desalination process. After initial capital expenditures, energy consumption is the primary cost factor in the the SWRO process. ERII's main products do not actually filter the water. ERII's primary product, the PX Pressure Exchanger helps optimize the energy intensive SWRO process by recapturing and recycling up to 98% of the energy in the high pressure reject stream. ERII's PX devices reduce overall energy consumption in the SWRO process by 60%. ERII's products make SWRO more efficient, which in turn helps make the process more cost effective. The more cost effective desalination becomes, the greater the growth possibilities.
**Think of ERII as a company that makes a product that allows the formerly cost prohibitive water desalination process become much more cost effective. This ipo fits into exactly what has been working in the stock market lately. Energy efficiency focused on a sector whose growth going forward should be strong due to continued worldwide population growth.** Energy efficiency and built in sector demand growth, a very nice combination here. If the financials are at least decent, ERII is a definite recommend in range.
As of 3/31/08, ERII had shipped over 4,000 PX devices to desalination plants worldwide. ERII estimates they have reduced energy consumption at desalination plants by 300 megawatts annually relative to comparable plants with no energy recovery devices. In dollar terms ERII believes this represents an annual electricity cost savings of approximately $210 million. ERII's devices are in use in plants located in China, Algeria, Australia and India.
Industry
The world's population continues to grow, with much of that growth being in locations lacking in abundant fresh water sources. The United Nations expects the global consumption of water to double every 20 years. That is a pretty remarkable statistic and it means there is most likely not enough current freshwater sources in many locations worldwide to handle this expected demand growth.
There are an estimated 13,080 desalination plants worldwide. Desalination capacity is approximately 39.9 million cubic meters per day as of 12/05. Installed capacity is estimated to grow 13% annually over the next decade.
The SWRO market has been focused in geographic areas with a lack of freshwater sources, but extensive salt water nearby. The Middle East has been, by far, the market leader in desalination. Saudi Arabia's desalination plants account for about 24% of total world capacity. The world's largest desalination plant is in the United Arab Emirates. World-wide, 13,080 desalination plants produce more than 12 billion gallons of water a day. Saudi Arabia recently announced more than $12 billion worth of planned water and power projects that will supply an additional 2.24 million cubic metres of water per day and 2,750 mega-watts of power in the next few years.
US market - ERII's PX device is currently in use in the pilot program for a proposed desalination plant in Carlsbad, CA. If approved, this desalination plant would be the largest in the US.
By 2015, the five largest countries in water desalination based on planned capacity will be Saudi Arabia, United Arab Emirates, The United States, China, and Spain. ERII believes they've a foothold into the growth in China.
ERII strengths - ****Unique and efficient*** - From the prospectus: 'we manufacture the only commercially available rotary isobaric energy recovery device, which we believe is more effective at recovering and recycling energy than any other commercially available energy recovery device. The PX device incorporates highly-engineered corrosion resistant ceramic parts that require minimal maintenance, and a modular design that allows for system redundancy resulting in minimal plant shutdowns. Our rotary device has only one moving part and a continuous flow design, which complements the continuous flow of the SWRO process. We believe these unique benefits lead to lower life cycle costs than competing products.'
Geida accounted for approximately 25% of revenues the 15 months ending 3/31/08. Geida is a Spanish construction consortium involved in water desalination plants primarily in Algeria and Spain.
ERII has 5 current US patents and 9 international patents. In addition, ERII has applied for 2 new US patents and 14 new International patents.
Risks:
1 - ERII currently does not receive residual revenues from their energy recovery devices. Eventually ERII will receive revenues from replacement devices, however as their installed base is fairly new that is still a ways off. To grow revenues, ERII needs water desalination capacity to continue to grow at a solid clip. Any factors slowing capacity growth would also slow ERII's revenue stream.
2 - Lumpy revenues. ERII has a greater risk than most young companies in missing revenues/earnings in any given quarter due to the structure/timing of their revenues. ERII's revenues are seasonal. Due to the cyclical nature annually of SWRO plant construction, ERII tends to see a seasonal increases in shipments of their PX devices in the fourth quarter annually. Also in any given quarter ERII depends on just 1-3 projects for the bulk of their revenues for said quarter. Backloaded annually depending on a few projects is a recipe for choppy revenues quarter to quarter even if the underlying business remains strong.
Competition - ERII's main competition is a private Swiss company, Calder AG. ERII believes their energy recovery devices have greater efficiency at 98% recovery than Calder's.
Financials
$1.20 per share in cash post-ipo.
ERII does not plan on paying a dividend.
Seasonality - As noted above ERII tends to generate greater revenues in the fourth quarter, expect annual revenues and earnings to be somewhat backloaded.
Revenues have steadily grown annually. In 2005 ERII booked $10.7 million in revenues, in 2006 revenues were $20 million and in 2007 revenues were $35.4 million.
Gross margins annually have been solid at 56% in 2005, 60% in 2006 and 58% in 2007.
ERII has been profitable annually since 2005.
Note that nearly all historical revenues are international and not derived from the US. ERII expects that trend to continue into the near future.
2007 - Revenues were $35.4 million, a strong 77% gain over 2006. Gross margins were 58%. Operating expense ratio was 31% (down from 41% in 2006), quite solid for a young fast growing company. Strong revenues growth coupled with solid gross margins declining operating expense ratios are exactly the trends you want to see. Operating margins were 27%. Net margins after taxes were 17%. Earnings per share were $0.12.
ERII is the type of ipo in which the trends and space are more important than the trailing PE. With an uncertain US economy, ERII is situated in a space that looks to grow worldwide over the next decade. Factoring in the strong revenue growth, solid gross margins and operating margin growth trends make the trailing PE of 67 X's earnings more palatable.
2008 - Again we note ERII's 2008 should be backloaded. Based on the first quarter and our usual somewhat conservative approach, ERII should grow revenues approximately 30% in 2008 to $47 million. ERII looks to continue to grow revenues without losing gross margins. Gross margins for 2008 should be in the 2006-2007 ballpark of 58%-60%. GSA expense increased significantly in the first quarter, for the most part due to increased personnel and legal/accounting expenses in preparation of the ipo. As such I am not plugging in any improvement in the operating expense ratio for full year 2008 and in fact would anticipate a slight slide to 26%. Due to increased cash on hand and added interest gains the second half of 2008, net margins should remain similar to 2007 at 17%. The flat net margins with strong revenue gains here look to be more a matter of added costs in being a public company. If ERII performs strongly the second half of 2008, there is the distinct possibility that my operating and net margin projections could be a little low. I'd rather err on the side of caution however. Earnings per share for 2008 should be $0.17. On a pricing of $8, ERII would be trading 47 X's 2008 earnings.
Conclusion - ERII is positioned well here. Water may very well be a huge story over the next decade or two. The world's population continues to grow and often in areas of the globe lacking sufficient freshwater sources to meet this growth. Desalination is a story we will be hearing much more from in the coming years. ERII has a unique product in a sector which should continue solid worldwide growth over the next decade. In this sector ERII creates greater energy efficiency by allowing energy use to be recovered through the desalination process. This uniqueness has allowed them to outgrow the sector annually while maintaining strong gross margins. Yes on a strict pe and price to sales basis, ERII looks a bit pricey on ipo. Keep in mind two things however: 1) ERII is one major project away from rapidly increasing revenues, and 2) ERII should regain operating margin growth momentum in 2009. As with any small and young company many things can occur to derail the story. However the potential positives going forward here outweigh the risks involved. This is a sector which should continue to see increased investor attention going forward and ERII in their short history has grown revenue rapidly with solid gross margins and impressive operating expense control. Definite recommend in range, even with the 'apparent' pricey initial valuation. ERII has the potential to be a 'story stock' down the line if all breaks right for the company and has all the makings of a strong ipo
2008-06-28
ERII - Energy Recovery Devices
ERII - Energy Recovery Devices plans on offering 14 million shares at a range of $7-$9. Insiders are selling 6 million shares in the deal. Citi and Credit Suisse are lead managing the deal, HSBC, Janney Montgomery and SEB Enskilda are co-managing. Post-ipo ERII will have 49.9 million shares outstanding for a market cap of $399 million on a pricing of $8. IPO proceeds will be used for working capital and general corporate purposes.
Arvarius will own 20% of ERII post-ipo. Arvarius (a Norwegian company) is selling 2 million shares on ipo.
From the prospectus:
'We are a leading global developer and manufacturer of highly efficient energy recovery devices utilized in the rapidly growing water desalination industry.'
Water desalination definition: 'The removal of salt, esp. from sea water to make it drinkable.'
ERII operates in the sea water reverse osmosis (SWRO) segment. With SWRO, high pressure is used to drive sea water through filtering membranes to produce fresh water. Historically this has been a very expensive endeavor, however technology is improving to make desalination more cost competitive. Companies such as ERII are driving the technology that recovers the energy used in the desalination process. After initial capital expenditures, energy consumption is the primary cost factor in the the SWRO process. ERII's main products do not actually filter the water. ERII's primary product, the PX Pressure Exchanger helps optimize the energy intensive SWRO process by recapturing and recycling up to 98% of the energy in the high pressure reject stream. ERII's PX devices reduce overall energy consumption in the SWRO process by 60%. ERII's products make SWRO more efficient, which in turn helps make the process more cost effective. The more cost effective desalination becomes, the greater the growth possibilities.
**Think of ERII as a company that makes a product that allows the formerly cost prohibitive water desalination process become much more cost effective. This ipo fits into exactly what has been working in the stock market lately. Energy efficiency focused on a sector whose growth going forward should be strong due to continued worldwide population growth.** Energy efficiency and built in sector demand growth, a very nice combination here. If the financials are at least decent, ERII is a definite recommend in range.
As of 3/31/08, ERII had shipped over 4,000 PX devices to desalination plants worldwide. ERII estimates they have reduced energy consumption at desalination plants by 300 megawatts annually relative to comparable plants with no energy recovery devices. In dollar terms ERII believes this represents an annual electricity cost savings of approximately $210 million. ERII's devices are in use in plants located in China, Algeria, Australia and India.
Industry
The world's population continues to grow, with much of that growth being in locations lacking in abundant fresh water sources. The United Nations expects the global consumption of water to double every 20 years. That is a pretty remarkable statistic and it means there is most likely not enough current freshwater sources in many locations worldwide to handle this expected demand growth.
There are an estimated 13,080 desalination plants worldwide. Desalination capacity is approximately 39.9 million cubic meters per day as of 12/05. Installed capacity is estimated to grow 13% annually over the next decade.
The SWRO market has been focused in geographic areas with a lack of freshwater sources, but extensive salt water nearby. The Middle East has been, by far, the market leader in desalination. Saudi Arabia's desalination plants account for about 24% of total world capacity. The world's largest desalination plant is in the United Arab Emirates. World-wide, 13,080 desalination plants produce more than 12 billion gallons of water a day. Saudi Arabia recently announced more than $12 billion worth of planned water and power projects that will supply an additional 2.24 million cubic metres of water per day and 2,750 mega-watts of power in the next few years.
US market - ERII's PX device is currently in use in the pilot program for a proposed desalination plant in Carlsbad, CA. If approved, this desalination plant would be the largest in the US.
By 2015, the five largest countries in water desalination based on planned capacity will be Saudi Arabia, United Arab Emirates, The United States, China, and Spain. ERII believes they've a foothold into the growth in China.
ERII strengths - ****Unique and efficient*** - From the prospectus: 'we manufacture the only commercially available rotary isobaric energy recovery device, which we believe is more effective at recovering and recycling energy than any other commercially available energy recovery device. The PX device incorporates highly-engineered corrosion resistant ceramic parts that require minimal maintenance, and a modular design that allows for system redundancy resulting in minimal plant shutdowns. Our rotary device has only one moving part and a continuous flow design, which complements the continuous flow of the SWRO process. We believe these unique benefits lead to lower life cycle costs than competing products.'
Geida accounted for approximately 25% of revenues the 15 months ending 3/31/08. Geida is a Spanish construction consortium involved in water desalination plants primarily in Algeria and Spain.
ERII has 5 current US patents and 9 international patents. In addition, ERII has applied for 2 new US patents and 14 new International patents.
Risks:
1 - ERII currently does not receive residual revenues from their energy recovery devices. Eventually ERII will receive revenues from replacement devices, however as their installed base is fairly new that is still a ways off. To grow revenues, ERII needs water desalination capacity to continue to grow at a solid clip. Any factors slowing capacity growth would also slow ERII's revenue stream.
2 - Lumpy revenues. ERII has a greater risk than most young companies in missing revenues/earnings in any given quarter due to the structure/timing of their revenues. ERII's revenues are seasonal. Due to the cyclical nature annually of SWRO plant construction, ERII tends to see a seasonal increases in shipments of their PX devices in the fourth quarter annually. Also in any given quarter ERII depends on just 1-3 projects for the bulk of their revenues for said quarter. Backloaded annually depending on a few projects is a recipe for choppy revenues quarter to quarter even if the underlying business remains strong.
Competition - ERII's main competition is a private Swiss company, Calder AG. ERII believes their energy recovery devices have greater efficiency at 98% recovery than Calder's.
Financials
$1.20 per share in cash post-ipo.
ERII does not plan on paying a dividend.
Seasonality - As noted above ERII tends to generate greater revenues in the fourth quarter, expect annual revenues and earnings to be somewhat backloaded.
Revenues have steadily grown annually. In 2005 ERII booked $10.7 million in revenues, in 2006 revenues were $20 million and in 2007 revenues were $35.4 million.
Gross margins annually have been solid at 56% in 2005, 60% in 2006 and 58% in 2007.
ERII has been profitable annually since 2005.
Note that nearly all historical revenues are international and not derived from the US. ERII expects that trend to continue into the near future.
2007 - Revenues were $35.4 million, a strong 77% gain over 2006. Gross margins were 58%. Operating expense ratio was 31% (down from 41% in 2006), quite solid for a young fast growing company. Strong revenues growth coupled with solid gross margins declining operating expense ratios are exactly the trends you want to see. Operating margins were 27%. Net margins after taxes were 17%. Earnings per share were $0.12.
ERII is the type of ipo in which the trends and space are more important than the trailing PE. With an uncertain US economy, ERII is situated in a space that looks to grow worldwide over the next decade. Factoring in the strong revenue growth, solid gross margins and operating margin growth trends make the trailing PE of 67 X's earnings more palatable.
2008 - Again we note ERII's 2008 should be backloaded. Based on the first quarter and our usual somewhat conservative approach, ERII should grow revenues approximately 30% in 2008 to $47 million. ERII looks to continue to grow revenues without losing gross margins. Gross margins for 2008 should be in the 2006-2007 ballpark of 58%-60%. GSA expense increased significantly in the first quarter, for the most part due to increased personnel and legal/accounting expenses in preparation of the ipo. As such I am not plugging in any improvement in the operating expense ratio for full year 2008 and in fact would anticipate a slight slide to 26%. Due to increased cash on hand and added interest gains the second half of 2008, net margins should remain similar to 2007 at 17%. The flat net margins with strong revenue gains here look to be more a matter of added costs in being a public company. If ERII performs strongly the second half of 2008, there is the distinct possibility that my operating and net margin projections could be a little low. I'd rather err on the side of caution however. Earnings per share for 2008 should be $0.17. On a pricing of $8, ERII would be trading 47 X's 2008 earnings.
Conclusion - ERII is positioned well here. Water may very well be a huge story over the next decade or two. The world's population continues to grow and often in areas of the globe lacking sufficient freshwater sources to meet this growth. Desalination is a story we will be hearing much more from in the coming years. ERII has a unique product in a sector which should continue solid worldwide growth over the next decade. In this sector ERII creates greater energy efficiency by allowing energy use to be recovered through the desalination process. This uniqueness has allowed them to outgrow the sector annually while maintaining strong gross margins. Yes on a strict pe and price to sales basis, ERII looks a bit pricey on ipo. Keep in mind two things however: 1) ERII is one major project away from rapidly increasing revenues, and 2) ERII should regain operating margin growth momentum in 2009. As with any small and young company many things can occur to derail the story. However the potential positives going forward here outweigh the risks involved. This is a sector which should continue to see increased investor attention going forward and ERII in their short history has grown revenue rapidly with solid gross margins and impressive operating expense control. Definite recommend in range, even with the 'apparent' pricey initial valuation. ERII has the potential to be a 'story stock' down the line if all breaks right for the company and has all the makings of a strong ipo
June 28, 2008, 7:33 pm
FSC - Fifth Street Capital
following ipo piece was available to tradingipos.com subscribers prior to FSC pricing their ipo at $14. FSC is currently trading at approximately $10 1/4. Sometimes it is as important to save money by passing on ipos as it is on catching a 'hot' one. FSC has been a disaster and was one to avoid.
also we've a complete write-up for subscribers on this week's ipo ERII.
http://www.tradingipos.com
2008-06-11
FSC - Fifth Street Capital
FSC - Fifth Street Capital plans on offering 10 million shares at a range of $14.12 - $15.12. Goldman Sachs and UBS are lead managing the deal, Wachovia, BMO and Stifel are co-managing. Post-ipo FSC will have 22.5 million shares outstanding for a market cap of $329 million on a pricing of $14.62. FSC will use the bulk of ipo proceeds to invest in small and medium size pre-ipo stage companies.
Toll Brothers(TOL) founder and former President Bruce E. Toll will own 9% of FSC post-ipo. Mr. Toll is the father in law of FSC CEO and President Leonard M. Tannenbaum. In addition Genworth Life and Greenlight Capital will each own 5% of FSC post-ipo.
From the prospectus:
'We are a specialty finance company that lends to and invests in small and mid-sized companies in connection with investments by private equity sponsors. We define small and mid-sized companies as those with annual revenues between $25 million and $250 million.'
FSC commenced operations in 2/07. FSC is a private investment operation that makes 'piggyback' investments in pre-ipo stage companies. We've seen a number of private equity 'quick flip' ipos this decade. Nearly all of them come saddled with hefty debt. Debt that was placed onto the back of the underlying entity to fund the purchase by the private equity operation. FSC helps fund these acquisitions by lending money to the underlying entity. That money usually ends up in the hands of the private equity firm to help fund the takeover.
FSC is managed by Fifth Street Management headed by 36 year old Leonard Tannenbaum. Mr. Tannenbaum has led the investment of approximately $450 million since 1998.
As of 3/08, FSC's portfolio totaled $192 million and comprised investment in 19 companies. The bulk of FSC's investment is debt based, usually straight first or second tier loans coupled with a samll($200k or so) equity investment. Average investment size is $5-$40 million. Their average annual yield on their debt investments is a substantial at 16.7%. The high yield on investments would appear to indicate that FSC's investments are placed with many companies unable to leverage themselves via normal credit routes. This fits with FSC's profile of doing deals in conjunction with private equity sponsored investments.
Note that if FSC prices in range it will increase FSC's assets under management by approximately 70%.
FSC's management fee structure mirrors that of a hedge fund. For the type of investments FSC makes and the return since inception the fee structure looks excessive. FSC is essentially a lender working with private equity operations. Yet they want public shareholders to pay them as if they're running a top tier high return and in demand hedge fund. FSC's management fee structure post-ipo will be 2% of gross assets annually as well as 20% of net investment income/capital gains. In other words, 2% of assets under management and 20% of any/all returns.
**FSC is essentially a 'high risk' lender, yet they want public investors to pay management fees akin to successful hedge and investment funds. In the prospectus FSC estimates that if they are able to generate a 5% annual return their first five years public investor fees/expenses would total $300 on a $1000 investment.
Portfolio companies - FSC's current portfolio companies can be found here: http://www.fifthstreetfinance.com/portfolio.html
Risk - All of FSC's originations have been first or second lien on the investment company's assets. However the bulk of FSC's investment portfolio are small to mid-size consumer discretionary operations, with the remainder all relying on US economic health in one form or another. That in and of itself is not really a negative even with the difficult current economic climate as long as solid due diligence is in place. the issue here is that FSC's investments/loans are in conjunction with private equity leveraged investments, meaning the underlying companies in which FSC invests are taking on significant debt in order to fund the private equity investment. High leverage always increases the odds of default down the line and FSC's business plan pretty much guarantees they will be making these type of investments going forward.
Note that FSC does plan on leveraging their investments. Prior ipo FSC had approximately $35 million in debt at an average interest rate of 4.15%. FSC does plan on borrowing at lower rates to lend at higher rates going forward. Again FSC mirrors a high risk lender more than a private investment fund.
Financials
FSC will have approximately $150 million in cash post ipo. This cash will be utilized to lend to and invest in small businesses in accordance with business plan.
Assuming a pricing of $14.62, book value post-ipo will be $13.80.
FSC does plan on distributing essentially all net income quarterly to shareholders.
Fiscal year ends 9/30 annually. FY '08 will end 9/30/08.
FSC marks their investment to market quarterly. For the six months ending 3/31/08, FSC's unrealized depreciation on their investments lost $2 million.
For the six months ending 3/31/08, FSC had interest and fee income of $12.3 million. Management and incentive fees totaled 22% of revenues. Other operating expenses totaled 13%. Factoring in depreciation on investment loss, net income per share was $0.25.
Going forward we can expect FSC to put the ipo monies to work which should increase FSC's interest income going forward. I would estimate, assuming no massive investment depreciation, net income for FY '08 will total approximately $0.60 per share.
Assuming again no defaults and no massive investment writedowns, I wold expect distributions shareholders to total $0.60-$0.75 FSC's first four quarters public. On a pricing of $14.62, FSC would yield approximately 4%-4 1/2% first year public. Conclusion - I don't see a compelling reason to own this ipo in range. This is essentially a high risk lender cloaked as a closed end investment fund coming public above book value. I'm not a huge fan of the hefty incentive fee structure here as well as the risky nature of FSC's investments assisting the funding of private equity buyouts. In a sluggish US economic climate lending at an average of 16.7% yield to companies loading up on leverage to fund private equity investments does not interest me.
also we've a complete write-up for subscribers on this week's ipo ERII.
http://www.tradingipos.com
2008-06-11
FSC - Fifth Street Capital
FSC - Fifth Street Capital plans on offering 10 million shares at a range of $14.12 - $15.12. Goldman Sachs and UBS are lead managing the deal, Wachovia, BMO and Stifel are co-managing. Post-ipo FSC will have 22.5 million shares outstanding for a market cap of $329 million on a pricing of $14.62. FSC will use the bulk of ipo proceeds to invest in small and medium size pre-ipo stage companies.
Toll Brothers(TOL) founder and former President Bruce E. Toll will own 9% of FSC post-ipo. Mr. Toll is the father in law of FSC CEO and President Leonard M. Tannenbaum. In addition Genworth Life and Greenlight Capital will each own 5% of FSC post-ipo.
From the prospectus:
'We are a specialty finance company that lends to and invests in small and mid-sized companies in connection with investments by private equity sponsors. We define small and mid-sized companies as those with annual revenues between $25 million and $250 million.'
FSC commenced operations in 2/07. FSC is a private investment operation that makes 'piggyback' investments in pre-ipo stage companies. We've seen a number of private equity 'quick flip' ipos this decade. Nearly all of them come saddled with hefty debt. Debt that was placed onto the back of the underlying entity to fund the purchase by the private equity operation. FSC helps fund these acquisitions by lending money to the underlying entity. That money usually ends up in the hands of the private equity firm to help fund the takeover.
FSC is managed by Fifth Street Management headed by 36 year old Leonard Tannenbaum. Mr. Tannenbaum has led the investment of approximately $450 million since 1998.
As of 3/08, FSC's portfolio totaled $192 million and comprised investment in 19 companies. The bulk of FSC's investment is debt based, usually straight first or second tier loans coupled with a samll($200k or so) equity investment. Average investment size is $5-$40 million. Their average annual yield on their debt investments is a substantial at 16.7%. The high yield on investments would appear to indicate that FSC's investments are placed with many companies unable to leverage themselves via normal credit routes. This fits with FSC's profile of doing deals in conjunction with private equity sponsored investments.
Note that if FSC prices in range it will increase FSC's assets under management by approximately 70%.
FSC's management fee structure mirrors that of a hedge fund. For the type of investments FSC makes and the return since inception the fee structure looks excessive. FSC is essentially a lender working with private equity operations. Yet they want public shareholders to pay them as if they're running a top tier high return and in demand hedge fund. FSC's management fee structure post-ipo will be 2% of gross assets annually as well as 20% of net investment income/capital gains. In other words, 2% of assets under management and 20% of any/all returns.
**FSC is essentially a 'high risk' lender, yet they want public investors to pay management fees akin to successful hedge and investment funds. In the prospectus FSC estimates that if they are able to generate a 5% annual return their first five years public investor fees/expenses would total $300 on a $1000 investment.
Portfolio companies - FSC's current portfolio companies can be found here: http://www.fifthstreetfinance.com/portfolio.html
Risk - All of FSC's originations have been first or second lien on the investment company's assets. However the bulk of FSC's investment portfolio are small to mid-size consumer discretionary operations, with the remainder all relying on US economic health in one form or another. That in and of itself is not really a negative even with the difficult current economic climate as long as solid due diligence is in place. the issue here is that FSC's investments/loans are in conjunction with private equity leveraged investments, meaning the underlying companies in which FSC invests are taking on significant debt in order to fund the private equity investment. High leverage always increases the odds of default down the line and FSC's business plan pretty much guarantees they will be making these type of investments going forward.
Note that FSC does plan on leveraging their investments. Prior ipo FSC had approximately $35 million in debt at an average interest rate of 4.15%. FSC does plan on borrowing at lower rates to lend at higher rates going forward. Again FSC mirrors a high risk lender more than a private investment fund.
Financials
FSC will have approximately $150 million in cash post ipo. This cash will be utilized to lend to and invest in small businesses in accordance with business plan.
Assuming a pricing of $14.62, book value post-ipo will be $13.80.
FSC does plan on distributing essentially all net income quarterly to shareholders.
Fiscal year ends 9/30 annually. FY '08 will end 9/30/08.
FSC marks their investment to market quarterly. For the six months ending 3/31/08, FSC's unrealized depreciation on their investments lost $2 million.
For the six months ending 3/31/08, FSC had interest and fee income of $12.3 million. Management and incentive fees totaled 22% of revenues. Other operating expenses totaled 13%. Factoring in depreciation on investment loss, net income per share was $0.25.
Going forward we can expect FSC to put the ipo monies to work which should increase FSC's interest income going forward. I would estimate, assuming no massive investment depreciation, net income for FY '08 will total approximately $0.60 per share.
Assuming again no defaults and no massive investment writedowns, I wold expect distributions shareholders to total $0.60-$0.75 FSC's first four quarters public. On a pricing of $14.62, FSC would yield approximately 4%-4 1/2% first year public. Conclusion - I don't see a compelling reason to own this ipo in range. This is essentially a high risk lender cloaked as a closed end investment fund coming public above book value. I'm not a huge fan of the hefty incentive fee structure here as well as the risky nature of FSC's investments assisting the funding of private equity buyouts. In a sluggish US economic climate lending at an average of 16.7% yield to companies loading up on leverage to fund private equity investments does not interest me.
May 13, 2008, 6:05 pm
Colfax - CFX
Our pre-ipo piece on CFX available to subscribers 5/1/08. CFX priced at $18 per share on 5/8.
analysis pieces on all ipos available at http://www.tradingipos.com
three year anniversary and still going stong.
2008-05-01
CFX - Colfax
CFX - Colfax plans on offering 18.8 million shares at a range of $15-$17. Insiders are planning on selling 11 million shares in the deal. Merrill Lynch, UBS and Lehman will be lead managing the deal; Robert Baird, BofA, Deutsche Bank, and KeyBanc will be co-managing. Post-ipo CFX will have 41.2 million shares outstanding for a market cap of $659 million on a price of $16. Approximately 1/3 of ipo monies will be used to repay debt, 2/3's will go to insiders in the form of bonuses, dividends and reimbursements.
Capital Yield Corporation will own 21% of CFX post-ipo. Capital Yield is the selling shareholder on ipo.
From the prospectus:
'We are a global supplier of a broad range of fluid handling products, including pumps, fluid handling systems and specialty valves.'
CFX specializes in rotary positive displacement pumps. What is a displacement pump? According to wikipedia it is a pump that causes a liquid or gas to move by trapping a fixed amount of fluid and then forcing (displacing) that trapped volume into the discharge pipe.
The key to this ipo is CFX end market segment users which include commercial marine, oil and gas, power generation, global navy and general industrial. From previous ipo pieces we know that the next few years will bring unprecedented new ship builds spurred by commodity demand in places such as India, China and Brazil. Similarly the historical high oil and gas prices have spurred exploration which means more equipment is needed. Power generation infrastructure around the world is also in need of massive upgrades due to age and inefficiencies. CFX's end markets look solid even in a slowing world economy.
Pumps are marketing under the Allweiler, Fairmount, Houttuin, Imo, LSC, Portland Valve, Tushaco, Warren and Zenith brand names.
CFX has production facilities in Europe, North America and Asia. Asia production facilities include operations in both India and China. Products are sold through 300+ person direct sales team and more than 450 distributors in 79 countries. **67% of 2007 revenues were derived outside the US** with no single customer accounting for more than 3% of revenues. Customers include Alfa Laval, Cummins, General Dynamics, Hyundai Heavy Industries, Siemens, Solar Turbines, Thyssenkrupp, the U.S. Navy and various sovereign navies around the world.
CFX has a large installed product base which leads to significant aftermarket sales and service revenues as well as eventual recurring replacement sales. In 2007 25% of revenues were derived from aftermarket sales and service.
Pumps (including pump aftermarket sales/service) account for 85% of revenues.
The worldwide pump and valve sector is highly fragmented. CFX believe their sector is ripe for consolidation and they've made numerous acquisitions and plan on making more in the future. Recent acquisitions include Zenith Pump in 6/04, Portland Valve in 8/04, Tushaco Pump in 8/05, Lubrication Systems in 1/07, and Fairmount Automation in 11/07.
A quick look at CFX end markets:
Commercial Marine/Naval - Fuel oil transfer; oil transport; water and wastewater handling;
Oil and Gas - Crude oil gathering; pipeline services; unloading and loading; rotating equipment lubrication; lube oil purification;
Power Generation - Fuel unloading, transfer, burner and injection; rotating equipment lubrication;
General Industrial - Machinery lubrication; hydraulic elevators; chemical processing; pulp and paper processing; food and beverage processing;
Looking ahead - In their S-1, CFX exudes a confidence in 2008 that is rarely seen in ipo filings. To quote from the S-1: 'We believe that we are well positioned to continue to grow organically by enhancing our product offerings and expanding our customer base in each of our strategic markets. During 2007, we experienced strong demand in the majority of our strategic markets, and we expect favorable market conditions to continue throughout 2008.'
CFX sees growth coming from the following core markets:
1) In the commercial marine industry, CFX expects growth in international trade and high demand for crude oil to continue to create demand for container ships and tankers;
2) CFX expects activity within the global oil and gas market to remain favorable as capacity constraints and increased global demand keep oil and gas prices elevated;
3) In the power generation industry, CFX expects activity in Asia and the Middle East to be robust as economic growth continues to drive significant investment in energy infrastructure projects;
4) In the global navy industry, CFX expects that sovereign nations outside of the U.S. will continue to expand their fleets as they address national security concerns. In the U.S., Congress is expected to continue to appropriate funds for new ship construction for the next generation of naval vessels as older classes are decommissioned;
5) In the general industrial market, CFX expects that the continued economic development of regions throughout the world will continue to drive increased capital investment and will benefit local suppliers as well as international exporters of fluid handling equipment;
Asbestos - Two of CFX subsidiaries have substantial asbestos liability. CFX took an asbestos related charge annually from 2003-2006 averaging $25 million annually. They took the charge because one of their primary insurance carriers claimed it had exhausted resources to pay further asbestos claims. This changed CFX liability and they took a charge annually to include this increase in liability from the insurance carrier to CFX itself. In 2007, CFX actually gained approximately $50 million on the asbestos expense line thanks to a settlement with said insurance carrier. CFX will continue to book a gain or loss on annual earnings as their asbestos liability estimates shift. It appears that CFX may book another asbestos related accounting gain in 2008 as they continue to factor in less liability due to insurance settlement. Currently on the balance sheet CFX lists $376 million in asbestos liability with $305 million in insurance coverage for said liability. It appears CFX took on their insurance carriers and won. Barring a change in the 2007 settlement I would expect minimal additional asbestos charges for CFX going forward. As such I will be folding out asbestos charges and gains from earnings and projections.
**Assuming the financials appear promising, CFX looks to be a very nice way to play the Asian growth engine. Looking at their core markets, my first thought was that CFX is positioned very nicely. Reading the prospectus it is clear CFX feels the same as they essentially come out and write in an SEC filing they fully expect strong growth to continue in 2008.
Financials
$168 million in debt post-ipo. While not enough to derail operations, I would rather have seen insiders hold off on selling in this deal to allow CFX to repay more debt. CFX plans on acquiring companies going forward and a cleaner balance sheet would make those acquisitions far more accretive. In addition to the debt, CFX will have nearly $50 million in cash on hand post-ipo. I'd expect CFX to utilize this cash for future acquisitions. Overall for a company that has been rather aggressive acquiring over the past four years, the balance sheet here is in decent shape.
Revenues grew steadily from 2003-2006 and exploded in 2007. Revenues were $345 million in 2005, $394 million in 2006 and $506 million in 2007.
Gross margins were 36% in 2005, 35% in 2006 and 35% in 2007. In 2007 CFX was able to grow revenues by 28% while maintaining gross margins. Approximately 50% of that growth was organic from existing business with the remainder from acquisitions and currency benefits.
2007 - Revenues were $506 million a 28% increase over 2006. Gross margins were 35%. Operating expense ratio was 20%. Operating margins were 15%. Plugging in interest expense and full taxes, net margins were 7.5%. Earnings per share were $0.90. On a pricing of $16, CFX would trade 18 X's 2007 earnings. *note* Preceding numbers take into account debt paid off on ipo and fold out the $50 million in asbestos accounting gains for reasons noted above.
2008 - In the current S-1, CFX has preliminary first quarter revenue and operating earnings numbers. Operating margins were a bit light but there was no breakout of expenses so I'm going to assume there were some asbestos accounting charges in those numbers. We'll know more when CFX officially releases first Q '08 results. I'm going to be slightly conservative in projections however based on the lower operating margins in first quarter 2008. Based on first quarter numbers and CFX own enthusiasm for 2008 growth, I believe CFX can grow revenues 10%-15% in 2008. Assuming slightly lower operating margins, net margins should be in the same 7.5% ballpark due to lower debt servicing to revenue ratio. Earnings per share should be $1.05. On a pricing of $16, CFX would trade 15 X's 2008 earnings.
Conclusion - Very solid ipo. Too often this type of industrial solid cash flow business has come public laden with LBO debt. That isn't the case here. Yes insiders could be selling less stock to allow CFX to pay off more debt, but the balance sheet here is in solid shape. Ideally I'd like to see all debt wiped off on ipo instead of 25%-30%. The ipo driver here is the current boom in worldwide shipbuilds, oil & gas equipment manufacturing and power infrastructure. These three sectors look to continue to grow strongly over the next 3+ years with much of that growth coming outside the US. CFX is positioned perfectly for that growth and 15 X's 2008 earnings is a very reasonable multiple here. Definite recommend in range and a bit above, I like this ipo.
analysis pieces on all ipos available at http://www.tradingipos.com
three year anniversary and still going stong.
2008-05-01
CFX - Colfax
CFX - Colfax plans on offering 18.8 million shares at a range of $15-$17. Insiders are planning on selling 11 million shares in the deal. Merrill Lynch, UBS and Lehman will be lead managing the deal; Robert Baird, BofA, Deutsche Bank, and KeyBanc will be co-managing. Post-ipo CFX will have 41.2 million shares outstanding for a market cap of $659 million on a price of $16. Approximately 1/3 of ipo monies will be used to repay debt, 2/3's will go to insiders in the form of bonuses, dividends and reimbursements.
Capital Yield Corporation will own 21% of CFX post-ipo. Capital Yield is the selling shareholder on ipo.
From the prospectus:
'We are a global supplier of a broad range of fluid handling products, including pumps, fluid handling systems and specialty valves.'
CFX specializes in rotary positive displacement pumps. What is a displacement pump? According to wikipedia it is a pump that causes a liquid or gas to move by trapping a fixed amount of fluid and then forcing (displacing) that trapped volume into the discharge pipe.
The key to this ipo is CFX end market segment users which include commercial marine, oil and gas, power generation, global navy and general industrial. From previous ipo pieces we know that the next few years will bring unprecedented new ship builds spurred by commodity demand in places such as India, China and Brazil. Similarly the historical high oil and gas prices have spurred exploration which means more equipment is needed. Power generation infrastructure around the world is also in need of massive upgrades due to age and inefficiencies. CFX's end markets look solid even in a slowing world economy.
Pumps are marketing under the Allweiler, Fairmount, Houttuin, Imo, LSC, Portland Valve, Tushaco, Warren and Zenith brand names.
CFX has production facilities in Europe, North America and Asia. Asia production facilities include operations in both India and China. Products are sold through 300+ person direct sales team and more than 450 distributors in 79 countries. **67% of 2007 revenues were derived outside the US** with no single customer accounting for more than 3% of revenues. Customers include Alfa Laval, Cummins, General Dynamics, Hyundai Heavy Industries, Siemens, Solar Turbines, Thyssenkrupp, the U.S. Navy and various sovereign navies around the world.
CFX has a large installed product base which leads to significant aftermarket sales and service revenues as well as eventual recurring replacement sales. In 2007 25% of revenues were derived from aftermarket sales and service.
Pumps (including pump aftermarket sales/service) account for 85% of revenues.
The worldwide pump and valve sector is highly fragmented. CFX believe their sector is ripe for consolidation and they've made numerous acquisitions and plan on making more in the future. Recent acquisitions include Zenith Pump in 6/04, Portland Valve in 8/04, Tushaco Pump in 8/05, Lubrication Systems in 1/07, and Fairmount Automation in 11/07.
A quick look at CFX end markets:
Commercial Marine/Naval - Fuel oil transfer; oil transport; water and wastewater handling;
Oil and Gas - Crude oil gathering; pipeline services; unloading and loading; rotating equipment lubrication; lube oil purification;
Power Generation - Fuel unloading, transfer, burner and injection; rotating equipment lubrication;
General Industrial - Machinery lubrication; hydraulic elevators; chemical processing; pulp and paper processing; food and beverage processing;
Looking ahead - In their S-1, CFX exudes a confidence in 2008 that is rarely seen in ipo filings. To quote from the S-1: 'We believe that we are well positioned to continue to grow organically by enhancing our product offerings and expanding our customer base in each of our strategic markets. During 2007, we experienced strong demand in the majority of our strategic markets, and we expect favorable market conditions to continue throughout 2008.'
CFX sees growth coming from the following core markets:
1) In the commercial marine industry, CFX expects growth in international trade and high demand for crude oil to continue to create demand for container ships and tankers;
2) CFX expects activity within the global oil and gas market to remain favorable as capacity constraints and increased global demand keep oil and gas prices elevated;
3) In the power generation industry, CFX expects activity in Asia and the Middle East to be robust as economic growth continues to drive significant investment in energy infrastructure projects;
4) In the global navy industry, CFX expects that sovereign nations outside of the U.S. will continue to expand their fleets as they address national security concerns. In the U.S., Congress is expected to continue to appropriate funds for new ship construction for the next generation of naval vessels as older classes are decommissioned;
5) In the general industrial market, CFX expects that the continued economic development of regions throughout the world will continue to drive increased capital investment and will benefit local suppliers as well as international exporters of fluid handling equipment;
Asbestos - Two of CFX subsidiaries have substantial asbestos liability. CFX took an asbestos related charge annually from 2003-2006 averaging $25 million annually. They took the charge because one of their primary insurance carriers claimed it had exhausted resources to pay further asbestos claims. This changed CFX liability and they took a charge annually to include this increase in liability from the insurance carrier to CFX itself. In 2007, CFX actually gained approximately $50 million on the asbestos expense line thanks to a settlement with said insurance carrier. CFX will continue to book a gain or loss on annual earnings as their asbestos liability estimates shift. It appears that CFX may book another asbestos related accounting gain in 2008 as they continue to factor in less liability due to insurance settlement. Currently on the balance sheet CFX lists $376 million in asbestos liability with $305 million in insurance coverage for said liability. It appears CFX took on their insurance carriers and won. Barring a change in the 2007 settlement I would expect minimal additional asbestos charges for CFX going forward. As such I will be folding out asbestos charges and gains from earnings and projections.
**Assuming the financials appear promising, CFX looks to be a very nice way to play the Asian growth engine. Looking at their core markets, my first thought was that CFX is positioned very nicely. Reading the prospectus it is clear CFX feels the same as they essentially come out and write in an SEC filing they fully expect strong growth to continue in 2008.
Financials
$168 million in debt post-ipo. While not enough to derail operations, I would rather have seen insiders hold off on selling in this deal to allow CFX to repay more debt. CFX plans on acquiring companies going forward and a cleaner balance sheet would make those acquisitions far more accretive. In addition to the debt, CFX will have nearly $50 million in cash on hand post-ipo. I'd expect CFX to utilize this cash for future acquisitions. Overall for a company that has been rather aggressive acquiring over the past four years, the balance sheet here is in decent shape.
Revenues grew steadily from 2003-2006 and exploded in 2007. Revenues were $345 million in 2005, $394 million in 2006 and $506 million in 2007.
Gross margins were 36% in 2005, 35% in 2006 and 35% in 2007. In 2007 CFX was able to grow revenues by 28% while maintaining gross margins. Approximately 50% of that growth was organic from existing business with the remainder from acquisitions and currency benefits.
2007 - Revenues were $506 million a 28% increase over 2006. Gross margins were 35%. Operating expense ratio was 20%. Operating margins were 15%. Plugging in interest expense and full taxes, net margins were 7.5%. Earnings per share were $0.90. On a pricing of $16, CFX would trade 18 X's 2007 earnings. *note* Preceding numbers take into account debt paid off on ipo and fold out the $50 million in asbestos accounting gains for reasons noted above.
2008 - In the current S-1, CFX has preliminary first quarter revenue and operating earnings numbers. Operating margins were a bit light but there was no breakout of expenses so I'm going to assume there were some asbestos accounting charges in those numbers. We'll know more when CFX officially releases first Q '08 results. I'm going to be slightly conservative in projections however based on the lower operating margins in first quarter 2008. Based on first quarter numbers and CFX own enthusiasm for 2008 growth, I believe CFX can grow revenues 10%-15% in 2008. Assuming slightly lower operating margins, net margins should be in the same 7.5% ballpark due to lower debt servicing to revenue ratio. Earnings per share should be $1.05. On a pricing of $16, CFX would trade 15 X's 2008 earnings.
Conclusion - Very solid ipo. Too often this type of industrial solid cash flow business has come public laden with LBO debt. That isn't the case here. Yes insiders could be selling less stock to allow CFX to pay off more debt, but the balance sheet here is in solid shape. Ideally I'd like to see all debt wiped off on ipo instead of 25%-30%. The ipo driver here is the current boom in worldwide shipbuilds, oil & gas equipment manufacturing and power infrastructure. These three sectors look to continue to grow strongly over the next 3+ years with much of that growth coming outside the US. CFX is positioned perfectly for that growth and 15 X's 2008 earnings is a very reasonable multiple here. Definite recommend in range and a bit above, I like this ipo.
April 29, 2008, 2:29 pm
AWK - American Water Works
Following piece was available to subscribers 4/11/08, well ahead of the 4/22/08 pricing date.
http://www.tradingipos.com
2008-04-11
AWK - American Water Works
AWK - American Water Works plans on offering 64 million shares (75.6 million if over-allotment is exercised) at a range of $24-$26. **Note** - All shares in this deal are being sold by insiders. AWK will receive no monies from this ipo. Fact is AWK is heavily leveraged and they most certainly could use ipo monies to pay off debt. However that is not going to occur.
Goldman Sachs, Citi, and Merrill Lynch are lead managing the deal. Co-managing will be nearly every firm on the street other than Bear Stearns. There are thirteen co-managing firms in all.
Post-ipo AWK will have 160 million shares outstanding for a market cap of $4 billion on a pricing of $25.
RWE will own essentially all non-floated AWK shares post ipo, an approximate 60% stake in AWK post-ipo. RWE is the selling shareholder in this deal, selling all 64 million shares, 75.6 million if over-allotment is exercised. RWE, a German operation, is one of Europe’s leading electricity and gas companies and supplies 20 million customers with electricity and 10 million customers with gas in Germany, the United Kingdom and Central and Eastern Europe. RWE purchased the then public American Water Works in early 2003 for $4.6 billion in cash.
This is a classic spin-off ipo as RWE plans on divesting themselves of their 60% stake in AWK as soon as possible (meaning right around that 180 day mark). Expect heavy future overhang here as RWE Aqua will be divesting approximately 90 million more shares of AWK sometime in late 2008.
Note - American Water Works has always toted around substantial debt. As a utility, in this case a water utility, it is common to see substantial debt as cash flows from this type of operation tend to be fairly predictable and not effected by economic cycles. When RWE purchased American Water Works five years ago, AWK had approximately $3.3 billion in debt. The public AWK in 2008 will have $5 billion in debt. It appears that a portion of the increased debt over the past five years has been due to RWE laying debt onto the back of AWK in order to fund payouts to RWE. If we look at the increased debt levels, RWE purchased American Water Works in for a total cash and debt-load interest of $7.9 billion. Assuming a pricing of $25, AWK post-ipo will have a total market cap plus debt consideration value of $9 billion.
Personally, I don't care what business one is in I'm always uncomfortable with a debt to capitalization level in AWK's post-ipo ballpark. $5 billion in debt and an expected initial market cap of $4 billion is a highly leveraged operation. So before we even look at the company, this deal has two serious strikes against it: 1) heavily leveraged with at least a portion of the leverage coming due to cash-out to parent company; 2) future overhang of approximately 90 million shares as RWE plans to completely spin-off their entire ownership of AWK by the end of 2008. I would expect these shares to come in the form of a hefty secondary as RWE is traded in Germany making a tax free dividend of AWK shares to RWE shareholders unlikely.
All things being equal the above is enough for me to pass on this ipo right here. Let's take a look at AWK the company to see if something might make me change my mind.
From the prospectus:
'Founded in 1886, American Water Works Company, Inc., which we refer to, together with its subsidiaries, as American Water or the Company, is the largest investor-owned United States water and wastewater utility company, as measured both by operating revenue and population served.'
AWK provides approximately 15.6 million people with drinking water, wastewater and other water-related services in 32 US states and Ontario, Canada. AWK treats and delivers over 1 billion gallons of water daily. AWK's primary water business is regulated as a utility by the Public Utility Commission (PUC). AWK's regulated business accounts for nearly 90% of overall revenues.
Residential water services account for 61% of revenues. Revenues from Pennsylvania and New Jersey account for approximately 45% of overall revenues.
Sector - In the US water and wastewater utility sector, government owned and operated entities make up the bulk of operators. Government owned systems account for approximately 84% of all United States community water systems and approximately 98% of all United States community wastewater systems. Commercially operated systems such as those run by AWK are in the minority. Overall there are an estimated 53,000 community water systems and approximately 16,000 community wastewater facilities in the United States. A strategy going forward for AWK will be to selectively acquire community based and run water and wastewater systems. For example in 12/07 AWK signed an agreement to purchase the water system assets of Trenton, NJ.
For our purposes, AWK is a water utility regulated in a very similar fashion as other utilities. Their utility business does provide a predictable and stable cash flow, however the prices AWK can charge for their services are highly regulated and controlled by the PUC.
Capital Expenditures - AWK spends a hefty amount on capital expenditures annually as they're required to continue to keep their infrastructure operating on a baseline level. As WK puts it in the prospectus: 'The water and wastewater utility business is capital intensive.' In 2007 AWK spent $759 million on capital expenditures.
Impairment charges - Since being acquired by RWE in 2003, AWK annually has listed hefty impairment charge losses on their earnings statements. This is directly related to the amount of goodwill on AWK's books due to the acquisition. As of 12/31/07 AWK was carrying approximately $2.5 billion of goodwill on the books. Annually AWK re-evaluates their goodwill and any lowered amount gets written down as an impairment charge on the earnings statements. AWK has had impairment charges of $396.3 million in 2005, $227.8 million in 2006 and $509.3 million in 2007. The large impairment charge in 2007 is due to lowered customer demand expectations going forward; their debt being placed on watch for a potential downgrade; the upcoming ipo and RWE's ownership divesture; and the continued high debt levels expected post-ipo. While these impairments are not cash flow losses, they do heavily impact the GAAP bottom line. I would expect continued hefty impairment loss expenses annually going forward.
Competitors include Aqua America (WTR), American States Water (AWR) and California Water Services Group (CWT).
Financials
Debt is the issue here. Utilities tend to be heavily leveraged and AWK is no exception. Debt post ipo will be approximately $5 billion in debt. A huge drag on this deal is that AWK will not be receiving any of the ipo monies. AWK could really use ipo cash to pay off debt and better position themselves for future acquisitions. However this ipo is nothing more than an exit strategy for parent company RWE. RWE will pocket all the ipo cash.
Dividend - AWK does plan on paying a quarterly dividend of $0.20. At an annualized $0.80, AWK would be yielding 3.2% on a $25 pricing.
Revenues have been rather flat the past three years. Utilities are generally not a growth industry, and again, AWK is no exception. Revenues in 2005 were $2.1 billion, in 2006 $2.1 billion and in 2007 $2.2 billion.
Due to the impairment charges noted above AWK booked a significant GAAP loss in 2007.
2007 - Revenues were $2.2 billion. Debt servicing expenses totaled nearly 13% of revenues. For a slim margin utility business, this amount of debt servicing expense will kill margins with or without impairment charges. Operating margins (pre debt servicing and impairment charges) were 24%. When plugging in debt servicing and the $509 million impairment charge, losses after tax were $2.13. To get a clearer picture of operations, we'll fold out that $509 million impairment charge. Folding that out AWK earned a fully taxed $1.00 per share. This latter number of $1 per share in earnings gives us a better picture of AWK's operation and valuation.
2008 - AWK will most likely take another impairment charge in 2008, so we'll see a much lower GAAP number than 'actual' earnings. Until AWK does their own internal assessment in the second half of 2008 we have no way of determining what that impairment charge may be, making GAAP earnings forecasts here next to impossible. We can however forecast AWK's business fairly easily as 2008 should look quite similar operationally as 2007. I would expect revenues to once again be in the $2.1 - $2.3 billion range with earnings per share in that $1.00 - $1.10 ballpark.
On a pricing of $25, AWK will be trading approximately 24- 25 X's 2007 and 2008 earnings and will be yielding 3.2%.
A quick look at '08 estimates and yield for AWK's three public competitors.
WTR - 23 X's '08 earnings, yielding 2.6% with $1.3 billion in debt and $2.6 billion market cap.
AWR - 21 X's '08 estimates, yielding 2.7% with $305 million in debt and a $650 million market cap.
CWT - 23 X's '08 estimates yielding 2.9% with $300 million in debt and a $834 million market cap.
Conclusion - For the amount of leverage and the spin-off nature of this ipo creating substantial share overhang, AWK is a pass for me. Valuation seems a bit aggressive for a water utility with substantial leverage. However we should note that on a PE/yield basis AWK is not coming public out of line with the sector at all. Note though that AWK's balance sheet is a bit more leveraged than the competition. Also we'll be seeing 90-100 million shares coming for sale later in 2008 as RWE completes their divesture. AWK's leverage and high annual capital expenses here will mute future acquisition related growth. Other than acquisitions, AWK will be hard pressed to substantially increase the bottom line. I just don't see much growth here over the next few years, quite similar to the past 3-4 years actually. 25 X's earnings for 2008 looks to be a bit steep. Not interested in range.
http://www.tradingipos.com
2008-04-11
AWK - American Water Works
AWK - American Water Works plans on offering 64 million shares (75.6 million if over-allotment is exercised) at a range of $24-$26. **Note** - All shares in this deal are being sold by insiders. AWK will receive no monies from this ipo. Fact is AWK is heavily leveraged and they most certainly could use ipo monies to pay off debt. However that is not going to occur.
Goldman Sachs, Citi, and Merrill Lynch are lead managing the deal. Co-managing will be nearly every firm on the street other than Bear Stearns. There are thirteen co-managing firms in all.
Post-ipo AWK will have 160 million shares outstanding for a market cap of $4 billion on a pricing of $25.
RWE will own essentially all non-floated AWK shares post ipo, an approximate 60% stake in AWK post-ipo. RWE is the selling shareholder in this deal, selling all 64 million shares, 75.6 million if over-allotment is exercised. RWE, a German operation, is one of Europe’s leading electricity and gas companies and supplies 20 million customers with electricity and 10 million customers with gas in Germany, the United Kingdom and Central and Eastern Europe. RWE purchased the then public American Water Works in early 2003 for $4.6 billion in cash.
This is a classic spin-off ipo as RWE plans on divesting themselves of their 60% stake in AWK as soon as possible (meaning right around that 180 day mark). Expect heavy future overhang here as RWE Aqua will be divesting approximately 90 million more shares of AWK sometime in late 2008.
Note - American Water Works has always toted around substantial debt. As a utility, in this case a water utility, it is common to see substantial debt as cash flows from this type of operation tend to be fairly predictable and not effected by economic cycles. When RWE purchased American Water Works five years ago, AWK had approximately $3.3 billion in debt. The public AWK in 2008 will have $5 billion in debt. It appears that a portion of the increased debt over the past five years has been due to RWE laying debt onto the back of AWK in order to fund payouts to RWE. If we look at the increased debt levels, RWE purchased American Water Works in for a total cash and debt-load interest of $7.9 billion. Assuming a pricing of $25, AWK post-ipo will have a total market cap plus debt consideration value of $9 billion.
Personally, I don't care what business one is in I'm always uncomfortable with a debt to capitalization level in AWK's post-ipo ballpark. $5 billion in debt and an expected initial market cap of $4 billion is a highly leveraged operation. So before we even look at the company, this deal has two serious strikes against it: 1) heavily leveraged with at least a portion of the leverage coming due to cash-out to parent company; 2) future overhang of approximately 90 million shares as RWE plans to completely spin-off their entire ownership of AWK by the end of 2008. I would expect these shares to come in the form of a hefty secondary as RWE is traded in Germany making a tax free dividend of AWK shares to RWE shareholders unlikely.
All things being equal the above is enough for me to pass on this ipo right here. Let's take a look at AWK the company to see if something might make me change my mind.
From the prospectus:
'Founded in 1886, American Water Works Company, Inc., which we refer to, together with its subsidiaries, as American Water or the Company, is the largest investor-owned United States water and wastewater utility company, as measured both by operating revenue and population served.'
AWK provides approximately 15.6 million people with drinking water, wastewater and other water-related services in 32 US states and Ontario, Canada. AWK treats and delivers over 1 billion gallons of water daily. AWK's primary water business is regulated as a utility by the Public Utility Commission (PUC). AWK's regulated business accounts for nearly 90% of overall revenues.
Residential water services account for 61% of revenues. Revenues from Pennsylvania and New Jersey account for approximately 45% of overall revenues.
Sector - In the US water and wastewater utility sector, government owned and operated entities make up the bulk of operators. Government owned systems account for approximately 84% of all United States community water systems and approximately 98% of all United States community wastewater systems. Commercially operated systems such as those run by AWK are in the minority. Overall there are an estimated 53,000 community water systems and approximately 16,000 community wastewater facilities in the United States. A strategy going forward for AWK will be to selectively acquire community based and run water and wastewater systems. For example in 12/07 AWK signed an agreement to purchase the water system assets of Trenton, NJ.
For our purposes, AWK is a water utility regulated in a very similar fashion as other utilities. Their utility business does provide a predictable and stable cash flow, however the prices AWK can charge for their services are highly regulated and controlled by the PUC.
Capital Expenditures - AWK spends a hefty amount on capital expenditures annually as they're required to continue to keep their infrastructure operating on a baseline level. As WK puts it in the prospectus: 'The water and wastewater utility business is capital intensive.' In 2007 AWK spent $759 million on capital expenditures.
Impairment charges - Since being acquired by RWE in 2003, AWK annually has listed hefty impairment charge losses on their earnings statements. This is directly related to the amount of goodwill on AWK's books due to the acquisition. As of 12/31/07 AWK was carrying approximately $2.5 billion of goodwill on the books. Annually AWK re-evaluates their goodwill and any lowered amount gets written down as an impairment charge on the earnings statements. AWK has had impairment charges of $396.3 million in 2005, $227.8 million in 2006 and $509.3 million in 2007. The large impairment charge in 2007 is due to lowered customer demand expectations going forward; their debt being placed on watch for a potential downgrade; the upcoming ipo and RWE's ownership divesture; and the continued high debt levels expected post-ipo. While these impairments are not cash flow losses, they do heavily impact the GAAP bottom line. I would expect continued hefty impairment loss expenses annually going forward.
Competitors include Aqua America (WTR), American States Water (AWR) and California Water Services Group (CWT).
Financials
Debt is the issue here. Utilities tend to be heavily leveraged and AWK is no exception. Debt post ipo will be approximately $5 billion in debt. A huge drag on this deal is that AWK will not be receiving any of the ipo monies. AWK could really use ipo cash to pay off debt and better position themselves for future acquisitions. However this ipo is nothing more than an exit strategy for parent company RWE. RWE will pocket all the ipo cash.
Dividend - AWK does plan on paying a quarterly dividend of $0.20. At an annualized $0.80, AWK would be yielding 3.2% on a $25 pricing.
Revenues have been rather flat the past three years. Utilities are generally not a growth industry, and again, AWK is no exception. Revenues in 2005 were $2.1 billion, in 2006 $2.1 billion and in 2007 $2.2 billion.
Due to the impairment charges noted above AWK booked a significant GAAP loss in 2007.
2007 - Revenues were $2.2 billion. Debt servicing expenses totaled nearly 13% of revenues. For a slim margin utility business, this amount of debt servicing expense will kill margins with or without impairment charges. Operating margins (pre debt servicing and impairment charges) were 24%. When plugging in debt servicing and the $509 million impairment charge, losses after tax were $2.13. To get a clearer picture of operations, we'll fold out that $509 million impairment charge. Folding that out AWK earned a fully taxed $1.00 per share. This latter number of $1 per share in earnings gives us a better picture of AWK's operation and valuation.
2008 - AWK will most likely take another impairment charge in 2008, so we'll see a much lower GAAP number than 'actual' earnings. Until AWK does their own internal assessment in the second half of 2008 we have no way of determining what that impairment charge may be, making GAAP earnings forecasts here next to impossible. We can however forecast AWK's business fairly easily as 2008 should look quite similar operationally as 2007. I would expect revenues to once again be in the $2.1 - $2.3 billion range with earnings per share in that $1.00 - $1.10 ballpark.
On a pricing of $25, AWK will be trading approximately 24- 25 X's 2007 and 2008 earnings and will be yielding 3.2%.
A quick look at '08 estimates and yield for AWK's three public competitors.
WTR - 23 X's '08 earnings, yielding 2.6% with $1.3 billion in debt and $2.6 billion market cap.
AWR - 21 X's '08 estimates, yielding 2.7% with $305 million in debt and a $650 million market cap.
CWT - 23 X's '08 estimates yielding 2.9% with $300 million in debt and a $834 million market cap.
Conclusion - For the amount of leverage and the spin-off nature of this ipo creating substantial share overhang, AWK is a pass for me. Valuation seems a bit aggressive for a water utility with substantial leverage. However we should note that on a PE/yield basis AWK is not coming public out of line with the sector at all. Note though that AWK's balance sheet is a bit more leveraged than the competition. Also we'll be seeing 90-100 million shares coming for sale later in 2008 as RWE completes their divesture. AWK's leverage and high annual capital expenses here will mute future acquisition related growth. Other than acquisitions, AWK will be hard pressed to substantially increase the bottom line. I just don't see much growth here over the next few years, quite similar to the past 3-4 years actually. 25 X's earnings for 2008 looks to be a bit steep. Not interested in range.
April 16, 2008, 2:47 pm
four on the schedule
A 'massive' amount of ipos on the schedule for the week of 4/21, four! We've analysis pieces in subscriber section currently for American Water Works, Whiting Trust and Intrepid Potash and will have Digital Domain published for subscribers by Thursday evening.
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A few new filings as well so we should see the ipo pace pick up a bit for May. Tradingipos.com is still here analyzing ipos, the market and actively trading and posting in our site forum....and we'll be here through every tough market too.
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A few new filings as well so we should see the ipo pace pick up a bit for May. Tradingipos.com is still here analyzing ipos, the market and actively trading and posting in our site forum....and we'll be here through every tough market too.
March 19, 2008, 9:39 pm
V - Visa
Yes we're still here. The ipo market has been quite quiet in 2008 with the market turmoil, economic slowdown and credit crisis. For first time since tradingipos.com went live three years back we've had very few ipos to analyze over the past few months. Here is our piece on Visa that was published for subscribers on 3/1. Off pricing this is a good deal and one of few in '08 to grab all allocations possible. Aftermarket this morning I felt it opened a bit too 'hot' at $60+ in this climate and would look at a print near $50 to enter for those not allocated.
Tradingipos.com pre-ipo piece:
2008-03-01
V - Visa
V - Visa plans on offering 446.6 million shares (assuming over-allotments) at a range of $37-$42. JP Morgan and Goldman Sachs are lead managing the deal, BofA, Citi, HSBC, Merrill Lynch, UBS and Wachovia co-managing. Post-ipo, V will have 849.2 million shares outstanding for a market cap of $33.54 billion on a pricing of $39.5.
If priced at $39.5, V's net proceeds (minus underwriter fees) from the ipo will be approximately $17.1 billion. V plans on utilizing ipos proceeds as follows: $3 billion placed in escrow to be used in possible litigation settlements; $10.2 billion to redeem class 'B' and class 'C' shares on ipo; $2.4 billion to redeem shares in 2008 (which will reduce overall share-count for V in '0; and the remaining $1.7 billion for general corporate purposes.
*Note - With share redemptions planned in 2008, V is forecasting a 10/08 share-count of 818 million total shares outstanding. At a price of $39.5, V will have a market cap of $32.3 billion come 10/08 assuming they fulfill their share redemption plans.
Post-ipo, JP Morgan Chase will own 8% of V and Bank of America will own 4%. JP Morgan Chase and Bank of America are Visa's two largest customers globally and each generates more than twice the issuing volume of Visa's next largest customer.
Until 10/07 Visa was organized into five separate entities Visa U.S.A., Visa International, Visa Canada, Visa Europe and Inovant. In 10/07, in preparation for this ipo, Visa reorganized, and all but Visa Europe came under one umbrella for the ipo Visa (V). Visa Europe opted to not become a subsidiary of the soon to be public V; instead remaining owned by a consortium of member financial institutions. Much of the planned share repurchased in 2008 will be shares owned by Visa Europe.
From the prospectus:
'Visa operates the world’s largest retail electronic payments network and manages the world’s most recognized global financial services brand. We have more branded credit and debit cards in circulation, more transactions and greater total volume than any of our competitors. We facilitate global commerce through the transfer of value and information among financial institutions, merchants, consumers, businesses and government entities.'
Worldwide there are an estimated 1.5 billion cards carrying the Visa brand.
The direct comparable here is Mastercard (MA). MA and V's primary competitors are large banks that utilize the payment processing platforms for consumer credit cards, debit cards, prepaid credit and commercial payments. The business driver here is the ongoing worldwide shift from paper-based payments such as cash and checks to card based and other electronic payments. These card transactions globally have grown an average of 14% annually over the past 6 years. Over the next five years annual growth is expected to be 11%, led by strong growth projected in Asia.
Revenues are generated from card service fees, data processing fees and international transaction fees. As with Mastercard, Visa does not issue cards, set customer fees or determine credit card interest rates.
Visa has three core aspects to their business: transaction processing services, product platforms and payments network management.
Transaction processing services - Routing of payment information and related data to facilitate the authorization, clearing and settlement of transactions between Visa issuers, which are the financial institutions that issue Visa cards to cardholders, and acquirers, which are the financial institutions that offer Visa network connectivity and payment acceptance services to merchants.
Product platforms - These are actual cards with the Visa logo. Visa offers their platforms to financial institutions to brand with their bank name. Visa platforms include credit cards, debit cards, prepaid cards and business cards/accounts.
Payments network management - Visa's advertising segment to promote their transaction processing services and product platforms....in other words to promote the Visa brand name.
In 2006 Visa cardholders conducted over 44 billion transactions, nearly double Mastercard's $23.4 million transactions. Total transaction volume was $3.2 billion, well above Mastercard's $1.9 billion. A key to Visa's success has been grabbing the bulk of the debit card market from the large US financial institutions. Over the past decade as debit card use has increased annually at a rapid rate, Visa has been able to annually grow their market share in this niche.
In FY '07 Visa increased their number of transactions annually by 13%. Thus far in FY '08 that transaction growth rate has been 12%.
Thus far in FY '08 Credit cards accounted for 56% of dollar transaction volume, debit cards 32% of dollar transaction volume, and commercial(and other) 12% of dollar transaction volume. In the US debit volumes have surpassed credit volumes, however credit revenues dominate in V's International segment.
Visa makes an average of $0.07 per transaction. The US accounts for approximately 66% of annual revenues with Asia/Pacific accounting for 14%.
Top five customers account for 22% of annual revenues. Largest, JP Morgan Chase accounts for approximately 7% of annual revenues.
Legal
Since 2005, there have been approximately 50 class action and individual lawsuits filed by merchants over interchange fees. Interchange fees are the fees received by issuing financial institutions when one of their cards is used in a transaction. The fee is ultimately paid by the merchant with whom the transaction took place. Visa sets default interchange fees and acts as a 'middle-man' in collection and remittance of interchange fees. The suits allege that Visa setting their own interchange default rates violate federal and state antitrust laws.
Also American Express and Discover filed suit against both Mastercard and Visa claiming they restrained competition by prohibiting client banks from also offering Discover and American Express cards. In 11/07 Visa reached a settlement with American Express.
Visa is setting aside $3 billion of the ipo money for settlements and future judgments. Visa believes that insured coverage as well as the ipo money set aside will be sufficient to cover the above legal issues.
Financials
$5 per share in cash.
V intends to pay a quarterly dividend of $0.105 per share. At an annualized $0.42, V would yield 1.1% on a pricing of $39.5.
Historically V's fiscal year has ended 6/30 annually. With the reorganization it appears Visa has shifted their fiscal year to 9/30 annually. Financials in the prospectus have shifted to 9/30 so that is what we will go with.
Note - Much as with Mastercard, Visa does not have credit exposure. Visa derives their revenues from service and transaction processing fees. There is economic slowdown risk here as a slowing economy may mean less use of credit and debit cards. The overall organic shift to use of plastic instead of paper should mitigate some of that risk however. In addition, Visa is banking on the increased use of plastic in Asia/Pacific to fuel the majority of growth going forward.
As Visa recently consolidated their operations, historical comparisons are not valid. In the prospectus V does breakdown FY '06 and FY '07 'pro forma' as if the consolidation had occurred prior to FY '06. Going back further than FY '06 doesn't offer a valid comparison on the financials here.
V had a fantastic FY '07(ending 9/30/07). We'll look at V's financials for both FY '07 and FY '08. Note that these numbers are pro forma and take a look historically at the numbers as if V was structured then as they will be post-ipo. Also V had a litigation settlement charge in FY '07 concerning the American Express settlement that impacted the bottom line. I folded that out as it is a non-recurring charge and only serves to cloud V's operational picture post-ipo.
FY '07(ending 9/30/07) - V has a phenomenal fiscal year 2007. Revenues were $5.2 billion, a 33% increase over FY '06. Asia/Pacific and US debit card usage were the key growth drivers. V does issue volume and support incentives back to their financials customers and those rebates are included in the $5.2 billion number. For a middle man type business V had strong operating margins at 29%. The Visa brand name and worldwide market leadership play into the strong operating margins. In comparison, Mastercard's operating margins for FY '07 were 25%. Plugging in full taxes, net margins were a solid 19%. Operationally, EPS was $1.23 after taxes in FY '07. **Note the actual GAAP numbers show a loss for FY '07. This is due to the American Express litigation settlement set-aside.. On a pricing of $39.50, V would trade 32 X's trailing earnings.
FY '08(ending 9/30/0
V's previous four quarterly revenue run rates: 3/07 - $1.19 billion; 6/07 - $1.36 billion; 9/07 - $1.46 billion; 12/07 - $1.488 billion.
The pace of V's growth has definitely slowed as the US economy has slowed in the back half of 2007. Still Visa has been able to grow quarterly sequential growth 7% in 9/07 and 2% in 12/07 amidst a more challenging environment. The growth again has been fueled by increased revenues in Asia/Pacific/Latin America and by continued shift to increased debit card usage. Those two factors should allow Visa to grow revenues in '08 even if V's US credit card segment slows.
Revenues for FY '08 should be in the $6 billion range. This would represent a solid 15% revenue increase over FY '07 and models in a very conservative figure for US revenue growth. Fueling revenues in FY '08 is a policy initiated in the second half of 2007- rolling out more aggressive fees outside the US. The new fees are specifically designed to maximize V's profit margins outside the US and look to favorably impact operating margins.
Operating margins look to increase driven by the increased non-US fees. Also Visa has aggressively implemented an outsourcing program and significantly reduced headcount throughout 2007. Visa has a nice double-shot here of pricing power internationally while able to keep operating expenses fairly stable due to outsourcing savings. V's strong margin quarter has historically been the 12/07 quarter as they tend to put on the books heavier advertising expenses in their last quarter of the fiscal year (9/30). Still based on the 12/07 quarter, combined with recent trends I could see V increasing gross margins in FY '08 to 34%, a strong gain on FY '07's 29%. Net margins should be 22%. Earnings per share should hit $1.60 driven by both solid revenue growth and the increased operating margins. On a pricing of $39.50 V would trade 25 X's FY '08 earnings.
A quick comparison with V and MA
MA - $24.9 billion market cap, currently trading 25 X's FY '08 earnings with an anticipated 15% revenue growth rate.
V - On a $39.50 pricing, would have a 33.5 billion market cap and trade 25 X's FY '08 earnings with an anticipated 15% revenue growth rate.
The pricing range here is not an accident. Visa is being priced to match Mastercard's valuation. The key difference and driver here is Visa is larger than Mastercard and has a stranglehold on the important US debit card market. Visa is also being very aggressive in both Asia and Latin America. While the US economic slowdown in '08 could slow V a bit in the short term, they're positioning themselves for strong worldwide growth into the foreseeable future. A market leading brand fueled by both international growth and the shift in the US to electronic payments, make 25 X's FY '08 earnings here on pricing very attractive. Visa should trade at a bit of a premium to MA in my opinion and in range it is being priced to match MA's valuation. Note too that my FY '08 V estimates are a bit conservative here due to the current cloudy US economic environment.
Blue chip ipo, strong recommend in range.
Tradingipos.com pre-ipo piece:
2008-03-01
V - Visa
V - Visa plans on offering 446.6 million shares (assuming over-allotments) at a range of $37-$42. JP Morgan and Goldman Sachs are lead managing the deal, BofA, Citi, HSBC, Merrill Lynch, UBS and Wachovia co-managing. Post-ipo, V will have 849.2 million shares outstanding for a market cap of $33.54 billion on a pricing of $39.5.
If priced at $39.5, V's net proceeds (minus underwriter fees) from the ipo will be approximately $17.1 billion. V plans on utilizing ipos proceeds as follows: $3 billion placed in escrow to be used in possible litigation settlements; $10.2 billion to redeem class 'B' and class 'C' shares on ipo; $2.4 billion to redeem shares in 2008 (which will reduce overall share-count for V in '0
; and the remaining $1.7 billion for general corporate purposes.*Note - With share redemptions planned in 2008, V is forecasting a 10/08 share-count of 818 million total shares outstanding. At a price of $39.5, V will have a market cap of $32.3 billion come 10/08 assuming they fulfill their share redemption plans.
Post-ipo, JP Morgan Chase will own 8% of V and Bank of America will own 4%. JP Morgan Chase and Bank of America are Visa's two largest customers globally and each generates more than twice the issuing volume of Visa's next largest customer.
Until 10/07 Visa was organized into five separate entities Visa U.S.A., Visa International, Visa Canada, Visa Europe and Inovant. In 10/07, in preparation for this ipo, Visa reorganized, and all but Visa Europe came under one umbrella for the ipo Visa (V). Visa Europe opted to not become a subsidiary of the soon to be public V; instead remaining owned by a consortium of member financial institutions. Much of the planned share repurchased in 2008 will be shares owned by Visa Europe.
From the prospectus:
'Visa operates the world’s largest retail electronic payments network and manages the world’s most recognized global financial services brand. We have more branded credit and debit cards in circulation, more transactions and greater total volume than any of our competitors. We facilitate global commerce through the transfer of value and information among financial institutions, merchants, consumers, businesses and government entities.'
Worldwide there are an estimated 1.5 billion cards carrying the Visa brand.
The direct comparable here is Mastercard (MA). MA and V's primary competitors are large banks that utilize the payment processing platforms for consumer credit cards, debit cards, prepaid credit and commercial payments. The business driver here is the ongoing worldwide shift from paper-based payments such as cash and checks to card based and other electronic payments. These card transactions globally have grown an average of 14% annually over the past 6 years. Over the next five years annual growth is expected to be 11%, led by strong growth projected in Asia.
Revenues are generated from card service fees, data processing fees and international transaction fees. As with Mastercard, Visa does not issue cards, set customer fees or determine credit card interest rates.
Visa has three core aspects to their business: transaction processing services, product platforms and payments network management.
Transaction processing services - Routing of payment information and related data to facilitate the authorization, clearing and settlement of transactions between Visa issuers, which are the financial institutions that issue Visa cards to cardholders, and acquirers, which are the financial institutions that offer Visa network connectivity and payment acceptance services to merchants.
Product platforms - These are actual cards with the Visa logo. Visa offers their platforms to financial institutions to brand with their bank name. Visa platforms include credit cards, debit cards, prepaid cards and business cards/accounts.
Payments network management - Visa's advertising segment to promote their transaction processing services and product platforms....in other words to promote the Visa brand name.
In 2006 Visa cardholders conducted over 44 billion transactions, nearly double Mastercard's $23.4 million transactions. Total transaction volume was $3.2 billion, well above Mastercard's $1.9 billion. A key to Visa's success has been grabbing the bulk of the debit card market from the large US financial institutions. Over the past decade as debit card use has increased annually at a rapid rate, Visa has been able to annually grow their market share in this niche.
In FY '07 Visa increased their number of transactions annually by 13%. Thus far in FY '08 that transaction growth rate has been 12%.
Thus far in FY '08 Credit cards accounted for 56% of dollar transaction volume, debit cards 32% of dollar transaction volume, and commercial(and other) 12% of dollar transaction volume. In the US debit volumes have surpassed credit volumes, however credit revenues dominate in V's International segment.
Visa makes an average of $0.07 per transaction. The US accounts for approximately 66% of annual revenues with Asia/Pacific accounting for 14%.
Top five customers account for 22% of annual revenues. Largest, JP Morgan Chase accounts for approximately 7% of annual revenues.
Legal
Since 2005, there have been approximately 50 class action and individual lawsuits filed by merchants over interchange fees. Interchange fees are the fees received by issuing financial institutions when one of their cards is used in a transaction. The fee is ultimately paid by the merchant with whom the transaction took place. Visa sets default interchange fees and acts as a 'middle-man' in collection and remittance of interchange fees. The suits allege that Visa setting their own interchange default rates violate federal and state antitrust laws.
Also American Express and Discover filed suit against both Mastercard and Visa claiming they restrained competition by prohibiting client banks from also offering Discover and American Express cards. In 11/07 Visa reached a settlement with American Express.
Visa is setting aside $3 billion of the ipo money for settlements and future judgments. Visa believes that insured coverage as well as the ipo money set aside will be sufficient to cover the above legal issues.
Financials
$5 per share in cash.
V intends to pay a quarterly dividend of $0.105 per share. At an annualized $0.42, V would yield 1.1% on a pricing of $39.5.
Historically V's fiscal year has ended 6/30 annually. With the reorganization it appears Visa has shifted their fiscal year to 9/30 annually. Financials in the prospectus have shifted to 9/30 so that is what we will go with.
Note - Much as with Mastercard, Visa does not have credit exposure. Visa derives their revenues from service and transaction processing fees. There is economic slowdown risk here as a slowing economy may mean less use of credit and debit cards. The overall organic shift to use of plastic instead of paper should mitigate some of that risk however. In addition, Visa is banking on the increased use of plastic in Asia/Pacific to fuel the majority of growth going forward.
As Visa recently consolidated their operations, historical comparisons are not valid. In the prospectus V does breakdown FY '06 and FY '07 'pro forma' as if the consolidation had occurred prior to FY '06. Going back further than FY '06 doesn't offer a valid comparison on the financials here.
V had a fantastic FY '07(ending 9/30/07). We'll look at V's financials for both FY '07 and FY '08. Note that these numbers are pro forma and take a look historically at the numbers as if V was structured then as they will be post-ipo. Also V had a litigation settlement charge in FY '07 concerning the American Express settlement that impacted the bottom line. I folded that out as it is a non-recurring charge and only serves to cloud V's operational picture post-ipo.
FY '07(ending 9/30/07) - V has a phenomenal fiscal year 2007. Revenues were $5.2 billion, a 33% increase over FY '06. Asia/Pacific and US debit card usage were the key growth drivers. V does issue volume and support incentives back to their financials customers and those rebates are included in the $5.2 billion number. For a middle man type business V had strong operating margins at 29%. The Visa brand name and worldwide market leadership play into the strong operating margins. In comparison, Mastercard's operating margins for FY '07 were 25%. Plugging in full taxes, net margins were a solid 19%. Operationally, EPS was $1.23 after taxes in FY '07. **Note the actual GAAP numbers show a loss for FY '07. This is due to the American Express litigation settlement set-aside.. On a pricing of $39.50, V would trade 32 X's trailing earnings.
FY '08(ending 9/30/0
V's previous four quarterly revenue run rates: 3/07 - $1.19 billion; 6/07 - $1.36 billion; 9/07 - $1.46 billion; 12/07 - $1.488 billion.
The pace of V's growth has definitely slowed as the US economy has slowed in the back half of 2007. Still Visa has been able to grow quarterly sequential growth 7% in 9/07 and 2% in 12/07 amidst a more challenging environment. The growth again has been fueled by increased revenues in Asia/Pacific/Latin America and by continued shift to increased debit card usage. Those two factors should allow Visa to grow revenues in '08 even if V's US credit card segment slows.
Revenues for FY '08 should be in the $6 billion range. This would represent a solid 15% revenue increase over FY '07 and models in a very conservative figure for US revenue growth. Fueling revenues in FY '08 is a policy initiated in the second half of 2007- rolling out more aggressive fees outside the US. The new fees are specifically designed to maximize V's profit margins outside the US and look to favorably impact operating margins.
Operating margins look to increase driven by the increased non-US fees. Also Visa has aggressively implemented an outsourcing program and significantly reduced headcount throughout 2007. Visa has a nice double-shot here of pricing power internationally while able to keep operating expenses fairly stable due to outsourcing savings. V's strong margin quarter has historically been the 12/07 quarter as they tend to put on the books heavier advertising expenses in their last quarter of the fiscal year (9/30). Still based on the 12/07 quarter, combined with recent trends I could see V increasing gross margins in FY '08 to 34%, a strong gain on FY '07's 29%. Net margins should be 22%. Earnings per share should hit $1.60 driven by both solid revenue growth and the increased operating margins. On a pricing of $39.50 V would trade 25 X's FY '08 earnings.
A quick comparison with V and MA
MA - $24.9 billion market cap, currently trading 25 X's FY '08 earnings with an anticipated 15% revenue growth rate.
V - On a $39.50 pricing, would have a 33.5 billion market cap and trade 25 X's FY '08 earnings with an anticipated 15% revenue growth rate.
The pricing range here is not an accident. Visa is being priced to match Mastercard's valuation. The key difference and driver here is Visa is larger than Mastercard and has a stranglehold on the important US debit card market. Visa is also being very aggressive in both Asia and Latin America. While the US economic slowdown in '08 could slow V a bit in the short term, they're positioning themselves for strong worldwide growth into the foreseeable future. A market leading brand fueled by both international growth and the shift in the US to electronic payments, make 25 X's FY '08 earnings here on pricing very attractive. Visa should trade at a bit of a premium to MA in my opinion and in range it is being priced to match MA's valuation. Note too that my FY '08 V estimates are a bit conservative here due to the current cloudy US economic environment.
Blue chip ipo, strong recommend in range.
January 25, 2008, 6:27 pm
RMG - RiskMetrics
RiskMetrics ipo'd this morning. following is our full pre-ipo analysis piece. This was available to http://www.tradingipos.com subscribers on January 15th.
Disclosure: Tradingipos.com does have a position in RMG.
2008-01-15
RMG - RiskMetrics
RMG - RiskMetrics Group plans on offering 16.1 million shares(assuming over-allotments) at a range of $17-$19. Insiders are selling 4 million shares in the deal. Credit Suisse, Goldman Sachs and BofA are leading the deal, Citi, Merrill Lynch and Morgan Stanley are co-managing. Post-ipo RMG will have 59.9 million shares outstanding for a market cap of $1.078 billion on a pricing of $18. The bulk of ipo proceeds will go to repay debt.
General Atlantic Partners will own 22% of RMG post-ipo.
From the prospectus:
'We are a leading provider of risk management and corporate governance products and services to participants in the global financial markets. We enable clients to better understand and manage the risks associated with their financial holdings, provide greater transparency to their internal and external constituencies, satisfy regulatory and reporting requirements and make more informed investment decisions.'
RMG operates under two segments, risk management(RickMetrics) and corporate governance(ISS). RMG acquired their corporate governance segment ISS in January 2007 for $542 million in total consideration. RMG has 3,500 clients in 55 countries. Clients include asset managers, hedge funds, pension funds, banks, insurance companies, financial advisers and corporations. Among clients are 70 of the 100 largest investment managers, 34 of the 50 largest mutual fund companies, 41 of the 50 largest hedge funds and each of the 10 largest global investment banks.
RMG is a play on the growth of managed assets globally coupled with the ever increasing complication and intertwining of securities and derivatives.
RiskMetrics - Multi-asset, position-based risk and wealth management products and services. What does that mean? RMG's products help investment managers quantify portfolio risk across a broad range of security products, geographies and markets. Interestingly RMG utilizes transparent processes and algorithms to model risk and portfolio positions. RMG first published their processes in 1994 and continuously updates. Customers subscribe to RMG's applications, interactive analytics and risk reports based on consistently-modeled market data that are integrated with their holdings. RMG's database includes over four million active global securities across 150,000 issuers, spanning 200 countries, 220 exchanges, 11,000 global benchmarks updated daily. RMG believes their dbase covers nearly all equity, fixed income and derivatives in clients portfolios.
RMG's risk management products allow customers to:
1) measure their trading, credit and counterparty risk;
2) monitor and comply with internal or external exposure and risk limits;
3) deploy and optimize their use of capital;
4) communicate risk in a transparent fashion to regulators, investors, clients and creditors;
ISS - RMG's corporate governance segment acquired in January 2007. RMG offers an outsourced proxy research, voting and vote reporting service to assist companies with their proxy voting responsibilities. RMG's web based product offers a full proxy voting solution, from policy creation to comprehensive research, vote recommendations, reliable vote execution, post-vote disclosure and reporting and analytical tools. ISS growth in recent years has been derived from the increase in corporate regulatory oversight. In 2006 ISS provided proxy research and vote recommendations for more than 38,000 shareholder meetings across approximately 100 countries and voted approximately 7.6 million ballots on behalf of clients, representing almost 700 billion shares.
Revenues are derived primarily on an annual subscription basis. through the first nine months of 2007 93% of revenues were derived from annual subscriptions with a strong renewal rate of 91%. The high renewal rate leads to strong recurring revenues annually.
Customers breakdown is as follows: 35% investment managers; 21% alternative investment managers; 15% banking and trading; 6% mutual funds; 6% pension funds; 5% corporate; 5% custodians; 4% insurance and 3% other.
63% of revenues is US, 37% international.
Financials
In addition to the acquisition of ISS, RMG also recently acquired CFRA. To fund these acquisitions RMG took on debt. Post-ipo, RMF will have approximately $314 million in debt on the books.
RMG does not plan on paying dividends.
Revenues from both segments(RiskMetrics/ISS) are roughly equal. The bottom line in 2007 has really been negatively impacted from the ISS acquisition due to increased debt servicing and amortization costs. The acquisition doubled RMG's total revenue stream and in the long run should be beneficial. However as far as GAAP earnings go, the ISS acquisition will really put a damper on the bottom line in 2007 and beyond.
As ISS wasn't acquired until 1/07, we have to combine the two entities for historical revenues. Total revenues were $177 million in 2005, $205 million for 2006 and through the first nine months of 2007 on pace for $235-$240 million.
2007. Revenues are on pace for $235-$240 million, a 15% increase over combined pro-forma 2006 revenues. *Note that the expense numbers that follow take into account the removal of one-time acquisition expenses as well as debt paid of on ipo. Gross margins are a solid 66%. Operating expense ratio should be 38%, putting operating margins at 28%. So far, so good. the issue here is the debt laid on to acquire ISS and the amortization charges. Amortization charges(which do not impact cash flows) should eat up 1/4 of operating margins and debt servicing(which does impact cash flows) should eat up 1/3 of operating margins. Net margins after taxes then should be 7%. Earnings per share should be $0.25-$0.30. On a pricing of $18, RMG would trade 65 X's 2007 earnings. Removing the amortization charges related to the ISS acquisition would mean RMG would net between $0.45-$0.50 per share. In my opinion this second number is more indicative of RMG's cash flows and real earnings.
2008 - Both RMG's segments have a proven track record of 10%-15% organic growth and there is every indication that should continue into 2008. Risk management assessment and corporate governance are two segments that should not be negatively impacted by a slowdown in the financials or the worldwide economy. RMG's subscription fees are not based on assets under management. Assuming a 10%-15% revenues increase in 2008 to $270 million, RMG should be able to put $0.40 on the GAAP bottom line. RMG will continue to carry acquisition amortization expenses through 2008, folding those out would bring $0.60 on the bottom line.
Conclusion - RMG has 'GAAP handicap' due to the acquisition of ISS. The $300 million in debt-post ipo is a very real earnings drag here, however this debt was brought on to double RMG's revenues and bring in a new segment, corporate governance. As mutual and investment funds utilize both RMG's risk management products as well as corporate governance proxy services, the acquisition was a good fit overall for RMG. It does however negatively impact the bottom line. As separate entities, RMG/ISS would earn a combined $0.75-$0.80 in 2007. Together with the added debt/amortization, that number drops to $0.25-$0.30. The bottom line here doesn't really indicate the nice niche and strong underlying business of RMG. Based on the organic strength of each underlying segment and the estimated 2008 cash flows, RMG is a recommend in range. Keep in mind RMG will look expensive on a PE level over the next 2-3 years which in this environment is probably reason enough not to pay up here. However I like both segments here quite a bit and even with the debt on hand post-ipo this is a recommend in range. The two parts here are greater than the sum on ipo....I suspect eventually the 'sum' will catch up.
Disclosure: Tradingipos.com does have a position in RMG.
2008-01-15
RMG - RiskMetrics
RMG - RiskMetrics Group plans on offering 16.1 million shares(assuming over-allotments) at a range of $17-$19. Insiders are selling 4 million shares in the deal. Credit Suisse, Goldman Sachs and BofA are leading the deal, Citi, Merrill Lynch and Morgan Stanley are co-managing. Post-ipo RMG will have 59.9 million shares outstanding for a market cap of $1.078 billion on a pricing of $18. The bulk of ipo proceeds will go to repay debt.
General Atlantic Partners will own 22% of RMG post-ipo.
From the prospectus:
'We are a leading provider of risk management and corporate governance products and services to participants in the global financial markets. We enable clients to better understand and manage the risks associated with their financial holdings, provide greater transparency to their internal and external constituencies, satisfy regulatory and reporting requirements and make more informed investment decisions.'
RMG operates under two segments, risk management(RickMetrics) and corporate governance(ISS). RMG acquired their corporate governance segment ISS in January 2007 for $542 million in total consideration. RMG has 3,500 clients in 55 countries. Clients include asset managers, hedge funds, pension funds, banks, insurance companies, financial advisers and corporations. Among clients are 70 of the 100 largest investment managers, 34 of the 50 largest mutual fund companies, 41 of the 50 largest hedge funds and each of the 10 largest global investment banks.
RMG is a play on the growth of managed assets globally coupled with the ever increasing complication and intertwining of securities and derivatives.
RiskMetrics - Multi-asset, position-based risk and wealth management products and services. What does that mean? RMG's products help investment managers quantify portfolio risk across a broad range of security products, geographies and markets. Interestingly RMG utilizes transparent processes and algorithms to model risk and portfolio positions. RMG first published their processes in 1994 and continuously updates. Customers subscribe to RMG's applications, interactive analytics and risk reports based on consistently-modeled market data that are integrated with their holdings. RMG's database includes over four million active global securities across 150,000 issuers, spanning 200 countries, 220 exchanges, 11,000 global benchmarks updated daily. RMG believes their dbase covers nearly all equity, fixed income and derivatives in clients portfolios.
RMG's risk management products allow customers to:
1) measure their trading, credit and counterparty risk;
2) monitor and comply with internal or external exposure and risk limits;
3) deploy and optimize their use of capital;
4) communicate risk in a transparent fashion to regulators, investors, clients and creditors;
ISS - RMG's corporate governance segment acquired in January 2007. RMG offers an outsourced proxy research, voting and vote reporting service to assist companies with their proxy voting responsibilities. RMG's web based product offers a full proxy voting solution, from policy creation to comprehensive research, vote recommendations, reliable vote execution, post-vote disclosure and reporting and analytical tools. ISS growth in recent years has been derived from the increase in corporate regulatory oversight. In 2006 ISS provided proxy research and vote recommendations for more than 38,000 shareholder meetings across approximately 100 countries and voted approximately 7.6 million ballots on behalf of clients, representing almost 700 billion shares.
Revenues are derived primarily on an annual subscription basis. through the first nine months of 2007 93% of revenues were derived from annual subscriptions with a strong renewal rate of 91%. The high renewal rate leads to strong recurring revenues annually.
Customers breakdown is as follows: 35% investment managers; 21% alternative investment managers; 15% banking and trading; 6% mutual funds; 6% pension funds; 5% corporate; 5% custodians; 4% insurance and 3% other.
63% of revenues is US, 37% international.
Financials
In addition to the acquisition of ISS, RMG also recently acquired CFRA. To fund these acquisitions RMG took on debt. Post-ipo, RMF will have approximately $314 million in debt on the books.
RMG does not plan on paying dividends.
Revenues from both segments(RiskMetrics/ISS) are roughly equal. The bottom line in 2007 has really been negatively impacted from the ISS acquisition due to increased debt servicing and amortization costs. The acquisition doubled RMG's total revenue stream and in the long run should be beneficial. However as far as GAAP earnings go, the ISS acquisition will really put a damper on the bottom line in 2007 and beyond.
As ISS wasn't acquired until 1/07, we have to combine the two entities for historical revenues. Total revenues were $177 million in 2005, $205 million for 2006 and through the first nine months of 2007 on pace for $235-$240 million.
2007. Revenues are on pace for $235-$240 million, a 15% increase over combined pro-forma 2006 revenues. *Note that the expense numbers that follow take into account the removal of one-time acquisition expenses as well as debt paid of on ipo. Gross margins are a solid 66%. Operating expense ratio should be 38%, putting operating margins at 28%. So far, so good. the issue here is the debt laid on to acquire ISS and the amortization charges. Amortization charges(which do not impact cash flows) should eat up 1/4 of operating margins and debt servicing(which does impact cash flows) should eat up 1/3 of operating margins. Net margins after taxes then should be 7%. Earnings per share should be $0.25-$0.30. On a pricing of $18, RMG would trade 65 X's 2007 earnings. Removing the amortization charges related to the ISS acquisition would mean RMG would net between $0.45-$0.50 per share. In my opinion this second number is more indicative of RMG's cash flows and real earnings.
2008 - Both RMG's segments have a proven track record of 10%-15% organic growth and there is every indication that should continue into 2008. Risk management assessment and corporate governance are two segments that should not be negatively impacted by a slowdown in the financials or the worldwide economy. RMG's subscription fees are not based on assets under management. Assuming a 10%-15% revenues increase in 2008 to $270 million, RMG should be able to put $0.40 on the GAAP bottom line. RMG will continue to carry acquisition amortization expenses through 2008, folding those out would bring $0.60 on the bottom line.
Conclusion - RMG has 'GAAP handicap' due to the acquisition of ISS. The $300 million in debt-post ipo is a very real earnings drag here, however this debt was brought on to double RMG's revenues and bring in a new segment, corporate governance. As mutual and investment funds utilize both RMG's risk management products as well as corporate governance proxy services, the acquisition was a good fit overall for RMG. It does however negatively impact the bottom line. As separate entities, RMG/ISS would earn a combined $0.75-$0.80 in 2007. Together with the added debt/amortization, that number drops to $0.25-$0.30. The bottom line here doesn't really indicate the nice niche and strong underlying business of RMG. Based on the organic strength of each underlying segment and the estimated 2008 cash flows, RMG is a recommend in range. Keep in mind RMG will look expensive on a PE level over the next 2-3 years which in this environment is probably reason enough not to pay up here. However I like both segments here quite a bit and even with the debt on hand post-ipo this is a recommend in range. The two parts here are greater than the sum on ipo....I suspect eventually the 'sum' will catch up.
January 13, 2008, 7:17 pm
VRAD - Virtual Radiologic
The 2008 ipo calendar kicks off this week with three new deals. As we've been doing annually, tradingipos.com will have full analysis pieces on every deal available to subscribers pre-ipo again in 2008. Wish everyone a profitable '08.
this week's free blog piece is an interesting medical ipo thst debuted bacin in November, VRAD. As has been the custom, we'll post 10-20 free analysis pieces on this blog post-ipo in 2008, while every analysis piece on every deal is available to subscribers pre-ipo. we also have a number of professional traders posting on our subscriber forum daily as well.
http://www.tradingipos.com
2007-11-08
VRAD - Virtual Radiologic
VRAD - Virtual Radiologic plans on offering 4.6 million shares(assuming over-allotments) at a range of $16-$18. Goldman Sachs is leading the deal, Merrill Lynch and William Blair co-managing. Post-ipo VRAD will have 16.4 million shares outstanding for a market cap of $279 million on a pricing of $17. Approximately 50% of ipo proceeds will be used to redeem debt, the remainder for general corporate purposes.
President and CEO Sean Casey will own 25% of VRAD post ipo.
From the prospectus:
'We believe we are one of the leading providers of remote diagnostic image interpretation, or teleradiology, services in the United States. According to Frost & Sullivan, we are the second largest provider of teleradiology services in the United States.'
The leader in this space is 2006 ipo NHWK, Nighthawk.
VRAD provides remote diagnostic image interpretations, or reads, 24 hours a day, seven days a week, 365 days a year. Customers include radiology practices, hospitals, clinics and diagnostic imaging centers. The differentiator with VRAD compared to NHWK appears to be that VRAD's radiologists can work remotely from anywhere in the US, while NHWK's US staff is all located at their facility in Idaho.
Digital diagnostic imaging is expected to grow 15% annually over the next three years. 500 million procedures are expected by 2009. Sector is being driven by an aging population, advances in diagnostic imaging technologies and the growing availability of imaging equipment in hospitals and clinics, as well as by more frequent physician referrals for diagnostic imaging. However the projected number of radiologists is expected to grow just 2% annually in the US. The slower pace of radiologist growth coupled with the 24/7 365 demand has pushed hospitals/clinics to outsource some of their radiologist needs.
VRAD has affiliations with 121 radiologists. Reads include computed tomography, or CT scans, magnetic resonance imaging, or MRI, and ultrasound. VRAD is compensated directly by their customers and does not directly depend on third party reimbursement. VRAD has provided services to 457 customers serving 787 medical facilities, which includes 736 hospitals, representing approximately 13% of hospitals in the United States. 98% of contracts up for renewal have been renewed.
Same site sales growth has been strong indication that once VRAD sells in their remote radiology services, the revenue stream per location grows. Same site growth for 2005 was 24%, 2006 was 20% and through first nine months of 2007 17%.
Legal - In 7/07 Merge eMed filed a patent infringement suit against VRAD. The suit claims VRAD infringed on Merge eMed's teleradiology patent. Case is in a very stage currently.
Financials
$2 per share in cash post-ipo, no debt.
Revenues have grown swiftly as VRAD has added new radiologists, sites and grown revenues in existing sites. Revenues in 2005 were $27 million, doubling to $54 million in 2006 and through first nine months of 2007 on pace for $90 million.
Eight straight quarters of sequential revenue growth. VRAD shifted into profitability in 2006.
2007 - Note that due directly to the fast rise in fair value of VRAD, they've booked pretty hefty stock compensation expenses in 2006/2007. VRAD does not have excessive options and this line will fall significantly post-ipo. I've smoothed out stock compensation expense a bit for 2007 numbers as if they were a public company at IPO price for all of 2007. Revenues on track for $90 million, a 67% increase over 2006. The largest expense line is physician cash expenses at 45%. As this is an operation that depends entirely on their physician radiologists, this expense line will always be significant at the 45% level of revenues. Operating margins which have been increasing annually should be 14%. Net margins should be 9%. Earnings per share of approximately $0.50. On a pricing of $17, VRAD would trade 34 X's 2007 earnings.
2008 - VRAD has shown an ability to grow revenues sequentially, I don't see why that should halt in 2008. If we assume conservative sequential quarterly growth through 2008, I would not be surprised to see VRAD hit $120-$125 million in revenues. This would be a 36% increase over 2007 and might be a tad conservative as VRAD has increased revenues 100% and 67% in '06 and '07 respectively. Still, I'd rather be conservative when forecasting. Operating margins should improve a bit as VRAD gets some economies of scale on SGA if not on physician radiologist cash expenses. At 16% operating margins, VRAD should earn $0.75 - $0.80. On a pricing of $17, VRAD would trade 22 X's 2008 estimates.
A quick look at NHWK and VRAD
NHWK - $664 million market cap. Trading 4.3 X's '07 revenues and 23 X's 2007 earnings with a 67% revenues growth rate in 2007. NHWK currently expecting a 40% growth rate in 2008 and trades 17 X's 2008 earnings.
VRAD - $279 million market cap at $17. Would trade 3 X's '07 revenues and 34 X's '07 earnings with a 67% revenue growth rate in 2007. VRAD conservatively should have a 36% revenue increase in 2008 and would trade 22 X's conservative 2008 estimates.
VRAD should book $125 in 2008 revenues compared to NHWK's $215. Both are solid operations filling an obviously desired/needed niche. I write obviously as the revenue growth for each has been been quick and fast. NHWK ipo'd in 2/06 at a $387 million market cap with an expected $0.50 in earnings and $90 million in revenues, exactly what VRAD will hit in 2007. VRAD is a recommend here. IPO here looks like a 'junior NHWK' except at a $100 million lower market cap in range than NHWK priced 18 months ago. I'd expect VRAD to follow a very similar path as NHWK and grow market cap into the $600 million range two years after ipo. Solid recommend in range.
this week's free blog piece is an interesting medical ipo thst debuted bacin in November, VRAD. As has been the custom, we'll post 10-20 free analysis pieces on this blog post-ipo in 2008, while every analysis piece on every deal is available to subscribers pre-ipo. we also have a number of professional traders posting on our subscriber forum daily as well.
http://www.tradingipos.com
2007-11-08
VRAD - Virtual Radiologic
VRAD - Virtual Radiologic plans on offering 4.6 million shares(assuming over-allotments) at a range of $16-$18. Goldman Sachs is leading the deal, Merrill Lynch and William Blair co-managing. Post-ipo VRAD will have 16.4 million shares outstanding for a market cap of $279 million on a pricing of $17. Approximately 50% of ipo proceeds will be used to redeem debt, the remainder for general corporate purposes.
President and CEO Sean Casey will own 25% of VRAD post ipo.
From the prospectus:
'We believe we are one of the leading providers of remote diagnostic image interpretation, or teleradiology, services in the United States. According to Frost & Sullivan, we are the second largest provider of teleradiology services in the United States.'
The leader in this space is 2006 ipo NHWK, Nighthawk.
VRAD provides remote diagnostic image interpretations, or reads, 24 hours a day, seven days a week, 365 days a year. Customers include radiology practices, hospitals, clinics and diagnostic imaging centers. The differentiator with VRAD compared to NHWK appears to be that VRAD's radiologists can work remotely from anywhere in the US, while NHWK's US staff is all located at their facility in Idaho.
Digital diagnostic imaging is expected to grow 15% annually over the next three years. 500 million procedures are expected by 2009. Sector is being driven by an aging population, advances in diagnostic imaging technologies and the growing availability of imaging equipment in hospitals and clinics, as well as by more frequent physician referrals for diagnostic imaging. However the projected number of radiologists is expected to grow just 2% annually in the US. The slower pace of radiologist growth coupled with the 24/7 365 demand has pushed hospitals/clinics to outsource some of their radiologist needs.
VRAD has affiliations with 121 radiologists. Reads include computed tomography, or CT scans, magnetic resonance imaging, or MRI, and ultrasound. VRAD is compensated directly by their customers and does not directly depend on third party reimbursement. VRAD has provided services to 457 customers serving 787 medical facilities, which includes 736 hospitals, representing approximately 13% of hospitals in the United States. 98% of contracts up for renewal have been renewed.
Same site sales growth has been strong indication that once VRAD sells in their remote radiology services, the revenue stream per location grows. Same site growth for 2005 was 24%, 2006 was 20% and through first nine months of 2007 17%.
Legal - In 7/07 Merge eMed filed a patent infringement suit against VRAD. The suit claims VRAD infringed on Merge eMed's teleradiology patent. Case is in a very stage currently.
Financials
$2 per share in cash post-ipo, no debt.
Revenues have grown swiftly as VRAD has added new radiologists, sites and grown revenues in existing sites. Revenues in 2005 were $27 million, doubling to $54 million in 2006 and through first nine months of 2007 on pace for $90 million.
Eight straight quarters of sequential revenue growth. VRAD shifted into profitability in 2006.
2007 - Note that due directly to the fast rise in fair value of VRAD, they've booked pretty hefty stock compensation expenses in 2006/2007. VRAD does not have excessive options and this line will fall significantly post-ipo. I've smoothed out stock compensation expense a bit for 2007 numbers as if they were a public company at IPO price for all of 2007. Revenues on track for $90 million, a 67% increase over 2006. The largest expense line is physician cash expenses at 45%. As this is an operation that depends entirely on their physician radiologists, this expense line will always be significant at the 45% level of revenues. Operating margins which have been increasing annually should be 14%. Net margins should be 9%. Earnings per share of approximately $0.50. On a pricing of $17, VRAD would trade 34 X's 2007 earnings.
2008 - VRAD has shown an ability to grow revenues sequentially, I don't see why that should halt in 2008. If we assume conservative sequential quarterly growth through 2008, I would not be surprised to see VRAD hit $120-$125 million in revenues. This would be a 36% increase over 2007 and might be a tad conservative as VRAD has increased revenues 100% and 67% in '06 and '07 respectively. Still, I'd rather be conservative when forecasting. Operating margins should improve a bit as VRAD gets some economies of scale on SGA if not on physician radiologist cash expenses. At 16% operating margins, VRAD should earn $0.75 - $0.80. On a pricing of $17, VRAD would trade 22 X's 2008 estimates.
A quick look at NHWK and VRAD
NHWK - $664 million market cap. Trading 4.3 X's '07 revenues and 23 X's 2007 earnings with a 67% revenues growth rate in 2007. NHWK currently expecting a 40% growth rate in 2008 and trades 17 X's 2008 earnings.
VRAD - $279 million market cap at $17. Would trade 3 X's '07 revenues and 34 X's '07 earnings with a 67% revenue growth rate in 2007. VRAD conservatively should have a 36% revenue increase in 2008 and would trade 22 X's conservative 2008 estimates.
VRAD should book $125 in 2008 revenues compared to NHWK's $215. Both are solid operations filling an obviously desired/needed niche. I write obviously as the revenue growth for each has been been quick and fast. NHWK ipo'd in 2/06 at a $387 million market cap with an expected $0.50 in earnings and $90 million in revenues, exactly what VRAD will hit in 2007. VRAD is a recommend here. IPO here looks like a 'junior NHWK' except at a $100 million lower market cap in range than NHWK priced 18 months ago. I'd expect VRAD to follow a very similar path as NHWK and grow market cap into the $600 million range two years after ipo. Solid recommend in range.
December 15, 2007, 2:40 am
XIN - Xinyuan Real Estate
Analysis on every deal every year at: http://www.tradingipos.com
2007-12-07
XIN - Xinyuan Real Estate
XIN - Xinyuan Real Estate plans on offering 20.1 ADS (assuming overallotments) at a range of $13-$15. Merrill Lynch is leading the deal, JP Morgan and Allen & Company co-managing. Post-ipo, XIN will have 74.5 ADS equivalent shares outstanding for a market cap of $1.043 billion on a pricing of $14. Nearly all ipo proceeds will be used to acquire land use rights for future property development projects.
Chairman and CEO Yong Zhang and Director Yuyan Zang will jointly own a combined 42% stake in XIN post-ipo.
From the prospectus:
'We are a fast-growing residential real estate developer that focuses on Tier II cities in China, which are a selected group of larger, more developed cities with above average GDP and urban population growth rates.'
We've had one successful Chinese real estate ipo in 2007, EJ. Where EJ is a real estate services company, XIN is a real estate developer. Simplified, XIN builds housing developments, EJ markets and sells housing developments.
Unlike many China ipos, XIN has actually been around for awhile commencing operations in 1997. From '97-'05, XIN focused operations in Zhengzhou, the provincial capital of Henan Province. Since they've focused on expanding to other cities. In addition to Zhengzhou, XIN currently has operations in four other 'Tier II' China cities Chengdu in Sichuan Province, Hefei in Anhui Province, Jinan in Shandong Province, and Suzhou in Jiangsu Province.
Approximately 40% of 2007 revenues have been derived in Zhengzhou.
XIN focuses on large scale residential projects typically multiple residential buildings that include multi-layer apartment buildings, sub-high-rise apartment buildings or high-rise apartment buildings. Target buyers of their development come from the growing Chinese middle class. From the prospectus, 'We provide standardized mid-sized units, typically ranging from 50 square meters to 100 square meters in size, at affordable prices for this market. Our residential units feature modern designs and offer comfortable and convenient community lifestyles.'
Land is generally acquired through public auctions. XIN focuses on unencumbered land auctions which allow them to commence construction quite soon after land acquisition. As of 9/30/07, XIN had seven active residential housing construction projects with a total gross floor area (GFA) of 770,781 square meters. In addition as of 9/30/07, XIN had in the planning stages an additional seven projects with a total GFA of 1,282,498 meters. This total does not include 12/4/07 governmental auction win for a parcel of land located in Kunshan Town of Suzhou City with a site area of 200,000 square meters.
To date XIN has completed 13 projects with a total GFA of approximately 939,829 square meters and comprising a total of 8,645 units, 99.6% of which have been sold. Impressive sell rate, it would appear XIN is able to sell their projects out quite soon after completion.
The draw here is similar to many other Chinese ipos of the past few years targeting the growing middle classes. As XIN states, 'Increases in consumer disposable income and urbanization rates have resulted in the emergence of a growing middle-income consumer market, driving demand for quality housing in many cities across China.'
XIN plans to continue to expand operations to additional 'Tier II' Chinese cities they feel have an underdeveloped residential real estate market for the middle classes.
PRC - Recently the PRC has put in place initiatives to slow the booming Chinese real estate market. While most of these are directed at high end residential real estate, the PRC has also removed middle class residential construction from the 'encouraged' category. The latter will continue to be a 'permitted' type of investment. In addition for residences over 90 square meters total GFA, the down payment must equal 30% of the purchase price. XIN's residences tend to be smaller however, it should be noted that the PRC appears intent on cooling the hot China real estate market at least somewhat. XIN states in the prospectus: 'We believe that these policies have negatively affected our sales to a lesser extent than other property developers that focus on the luxury sector, because our business model focuses on the development of mid-priced housing, which is consistent with these policies'.
Financials
XIN funds a portion of their land purchases through debt. Post-ipo XIN will have approximately $233 million in debt. Compared to US homebuilders, the leverage here is fairly low. Going forward though keep an eye on XIN's debt situation. If their business slows, the debt levels will tend to rise.
XIN does not anticipate paying dividends.
On a pricing of $14, XIN will trade 3 X's book value.
Historically the cost of revenues for XIN has broken down to 1/3 land use rights and 2/3 construction costs.
Unlike many Chinese ipos we've seen, XIN is heavily taxed all along their various phases from land acquisitions through construction to sales. XIN annually pays a Corporate Income Tax, a Land Appreciation Tax, a Deferred Tax expense and an Uncertainty Tax expense. Reads a bit like a cable bill. Note that the 'Uncertainty Tax' expense is an accounting maneuver to attempt to better capture deferred taxes owed.
Revenues have grown briskly. Revenues in 2005 were $62 million, in 2006 $142 million and through 9 months on pace in 2007 for $310 million. XIN had a monster 9/30/07 quarter.
XIN has been profitable since at least 2004.
*Note* - Due to the nature of the business quarterly results have historically been quite choppy. This will definitely continue in the future making projections here quite difficult.
2007 - XIN is on pace for $310 million in revenues, a 118% increase over 2006. XIN has $120 million in revenues alone in the 9/30/07 quarter. Note that XIN completed construction on two major projects in the 9/07 quarter. I've factored in a sequential slowdown in Q4 and they still look to double 2006 revenues. Gross margins should be 31%, operating margins 25%. Plugging in debt servicing and taxes, net margins should be 15%. Earnings per share should be $0.65. On a pricing of $14, XIN would trade a fully (and heavily for a China IPO) 22 X's 2007 earnings.
2008 - Due to the choppiness factor, forecasting 2008 is somewhat challenging. However XIN has a significant amount of active construction projects of which they'll be deriving 2008 revenues. They've also substantial land already purchased and planned for construction. Assuming China's real estate market and economy continue to grow nicely, XIN is poised for a strong 2008. I would anticipate XIN's 2008 will more resemble the 9/30/07 quarter of $120 million in revenues than the 3/31/07 quarter of $23 million in revenues. Note that XIN's gross margins have not been nearly as strong in their newer geographic areas so I would not look for a gross margin increase in 2008. I would not be surprised to see XIN book $450 million in 2008 revenues. Note that this is conservative as it breaks down to $110-$115 million in quarterly revenues, below their $120 million in the 9/30/07 quarter. While XIN does pre sell a large percentage of their properties, they are not anticipating completion on any projects until the second half of 2008. Assuming $450 million in revenues, XIN could earn in the $1 per share ballpark. *Note* - this is nothing more than an educated guess because 1) XIN had an 'outside the box' strong quarter just prior to ipo and 2) they operate in a segment that is traditionally quite choppy quarter to quarter.
Conclusion - XIN is trending strongly right into their ipo. They booked a fantastic quarter just prior to this offering fueled by the completion of two major residential projects. China residential real estate has not seen the difficulties of the US real estate market, so it is entirely reasonable to expect XIN to have a solid 2008. Home construction is notoriously cyclical in the western world, there is definite reason to assume it will be at some point in China also. On ipo though, XIN is not all that leveraged and the balance sheet looks quite lean for the sector. XIN is one of the stronger ipos from China in 2007. Recommend in range and a bit above, good looking China real estate ipo.
2007-12-07
XIN - Xinyuan Real Estate
XIN - Xinyuan Real Estate plans on offering 20.1 ADS (assuming overallotments) at a range of $13-$15. Merrill Lynch is leading the deal, JP Morgan and Allen & Company co-managing. Post-ipo, XIN will have 74.5 ADS equivalent shares outstanding for a market cap of $1.043 billion on a pricing of $14. Nearly all ipo proceeds will be used to acquire land use rights for future property development projects.
Chairman and CEO Yong Zhang and Director Yuyan Zang will jointly own a combined 42% stake in XIN post-ipo.
From the prospectus:
'We are a fast-growing residential real estate developer that focuses on Tier II cities in China, which are a selected group of larger, more developed cities with above average GDP and urban population growth rates.'
We've had one successful Chinese real estate ipo in 2007, EJ. Where EJ is a real estate services company, XIN is a real estate developer. Simplified, XIN builds housing developments, EJ markets and sells housing developments.
Unlike many China ipos, XIN has actually been around for awhile commencing operations in 1997. From '97-'05, XIN focused operations in Zhengzhou, the provincial capital of Henan Province. Since they've focused on expanding to other cities. In addition to Zhengzhou, XIN currently has operations in four other 'Tier II' China cities Chengdu in Sichuan Province, Hefei in Anhui Province, Jinan in Shandong Province, and Suzhou in Jiangsu Province.
Approximately 40% of 2007 revenues have been derived in Zhengzhou.
XIN focuses on large scale residential projects typically multiple residential buildings that include multi-layer apartment buildings, sub-high-rise apartment buildings or high-rise apartment buildings. Target buyers of their development come from the growing Chinese middle class. From the prospectus, 'We provide standardized mid-sized units, typically ranging from 50 square meters to 100 square meters in size, at affordable prices for this market. Our residential units feature modern designs and offer comfortable and convenient community lifestyles.'
Land is generally acquired through public auctions. XIN focuses on unencumbered land auctions which allow them to commence construction quite soon after land acquisition. As of 9/30/07, XIN had seven active residential housing construction projects with a total gross floor area (GFA) of 770,781 square meters. In addition as of 9/30/07, XIN had in the planning stages an additional seven projects with a total GFA of 1,282,498 meters. This total does not include 12/4/07 governmental auction win for a parcel of land located in Kunshan Town of Suzhou City with a site area of 200,000 square meters.
To date XIN has completed 13 projects with a total GFA of approximately 939,829 square meters and comprising a total of 8,645 units, 99.6% of which have been sold. Impressive sell rate, it would appear XIN is able to sell their projects out quite soon after completion.
The draw here is similar to many other Chinese ipos of the past few years targeting the growing middle classes. As XIN states, 'Increases in consumer disposable income and urbanization rates have resulted in the emergence of a growing middle-income consumer market, driving demand for quality housing in many cities across China.'
XIN plans to continue to expand operations to additional 'Tier II' Chinese cities they feel have an underdeveloped residential real estate market for the middle classes.
PRC - Recently the PRC has put in place initiatives to slow the booming Chinese real estate market. While most of these are directed at high end residential real estate, the PRC has also removed middle class residential construction from the 'encouraged' category. The latter will continue to be a 'permitted' type of investment. In addition for residences over 90 square meters total GFA, the down payment must equal 30% of the purchase price. XIN's residences tend to be smaller however, it should be noted that the PRC appears intent on cooling the hot China real estate market at least somewhat. XIN states in the prospectus: 'We believe that these policies have negatively affected our sales to a lesser extent than other property developers that focus on the luxury sector, because our business model focuses on the development of mid-priced housing, which is consistent with these policies'.
Financials
XIN funds a portion of their land purchases through debt. Post-ipo XIN will have approximately $233 million in debt. Compared to US homebuilders, the leverage here is fairly low. Going forward though keep an eye on XIN's debt situation. If their business slows, the debt levels will tend to rise.
XIN does not anticipate paying dividends.
On a pricing of $14, XIN will trade 3 X's book value.
Historically the cost of revenues for XIN has broken down to 1/3 land use rights and 2/3 construction costs.
Unlike many Chinese ipos we've seen, XIN is heavily taxed all along their various phases from land acquisitions through construction to sales. XIN annually pays a Corporate Income Tax, a Land Appreciation Tax, a Deferred Tax expense and an Uncertainty Tax expense. Reads a bit like a cable bill. Note that the 'Uncertainty Tax' expense is an accounting maneuver to attempt to better capture deferred taxes owed.
Revenues have grown briskly. Revenues in 2005 were $62 million, in 2006 $142 million and through 9 months on pace in 2007 for $310 million. XIN had a monster 9/30/07 quarter.
XIN has been profitable since at least 2004.
*Note* - Due to the nature of the business quarterly results have historically been quite choppy. This will definitely continue in the future making projections here quite difficult.
2007 - XIN is on pace for $310 million in revenues, a 118% increase over 2006. XIN has $120 million in revenues alone in the 9/30/07 quarter. Note that XIN completed construction on two major projects in the 9/07 quarter. I've factored in a sequential slowdown in Q4 and they still look to double 2006 revenues. Gross margins should be 31%, operating margins 25%. Plugging in debt servicing and taxes, net margins should be 15%. Earnings per share should be $0.65. On a pricing of $14, XIN would trade a fully (and heavily for a China IPO) 22 X's 2007 earnings.
2008 - Due to the choppiness factor, forecasting 2008 is somewhat challenging. However XIN has a significant amount of active construction projects of which they'll be deriving 2008 revenues. They've also substantial land already purchased and planned for construction. Assuming China's real estate market and economy continue to grow nicely, XIN is poised for a strong 2008. I would anticipate XIN's 2008 will more resemble the 9/30/07 quarter of $120 million in revenues than the 3/31/07 quarter of $23 million in revenues. Note that XIN's gross margins have not been nearly as strong in their newer geographic areas so I would not look for a gross margin increase in 2008. I would not be surprised to see XIN book $450 million in 2008 revenues. Note that this is conservative as it breaks down to $110-$115 million in quarterly revenues, below their $120 million in the 9/30/07 quarter. While XIN does pre sell a large percentage of their properties, they are not anticipating completion on any projects until the second half of 2008. Assuming $450 million in revenues, XIN could earn in the $1 per share ballpark. *Note* - this is nothing more than an educated guess because 1) XIN had an 'outside the box' strong quarter just prior to ipo and 2) they operate in a segment that is traditionally quite choppy quarter to quarter.
Conclusion - XIN is trending strongly right into their ipo. They booked a fantastic quarter just prior to this offering fueled by the completion of two major residential projects. China residential real estate has not seen the difficulties of the US real estate market, so it is entirely reasonable to expect XIN to have a solid 2008. Home construction is notoriously cyclical in the western world, there is definite reason to assume it will be at some point in China also. On ipo though, XIN is not all that leveraged and the balance sheet looks quite lean for the sector. XIN is one of the stronger ipos from China in 2007. Recommend in range and a bit above, good looking China real estate ipo.
December 1, 2007, 2:30 am
ENSG - Ensign Group
Pre-ipo analysis on 200+ ipos a year before they price at http://www.tradingipos.com
disclosure: tradingipos.com does have a position in ENSG at an average price of 15 3/4's.
2007-11-04
ENSG - Ensign Group
ENSG - Ensign Group plans on offering 4 million shares at a range of $18-$20. DA Davidson and Stifel are co-lead managing the deal. Post-ipo ENSG will have 20.5 million shares outstanding for a market cap of $390 million on a pricing of $19. Ipo proceeds will be used to acquire additional facilities, to upgrade existing facilities, pay down debt and for working capital and other general corporate purposes.
CEO and President Christopher R. Christensen will own 20% of ENSG post-ipo.
From the prospectus:
'We are a provider of skilled nursing and rehabilitative care services through the operation of facilities located in California, Arizona, Texas, Washington, Utah and Idaho.'
ENSG owns or leases 61 facilities. All are skilled nursing facilities while four also are assisted living facilities. ENSG owns 23 facilities and leases 38 others. They've options to purchase on 16 of those 38. Current bed count is 7,400. ENSG has aggressively grown via acquisitions adding 15 new facilities since 1/1/06. 31 of 61 facilities are in California, 13 in Arizona and 10 in Texas. Total occupancy rates for 2007 has been 78%.
Sector - The senior living and long-term care industries consist of three primary living arrangement alternatives, independent living facilities, assisted living facilities and skilled nursing facilities. ENSG operates primarily skilled nursing facilities, those that require the most resident care. Skilled nursing facilities provide both short-term, post-acute rehabilitative care for patients and long-term custodial care for residents who require skilled nursing and therapy care on an inpatient basis. ENSG estimates the skilled nursing facility market in the US is a $100 billion segment annually. ENSG believes the skilled nursing facility segment stands to grow going forward due to increasing life expectancies and the aging population.
Medicare is a federal health age based program, Medicaid is a federal health needs based program. ENSG relies extensively on Medicaid/Medicare reimbursements.
Approximately 44% of all revenues are derived from Medicaid, 33% from Medicare. Simplified Medicare will generally cover skilled nursing facility stays up to 100 days annually. After day 100, patients’ payment is received from either the patient, private health insurance or Medicaid. With 44% of all revenues derived from Medicaid, it is fairly safe to state a large portion of ENSG's residents are shifted from Medicare to Medicaid at some point for the bulk of their annual stay. The Center for Medicare & Medicaid Services (CMS) sets the Medicare rates. Skilled nursing centers have fared relatively favorably with the CMS this decade, however payments rates have been frozen for FY '08 due to budgetary attempts to cut overall Medicare/Medicaid costs. Medicaid is a bit different animal. Medicaid funding across the board has seen freezes and/or decreases due to federal and state budget issues. Medicaid is primarily funded by the Federal government, but disbursed by the states. Keep in mind that ENSG will annually be at the whim of federal Medicare rates set for skilled nursing centers and Medicaid disbursement rates set by the states. With runaway health care costs, trends for annual increases in Medicare/Medicaid reimbursement rates are not favorable going forward.
Financials
*ENSG will have approximately $1 per share in cash (minus debt) post-ipo. This is a good sign. Usually roll-up type operations such as nursing facilities come public pretty significantly leveraged. ENSG's solid balance sheet on ipo will allow them to aggressively grow over the next 2-3 years. Expect ENSG to grow revenues much faster than the industry growth rate the next 1-2 years due to acquisitions. When looking at this type of ipo, balance sheet health is as important (if not more) than any other factor. Nursing facilities are both a slim margin and consolidating sector. A solid balance sheet post-ipo allows a company such as ENSG to not only flow more operating margin to the bottom line, but grow top/bottom line strongly first few years public. I like the balance sheet here post-ipo quite a bit.
ENSG does plan on paying a dividend. Based on the past 12 months, it appears the dividend will be approximately $0.04 quarterly. At $0.16 annually, ENSG would yield 0.8% annually on a $19 pricing.
3 X's book value on a pricing of $19.
Growth going forward will be driven by acquisitions as the current Medicaid/Medicare reimbursement environment is not favorable for significant rate increases. ENSG's operating margins are not going to increase in this reimbursement environment, in fact they've dipped slightly in 2007. This is an industry wide trend, not specific to ENSG. This environment makes it even more important for a strong balance sheet and lack of debt.
Revenues in 2005 were $301 million, 2006 $359 million and through the first three quarters of 2007 on pace for $409 million.
ENSG has had a net profit annually since at least 2002.
2007 - Revenues on pace for $409 million, a 14% increase over 2006. Gross margins 19%. Operating margins of approximately 8 1/2%. Net margins 5%. Earnings per share should be in the $0.90 - $0.95 range. On a pricing of $19, ENSG would trade 21 X's 2007 earnings.
2008 - I fully expect ENSG to utilize their solid balance sheet to acquire revenue growth. Based on third quarter revenues, a full year operating current facilities should increase revenues by 10%. I think acquisitions could add another 5%, for a 15% top-line revenue growth. Gross margins will remain 19%, operating margins may increase slightly filtering down to a small net margin increase. With this sector it is extremely difficult to grow margins so you're just never going to see operating margins expand too much here no matter the revenue growth. With a 15% top-line growth rate, ENSG should earn $1.20 per share. On a pricing of $19, ENSG would trade 16 X's 2008 earnings.
Recent IPO SKH operates in the same sector as ENSG. The big difference between the two is SKH is heavily leveraged while ENSG post-ipo will have more cash on hand than debt.
SKH - $588 million market cap, operates approximately 80 skilled nursing facilities. Currently trading less than 1 X's 2008 revenues and 17 X's 2008 earnings. SKH has approximately 450 million in net debt on the books, much of it high interest debt. SKH has net margins of 3 1/2%.
ENSG - $390 million market cap on a $19 pricing. SKH operates 61 skilled nursing facilities. At $19 would trade less than 1 X's 2008 revenues and 16 X's 2008 earnings. ENSG has $1 per share net CASH on hand post ipo. ENSG has 5% net margins.
Conclusion - ENSG operates in a highly regulated sector experiencing rate freezes or lowered increases going forward. These factors make it nearly impossible for an operation such as ENSG to expand their margins. Top and bottom line growth therefore will come from acquisitions. With this type of business and in this sector you really want to look at operations that have low debt levels which will allow them A) filter more of their slim operating margins to the bottom line and B) allow them plenty of room to grow through acquisitions. I like the balance sheet here and I like the valuation at 16 X's 2008 revenues. Due to the constraints on the sector mentioned above, you don't want to pay too hefty an initial multiple here, but ENSG looks good to me in range. I would especially be interested here on a low pricing/open. Recommend.
disclosure: tradingipos.com does have a position in ENSG at an average price of 15 3/4's.
2007-11-04
ENSG - Ensign Group
ENSG - Ensign Group plans on offering 4 million shares at a range of $18-$20. DA Davidson and Stifel are co-lead managing the deal. Post-ipo ENSG will have 20.5 million shares outstanding for a market cap of $390 million on a pricing of $19. Ipo proceeds will be used to acquire additional facilities, to upgrade existing facilities, pay down debt and for working capital and other general corporate purposes.
CEO and President Christopher R. Christensen will own 20% of ENSG post-ipo.
From the prospectus:
'We are a provider of skilled nursing and rehabilitative care services through the operation of facilities located in California, Arizona, Texas, Washington, Utah and Idaho.'
ENSG owns or leases 61 facilities. All are skilled nursing facilities while four also are assisted living facilities. ENSG owns 23 facilities and leases 38 others. They've options to purchase on 16 of those 38. Current bed count is 7,400. ENSG has aggressively grown via acquisitions adding 15 new facilities since 1/1/06. 31 of 61 facilities are in California, 13 in Arizona and 10 in Texas. Total occupancy rates for 2007 has been 78%.
Sector - The senior living and long-term care industries consist of three primary living arrangement alternatives, independent living facilities, assisted living facilities and skilled nursing facilities. ENSG operates primarily skilled nursing facilities, those that require the most resident care. Skilled nursing facilities provide both short-term, post-acute rehabilitative care for patients and long-term custodial care for residents who require skilled nursing and therapy care on an inpatient basis. ENSG estimates the skilled nursing facility market in the US is a $100 billion segment annually. ENSG believes the skilled nursing facility segment stands to grow going forward due to increasing life expectancies and the aging population.
Medicare is a federal health age based program, Medicaid is a federal health needs based program. ENSG relies extensively on Medicaid/Medicare reimbursements.
Approximately 44% of all revenues are derived from Medicaid, 33% from Medicare. Simplified Medicare will generally cover skilled nursing facility stays up to 100 days annually. After day 100, patients’ payment is received from either the patient, private health insurance or Medicaid. With 44% of all revenues derived from Medicaid, it is fairly safe to state a large portion of ENSG's residents are shifted from Medicare to Medicaid at some point for the bulk of their annual stay. The Center for Medicare & Medicaid Services (CMS) sets the Medicare rates. Skilled nursing centers have fared relatively favorably with the CMS this decade, however payments rates have been frozen for FY '08 due to budgetary attempts to cut overall Medicare/Medicaid costs. Medicaid is a bit different animal. Medicaid funding across the board has seen freezes and/or decreases due to federal and state budget issues. Medicaid is primarily funded by the Federal government, but disbursed by the states. Keep in mind that ENSG will annually be at the whim of federal Medicare rates set for skilled nursing centers and Medicaid disbursement rates set by the states. With runaway health care costs, trends for annual increases in Medicare/Medicaid reimbursement rates are not favorable going forward.
Financials
*ENSG will have approximately $1 per share in cash (minus debt) post-ipo. This is a good sign. Usually roll-up type operations such as nursing facilities come public pretty significantly leveraged. ENSG's solid balance sheet on ipo will allow them to aggressively grow over the next 2-3 years. Expect ENSG to grow revenues much faster than the industry growth rate the next 1-2 years due to acquisitions. When looking at this type of ipo, balance sheet health is as important (if not more) than any other factor. Nursing facilities are both a slim margin and consolidating sector. A solid balance sheet post-ipo allows a company such as ENSG to not only flow more operating margin to the bottom line, but grow top/bottom line strongly first few years public. I like the balance sheet here post-ipo quite a bit.
ENSG does plan on paying a dividend. Based on the past 12 months, it appears the dividend will be approximately $0.04 quarterly. At $0.16 annually, ENSG would yield 0.8% annually on a $19 pricing.
3 X's book value on a pricing of $19.
Growth going forward will be driven by acquisitions as the current Medicaid/Medicare reimbursement environment is not favorable for significant rate increases. ENSG's operating margins are not going to increase in this reimbursement environment, in fact they've dipped slightly in 2007. This is an industry wide trend, not specific to ENSG. This environment makes it even more important for a strong balance sheet and lack of debt.
Revenues in 2005 were $301 million, 2006 $359 million and through the first three quarters of 2007 on pace for $409 million.
ENSG has had a net profit annually since at least 2002.
2007 - Revenues on pace for $409 million, a 14% increase over 2006. Gross margins 19%. Operating margins of approximately 8 1/2%. Net margins 5%. Earnings per share should be in the $0.90 - $0.95 range. On a pricing of $19, ENSG would trade 21 X's 2007 earnings.
2008 - I fully expect ENSG to utilize their solid balance sheet to acquire revenue growth. Based on third quarter revenues, a full year operating current facilities should increase revenues by 10%. I think acquisitions could add another 5%, for a 15% top-line revenue growth. Gross margins will remain 19%, operating margins may increase slightly filtering down to a small net margin increase. With this sector it is extremely difficult to grow margins so you're just never going to see operating margins expand too much here no matter the revenue growth. With a 15% top-line growth rate, ENSG should earn $1.20 per share. On a pricing of $19, ENSG would trade 16 X's 2008 earnings.
Recent IPO SKH operates in the same sector as ENSG. The big difference between the two is SKH is heavily leveraged while ENSG post-ipo will have more cash on hand than debt.
SKH - $588 million market cap, operates approximately 80 skilled nursing facilities. Currently trading less than 1 X's 2008 revenues and 17 X's 2008 earnings. SKH has approximately 450 million in net debt on the books, much of it high interest debt. SKH has net margins of 3 1/2%.
ENSG - $390 million market cap on a $19 pricing. SKH operates 61 skilled nursing facilities. At $19 would trade less than 1 X's 2008 revenues and 16 X's 2008 earnings. ENSG has $1 per share net CASH on hand post ipo. ENSG has 5% net margins.
Conclusion - ENSG operates in a highly regulated sector experiencing rate freezes or lowered increases going forward. These factors make it nearly impossible for an operation such as ENSG to expand their margins. Top and bottom line growth therefore will come from acquisitions. With this type of business and in this sector you really want to look at operations that have low debt levels which will allow them A) filter more of their slim operating margins to the bottom line and B) allow them plenty of room to grow through acquisitions. I like the balance sheet here and I like the valuation at 16 X's 2008 revenues. Due to the constraints on the sector mentioned above, you don't want to pay too hefty an initial multiple here, but ENSG looks good to me in range. I would especially be interested here on a low pricing/open. Recommend.
November 16, 2007, 7:44 pm
OZM - Och-Ziff Capital Management
pre-ipo analysis for 200+ ipos a year at http://www.tradingipos.com
2007-11-07
OZM - Och-Ziff Capital Management
OZM - Och-Ziff Capital Management plans on offering 41.4 million shares at a range of $30-$33. In addition OZM is also making a private offering to Dubai International Capital(DIC). the private offering will constitute an overall 9.9% stake in OZM and the price will be the equivalent of the underwriters discount pricing of OZM's public offering. Based on all ownership stakes post ipo, DIC will purchase approximately 38.2 million shares at a price of $1.50 below ipo price. Goldman Sachs and Lehman are leading the deal, thirteen other firms co-managing. Post-ipo, OZM will have a total of 390.4 shares outstanding for a market cap of $12.4 billion on a pricing of $31.50. All ipo proceeds from both offerings will go to insiders. The insiders will reinvest those proceeds(in their own name) back into Och-Ziff funds.
Daniel Och will own 49% of OZM post ipo. Mr. Och will retain voting control via a separate share class.
In addition to insiders(OZM principals) receiving all ipo proceeds(approximately $2.2 billion), they also declared a special distribution of $750 million payable to them. This payment was made by laying debt onto the back of the soon to be public OZM. Boy I'm so weary of these 'business as usual' shenanigans. Apparently it is not enough to be wealthy beyond wildest dreams, one also needs to pile debt onto the company just prior to coming public to pay yourselves even more money. At some point the market needs to say 'enough' to these greed grabs. Mr. Och will have an equity stake in the public OZM of approximately $6 billion, not counting the approximately $1 billion in cash he'll receive from this offering. Was the extra $750 million(of which Mr. Och stands to receive $350 million) really needed too???? I'm not touching this ipo simply for this reason. I'm tired of these shenanigans with these things. If they're this greedy pre-ipo how well will they treat their silent partners, those buying their public shares? Also Mr. Och will receive deferred income distributions totaling ans additional $1 billion during a three-year period beginning in 2008.
From the prospectus:
'We are a leading international, institutional alternative asset management firm and one of the largest alternative asset managers in the world, with approximately $30.1 billion of assets under management for over 700 fund investors as of September 30, 2007.'
OZM has been in operations 13 years. OZM is a hedge fund and operation focusing on "Risk-adjusted returns". Risk adjusted returns are based on the income generated from primary investment positions while also being hedged to limit risks from market changes, interest rate fluctuations, currency movements, geopolitical events and other risks. OZM goes out of their way to state they look for long term value and to mitigate risk.
OZM derives revenues from management fees and incentive income. Management fees are based on total assets under management and average 1.50% - 2.50% of assets. Incentive income is realized and unrealized gains generated by the funds that managed by OZM. Incentive income is typically equal to 20% of the net realized and unrealized profits earned. Pretty standard hedge fund revenue structure. OZM's partners(managing directors) receive nearly all their income payments from participation in the profits of our entire business.
Assets under management have grown impressively. OAM had $11.4 billion under management end of 2004, $15.6 end of 2005, $22.6 end of 2006 and $30.1 billion on 9/30/07.
OZM's flagship global multi-strategy fund is the OZ Master Fund. **Note** - The OZ Master Fund has lagged the S&P 500 in each of the following periods: one year performance 3% behind S&P 500; three year performance 0.6% lower than S&P 500; five year performance 1.6% behind the S&P 500. The OZ Master fund has averaged a 13.9% return over the past five years compared to a 15.5% average annual return for the S&P 500. An S&P 500 ETF held the past five years would have returned more than the OZ Master Fund which takes a % of assets as well as a % of gains annually as revenue.
The OZ Master fund holds approximately 63% of OZM's assets under management.
OZM had a losing quarter overall in their funds for the quarter of 9/30/07. This was the first quarter for OZM to not experience appreciation of assets since spring of 2003.
Financials
$750 million in debt-post ipo. As noted ipo all this debt was taken on to pay insiders a 'special dividend.'
OZM intends to pay quarterly dividends. They state, 'Our intention is to distribute to our Class A shareholders on a quarterly basis substantially all of Och-Ziff Capital Management Group LLC’s net after-tax share of Och-Ziff Operating Group annual economic income in excess of amounts determined by us to be necessary or appropriate to provide for the operation and growth.' As OZM does not factor in incentive income until the year end, assuming OZM's funds are net positive annually the fourth quarter distribution stands to be larger than the other three quarters.
Note - OZM is heavily invested in their own funds. This greatly increases OZM's profit when their funds appreciate as they've done annually the past five. However this also means losses can hit even harder. OZM derives approximately 2/3's of their operating revenues annually from incentive fees. These incentive fees are based on a percentage of annual gains in OZM's funds. OZM's gains from investing in their own funds has the past 7 quarters equaled 1/2 their operating profit. If OZM had a flat year overall in their funds for 2006 for example, they would have had nearly $1 billion less in inventive fees and funds gains putting them deeply in the red for the year. You do not want to be in OZM if they ever have a bad year. Not only will there be no distributions, the losses per share will be pretty staggering. **Essentially the public OZM is making a significant bet that OZM's funds can continue to perform well year in and year out. Also OZM's managing directors also appear to have much of their net worth tied up into OZM equity and investments in OZM funds. Everyone involved here is making a big bet OZM continues to perform. Keep in mind, if OZM has a flat year in their funds, dividends and earnings will disappear pretty quickly.
As with Fortress and Blackstone, OZM's financials are intricate and difficult to grasp.
2006 - Total revenues were $972 million. 2/3's of this revenue came from incentive fees, 1/3 from management fees. Compensation and benefits were 50% of revenues. Gains from investments in their own funds added $242 million to the bottom line. Pre-tax, OZM earnings $1.50 per share. If we plugged in taxes, earnings would be approximately $1 per share.
2007 - As OZM does not factor in incentive fee revenues until after the fourth quarter closes, net here is negative through nine months. Note that this is a change from the first nine months of 2006 directly due to a pretty significant bump up in compensations expenses. If we're to factor in incentive fees for the full year 2007, I would imagine revenues will be closer to $1.2 billion. Earnings per share should be in the ballpark of 2006, again due to a sharp increase in compensation expenses. OZM looks as if they'll earn again in the $1-$1.50 ballpark. Note that these numbers are highly fluid and much depends on the amount in incentive fees, OZM books on the close of 12/31/07.
Due to all the accounting changes as well as equity distributions and compensation and benefits, OZM's pre-ipo financials are dense and tricky. going forward keep in mind OZM is heavily leveraged in their own funds in the form of actual investments in their funds and the heavy reliance on incentive fees. As long as OZM's funds post solid annual gains, OZM will put on a solid bottom line. If OZM's funds have a hiccup in a given year, OZM can easily slip into the red on the bottom line.
Conclusion - complex dense financial statements in a deal in which insiders are making out extraordinarily well. What strikes me is that in the one, three and five year periods, OZM's flagship fund has underperformed the S&P 500. Why? Well because OZM takes not just 2% of assets under management for fees, but they also grab 20% of the profits annually. Why pay someone this much when your return is lagging the S&P 500? OZM has done well growing assets under management in the hedge fund boom this decade. At $12 billion+ market cap though, there are enough question marks and negative to keep me away in range.
2007-11-07
OZM - Och-Ziff Capital Management
OZM - Och-Ziff Capital Management plans on offering 41.4 million shares at a range of $30-$33. In addition OZM is also making a private offering to Dubai International Capital(DIC). the private offering will constitute an overall 9.9% stake in OZM and the price will be the equivalent of the underwriters discount pricing of OZM's public offering. Based on all ownership stakes post ipo, DIC will purchase approximately 38.2 million shares at a price of $1.50 below ipo price. Goldman Sachs and Lehman are leading the deal, thirteen other firms co-managing. Post-ipo, OZM will have a total of 390.4 shares outstanding for a market cap of $12.4 billion on a pricing of $31.50. All ipo proceeds from both offerings will go to insiders. The insiders will reinvest those proceeds(in their own name) back into Och-Ziff funds.
Daniel Och will own 49% of OZM post ipo. Mr. Och will retain voting control via a separate share class.
In addition to insiders(OZM principals) receiving all ipo proceeds(approximately $2.2 billion), they also declared a special distribution of $750 million payable to them. This payment was made by laying debt onto the back of the soon to be public OZM. Boy I'm so weary of these 'business as usual' shenanigans. Apparently it is not enough to be wealthy beyond wildest dreams, one also needs to pile debt onto the company just prior to coming public to pay yourselves even more money. At some point the market needs to say 'enough' to these greed grabs. Mr. Och will have an equity stake in the public OZM of approximately $6 billion, not counting the approximately $1 billion in cash he'll receive from this offering. Was the extra $750 million(of which Mr. Och stands to receive $350 million) really needed too???? I'm not touching this ipo simply for this reason. I'm tired of these shenanigans with these things. If they're this greedy pre-ipo how well will they treat their silent partners, those buying their public shares? Also Mr. Och will receive deferred income distributions totaling ans additional $1 billion during a three-year period beginning in 2008.
From the prospectus:
'We are a leading international, institutional alternative asset management firm and one of the largest alternative asset managers in the world, with approximately $30.1 billion of assets under management for over 700 fund investors as of September 30, 2007.'
OZM has been in operations 13 years. OZM is a hedge fund and operation focusing on "Risk-adjusted returns". Risk adjusted returns are based on the income generated from primary investment positions while also being hedged to limit risks from market changes, interest rate fluctuations, currency movements, geopolitical events and other risks. OZM goes out of their way to state they look for long term value and to mitigate risk.
OZM derives revenues from management fees and incentive income. Management fees are based on total assets under management and average 1.50% - 2.50% of assets. Incentive income is realized and unrealized gains generated by the funds that managed by OZM. Incentive income is typically equal to 20% of the net realized and unrealized profits earned. Pretty standard hedge fund revenue structure. OZM's partners(managing directors) receive nearly all their income payments from participation in the profits of our entire business.
Assets under management have grown impressively. OAM had $11.4 billion under management end of 2004, $15.6 end of 2005, $22.6 end of 2006 and $30.1 billion on 9/30/07.
OZM's flagship global multi-strategy fund is the OZ Master Fund. **Note** - The OZ Master Fund has lagged the S&P 500 in each of the following periods: one year performance 3% behind S&P 500; three year performance 0.6% lower than S&P 500; five year performance 1.6% behind the S&P 500. The OZ Master fund has averaged a 13.9% return over the past five years compared to a 15.5% average annual return for the S&P 500. An S&P 500 ETF held the past five years would have returned more than the OZ Master Fund which takes a % of assets as well as a % of gains annually as revenue.
The OZ Master fund holds approximately 63% of OZM's assets under management.
OZM had a losing quarter overall in their funds for the quarter of 9/30/07. This was the first quarter for OZM to not experience appreciation of assets since spring of 2003.
Financials
$750 million in debt-post ipo. As noted ipo all this debt was taken on to pay insiders a 'special dividend.'
OZM intends to pay quarterly dividends. They state, 'Our intention is to distribute to our Class A shareholders on a quarterly basis substantially all of Och-Ziff Capital Management Group LLC’s net after-tax share of Och-Ziff Operating Group annual economic income in excess of amounts determined by us to be necessary or appropriate to provide for the operation and growth.' As OZM does not factor in incentive income until the year end, assuming OZM's funds are net positive annually the fourth quarter distribution stands to be larger than the other three quarters.
Note - OZM is heavily invested in their own funds. This greatly increases OZM's profit when their funds appreciate as they've done annually the past five. However this also means losses can hit even harder. OZM derives approximately 2/3's of their operating revenues annually from incentive fees. These incentive fees are based on a percentage of annual gains in OZM's funds. OZM's gains from investing in their own funds has the past 7 quarters equaled 1/2 their operating profit. If OZM had a flat year overall in their funds for 2006 for example, they would have had nearly $1 billion less in inventive fees and funds gains putting them deeply in the red for the year. You do not want to be in OZM if they ever have a bad year. Not only will there be no distributions, the losses per share will be pretty staggering. **Essentially the public OZM is making a significant bet that OZM's funds can continue to perform well year in and year out. Also OZM's managing directors also appear to have much of their net worth tied up into OZM equity and investments in OZM funds. Everyone involved here is making a big bet OZM continues to perform. Keep in mind, if OZM has a flat year in their funds, dividends and earnings will disappear pretty quickly.
As with Fortress and Blackstone, OZM's financials are intricate and difficult to grasp.
2006 - Total revenues were $972 million. 2/3's of this revenue came from incentive fees, 1/3 from management fees. Compensation and benefits were 50% of revenues. Gains from investments in their own funds added $242 million to the bottom line. Pre-tax, OZM earnings $1.50 per share. If we plugged in taxes, earnings would be approximately $1 per share.
2007 - As OZM does not factor in incentive fee revenues until after the fourth quarter closes, net here is negative through nine months. Note that this is a change from the first nine months of 2006 directly due to a pretty significant bump up in compensations expenses. If we're to factor in incentive fees for the full year 2007, I would imagine revenues will be closer to $1.2 billion. Earnings per share should be in the ballpark of 2006, again due to a sharp increase in compensation expenses. OZM looks as if they'll earn again in the $1-$1.50 ballpark. Note that these numbers are highly fluid and much depends on the amount in incentive fees, OZM books on the close of 12/31/07.
Due to all the accounting changes as well as equity distributions and compensation and benefits, OZM's pre-ipo financials are dense and tricky. going forward keep in mind OZM is heavily leveraged in their own funds in the form of actual investments in their funds and the heavy reliance on incentive fees. As long as OZM's funds post solid annual gains, OZM will put on a solid bottom line. If OZM's funds have a hiccup in a given year, OZM can easily slip into the red on the bottom line.
Conclusion - complex dense financial statements in a deal in which insiders are making out extraordinarily well. What strikes me is that in the one, three and five year periods, OZM's flagship fund has underperformed the S&P 500. Why? Well because OZM takes not just 2% of assets under management for fees, but they also grab 20% of the profits annually. Why pay someone this much when your return is lagging the S&P 500? OZM has done well growing assets under management in the hedge fund boom this decade. At $12 billion+ market cap though, there are enough question marks and negative to keep me away in range.
November 11, 2007, 6:58 pm
GRO - Agria Corporation
all ipo pieces completed and available to subscribers before pricing and open. http://www.tradingipos.com
2007-10-29
GRO - Agria Corporation
GRO - Agria Corporation plans to offer 19.7 ADS(assuming over-allotments) at a range of $14.50-$16.50. Insiders will be selling 5.5 million ADS in the ipo. Credit Suisse is lead managing the deal, HSBC, Piper Jaffray and CIBC are co-managing. Post-ipo GFO will have 65.5 million ADS equivalent shares outstanding for a market cap of $1.02 billion on a $15.50 pricing. IPO proceeds will be used to fund capital expenditures, for R&D and for general corporate purposes.
An entity co-controlled by Chairman of the Board and CEO Guanglin Lai and Director Zhaohua Qian will own 60% of GRO post-ipo.
From the prospectus:
'We are a fast-growing China-based agri-solutions provider engaged in research and development, production and sale of upstream agricultural products.'
Yes yet another China ipo. GRO sells corn seeds, sheep breeding products, and seedling products. corn seeds account for 48% of revenues, sheep breeding products 40% and seedling products 12%. Gross margins for each segments are: corn seeds 41%, sheep breeding products 73% and seedling products 79%.
GRO has access to 27,000 acres of farmland in seven provinces of China, of which approximately 23,000 acres are used for production of corn seeds, approximately 3,700 acres are used for sheep farming and breeding activities and the remainder are used for seedling production and research and development activities. Note that GRO does not own their own farmland, as apparently they are legally prohibited to own farmland. Instead they rely for the most part on contractual agreements with village collectives. GRO owns 17,000 sheep and sells frozen sheep semen, sheep embryos and breeder sheep. Through the first six months of 2007 GRO sold approximately 14,400 tonnes of corn seeds, 10.6 million straws of frozen sheep semen, 4,980 sheep embryos, 1,760 breeder sheep, 14,400 Primalights III hybrid sheep and a total of 11.6 million seedlings. Seedling products predominantly include blackberry, raspberry, date and pine bark seedlings.
Sector - China's agricultural sector is growing, note however the growth has lagged China GDP growth in recent years. The agricultural sector accounts for 10% of China's GDP and has grown 8% average annually the past five years. China is the world's second largest corn producer accounting for 19% of worldwide-corn production. China has the largest sheep flock in the world at an estimated 171 million sheep.
Financials
$2 per share in cash post-ipo, no debt.
3 X's book value on a pricing of $15.50.
While corn seed still accounts for 45%-50% of revenues, corn seed revenues have been stagnant for 2 1/2 years now. Revenue growth has been driven by sheep breeding revenues and seedling products.
Annual revenues have been: 2004 - $20 million; 2005 - $50 million; 2006 - $60 million; 2007 - on pace for $65 million.
GRO has been profitable since 2002.
Note that revenues are seasonal with the June and December quarters annually being the strongest. As GRO sells barely any corn feed in the September quarter, that Q is by far the weakest. Expect a seasonally weak report when GRO releases their 9/30/07 quarterly earnings report.
2007 - Revenues appear on pace for $65 million, a 5%-10% increase over 2006. Gross margins should be 57%. GRO has very little operational expense as they contract with village collectives for most of the work, which is factored into gross margins. Actually looking at the strong gross margins here for GRO, I'd think these village collectives might want to consider adjusting their contracts! Operating expense ratio is just 6%. Operating margins should be 51%. Tax rate thus far has been 0%. However it appears going forward GRO's tax rate on earnings will be in the 10% range, so we'll plug that percentage into 2007 earnings. 46% net margins, earnings per share of $0.45-$0.50. On a pricing of $15.50 GRO would trade 33 X's 2007 earnings.
Conclusion - $1+ billion market cap for a farmings operation that will book $65 million in 2007 revenues, just 10% higher than 2006? The net margins here are strong, but just 10% top line growth and nearly 14 X's revenues for an agricultural operation that has village collectives producing corn seed, sheep and seedlings for them seems awfully excessive. China ipos have been pretty hot in 2007 and we've seen a number of good ones. GRO looks fine as a company, the valuation here seems way off however. Most of the high multiple, highly successful China appears have been sector leaders benefiting directly from the urbanization and growing affluence of the middle class in China. While one could make a tangential case that GRO benefits from the growing China individuals affluence, it is still not a direct link. This is a pass for me, as I've no interest in paying for a $1+ billion cap agricultural operation with $65 million in revenues. In range, this seems like a very lofty price to pay for an operation responsible for producing corn seed, various sheep breeding products and seedlings. Pass in range for me.
2007-10-29
GRO - Agria Corporation
GRO - Agria Corporation plans to offer 19.7 ADS(assuming over-allotments) at a range of $14.50-$16.50. Insiders will be selling 5.5 million ADS in the ipo. Credit Suisse is lead managing the deal, HSBC, Piper Jaffray and CIBC are co-managing. Post-ipo GFO will have 65.5 million ADS equivalent shares outstanding for a market cap of $1.02 billion on a $15.50 pricing. IPO proceeds will be used to fund capital expenditures, for R&D and for general corporate purposes.
An entity co-controlled by Chairman of the Board and CEO Guanglin Lai and Director Zhaohua Qian will own 60% of GRO post-ipo.
From the prospectus:
'We are a fast-growing China-based agri-solutions provider engaged in research and development, production and sale of upstream agricultural products.'
Yes yet another China ipo. GRO sells corn seeds, sheep breeding products, and seedling products. corn seeds account for 48% of revenues, sheep breeding products 40% and seedling products 12%. Gross margins for each segments are: corn seeds 41%, sheep breeding products 73% and seedling products 79%.
GRO has access to 27,000 acres of farmland in seven provinces of China, of which approximately 23,000 acres are used for production of corn seeds, approximately 3,700 acres are used for sheep farming and breeding activities and the remainder are used for seedling production and research and development activities. Note that GRO does not own their own farmland, as apparently they are legally prohibited to own farmland. Instead they rely for the most part on contractual agreements with village collectives. GRO owns 17,000 sheep and sells frozen sheep semen, sheep embryos and breeder sheep. Through the first six months of 2007 GRO sold approximately 14,400 tonnes of corn seeds, 10.6 million straws of frozen sheep semen, 4,980 sheep embryos, 1,760 breeder sheep, 14,400 Primalights III hybrid sheep and a total of 11.6 million seedlings. Seedling products predominantly include blackberry, raspberry, date and pine bark seedlings.
Sector - China's agricultural sector is growing, note however the growth has lagged China GDP growth in recent years. The agricultural sector accounts for 10% of China's GDP and has grown 8% average annually the past five years. China is the world's second largest corn producer accounting for 19% of worldwide-corn production. China has the largest sheep flock in the world at an estimated 171 million sheep.
Financials
$2 per share in cash post-ipo, no debt.
3 X's book value on a pricing of $15.50.
While corn seed still accounts for 45%-50% of revenues, corn seed revenues have been stagnant for 2 1/2 years now. Revenue growth has been driven by sheep breeding revenues and seedling products.
Annual revenues have been: 2004 - $20 million; 2005 - $50 million; 2006 - $60 million; 2007 - on pace for $65 million.
GRO has been profitable since 2002.
Note that revenues are seasonal with the June and December quarters annually being the strongest. As GRO sells barely any corn feed in the September quarter, that Q is by far the weakest. Expect a seasonally weak report when GRO releases their 9/30/07 quarterly earnings report.
2007 - Revenues appear on pace for $65 million, a 5%-10% increase over 2006. Gross margins should be 57%. GRO has very little operational expense as they contract with village collectives for most of the work, which is factored into gross margins. Actually looking at the strong gross margins here for GRO, I'd think these village collectives might want to consider adjusting their contracts! Operating expense ratio is just 6%. Operating margins should be 51%. Tax rate thus far has been 0%. However it appears going forward GRO's tax rate on earnings will be in the 10% range, so we'll plug that percentage into 2007 earnings. 46% net margins, earnings per share of $0.45-$0.50. On a pricing of $15.50 GRO would trade 33 X's 2007 earnings.
Conclusion - $1+ billion market cap for a farmings operation that will book $65 million in 2007 revenues, just 10% higher than 2006? The net margins here are strong, but just 10% top line growth and nearly 14 X's revenues for an agricultural operation that has village collectives producing corn seed, sheep and seedlings for them seems awfully excessive. China ipos have been pretty hot in 2007 and we've seen a number of good ones. GRO looks fine as a company, the valuation here seems way off however. Most of the high multiple, highly successful China appears have been sector leaders benefiting directly from the urbanization and growing affluence of the middle class in China. While one could make a tangential case that GRO benefits from the growing China individuals affluence, it is still not a direct link. This is a pass for me, as I've no interest in paying for a $1+ billion cap agricultural operation with $65 million in revenues. In range, this seems like a very lofty price to pay for an operation responsible for producing corn seed, various sheep breeding products and seedlings. Pass in range for me.
November 2, 2007, 5:53 pm
GXDX - Genoptix
pre-ipo analysis on every deal at http://www.tradingipos.com
disclosure: tradingipos.com does have a position in GXDX at anaverage of 24 1/4.
2007-10-27
GXDX - Genoptix
GXDX - Genoptix plans on offering 5 million shares at a range of $14 - $16. Insiders will be selling 700k shares in the deal. Lehman is leading the deal, BofA and Cowen co-managing. Post-ipo GXDX will have 15.6 million shares outstanding for a market cap of $234 million on a pricing of $15. IPO proceeds will be used to 1) increase personnel, (2) establish a second laboratory facility and expand backup systems, (3) repay all outstanding indebtedness and (4) pursue new collaborations or acquisitions.
Enterprise Partners will own 20% of GXDX post-ipo.
From the prospectus:
'We are a specialized laboratory service provider focused on delivering personalized and comprehensive diagnostic services to community-based hematologists and oncologists, or hem/oncs. Our highly trained group of hematopathologists, or hempaths, utilizes sophisticated diagnostic technologies to provide a differentiated, specialized and integrated assessment of a patients condition, aiding physicians in making vital decisions concerning the treatment of malignancies of the blood and bone marrow, and other forms of cancer.'
Cancer laboratory diagnostic operation focusing on malignancies of blood and bone marrow. There are approximately 800,000 patients in the United States living with malignancies or pre-malignant diseases of the blood and bone marrow, with more than 140,000 new cases being diagnosed each year. 60% of GXDX diagnostic cases are bone marrow, 40% blood-based.
In order for hematologists and oncologists to make the correct diagnosis, develop therapies and monitor therapy effectiveness, they require highly specialized diagnostic services. That is where GXDX comes in. 2007 Medicare reimbursement rates average $3,000 for typical bone marrow diagnostic cases and range from $100-$3000 for blood based cases. GXDX estimates there are 350,000 bone marrow procedures performed in the US annually and each one requires at least one bone marrow diagnostic test. GXDX believes the bone marrow diagnostic test market is approximately a $1 billion market in the US; 350,000 procedures with at least one diagnostic battery done on each averaged $3,000 a pop. In addition to the bone marrow diagnostic tests, GXDX believes there are 200,000 blood-based diagnostic tests for liquid and solid tumors performed annually in the United States.
Traditionally these tests have been performed by hospital pathologists, esoteric testing laboratories, national reference laboratories and academic laboratories. GXDX believes historically none of these testing entities effectively served the needs of community based hematologists and oncologists. GXDX states their diagnostic testing services as follows:
'We believe our differentiated services offer the technical expertise of an esoteric testing laboratory, the customer intimacy of a hospital pathologist and the state-of-the-art technology of an academic laboratory, while maintaining a specialized service focus that is not typically available from national reference laboratories that cover a broad range of medical specialties.'
The key differences appear to be:
1) Personalized and comprehensive approach - GXDX assigns a single hempath to guide the diagnostic process for each patient file. This hempath is the person that is responsible for guiding the sample through all diagnostic services and for communication with the hem/oncs. Hematologists and oncologists speak directly to the hempath if and when needed and desired. This appears to be a key differentiator with GXDX and the testing labs that have traditionally provided bone marrow cancer and blood cancer testing.
2) More than just test results - GXDX hempaths provide hem/oncs with a clear, concise and actionable diagnosis rather than just providing individual test results. GXDX is sort of a full service diagnostic shop, not just a testing company.
GXDX two service offerings are COMPASS and CHART. With the COMPASS service offering, the hem/onc authorizes the hempath at GXDX to determine the appropriate diagnostic tests to be performed, and the hempath then integrates patient history and all previous and current test results into a comprehensive diagnostic report. As part of their CHART service offering, the hem/onc also receives a detailed assessment of a patient’s disease progression over time. Approximately 50% of test requisitions in 2007 have been for both the COMPASS and CHART services.
Cartesian Medical Group - GXDX contracts with Cartesian Medical Group to provide all hempaths and an internal medicine specialist. All GXDX hempath physicians are employees of Cartesian, contracted to work for GXDX in GXDX labs. There are approximately 1,500 hempaths licensed in the US with just 75 newly receiving board certification annually.
GXDX estimates their current bone marrow testing market share is 3%.
54% of revenues come from private insurance, including managed care organizations and other healthcare insurance providers, 43% from Medicare and Medicaid and 3% from other sources.
Financials
$5 per share in cash post-ipo, no debt. Note that GXDX will be using $2-$3 per share in cash of ipo monies to construct a second lab testing facility and to hire personnel.
Often these small medical ipos come public way too early in their revenue profit curves. The reason is simple: They need the ipo cash to fund growth attempts. I like here that GXDX did not come public before generating significant revenues and turning a nice operating profit. Personally I'd like to see much more of this as it really gives us far more information to make a good buying decision. I am thrilled that GXDX did not attempt to come public in 2005 when revenues were still in development stage and there was doubt as to whether GXDX would be successful in grabbing bone marrow cancer and blood cancer diagnostic services from the traditional sources. Here in the fall of 2007, we can clearly see GXDX has been wildly successful, very quickly grabbing market share in this niche.
Revenue growth has been nothing short of phenomenal. Start-up stage in 2004 (GXDX did not begin offering their services until 3rd quarter of 2004), revenues in 2005 were $5 million, in 2006 $24 million and on pace in 2007 for $55-$60 million. 10+ straight quarter of sequential revenue growth. *At just a $234 million market cap this revenue growth rate in a very specialized niche is reason enough to recommend this ipo very strongly.*
It gets better too. GXDX moved into operational profitability in the first quarter of 2007 and in the 6/30/07 quarter booked operating margins of 28%. For a company attempting to grab a foothold in a highly specialized niche, you nearly always see them spending massively on sales & marketing to grow revenues as fast as GXDX. Hasn't been the case here, there appears to be extremely strong organic demand for GXDX services. Sales and marketing expenses were just 20% of revenues in the 3/07 quarter and dipped to only 17% of revenues in the 6/30/07 quarter. In hard dollars, GXDX doubled revenues in the 6/07 quarter when compared to the 12/06 quarter yet spent just the same each quarter on sales and marketing expenses. This is perfect in what you want to see with small fast growing ipos.
The three paragraphs above are reasons to get very excited about this GXDX ipo as you rarely see all these highly positive combinations in one ipo, let alone an ipo that was in start up stage just 3-4 years prior. This is just outstanding stuff here, this GXDX ipo in range is a 'goose bump' ipo.
Provisions for doubtful accounts has run around 4% in 2007.
GXDX has sufficient tax loss carryovers to cover the bulk of 2007's earnings. We'll take a look at earnings untaxed and also plugging in normalized taxes as GXDX should begin normal tax rates by mid 2008.
2007 - Revenues are on track here for $55-$60 million. Gross margins are increasing quarterly and full year should be 61% for the full year. Operating expense ratio is dropping quarterly as well. Increasing revenues, coupled with increasing gross margins and lowering operating expense ratios is a recipe for fast bottom line growth. Full year operating expense ratio should come in at 34%. Operating margins should be 27%. Untaxed net earnings will be around $1 per share. Plugging in full taxes GXDX should earn $0.65 in 2007.
Pricing range of $14-$16 is much too low here for all the positives. GXDX has plenty of room to continue growing as they're going to make $0.65 in only their third full year of operations and garnering just 3% of the bone marrow cancer testing segment. Strong recommend in range, this is the one to pay up significantly for as well. Fantastic ipo.
disclosure: tradingipos.com does have a position in GXDX at anaverage of 24 1/4.
2007-10-27
GXDX - Genoptix
GXDX - Genoptix plans on offering 5 million shares at a range of $14 - $16. Insiders will be selling 700k shares in the deal. Lehman is leading the deal, BofA and Cowen co-managing. Post-ipo GXDX will have 15.6 million shares outstanding for a market cap of $234 million on a pricing of $15. IPO proceeds will be used to 1) increase personnel, (2) establish a second laboratory facility and expand backup systems, (3) repay all outstanding indebtedness and (4) pursue new collaborations or acquisitions.
Enterprise Partners will own 20% of GXDX post-ipo.
From the prospectus:
'We are a specialized laboratory service provider focused on delivering personalized and comprehensive diagnostic services to community-based hematologists and oncologists, or hem/oncs. Our highly trained group of hematopathologists, or hempaths, utilizes sophisticated diagnostic technologies to provide a differentiated, specialized and integrated assessment of a patients condition, aiding physicians in making vital decisions concerning the treatment of malignancies of the blood and bone marrow, and other forms of cancer.'
Cancer laboratory diagnostic operation focusing on malignancies of blood and bone marrow. There are approximately 800,000 patients in the United States living with malignancies or pre-malignant diseases of the blood and bone marrow, with more than 140,000 new cases being diagnosed each year. 60% of GXDX diagnostic cases are bone marrow, 40% blood-based.
In order for hematologists and oncologists to make the correct diagnosis, develop therapies and monitor therapy effectiveness, they require highly specialized diagnostic services. That is where GXDX comes in. 2007 Medicare reimbursement rates average $3,000 for typical bone marrow diagnostic cases and range from $100-$3000 for blood based cases. GXDX estimates there are 350,000 bone marrow procedures performed in the US annually and each one requires at least one bone marrow diagnostic test. GXDX believes the bone marrow diagnostic test market is approximately a $1 billion market in the US; 350,000 procedures with at least one diagnostic battery done on each averaged $3,000 a pop. In addition to the bone marrow diagnostic tests, GXDX believes there are 200,000 blood-based diagnostic tests for liquid and solid tumors performed annually in the United States.
Traditionally these tests have been performed by hospital pathologists, esoteric testing laboratories, national reference laboratories and academic laboratories. GXDX believes historically none of these testing entities effectively served the needs of community based hematologists and oncologists. GXDX states their diagnostic testing services as follows:
'We believe our differentiated services offer the technical expertise of an esoteric testing laboratory, the customer intimacy of a hospital pathologist and the state-of-the-art technology of an academic laboratory, while maintaining a specialized service focus that is not typically available from national reference laboratories that cover a broad range of medical specialties.'
The key differences appear to be:
1) Personalized and comprehensive approach - GXDX assigns a single hempath to guide the diagnostic process for each patient file. This hempath is the person that is responsible for guiding the sample through all diagnostic services and for communication with the hem/oncs. Hematologists and oncologists speak directly to the hempath if and when needed and desired. This appears to be a key differentiator with GXDX and the testing labs that have traditionally provided bone marrow cancer and blood cancer testing.
2) More than just test results - GXDX hempaths provide hem/oncs with a clear, concise and actionable diagnosis rather than just providing individual test results. GXDX is sort of a full service diagnostic shop, not just a testing company.
GXDX two service offerings are COMPASS and CHART. With the COMPASS service offering, the hem/onc authorizes the hempath at GXDX to determine the appropriate diagnostic tests to be performed, and the hempath then integrates patient history and all previous and current test results into a comprehensive diagnostic report. As part of their CHART service offering, the hem/onc also receives a detailed assessment of a patient’s disease progression over time. Approximately 50% of test requisitions in 2007 have been for both the COMPASS and CHART services.
Cartesian Medical Group - GXDX contracts with Cartesian Medical Group to provide all hempaths and an internal medicine specialist. All GXDX hempath physicians are employees of Cartesian, contracted to work for GXDX in GXDX labs. There are approximately 1,500 hempaths licensed in the US with just 75 newly receiving board certification annually.
GXDX estimates their current bone marrow testing market share is 3%.
54% of revenues come from private insurance, including managed care organizations and other healthcare insurance providers, 43% from Medicare and Medicaid and 3% from other sources.
Financials
$5 per share in cash post-ipo, no debt. Note that GXDX will be using $2-$3 per share in cash of ipo monies to construct a second lab testing facility and to hire personnel.
Often these small medical ipos come public way too early in their revenue profit curves. The reason is simple: They need the ipo cash to fund growth attempts. I like here that GXDX did not come public before generating significant revenues and turning a nice operating profit. Personally I'd like to see much more of this as it really gives us far more information to make a good buying decision. I am thrilled that GXDX did not attempt to come public in 2005 when revenues were still in development stage and there was doubt as to whether GXDX would be successful in grabbing bone marrow cancer and blood cancer diagnostic services from the traditional sources. Here in the fall of 2007, we can clearly see GXDX has been wildly successful, very quickly grabbing market share in this niche.
Revenue growth has been nothing short of phenomenal. Start-up stage in 2004 (GXDX did not begin offering their services until 3rd quarter of 2004), revenues in 2005 were $5 million, in 2006 $24 million and on pace in 2007 for $55-$60 million. 10+ straight quarter of sequential revenue growth. *At just a $234 million market cap this revenue growth rate in a very specialized niche is reason enough to recommend this ipo very strongly.*
It gets better too. GXDX moved into operational profitability in the first quarter of 2007 and in the 6/30/07 quarter booked operating margins of 28%. For a company attempting to grab a foothold in a highly specialized niche, you nearly always see them spending massively on sales & marketing to grow revenues as fast as GXDX. Hasn't been the case here, there appears to be extremely strong organic demand for GXDX services. Sales and marketing expenses were just 20% of revenues in the 3/07 quarter and dipped to only 17% of revenues in the 6/30/07 quarter. In hard dollars, GXDX doubled revenues in the 6/07 quarter when compared to the 12/06 quarter yet spent just the same each quarter on sales and marketing expenses. This is perfect in what you want to see with small fast growing ipos.
The three paragraphs above are reasons to get very excited about this GXDX ipo as you rarely see all these highly positive combinations in one ipo, let alone an ipo that was in start up stage just 3-4 years prior. This is just outstanding stuff here, this GXDX ipo in range is a 'goose bump' ipo.
Provisions for doubtful accounts has run around 4% in 2007.
GXDX has sufficient tax loss carryovers to cover the bulk of 2007's earnings. We'll take a look at earnings untaxed and also plugging in normalized taxes as GXDX should begin normal tax rates by mid 2008.
2007 - Revenues are on track here for $55-$60 million. Gross margins are increasing quarterly and full year should be 61% for the full year. Operating expense ratio is dropping quarterly as well. Increasing revenues, coupled with increasing gross margins and lowering operating expense ratios is a recipe for fast bottom line growth. Full year operating expense ratio should come in at 34%. Operating margins should be 27%. Untaxed net earnings will be around $1 per share. Plugging in full taxes GXDX should earn $0.65 in 2007.
Pricing range of $14-$16 is much too low here for all the positives. GXDX has plenty of room to continue growing as they're going to make $0.65 in only their third full year of operations and garnering just 3% of the bone marrow cancer testing segment. Strong recommend in range, this is the one to pay up significantly for as well. Fantastic ipo.
October 28, 2007, 4:21 pm
PZN - Pzena Investment Management
We're looking at a very busy ipo calendar with 25 on the schedule the first two weeks alone. We're the best spot on the web to get a complete analysis write up on every deal pre-ipo. We've also an active forum focused on entries/exits as ipos trade throughout their first year public. We also provide pre-open indications for all nasdaq ipos, giving subscribers up to the minute open indications the day ipos debut.
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2007-10-21
PZN - Pzena Investment Management
PZN - Pzena Investment Management plans on offering 7 million shares(assuming over-allotments) at a range of $16-$18. Goldman Sachs and UBS are lead managing the deal, BofA, Fox-Pitt Kelton, JP Morgan an KBW are co-managing. Post-ipo PZN will have 65 million shares outstanding for a market cap of $1.105 billion on a pricing of $17. IPO proceeds will be used to redeem shares from non-employee insiders. Essentially think of the shares offered in this deal as being offered by insiders as PZN will retain no ipo monies.
CEO Richard S. Pzena will own 40% of PZN post-ipo and will retain full voting control post-ipo due to a separate share class.
From the prospectus:
'Founded in late 1995, Pzena Investment Management, LLC is a premier value-oriented investment management firm with a record of investment excellence and exceptional client service.'
We've seen a few investment management firms ipo this decade(notably Calamos), however I believe this is the first value-oriented firm coming public in a longtime. Most of the management firms that have accessed the public markets via ipo over the years have concentrated more on growth investing.
As of 6/30/07, PZN managed $30.6 billion in assets. Revenues are generated on advisory fees earned on assets under management. For these type firms, the level of profits and growth are directly tied to the size and growth of assets under management. PZN earns about 1/2 of 1% annually on assets under management. The goal of PZN and those of their ilk is to invest those assets in a way that will generate strong annual gains as well as attract new money inflows to their funds.
PZN invests strictly on a value oriented approach, eschewing growth metrics. They've ten distinct value oriented strategies that differ by market cap and geographic focus. As of 6/30/07 PZN managed separate accounts on behalf of over 375 institutions and high net worth individual investors and acted as sub-investment adviser for twelve SEC-registered mutual funds and ten offshore funds. PZN has seen net-inflows annually each of the past five years.
PZN's value investment philosophy can be summed up as follows:
'we seek to make investments in good businesses at low prices...we are focused on generating excess returns over the long term.'
Asset growth has been impressive. On 12/31/03, PZN managed $5.8 billion in assets. They grew to $10.7 in 2004, $16.8 in 2005, $27.3 in 2006 and $30.6 as of 6/30/07. It should be noted that the first half of 2007 saw lowest dollar amount of net inflows since 2004. Net inflows the first half of 2007 were $1.3 billion, well below the first half of 2005 and 2006.
PZN's four main investment strategies, Large Cap Value, Value Service, Global Value and Small Cap Value, have outperformed their benchmarks by 3%-5% since inception. Note that while PZN underperformed during the bull run of the late '90's, they outperformed massively in the difficult markets of 2000-2002. Since 12/31/95, PZN has easily outperformed both the S&P 500 and the Russell 1000 value index.
John Hancock Advisers - Part of PZN's rapid growth the past three years has been due to a strategy of forming strategic relationships with 'sub-advisers', essentially managing the assets of investment funds. PZN has a close relationship with John Hancock Advisers managing mutual funds for Hancock. PZN acts as the investment 'sub-adviser'(read: asset manager) for the John Hancock Classic Value Fund, the John Hancock Classic Value Fund II, the John Hancock International Classic Value Fund and the John Hancock Classic Value Mega Cap Fund. these four funds combine for approximately 1/3 of all of PZN's assets under management. For In the past 18 months 20%-25% of all PZN revenues have been directly from assets managed for John Hancock.
Note - The third quarter of 2007 was characterized by a period in which value stocks underperformed heavily, as evidenced by the huge losses sustained by quant funds heavily long value and short speculative stocks. The rough quarter for value stocks did not leave PZN unscathed. PZN's assets under management as of 9/30/07 declined $1.7 billion to $28.9 billion. PZN saw net inflows for the quarter of $0.4 billion, meaning markets losses were $2.1 billion for the quarter alone. In other words PZN lost 6.8% across the board on their investments in the third quarter of 2007 alone. Third quarter was a rough quarter for the value approach indeed.
PZN's value strategy - PZN generally invests in companies after they have experienced a shortfall in their historic earnings, due to an adverse business development, management error, accounting scandal or other disruption, and before there is clear evidence of earnings recovery or business momentum. PZN's approach seeks to capture the return that can be obtained by investing in a company before the market has a level of confidence in its ability to achieve earnings recovery. Obviously the risk here is that the trouble company is unable to manage a turnaround. PZN's portfolios are concentrated, generally with 30 to 60 holdings of companies underperforming their historical earnings. When PZN enters a troubled company, they usually enter in pretty good size due to the relatively concentrated approach. Top holdings as of 9/30/07 included Citigroup, Allstate, Freddie Mac, Wal-Mart, Alcatel-Lucent and on the international side ING and Mitsubishi.
Financials
PZN will have about $50 million in debt(minus cash on hand) on the books post-ipo. Not enough to make much of a difference with $29 billion in assets under management. Should be noted however that the debt was taken on to fund a dividend payout to insiders pre-ipo.
PZN does plan on paying dividends of $0.11 quarterly. At an annualized $0.44, PZN would be yielding 2.6% annually on a pricing of $17.
2006 - PZN had total revenues of $115 million. Again revenues are generated from advisory fees based on assets under management. Unlike the hedge fund/private equity ipos we've seen in 2007, PZN does not generate revenues based on a percentage of portfolio gains quarterly of annually. Compensation and benefits expenses were a fairly low 30%. This is well below investment banking/private equity/M&A ipos of the past few years, all with compensation expense & benefit ratios in the 50%-60% ballpark. General and administrative expenses are minimal here, just 7% of revenues. Operating margins were 62%. Plugging in full taxes, net margins were 40%. Earnings per share were $0.71. On a pricing of $17, PZN would trade 24 x's 2006 earnings.
2007 - As PZN derives revenues from total assets under management and not gains on those assets, the bad third quarter won't kill their year. That is, assuming the 3rd quarter of 2007 was an anomaly and not the beginning of a trend. PZN actually had a very solid third quarter operationally as assets under management for the quarter, while they slipped, were still near all time highs for PZN. Through 3 quarters, revenues for 2007 are on pace to be $148 million, a 29% increase over 2006. With the ipo, the compensation expense and benefits ratio will actually decrease as a chunk this expense line will be shifted to equity compensation and ipo shares. Expect this expense line to dip to 23% or so, which will boost operating margins. 2007 operating margins should increase to 70%, with 43% net margins. Earnings per share should be in the $1.00 ballpark. On a pricing of $17, PZN would trade 17 X's 2007 earnings.
Looking across the publicly traded asset managers, nearly all trade 20-25 2007 earnings, indicating a bit of a discount here with the PZN pricing range. I suspect this in part to the rough third quarter for PZN's investments. If you look at PZN's track record over the past twelve years, the odds appear in favor of the third quarter of 2007 being an anomaly and not the beginning of a trend. As long as that is the case, PZN is an easy recommend in range. One thing you do not want to see here however, is another quarter of a drop in assets under management. I applaud PZN for having the fortitude to come public in a quarter in which their investments got knocked around pretty good. If PZN is able to return to their historic levels of gains on assets under management, the pricing range here offers good value mid-term plus
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2007-10-21
PZN - Pzena Investment Management
PZN - Pzena Investment Management plans on offering 7 million shares(assuming over-allotments) at a range of $16-$18. Goldman Sachs and UBS are lead managing the deal, BofA, Fox-Pitt Kelton, JP Morgan an KBW are co-managing. Post-ipo PZN will have 65 million shares outstanding for a market cap of $1.105 billion on a pricing of $17. IPO proceeds will be used to redeem shares from non-employee insiders. Essentially think of the shares offered in this deal as being offered by insiders as PZN will retain no ipo monies.
CEO Richard S. Pzena will own 40% of PZN post-ipo and will retain full voting control post-ipo due to a separate share class.
From the prospectus:
'Founded in late 1995, Pzena Investment Management, LLC is a premier value-oriented investment management firm with a record of investment excellence and exceptional client service.'
We've seen a few investment management firms ipo this decade(notably Calamos), however I believe this is the first value-oriented firm coming public in a longtime. Most of the management firms that have accessed the public markets via ipo over the years have concentrated more on growth investing.
As of 6/30/07, PZN managed $30.6 billion in assets. Revenues are generated on advisory fees earned on assets under management. For these type firms, the level of profits and growth are directly tied to the size and growth of assets under management. PZN earns about 1/2 of 1% annually on assets under management. The goal of PZN and those of their ilk is to invest those assets in a way that will generate strong annual gains as well as attract new money inflows to their funds.
PZN invests strictly on a value oriented approach, eschewing growth metrics. They've ten distinct value oriented strategies that differ by market cap and geographic focus. As of 6/30/07 PZN managed separate accounts on behalf of over 375 institutions and high net worth individual investors and acted as sub-investment adviser for twelve SEC-registered mutual funds and ten offshore funds. PZN has seen net-inflows annually each of the past five years.
PZN's value investment philosophy can be summed up as follows:
'we seek to make investments in good businesses at low prices...we are focused on generating excess returns over the long term.'
Asset growth has been impressive. On 12/31/03, PZN managed $5.8 billion in assets. They grew to $10.7 in 2004, $16.8 in 2005, $27.3 in 2006 and $30.6 as of 6/30/07. It should be noted that the first half of 2007 saw lowest dollar amount of net inflows since 2004. Net inflows the first half of 2007 were $1.3 billion, well below the first half of 2005 and 2006.
PZN's four main investment strategies, Large Cap Value, Value Service, Global Value and Small Cap Value, have outperformed their benchmarks by 3%-5% since inception. Note that while PZN underperformed during the bull run of the late '90's, they outperformed massively in the difficult markets of 2000-2002. Since 12/31/95, PZN has easily outperformed both the S&P 500 and the Russell 1000 value index.
John Hancock Advisers - Part of PZN's rapid growth the past three years has been due to a strategy of forming strategic relationships with 'sub-advisers', essentially managing the assets of investment funds. PZN has a close relationship with John Hancock Advisers managing mutual funds for Hancock. PZN acts as the investment 'sub-adviser'(read: asset manager) for the John Hancock Classic Value Fund, the John Hancock Classic Value Fund II, the John Hancock International Classic Value Fund and the John Hancock Classic Value Mega Cap Fund. these four funds combine for approximately 1/3 of all of PZN's assets under management. For In the past 18 months 20%-25% of all PZN revenues have been directly from assets managed for John Hancock.
Note - The third quarter of 2007 was characterized by a period in which value stocks underperformed heavily, as evidenced by the huge losses sustained by quant funds heavily long value and short speculative stocks. The rough quarter for value stocks did not leave PZN unscathed. PZN's assets under management as of 9/30/07 declined $1.7 billion to $28.9 billion. PZN saw net inflows for the quarter of $0.4 billion, meaning markets losses were $2.1 billion for the quarter alone. In other words PZN lost 6.8% across the board on their investments in the third quarter of 2007 alone. Third quarter was a rough quarter for the value approach indeed.
PZN's value strategy - PZN generally invests in companies after they have experienced a shortfall in their historic earnings, due to an adverse business development, management error, accounting scandal or other disruption, and before there is clear evidence of earnings recovery or business momentum. PZN's approach seeks to capture the return that can be obtained by investing in a company before the market has a level of confidence in its ability to achieve earnings recovery. Obviously the risk here is that the trouble company is unable to manage a turnaround. PZN's portfolios are concentrated, generally with 30 to 60 holdings of companies underperforming their historical earnings. When PZN enters a troubled company, they usually enter in pretty good size due to the relatively concentrated approach. Top holdings as of 9/30/07 included Citigroup, Allstate, Freddie Mac, Wal-Mart, Alcatel-Lucent and on the international side ING and Mitsubishi.
Financials
PZN will have about $50 million in debt(minus cash on hand) on the books post-ipo. Not enough to make much of a difference with $29 billion in assets under management. Should be noted however that the debt was taken on to fund a dividend payout to insiders pre-ipo.
PZN does plan on paying dividends of $0.11 quarterly. At an annualized $0.44, PZN would be yielding 2.6% annually on a pricing of $17.
2006 - PZN had total revenues of $115 million. Again revenues are generated from advisory fees based on assets under management. Unlike the hedge fund/private equity ipos we've seen in 2007, PZN does not generate revenues based on a percentage of portfolio gains quarterly of annually. Compensation and benefits expenses were a fairly low 30%. This is well below investment banking/private equity/M&A ipos of the past few years, all with compensation expense & benefit ratios in the 50%-60% ballpark. General and administrative expenses are minimal here, just 7% of revenues. Operating margins were 62%. Plugging in full taxes, net margins were 40%. Earnings per share were $0.71. On a pricing of $17, PZN would trade 24 x's 2006 earnings.
2007 - As PZN derives revenues from total assets under management and not gains on those assets, the bad third quarter won't kill their year. That is, assuming the 3rd quarter of 2007 was an anomaly and not the beginning of a trend. PZN actually had a very solid third quarter operationally as assets under management for the quarter, while they slipped, were still near all time highs for PZN. Through 3 quarters, revenues for 2007 are on pace to be $148 million, a 29% increase over 2006. With the ipo, the compensation expense and benefits ratio will actually decrease as a chunk this expense line will be shifted to equity compensation and ipo shares. Expect this expense line to dip to 23% or so, which will boost operating margins. 2007 operating margins should increase to 70%, with 43% net margins. Earnings per share should be in the $1.00 ballpark. On a pricing of $17, PZN would trade 17 X's 2007 earnings.
Looking across the publicly traded asset managers, nearly all trade 20-25 2007 earnings, indicating a bit of a discount here with the PZN pricing range. I suspect this in part to the rough third quarter for PZN's investments. If you look at PZN's track record over the past twelve years, the odds appear in favor of the third quarter of 2007 being an anomaly and not the beginning of a trend. As long as that is the case, PZN is an easy recommend in range. One thing you do not want to see here however, is another quarter of a drop in assets under management. I applaud PZN for having the fortitude to come public in a quarter in which their investments got knocked around pretty good. If PZN is able to return to their historic levels of gains on assets under management, the pricing range here offers good value mid-term plus
October 18, 2007, 1:29 pm
CML - Compellent Technologies
as always all ipo pieces on every ipo available to subscribers pre-ipo at http://www.tradingipos.com
2007-10-06
CML - Compellent Technologies
CML - Compellent Technologies plans on offering 6.9 million shares at a range of $10-$12. Morgan Stanley is leading the deal, Needham, Piper Jaffray, RBC and Weisel co-managing. Post-ipo, CML will have 30.5 million shares outstanding for a market cap of $336 million on a pricing of $11. IPO proceeds will be used for working capital (to fund losses) and general corporate purposes.
El Dorado and Crescendo Ventures will each own 17% of CML post-ipo. El Dorado and Crescendo each made a mint back in the 1990's, being very early stage tech centric venture funds. It has been quite awhile since one of their companies has gone public I believe.
From the prospectus:
'We are a leading provider of enterprise-class network storage solutions that are highly scalable, feature rich and designed to be easy to use and cost effective.'
Storage Area Network (SAN) operation; CML has sold their SAN's to 600 enterprises worldwide. They call their SAN, 'Storage Center.' CML describes their Storage Center product as follows:
'Provides storage virtualization and speeds both common and complex storage tasks by reducing the time and effort required for many complex functions into a few simple point-and-click steps.'
Performance: CML is still losing money on the bottom line. Two things however make this an interesting little tech ipo: Recent swift revenue growth and industry acknowledgment of CML's high quality storage solutions. Rarely in the prospectus do you see a company make the sort of claim CML makes. To quote, 'We believe that Storage Center is the most comprehensive enterprise-class network storage solution available today, providing increased functionality and lower total cost of ownership when compared to traditional storage systems.'
Awards: In 2006, InfoWorld selected CML's Storage Center as "Best SAN" and Computer Reseller News selected CML as a top Storage Standout. Gartner, a third-party industry analyst, recently reported Compellent to be the fastest growing disk storage company in the world in 2006.
CML does not sell through a direct sales force, instead relying 100% on channel partners. CML also employs something they call a 'virtual manufacturing strategy' in which their hardware component suppliers ship directly to customers, merging in transit with CML's storage solutions. This helps CML cut down on inventory as supplier components are pretty much drop shipped to CML's customers at the same time as CML's storage products. CML believes relying on channel partners as well as 'virtual manufacturing' lowers their operating cost structure.
Sector - Data storage as been a growing need this entire decade as enterprises are creating vast amounts of data in need of storing. Traditional storage solutions were not developed for the continued need for updated storage. These storage systems were designed to take storage snapshots, storing all data at regular intervals. This has led to massive stored data duplication.
CML's solution: Similar to 'node storage' CML's solution is based on module 'Dynamic Block' storage architecture. A block is the lowest level of data granularity within any storage system. Dynamic Block Architecture allows CML to record and track specific information about each block of data and provides intelligence on how that block is being used. With the use of modules, CML's customers can easily add storage capacity as they go. CML's block system also allows for automatic movement of blocks of data between tiers of high cost, high performance storage and tiers of lower cost inactive storage. CML believes up to 80% of stored data falls into the 'inactive' area, allowing CML's customers to save money in storing this inactive data in a low cost way.
Virtualization: Dynamic Block Architecture enables end users to create a shared storage pool. Storage Center distributes workloads across the entire pool, automatically improving utilization of storage resources for all applications. CML believes their Storage Center product meshes well with the growing adoption of server virtualization. CML and VMware have a technology partnership. From CML's website: 'Compellent's innovative storage virtualization technology integrates with VMware to create an efficient virtualized data center. Using Compellent and VMware in unison enables customers to improve utilization and lower overall costs with flexible server.'
CML currently has eight pending patent applications in the United States, two patent applications filed pursuant to the Patent Cooperation Treaty and four pending foreign patent applications. The bulk of the pending patents relate to their Dynamic Block Architecture.
Historically CML has focused on small and medium sized business. One of their growth goals going forward is to expand their business into larger enterprises. One reason that CML has focused on smaller operations is that the SAN space is dominated by large, well established tech companies. CML's direct competition includes Dell, EMC, Hewlett-Packard, Hitachi, IBM and Network Appliance.
CML has also focused primarily on the US market. 89% of revenues through the first 6 months of 2007 were from enterprises based in the US.
Financials
$2 per share in cash, no debt.
CML began shipping product in February 2004. Since revenues have grown briskly. In 2004, CML booked a shade under $4 million in revenues, $10 million in 2005 and $23.3 million in 2006. Through the first 6 months of 2007, CML appears on pace to book $48-$50 million in full year revenues a 100%+ increase over 2006. Hefty losses have come with the swift revenue growth. CML lost $0.43 in 2006.
2007 - Revenues are on pace to hit $48-$50 million in 2007, a strong 110% improvement over 2006. Gross margins are in the 45%-50% range. CML is such a young company it is not at all surprising that operating expenses here have been hefty in relation to revenues. Operating expense ratio in 2005 was 133%, 76% in 2006 and 68% through the first 6 months of 2007. The good news is that operating expenses are moving in the right direction, growing at a slower pace than revenues. They're still quite robust however, meaning CML is not closing in on break-even just yet. It should be noted that in the 6/07 quarter, CML did have by far both their strongest revenue quarter in operating history and lowest operating expense ratio. Assuming each trend continues the back half of the year, I'd expect CML to hit 62% operating expense ratio for the full year 2007. Losses for 2007 on $49-$50 million in revenues should be approximately $0.20 - $0.25.
2008 - With a company this young growing revenues this swiftly, we'll need to see the last two quarters of 2007 before predicting 2007. Assuming strong growth continues, CML should be shifting towards operational break-even sometime the back half of 2008.
Positives here are pretty clear: Swift 'hockey stick' type revenue growth from recent start up stage, industry awards, and a technology partnership with hyperbolic tech growth company VMware. Really that is enough to recommend CML in range. There are numerous risks here going forward that need to be mentioned. CML is coming public a bit too prematurely in their revenue and profit curve. This greatly heightens the risks going forward. As CML relies on one product (Storage Center) for the bulk of their revenues, any end market hiccup in quarterly demand/revenues would lead to a rather significant drop in share price. This is a very difficult and competitive sector filled with large players more than willing to cut margins to increase their market share and drive smaller companies such as CML out of the game. One need only to look at recent storage ipo ISLN for an example of what can go wrong with these type of young fast growing ipos; it is the pace of that growth stalls. In addition CML has never booked a quarterly profit and losses should continue annually for full year 2008. All this means one does not pay up heavily for this ipo. However, with an initial market cap in range of $350m or so, CML is worth the risk here. Personally I'd be far more comfortable if CML had one more year of revenue growth while shifting closer to break-even before accessing the public markets.
Recommend in range due to swift growth from recent start-up stage, industry awards/recognition and the technology partnership with VMware.
2007-10-06
CML - Compellent Technologies
CML - Compellent Technologies plans on offering 6.9 million shares at a range of $10-$12. Morgan Stanley is leading the deal, Needham, Piper Jaffray, RBC and Weisel co-managing. Post-ipo, CML will have 30.5 million shares outstanding for a market cap of $336 million on a pricing of $11. IPO proceeds will be used for working capital (to fund losses) and general corporate purposes.
El Dorado and Crescendo Ventures will each own 17% of CML post-ipo. El Dorado and Crescendo each made a mint back in the 1990's, being very early stage tech centric venture funds. It has been quite awhile since one of their companies has gone public I believe.
From the prospectus:
'We are a leading provider of enterprise-class network storage solutions that are highly scalable, feature rich and designed to be easy to use and cost effective.'
Storage Area Network (SAN) operation; CML has sold their SAN's to 600 enterprises worldwide. They call their SAN, 'Storage Center.' CML describes their Storage Center product as follows:
'Provides storage virtualization and speeds both common and complex storage tasks by reducing the time and effort required for many complex functions into a few simple point-and-click steps.'
Performance: CML is still losing money on the bottom line. Two things however make this an interesting little tech ipo: Recent swift revenue growth and industry acknowledgment of CML's high quality storage solutions. Rarely in the prospectus do you see a company make the sort of claim CML makes. To quote, 'We believe that Storage Center is the most comprehensive enterprise-class network storage solution available today, providing increased functionality and lower total cost of ownership when compared to traditional storage systems.'
Awards: In 2006, InfoWorld selected CML's Storage Center as "Best SAN" and Computer Reseller News selected CML as a top Storage Standout. Gartner, a third-party industry analyst, recently reported Compellent to be the fastest growing disk storage company in the world in 2006.
CML does not sell through a direct sales force, instead relying 100% on channel partners. CML also employs something they call a 'virtual manufacturing strategy' in which their hardware component suppliers ship directly to customers, merging in transit with CML's storage solutions. This helps CML cut down on inventory as supplier components are pretty much drop shipped to CML's customers at the same time as CML's storage products. CML believes relying on channel partners as well as 'virtual manufacturing' lowers their operating cost structure.
Sector - Data storage as been a growing need this entire decade as enterprises are creating vast amounts of data in need of storing. Traditional storage solutions were not developed for the continued need for updated storage. These storage systems were designed to take storage snapshots, storing all data at regular intervals. This has led to massive stored data duplication.
CML's solution: Similar to 'node storage' CML's solution is based on module 'Dynamic Block' storage architecture. A block is the lowest level of data granularity within any storage system. Dynamic Block Architecture allows CML to record and track specific information about each block of data and provides intelligence on how that block is being used. With the use of modules, CML's customers can easily add storage capacity as they go. CML's block system also allows for automatic movement of blocks of data between tiers of high cost, high performance storage and tiers of lower cost inactive storage. CML believes up to 80% of stored data falls into the 'inactive' area, allowing CML's customers to save money in storing this inactive data in a low cost way.
Virtualization: Dynamic Block Architecture enables end users to create a shared storage pool. Storage Center distributes workloads across the entire pool, automatically improving utilization of storage resources for all applications. CML believes their Storage Center product meshes well with the growing adoption of server virtualization. CML and VMware have a technology partnership. From CML's website: 'Compellent's innovative storage virtualization technology integrates with VMware to create an efficient virtualized data center. Using Compellent and VMware in unison enables customers to improve utilization and lower overall costs with flexible server.'
CML currently has eight pending patent applications in the United States, two patent applications filed pursuant to the Patent Cooperation Treaty and four pending foreign patent applications. The bulk of the pending patents relate to their Dynamic Block Architecture.
Historically CML has focused on small and medium sized business. One of their growth goals going forward is to expand their business into larger enterprises. One reason that CML has focused on smaller operations is that the SAN space is dominated by large, well established tech companies. CML's direct competition includes Dell, EMC, Hewlett-Packard, Hitachi, IBM and Network Appliance.
CML has also focused primarily on the US market. 89% of revenues through the first 6 months of 2007 were from enterprises based in the US.
Financials
$2 per share in cash, no debt.
CML began shipping product in February 2004. Since revenues have grown briskly. In 2004, CML booked a shade under $4 million in revenues, $10 million in 2005 and $23.3 million in 2006. Through the first 6 months of 2007, CML appears on pace to book $48-$50 million in full year revenues a 100%+ increase over 2006. Hefty losses have come with the swift revenue growth. CML lost $0.43 in 2006.
2007 - Revenues are on pace to hit $48-$50 million in 2007, a strong 110% improvement over 2006. Gross margins are in the 45%-50% range. CML is such a young company it is not at all surprising that operating expenses here have been hefty in relation to revenues. Operating expense ratio in 2005 was 133%, 76% in 2006 and 68% through the first 6 months of 2007. The good news is that operating expenses are moving in the right direction, growing at a slower pace than revenues. They're still quite robust however, meaning CML is not closing in on break-even just yet. It should be noted that in the 6/07 quarter, CML did have by far both their strongest revenue quarter in operating history and lowest operating expense ratio. Assuming each trend continues the back half of the year, I'd expect CML to hit 62% operating expense ratio for the full year 2007. Losses for 2007 on $49-$50 million in revenues should be approximately $0.20 - $0.25.
2008 - With a company this young growing revenues this swiftly, we'll need to see the last two quarters of 2007 before predicting 2007. Assuming strong growth continues, CML should be shifting towards operational break-even sometime the back half of 2008.
Positives here are pretty clear: Swift 'hockey stick' type revenue growth from recent start up stage, industry awards, and a technology partnership with hyperbolic tech growth company VMware. Really that is enough to recommend CML in range. There are numerous risks here going forward that need to be mentioned. CML is coming public a bit too prematurely in their revenue and profit curve. This greatly heightens the risks going forward. As CML relies on one product (Storage Center) for the bulk of their revenues, any end market hiccup in quarterly demand/revenues would lead to a rather significant drop in share price. This is a very difficult and competitive sector filled with large players more than willing to cut margins to increase their market share and drive smaller companies such as CML out of the game. One need only to look at recent storage ipo ISLN for an example of what can go wrong with these type of young fast growing ipos; it is the pace of that growth stalls. In addition CML has never booked a quarterly profit and losses should continue annually for full year 2008. All this means one does not pay up heavily for this ipo. However, with an initial market cap in range of $350m or so, CML is worth the risk here. Personally I'd be far more comfortable if CML had one more year of revenue growth while shifting closer to break-even before accessing the public markets.
Recommend in range due to swift growth from recent start-up stage, industry awards/recognition and the technology partnership with VMware.
October 6, 2007, 1:27 am
DUF - Duff & Phelps
disclosure - as of date of blog post(10/05/07), tradingipos.com does have a position in DUF.
going on 2 1/2 years now, as always all ipo analysis pieces are available to subscribers pre-ipo.
http://www.tradingipos.com/subscribe.php
2007-09-23
DUF - Duff & Phelps
DUF - Duff & Phelps plans on offering 9.5 million shares (assuming over-allotments) at a range of $16.50-$18.50. Goldman Sachs and UBS are lead managing the deal. Lehman, William Blair, KBW, and fox-Pitt Kelton will be co-managing. Post-ipo DUF will have 33.8 million shares outstanding for a market cap of $592 million on a $17.50 pricing. Approximately 20% of the ipo proceeds will be used to repay debt, the remainder will go to insiders.
Vestar Capital will own 20% of DUF post-ipo, Lovell Minnick 16%. Both are private equity entities that came on board DUF to help fund the 2005 purchase of Corporate Value Consulting from Standard & Poors. In addition on 9/1/07, Shinsei Bank (Japanese) purchased a 10% post-ipo stake in DUF at $16.07 per share.
From the prospectus:
'We are a leading provider of independent financial advisory and investment banking services. Our mission is to help our clients protect, maximize and recover value. The foundation of our services is our ability to provide independent advice on issues involving highly technical and complex assessments of value.'
DUF's valuation advisory services are focused on four core areas: 1)financial and tax valuation; 2)mergers & acquisitions; 3)restructuring; and 4) litigation & dispute.
We've seen a number of financial advisory and/or investment banks come public the past few years. DUF is a bit of a different animal than the rest as they focus on the unique niche of valuation advisory services specializing in complex financial, accounting, tax, regulatory and legal issues.
DUF breaks down their business into Financial Advisory and Investment Banking segments. Financial Advisory segment provides valuation advisory, corporate finance consulting, specialty tax and dispute and legal management consulting services. Investment Banking Segment provides M&A advisory services, transaction opinions and restructuring advisory services.
This is a good spot to make an important point. With the slowdown in M&A activities over the past two months, this might not be an ideal time for a financial operation with an Investment Banking M&A component to come public. DUF however derives 75%-80% of annual revenues from their Financial Advisory segment (valuation advice) and 20%-25% from their Investment Banking segment. It should be noted that a chunk of those Financial Advisory segment revenues have come from valuation advisory services for newly acquired/merged operations. DUF believes the past 18 months that 45%-50% of their overall revenues were in some aspect related to M&A. This alone should be enough to proceed with a bit of caution on this DUF ipo.
DUF does not fall neatly into either of the financial advisory/IB ipos of the past two years in that they do not rely primarily on either direct M&A advisory services nor capital raising (IPO/secondary) activities.
DUF (with 21 offices, 6 being international) had approximately 400 clients in 2006. 36% of the S&P were a client sometime over the past 18 months and during that period 60%+ of revenues were derived from repeat customers. DUF is the industry's leading independent practice providing purchase price allocation services. Additionally, DUF is the number two independent provider of fairness opinions and a top ten global provider of restructuring services based on number of assignments.
Growth Drivers:
Sarbanes Oxley - In 2002 the Sarbanes-Oxley Act, among other things, has conflict of interest restraints preventing accounting firms from providing other non-audit advice. The Enron scandal was the primary driver behind this aspect of Sarbanes-Oxley. This has led to an increase in demand for independent non-audit accounting related services. DUF believes that Sarbanes-Oxley gives them a competitive advantage over the auditing focused accounting firms in securing valuation advisory clients as DUF has no audit related segment and thus no potential conflicts of interest that would run up against the constraints of Sarbanes-Oxley.
Fair Value Accounting - DUF believes they benefit from the shift towards Fair Value Accounting (FVA). FVA seeks to measure the current market value of a company's assets and liabilities as an alternative to the traditional historical cost method of accounting. Simplified for our purposes, FVA is an accounting snapshot of a company as it looks on current assessment of value, not historical. As DUF specializes in valuation, this shift to FVA standards and away from historical accounting standards plays into their favor.
Global M&A boom - This is the big question mark with this ipo. While DUF's direct M&A advisory arm is small when compared to their Financial Advisory segment, a huge chunk of their organic growth the past few years has been from giving financial advisory valuation services to newly acquired and merged companies. As M&A activity, particularly levered buyout M&A activity has slowed significantly the past few months, it remains to be seen what sort of impact this slowdown will have on DUF's advisory services. I would think the third quarter of 2007 will see a rather significant slowdown in DUF's direct and indirect M&A related revenues. Whether M&A activity resumes strength over the next twelve months will go a long way in determining the success of this DUF ipo.
Restructuring - On the flip side, if the economy slows DUF hopes that their restructuring and financial distress advisory services will grow in demand. I do like that DUF is playing both sides of the fence here with merger financial valuation advisory services as well as bankruptcy valuation services. On some level, valuation experts will be in demand no matter the economic climate.
Note - In the prospectus DUF stresses quite a bit on their non M&A related strengths. They do have that, however the transaction boom the past few years has been very good to DUF. It stands to reason that if the number of transactions in the global marketplace slow from 2006 and first half 2007 levels, DUF's revenue stream would be impacted on some level.
Financials
DUF will have approximately $1 per share in cash and debt each on the books post-ipo.
Compensation expense ratio - DUF is a people expertise operation, quite similar in this fashion to investment banking/M&A ipos such as EVR/GHL/TWPG etc...As such, compensation expenses are by far the highest expense line item. DUF's historical compensation expenses are a bit more difficult to decipher than most as they've made a few acquisitions over the past few years, most significantly being the private equity backed Corporate Value Consulting acquisition in 2005. These acquisitions have led to significantly deferred equity compensation expenses which have shown up in 2006 and 2007 (and will again for the final time in 200. Folding out these acquisition related awards, DUF's compensation expense ratio is in line with other 'people expertise' operations at 50%.
*Note* - DUF does not fold out these acquisition related expenses in the prospectus, so the numbers below will look different than those in the prospectus. I feel the numbers below are more representative of the overall operation in 2006 and first half of 2007.
Much of DUF's revenue growth has been fueled by their own acquisitions and related M&A advisory services.
2006 - Revenues were $278 million. Compensation expense ratio was 50%. Operating margins were 11%, net margins 6%. Earnings per share were $0.50.
2007 - without seeing the impact of 3rd quarter M&A slowdown on results, I'm not going to try and forecast the full year here. This is one of those ipos that is coming right in the middle of a whole lot of confusion in their core growth driver niche and frankly I don't know how significant the M&A slowdown in the third quarter of 2007 will be on DUF. Instead let us take a look at the first half of 2007 and go from there. Revenues for the first half of 2007 were a very strong $171 million. DUF at the halfway point was on pace to blow away 2006 revenue numbers. Compensation expense ratio was 52%. Operating margins were 14%, net margins 8%. Earnings per share for the first half of 2007 were $0.42.
One would have to surmise that DUF's third quarter of 2007 will be stagnant at best, most likely a bit weaker than the first half of 2007. If we are a bit conservative on the back half of 2007, DUF earnings per share range should be $0.70 - $0.75 for the full year. On a pricing of $18.50, DUF would be trading 25 X's 2007 earnings. Again keep in mind due to the acquisition related deferred compensation expenses, GAAP earnings will be much smaller than this number. This number however is a truer indication of their current business.
Conclusion - This is a tough one. DUF had a very solid first half of 2007 fueled by prior acquisitions and a strong M&A environment. DUF is a niche leader in valuation advisory, a nice growing segment whose growth is not entirely fueled by M&A. I really would like to see DUF's third quarter earnings report. I think the abrupt global M&A slowdown in July had to have impacted DUF in some fashion. I like expertise related niche leaders however I would be very careful adding DUF on an aggressive open pending the third quarter earnings release. . M&A activity in the first half of 2007 was about as strong as it has ever been. That pace has slowed considerable thus far in the 2nd half of 2007. DUF's niche leadership is enough to recommend in range, however I'm not interested here on an aggressive opening until I see the third quarter earnings report.
going on 2 1/2 years now, as always all ipo analysis pieces are available to subscribers pre-ipo.
http://www.tradingipos.com/subscribe.php
2007-09-23
DUF - Duff & Phelps
DUF - Duff & Phelps plans on offering 9.5 million shares (assuming over-allotments) at a range of $16.50-$18.50. Goldman Sachs and UBS are lead managing the deal. Lehman, William Blair, KBW, and fox-Pitt Kelton will be co-managing. Post-ipo DUF will have 33.8 million shares outstanding for a market cap of $592 million on a $17.50 pricing. Approximately 20% of the ipo proceeds will be used to repay debt, the remainder will go to insiders.
Vestar Capital will own 20% of DUF post-ipo, Lovell Minnick 16%. Both are private equity entities that came on board DUF to help fund the 2005 purchase of Corporate Value Consulting from Standard & Poors. In addition on 9/1/07, Shinsei Bank (Japanese) purchased a 10% post-ipo stake in DUF at $16.07 per share.
From the prospectus:
'We are a leading provider of independent financial advisory and investment banking services. Our mission is to help our clients protect, maximize and recover value. The foundation of our services is our ability to provide independent advice on issues involving highly technical and complex assessments of value.'
DUF's valuation advisory services are focused on four core areas: 1)financial and tax valuation; 2)mergers & acquisitions; 3)restructuring; and 4) litigation & dispute.
We've seen a number of financial advisory and/or investment banks come public the past few years. DUF is a bit of a different animal than the rest as they focus on the unique niche of valuation advisory services specializing in complex financial, accounting, tax, regulatory and legal issues.
DUF breaks down their business into Financial Advisory and Investment Banking segments. Financial Advisory segment provides valuation advisory, corporate finance consulting, specialty tax and dispute and legal management consulting services. Investment Banking Segment provides M&A advisory services, transaction opinions and restructuring advisory services.
This is a good spot to make an important point. With the slowdown in M&A activities over the past two months, this might not be an ideal time for a financial operation with an Investment Banking M&A component to come public. DUF however derives 75%-80% of annual revenues from their Financial Advisory segment (valuation advice) and 20%-25% from their Investment Banking segment. It should be noted that a chunk of those Financial Advisory segment revenues have come from valuation advisory services for newly acquired/merged operations. DUF believes the past 18 months that 45%-50% of their overall revenues were in some aspect related to M&A. This alone should be enough to proceed with a bit of caution on this DUF ipo.
DUF does not fall neatly into either of the financial advisory/IB ipos of the past two years in that they do not rely primarily on either direct M&A advisory services nor capital raising (IPO/secondary) activities.
DUF (with 21 offices, 6 being international) had approximately 400 clients in 2006. 36% of the S&P were a client sometime over the past 18 months and during that period 60%+ of revenues were derived from repeat customers. DUF is the industry's leading independent practice providing purchase price allocation services. Additionally, DUF is the number two independent provider of fairness opinions and a top ten global provider of restructuring services based on number of assignments.
Growth Drivers:
Sarbanes Oxley - In 2002 the Sarbanes-Oxley Act, among other things, has conflict of interest restraints preventing accounting firms from providing other non-audit advice. The Enron scandal was the primary driver behind this aspect of Sarbanes-Oxley. This has led to an increase in demand for independent non-audit accounting related services. DUF believes that Sarbanes-Oxley gives them a competitive advantage over the auditing focused accounting firms in securing valuation advisory clients as DUF has no audit related segment and thus no potential conflicts of interest that would run up against the constraints of Sarbanes-Oxley.
Fair Value Accounting - DUF believes they benefit from the shift towards Fair Value Accounting (FVA). FVA seeks to measure the current market value of a company's assets and liabilities as an alternative to the traditional historical cost method of accounting. Simplified for our purposes, FVA is an accounting snapshot of a company as it looks on current assessment of value, not historical. As DUF specializes in valuation, this shift to FVA standards and away from historical accounting standards plays into their favor.
Global M&A boom - This is the big question mark with this ipo. While DUF's direct M&A advisory arm is small when compared to their Financial Advisory segment, a huge chunk of their organic growth the past few years has been from giving financial advisory valuation services to newly acquired and merged companies. As M&A activity, particularly levered buyout M&A activity has slowed significantly the past few months, it remains to be seen what sort of impact this slowdown will have on DUF's advisory services. I would think the third quarter of 2007 will see a rather significant slowdown in DUF's direct and indirect M&A related revenues. Whether M&A activity resumes strength over the next twelve months will go a long way in determining the success of this DUF ipo.
Restructuring - On the flip side, if the economy slows DUF hopes that their restructuring and financial distress advisory services will grow in demand. I do like that DUF is playing both sides of the fence here with merger financial valuation advisory services as well as bankruptcy valuation services. On some level, valuation experts will be in demand no matter the economic climate.
Note - In the prospectus DUF stresses quite a bit on their non M&A related strengths. They do have that, however the transaction boom the past few years has been very good to DUF. It stands to reason that if the number of transactions in the global marketplace slow from 2006 and first half 2007 levels, DUF's revenue stream would be impacted on some level.
Financials
DUF will have approximately $1 per share in cash and debt each on the books post-ipo.
Compensation expense ratio - DUF is a people expertise operation, quite similar in this fashion to investment banking/M&A ipos such as EVR/GHL/TWPG etc...As such, compensation expenses are by far the highest expense line item. DUF's historical compensation expenses are a bit more difficult to decipher than most as they've made a few acquisitions over the past few years, most significantly being the private equity backed Corporate Value Consulting acquisition in 2005. These acquisitions have led to significantly deferred equity compensation expenses which have shown up in 2006 and 2007 (and will again for the final time in 200
. Folding out these acquisition related awards, DUF's compensation expense ratio is in line with other 'people expertise' operations at 50%. *Note* - DUF does not fold out these acquisition related expenses in the prospectus, so the numbers below will look different than those in the prospectus. I feel the numbers below are more representative of the overall operation in 2006 and first half of 2007.
Much of DUF's revenue growth has been fueled by their own acquisitions and related M&A advisory services.
2006 - Revenues were $278 million. Compensation expense ratio was 50%. Operating margins were 11%, net margins 6%. Earnings per share were $0.50.
2007 - without seeing the impact of 3rd quarter M&A slowdown on results, I'm not going to try and forecast the full year here. This is one of those ipos that is coming right in the middle of a whole lot of confusion in their core growth driver niche and frankly I don't know how significant the M&A slowdown in the third quarter of 2007 will be on DUF. Instead let us take a look at the first half of 2007 and go from there. Revenues for the first half of 2007 were a very strong $171 million. DUF at the halfway point was on pace to blow away 2006 revenue numbers. Compensation expense ratio was 52%. Operating margins were 14%, net margins 8%. Earnings per share for the first half of 2007 were $0.42.
One would have to surmise that DUF's third quarter of 2007 will be stagnant at best, most likely a bit weaker than the first half of 2007. If we are a bit conservative on the back half of 2007, DUF earnings per share range should be $0.70 - $0.75 for the full year. On a pricing of $18.50, DUF would be trading 25 X's 2007 earnings. Again keep in mind due to the acquisition related deferred compensation expenses, GAAP earnings will be much smaller than this number. This number however is a truer indication of their current business.
Conclusion - This is a tough one. DUF had a very solid first half of 2007 fueled by prior acquisitions and a strong M&A environment. DUF is a niche leader in valuation advisory, a nice growing segment whose growth is not entirely fueled by M&A. I really would like to see DUF's third quarter earnings report. I think the abrupt global M&A slowdown in July had to have impacted DUF in some fashion. I like expertise related niche leaders however I would be very careful adding DUF on an aggressive open pending the third quarter earnings release. . M&A activity in the first half of 2007 was about as strong as it has ever been. That pace has slowed considerable thus far in the 2nd half of 2007. DUF's niche leadership is enough to recommend in range, however I'm not interested here on an aggressive opening until I see the third quarter earnings report.
September 21, 2007, 4:21 pm
PRGN - Paragon Shipping
disclosure: Tradingipos.com does hold a position currently in PRGN. Full analysis pieces on every ipo for subscribers at http://www.tradingipos.com
2007-08-09
PRGN - Paragon Shipping
PRGN - Paragon Shipping plans on offering 10.3 million shares at a range of $16-$18. UBS and Morgan Stanley are lead managing the deal, Cantor Fitzgerald and Dahlman Rose are co-managing. Post ipo PRGN will have 26 million shares outstanding for a market cap of $442 million on a pricing of $17. IPO proceeds will be used to assist in purchasing PRGN's fleet.
Chairman and CEO Michael Bodouroglou will own 20% of PRGN post-ipo.
From the prospectus:
'We are a recently formed company incorporated in the Republic of the Marshall Islands in April 2006 to provide drybulk shipping services worldwide. We acquired our current fleet of three Handymax and three Panamax drybulk carriers, which we refer to as our initial fleet, in the fourth quarter of 2006 and the beginning of 2007.'
PRGN's initial fleet of six drybulk vessels achieved daily time charter equivalent rates of $24,080 the first quarter of 2007. All six are currently employed under fixed rate time charters with an average remaining term of 19.6 months as of June 30, 2007. In addition to the initial fleet, PRGN has agreed to purchase an additional three drybulk vessels. These three have existing charters with an average remaining term of 28.1 months as of June 30, 2007.
PRGN plans to distribute cash flows quarterly to shareholders. Based on projections, the initial dividend is expected to be $0.4744 quarterly. Annualized that will be $1.90. On pricing of $17, PRGN would yield a very strong 11.2%.
A quick glance at annual yields of similar public companies based on most recent quarterly payout:
OCNF 9.7%; DSX 8%; DRYS 1.5%; EXM 2.7%; EGLE 7.3%; GNK 4.8%; QMAR 7%.
Some of the public dry bulk shippers distribute bulk of cash flows to shareholders, some utilize cash flows to grow. PRGN on a mid-range pricing would be the strongest yielding public drybulk shipper it would appear. This strong dividend makes the deal work.
Note - PRGN has three time charters expiring over the next few months. They've already rechartered each at substantially higher rates then the previous charters.
CEO and Chairman Michael Bodouroglou will also act as Fleet Manager through another company he owns and operates. Fleet management fees appear as if they'll be approximately $2.2 million annually.
Average age of the combined fleet is 7.8 years.
Sector
Dry Bulk cargo consists of of iron ore, coal and grains as well as fertilizers, forest products and essentially any non-liquid, non-container cargo. Dry bulk cargo accounts for 33% of world seaborne trade with coal and ion ore combining for 51% of all dry bulk cargo. The dry bulk cargo sector has grown an average of 5% annually this decade.
Dry bulk rates exploded in late 2003 and hit all-time highs the second half of 2004. New shipbuilds had slowed to a crawl during the worldwide economic slowdown in 2001-2002 and there just were not enough vessels in use in 2003/2004 to handle the demand boom from China/India coupled with a worldwide economic activity pick-up. Since, the sector has seen a sharp rise in new vessel construction much of which has begun to come on-line the past 2 years. The result has been a move off the highs for the dry bulk spot rate market. Worldwide demand however has continued to remain strong and while dry bulk rates are not at their record levels, they have been in a fairly tight range the past two years at historically strong levels. The big risk in the shipping sector is a worldwide economic slowdown just as heavy supply of new shipbuilds come on-line.
The big risk here is that there is a global economic slowdown at just about the time PRGN's charters expire. If that is the case, PRGN may struggle to replace their vessels at a price near current charter rates. Also as this sector is notoriously cyclical, new shipbuilds tend to increase dramatically during periods of strong rates. That is occurring currently. As of 4/30/07 drybulk newbuilding orders had been placed for an aggregate of more than 20.0% of the existing global drybulk fleet, with deliveries expected during the next 36 months. This is a classic boom/bust sector with a few of the public companies in the sector managed by those that went bankrupt during the last cycle trough.
Financials
PRGN will have a bit of debt on the books post ipo, $126 million worth.
1 1/2 X's book value.
Forecast - As PRGN plans on distributing nearly all quarterly cash flows to shareholders, cash flow here is what to look at not earnings. PRGN forecasts approximately $85 million in revenues their first year public. Based on current charter rates, PRGN anticipates $45-$50 million in distributable cash flows.
conclusion - The initial yield makes this deal work. Keep in mind while the yield is strong, this a classic boom/bust sector currently enjoying a boom time. Recommend due to the 11.1% initial yield on a pricing of $16.
2007-08-09
PRGN - Paragon Shipping
PRGN - Paragon Shipping plans on offering 10.3 million shares at a range of $16-$18. UBS and Morgan Stanley are lead managing the deal, Cantor Fitzgerald and Dahlman Rose are co-managing. Post ipo PRGN will have 26 million shares outstanding for a market cap of $442 million on a pricing of $17. IPO proceeds will be used to assist in purchasing PRGN's fleet.
Chairman and CEO Michael Bodouroglou will own 20% of PRGN post-ipo.
From the prospectus:
'We are a recently formed company incorporated in the Republic of the Marshall Islands in April 2006 to provide drybulk shipping services worldwide. We acquired our current fleet of three Handymax and three Panamax drybulk carriers, which we refer to as our initial fleet, in the fourth quarter of 2006 and the beginning of 2007.'
PRGN's initial fleet of six drybulk vessels achieved daily time charter equivalent rates of $24,080 the first quarter of 2007. All six are currently employed under fixed rate time charters with an average remaining term of 19.6 months as of June 30, 2007. In addition to the initial fleet, PRGN has agreed to purchase an additional three drybulk vessels. These three have existing charters with an average remaining term of 28.1 months as of June 30, 2007.
PRGN plans to distribute cash flows quarterly to shareholders. Based on projections, the initial dividend is expected to be $0.4744 quarterly. Annualized that will be $1.90. On pricing of $17, PRGN would yield a very strong 11.2%.
A quick glance at annual yields of similar public companies based on most recent quarterly payout:
OCNF 9.7%; DSX 8%; DRYS 1.5%; EXM 2.7%; EGLE 7.3%; GNK 4.8%; QMAR 7%.
Some of the public dry bulk shippers distribute bulk of cash flows to shareholders, some utilize cash flows to grow. PRGN on a mid-range pricing would be the strongest yielding public drybulk shipper it would appear. This strong dividend makes the deal work.
Note - PRGN has three time charters expiring over the next few months. They've already rechartered each at substantially higher rates then the previous charters.
CEO and Chairman Michael Bodouroglou will also act as Fleet Manager through another company he owns and operates. Fleet management fees appear as if they'll be approximately $2.2 million annually.
Average age of the combined fleet is 7.8 years.
Sector
Dry Bulk cargo consists of of iron ore, coal and grains as well as fertilizers, forest products and essentially any non-liquid, non-container cargo. Dry bulk cargo accounts for 33% of world seaborne trade with coal and ion ore combining for 51% of all dry bulk cargo. The dry bulk cargo sector has grown an average of 5% annually this decade.
Dry bulk rates exploded in late 2003 and hit all-time highs the second half of 2004. New shipbuilds had slowed to a crawl during the worldwide economic slowdown in 2001-2002 and there just were not enough vessels in use in 2003/2004 to handle the demand boom from China/India coupled with a worldwide economic activity pick-up. Since, the sector has seen a sharp rise in new vessel construction much of which has begun to come on-line the past 2 years. The result has been a move off the highs for the dry bulk spot rate market. Worldwide demand however has continued to remain strong and while dry bulk rates are not at their record levels, they have been in a fairly tight range the past two years at historically strong levels. The big risk in the shipping sector is a worldwide economic slowdown just as heavy supply of new shipbuilds come on-line.
The big risk here is that there is a global economic slowdown at just about the time PRGN's charters expire. If that is the case, PRGN may struggle to replace their vessels at a price near current charter rates. Also as this sector is notoriously cyclical, new shipbuilds tend to increase dramatically during periods of strong rates. That is occurring currently. As of 4/30/07 drybulk newbuilding orders had been placed for an aggregate of more than 20.0% of the existing global drybulk fleet, with deliveries expected during the next 36 months. This is a classic boom/bust sector with a few of the public companies in the sector managed by those that went bankrupt during the last cycle trough.
Financials
PRGN will have a bit of debt on the books post ipo, $126 million worth.
1 1/2 X's book value.
Forecast - As PRGN plans on distributing nearly all quarterly cash flows to shareholders, cash flow here is what to look at not earnings. PRGN forecasts approximately $85 million in revenues their first year public. Based on current charter rates, PRGN anticipates $45-$50 million in distributable cash flows.
conclusion - The initial yield makes this deal work. Keep in mind while the yield is strong, this a classic boom/bust sector currently enjoying a boom time. Recommend due to the 11.1% initial yield on a pricing of $16.
September 5, 2007, 2:22 am
EJ
Well it appears the ipo schedule will commence next week after a 3 week or so lull. We should see quite a few the back half of September so we'll resume the one free weekly blog piece.
This weeks is an interesting China ipo from August, EJ. Note as always analysis pieces are available for subscribers before debut. The free blog pieces are all done pre-ipo and posted here after debut. We've analyzed pretty much every ipo here before debut for 2 1/2 years now. Subscriptions to the site are available at:
http://www.tradingipos.com/subscribe.php
2007-08-04
EJ - E-House(China) Holdings
EJ - E-House (China) Holdings plans on offering 16.8 million ADS at a range of $11.50 - $13.50. 4 million ADS will be sold by insiders. Credit Suisse and Merrill Lynch will be lead managing the deal, CIBC and Lazard co-managing. Post-ipo EJ will have 76 million ADS equivalent shares outstanding for a market cap of $950 million on a $12.50 pricing. Bulk of ipo proceeds will be used to fund capital expenditures.
Chairman and CEO Xin Zhou will own 30% of EJ post-ipo.
From the prospectus:
'We are a leading real estate services company in China based on scope of services, brand recognition and geographic presence. We provide primary real estate agency services, secondary real estate brokerage services as well as real estate consulting and information services.'
EJ has been the largest real estate agency and consulting services company in China for three years now (2004-2006). EJ has 2,100 real estate professionals in twenty cities throughout China. In the past five years they've sold 5 million square feet of properties worth a $5.4 billion US. EJ also operates the only information system that provides up-to-date, comprehensive and in-depth information covering residential and commercial real estate properties in all major regions in China.
Chinese sector leaders in fast growing sectors have done very well in the US market the past few years, usually garnering aggressive multiples. The US market has not been a 'one size fits all' for Chinese offerings, the differentiators would appear to be that sector leadership. Sector leaders tend to outperform non-sector leader Chinese ipos. Financials and valuation aside, EJ would appear to fit in the 'sector leadership outperformer' category.
Awards - EJ has been named "China’s Best Company" from the National Association of Real Estate Brokerage and Appraisal Companies in 2006, and the "Leading Brand Name in China’s Real Estate Services Industry" from the China Real Estate Top 10 Committee in 2006.
Sector - The real estate sector in China has experienced rapid growth with primary property sales revenue growing 38% over the past five years. Primary property refers to the sale of new properties, which is EJ's focus. As such, EJ's clients tend to be real estate developers who utilize EJ's middle-man services to consult on development and to sell their properties. 82% of revenues in 2006 were from services relating to 'primary' (newly developed) properties.
Approximately 45% of 2006 revenues were derived in the populous Shanghai, Jiangsu Province and Zhejiang Province.
Governmental Control - Since 2006, the PRC has instituted a number of initiatives to slow the swift property growth rates. These include: requiring that at least 70% of the land approved by a local government for residential property development for any given year be used for developing low- to-medium cost and small-to-medium size units and low-cost rental properties; 70% of construction be for 'small unit space' properties. Increasing the down payment required for larger properties; imposing a resale tax on properties held less than five years.
Note- EJ has very high 'receivables' for their revenues stream. The June 2007 quarter saw approximately $23.5 million in revenues, while receivables on the book totaled $48.5 million. This appears due to EJ receiving payment for services only after a development (or phase of development) has been completely sold. EJ reports revenue upon each sale, however they do not receive the actual monies until the entire development project has been completed and all units sold. I'm not real thrilled with this accounting method. It appears to be a concession EJ has made to garner business, which is fine. However they've substantial receivables on the books that they've already booked as revenues but have not yet been paid. Cash flows here are not nearly as impressive as revenues/earnings would indicate. If all goes well they would eventually see the cash, however there appears to be serious lag time here from 'booking' revenues and actually receiving monies.
Financials
$2 per share in cash post ipo.
Tax Rate - EJ is taxed a little more heavily than many of the Chinese based ipos we've seen. It appears EJ's current tax rate is in the 25%-30% ballpark.
Historically, EJ has booked an outsized revenue number in the fourth quarter of the year. For example in 2006 quarterly revenue numbers were (in millions) $4, $10, $8 and $34. I would expect a similar trend in 2007.
2006 - Revenues were $56 million, a 44% increase over 2005. Operating margins were a strong 44%. Net margins were 34%. Earnings per share were $0.24.
2007 - As the bulk of revenues will be booked in the fourth quarter, it is a bit difficult to forecast full year. However based on the growth in first and second quarters, I would expect revenues to rise sharply in 2007 to $115 million or so. That would be a very impressive 100%+ revenue growth in 2007. Operating margins should improve to 50%. *Note* - both revenue and operating margin numbers assume a strong fourth quarter of 2007. Net margins should be 38%. Earnings per share should be $0.55 - $0.60. On a pricing of $12.50, EJ would trade 22 x's 2007 earnings.
*Note* - EJ's net margins and earnings per share are not quite comparable to similar sector leader Chinese ipos in that their earnings are taxed at a higher rate than most of those.
Conclusion - Strong recommend in range. In fact, EJ is so attractive in range, I expect the range to be increased here. Sector leader in a fast growing sector, 100% revenue increase expected in 2007, coming at a pretty fully taxed 21 X's 2007 earnings. EJ is coming too cheap in range.
This weeks is an interesting China ipo from August, EJ. Note as always analysis pieces are available for subscribers before debut. The free blog pieces are all done pre-ipo and posted here after debut. We've analyzed pretty much every ipo here before debut for 2 1/2 years now. Subscriptions to the site are available at:
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2007-08-04
EJ - E-House(China) Holdings
EJ - E-House (China) Holdings plans on offering 16.8 million ADS at a range of $11.50 - $13.50. 4 million ADS will be sold by insiders. Credit Suisse and Merrill Lynch will be lead managing the deal, CIBC and Lazard co-managing. Post-ipo EJ will have 76 million ADS equivalent shares outstanding for a market cap of $950 million on a $12.50 pricing. Bulk of ipo proceeds will be used to fund capital expenditures.
Chairman and CEO Xin Zhou will own 30% of EJ post-ipo.
From the prospectus:
'We are a leading real estate services company in China based on scope of services, brand recognition and geographic presence. We provide primary real estate agency services, secondary real estate brokerage services as well as real estate consulting and information services.'
EJ has been the largest real estate agency and consulting services company in China for three years now (2004-2006). EJ has 2,100 real estate professionals in twenty cities throughout China. In the past five years they've sold 5 million square feet of properties worth a $5.4 billion US. EJ also operates the only information system that provides up-to-date, comprehensive and in-depth information covering residential and commercial real estate properties in all major regions in China.
Chinese sector leaders in fast growing sectors have done very well in the US market the past few years, usually garnering aggressive multiples. The US market has not been a 'one size fits all' for Chinese offerings, the differentiators would appear to be that sector leadership. Sector leaders tend to outperform non-sector leader Chinese ipos. Financials and valuation aside, EJ would appear to fit in the 'sector leadership outperformer' category.
Awards - EJ has been named "China’s Best Company" from the National Association of Real Estate Brokerage and Appraisal Companies in 2006, and the "Leading Brand Name in China’s Real Estate Services Industry" from the China Real Estate Top 10 Committee in 2006.
Sector - The real estate sector in China has experienced rapid growth with primary property sales revenue growing 38% over the past five years. Primary property refers to the sale of new properties, which is EJ's focus. As such, EJ's clients tend to be real estate developers who utilize EJ's middle-man services to consult on development and to sell their properties. 82% of revenues in 2006 were from services relating to 'primary' (newly developed) properties.
Approximately 45% of 2006 revenues were derived in the populous Shanghai, Jiangsu Province and Zhejiang Province.
Governmental Control - Since 2006, the PRC has instituted a number of initiatives to slow the swift property growth rates. These include: requiring that at least 70% of the land approved by a local government for residential property development for any given year be used for developing low- to-medium cost and small-to-medium size units and low-cost rental properties; 70% of construction be for 'small unit space' properties. Increasing the down payment required for larger properties; imposing a resale tax on properties held less than five years.
Note- EJ has very high 'receivables' for their revenues stream. The June 2007 quarter saw approximately $23.5 million in revenues, while receivables on the book totaled $48.5 million. This appears due to EJ receiving payment for services only after a development (or phase of development) has been completely sold. EJ reports revenue upon each sale, however they do not receive the actual monies until the entire development project has been completed and all units sold. I'm not real thrilled with this accounting method. It appears to be a concession EJ has made to garner business, which is fine. However they've substantial receivables on the books that they've already booked as revenues but have not yet been paid. Cash flows here are not nearly as impressive as revenues/earnings would indicate. If all goes well they would eventually see the cash, however there appears to be serious lag time here from 'booking' revenues and actually receiving monies.
Financials
$2 per share in cash post ipo.
Tax Rate - EJ is taxed a little more heavily than many of the Chinese based ipos we've seen. It appears EJ's current tax rate is in the 25%-30% ballpark.
Historically, EJ has booked an outsized revenue number in the fourth quarter of the year. For example in 2006 quarterly revenue numbers were (in millions) $4, $10, $8 and $34. I would expect a similar trend in 2007.
2006 - Revenues were $56 million, a 44% increase over 2005. Operating margins were a strong 44%. Net margins were 34%. Earnings per share were $0.24.
2007 - As the bulk of revenues will be booked in the fourth quarter, it is a bit difficult to forecast full year. However based on the growth in first and second quarters, I would expect revenues to rise sharply in 2007 to $115 million or so. That would be a very impressive 100%+ revenue growth in 2007. Operating margins should improve to 50%. *Note* - both revenue and operating margin numbers assume a strong fourth quarter of 2007. Net margins should be 38%. Earnings per share should be $0.55 - $0.60. On a pricing of $12.50, EJ would trade 22 x's 2007 earnings.
*Note* - EJ's net margins and earnings per share are not quite comparable to similar sector leader Chinese ipos in that their earnings are taxed at a higher rate than most of those.
Conclusion - Strong recommend in range. In fact, EJ is so attractive in range, I expect the range to be increased here. Sector leader in a fast growing sector, 100% revenue increase expected in 2007, coming at a pretty fully taxed 21 X's 2007 earnings. EJ is coming too cheap in range.
August 6, 2007, 9:21 pm
DM - Dolan Media
pre-ipo analysis on this week's full calendar at http://www.tradingipos.com
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2007-08-01
DM - Dolan Media
DM - Dolan Media plans on offering 12 million shares(assuming over-allotments) at a range of $13.50 - $15.50. Insiders will be selling 1.5 million shares in the deal. Post-ipo DM will have 25.1 million shares outstanding for a market cap of $364 million on a $14.50 pricing. Goldman Sachs and Merrill Lynch are lead managing the deal, Piper Jaffray and Craig-Hallum Capital Group will co-manage. 3/4's of the ipo proceeds will be used to redeem preferred shares, 1/4 to repay debt.
Executives and Directors will own 20% of DM post-ipo.
From the prospectus:
'We are a leading provider of necessary business information and professional services to the legal, financial and real estate sectors in the United States. We provide companies and professionals in the markets we serve with access to timely, relevant and dependable information and services that enable them to operate effectively in highly competitive and time sensitive business environments.'
DM operates under two segments, Business Information and Professional Services.
Business Information - Business journal publishing, court and commercial newspapers and other publications as well as operating websites in 20 US markets. Third largest business journal publisher and second largest court and commercial publisher in the US. DM also believes they're one of the largest carriers of public notices in the United States. DM publishes 60 print publications consisting of 14 paid daily publications, 29 paid non-daily publications and 17 non-paid non-daily publications. Paid publications and non-paid and controlled publications had approximately 75,500 and 167,400 subscribers, respectively, as of March 31, 2007. DM's 42 on-line publication/non publication web sites also had approximately 315,000 unique users in March 2007.
Professional Services - This is the segment that is the most interesting. DM, via the ABC and Counsel Press brands names, provides services that enable law firms and attorneys to process residential mortgage defaults and court appeals. DM is the dominant provider of mortgage default services in Michigan and Indiana, which had the second and third highest residential mortgage foreclosure rates in the first quarter of 2007. DM serviced approximately 30,100 mortgage default case files relating to approximately 270 mortgage loan lenders and servicers that are clients of DM law firm customers in Michigan and Indiana during the first quarter of 2007. DM, via their Counsel Press brand, is the largest appellate service provider nationwide, providing appellate services to attorneys in connection with approximately 8,300 and 2,200 appellate filings in federal and state courts in 2006 and the first quarter of 2007. Customers of Counsel Press include 80 of the top 100 law firms in the US.
DM's Business Information segment collects revenues primarily via classified advertising, Professional Services via fee arrangements. Both segments have grown through acquisition, with the Business Information segment completing 38 acquisitions since 1992 and Professional services 5 since 2005.
In 2006 Business Information segment accounted for 55% of revenues Professional Services 45%. Display and classified advertising accounted for 21% of total revenues, public notices also 21% of revenues While DM has their hands in a few different pots, their more a classic classified advertising reliant publication company as anything else with 42% of total revenues derived from advertising and public notices. A risk here going forward is that a number of states are considering switching from required public notice postings in print publications to posting their own public notices online. If that is a trend that develops, DM could lose a substantial portion of their public notice business.
Mortgage foreclosure services accounted for 35% of revenues in the first quarter of 2007.
Financials
DM will have a bit of debt on the books post-ipo, $55 million. Fully expect DM to continue to acquire smaller publications and professional services businesses, so debt here should rise going forward.
Revenues in 2006 were $128 million. 2006 was the first full year DM derived revenues from their professional services segment, so comparables to previous years is not valid here. Operating margins were 17%. Interest expense 'ate' up 29% of operating profits. Net margins were 6%, earnings per share $0.31. On a $14.50 pricing, DM would trade 47 X's 2006 earnings.
2007 - DM had a solid first quarter. Full year revenues should be in the $150 million ballpark, a 17% increase over 2006. Revenue growth is being driven by the Professional Services segment. Operating margins look to be improving a bit past few quarter, full year could see 20%-21%. Interest expense should eat up 20% of operating profits. Net margins should be in the 9% ballpark. Earnings per share should be $0.50 - $0.55. On a $14 1/2 pricing, DM would trade 28 X's 2007 earnings.
Conclusion - I like the mortgage default processing segment quite a bit here, I'm not enamored with the publications side of the business. Problem is, DM conducts their mortgage default processing services in just two states, while they own publications in 20 markets and derive 55% of annual revenues from that segment. 28 X's 2007 earnings with a 17% organic revenue growth rate is an awful lot to pay for that segment. Mortgage defaults in Michigan and Indiana have been a growth business the past year and should continue to be a strong revenue driver for DM. On that basis this is a slight recommend in range. Frankly I'd be much more interested here if DM was ipo'ing just their higher margin, higher growth Professional Services segment here without the print publication business attached. I wouldn't pay up for this deal, but in range it is worth a shot due only to the Professional Services segment.
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2007-08-01
DM - Dolan Media
DM - Dolan Media plans on offering 12 million shares(assuming over-allotments) at a range of $13.50 - $15.50. Insiders will be selling 1.5 million shares in the deal. Post-ipo DM will have 25.1 million shares outstanding for a market cap of $364 million on a $14.50 pricing. Goldman Sachs and Merrill Lynch are lead managing the deal, Piper Jaffray and Craig-Hallum Capital Group will co-manage. 3/4's of the ipo proceeds will be used to redeem preferred shares, 1/4 to repay debt.
Executives and Directors will own 20% of DM post-ipo.
From the prospectus:
'We are a leading provider of necessary business information and professional services to the legal, financial and real estate sectors in the United States. We provide companies and professionals in the markets we serve with access to timely, relevant and dependable information and services that enable them to operate effectively in highly competitive and time sensitive business environments.'
DM operates under two segments, Business Information and Professional Services.
Business Information - Business journal publishing, court and commercial newspapers and other publications as well as operating websites in 20 US markets. Third largest business journal publisher and second largest court and commercial publisher in the US. DM also believes they're one of the largest carriers of public notices in the United States. DM publishes 60 print publications consisting of 14 paid daily publications, 29 paid non-daily publications and 17 non-paid non-daily publications. Paid publications and non-paid and controlled publications had approximately 75,500 and 167,400 subscribers, respectively, as of March 31, 2007. DM's 42 on-line publication/non publication web sites also had approximately 315,000 unique users in March 2007.
Professional Services - This is the segment that is the most interesting. DM, via the ABC and Counsel Press brands names, provides services that enable law firms and attorneys to process residential mortgage defaults and court appeals. DM is the dominant provider of mortgage default services in Michigan and Indiana, which had the second and third highest residential mortgage foreclosure rates in the first quarter of 2007. DM serviced approximately 30,100 mortgage default case files relating to approximately 270 mortgage loan lenders and servicers that are clients of DM law firm customers in Michigan and Indiana during the first quarter of 2007. DM, via their Counsel Press brand, is the largest appellate service provider nationwide, providing appellate services to attorneys in connection with approximately 8,300 and 2,200 appellate filings in federal and state courts in 2006 and the first quarter of 2007. Customers of Counsel Press include 80 of the top 100 law firms in the US.
DM's Business Information segment collects revenues primarily via classified advertising, Professional Services via fee arrangements. Both segments have grown through acquisition, with the Business Information segment completing 38 acquisitions since 1992 and Professional services 5 since 2005.
In 2006 Business Information segment accounted for 55% of revenues Professional Services 45%. Display and classified advertising accounted for 21% of total revenues, public notices also 21% of revenues While DM has their hands in a few different pots, their more a classic classified advertising reliant publication company as anything else with 42% of total revenues derived from advertising and public notices. A risk here going forward is that a number of states are considering switching from required public notice postings in print publications to posting their own public notices online. If that is a trend that develops, DM could lose a substantial portion of their public notice business.
Mortgage foreclosure services accounted for 35% of revenues in the first quarter of 2007.
Financials
DM will have a bit of debt on the books post-ipo, $55 million. Fully expect DM to continue to acquire smaller publications and professional services businesses, so debt here should rise going forward.
Revenues in 2006 were $128 million. 2006 was the first full year DM derived revenues from their professional services segment, so comparables to previous years is not valid here. Operating margins were 17%. Interest expense 'ate' up 29% of operating profits. Net margins were 6%, earnings per share $0.31. On a $14.50 pricing, DM would trade 47 X's 2006 earnings.
2007 - DM had a solid first quarter. Full year revenues should be in the $150 million ballpark, a 17% increase over 2006. Revenue growth is being driven by the Professional Services segment. Operating margins look to be improving a bit past few quarter, full year could see 20%-21%. Interest expense should eat up 20% of operating profits. Net margins should be in the 9% ballpark. Earnings per share should be $0.50 - $0.55. On a $14 1/2 pricing, DM would trade 28 X's 2007 earnings.
Conclusion - I like the mortgage default processing segment quite a bit here, I'm not enamored with the publications side of the business. Problem is, DM conducts their mortgage default processing services in just two states, while they own publications in 20 markets and derive 55% of annual revenues from that segment. 28 X's 2007 earnings with a 17% organic revenue growth rate is an awful lot to pay for that segment. Mortgage defaults in Michigan and Indiana have been a growth business the past year and should continue to be a strong revenue driver for DM. On that basis this is a slight recommend in range. Frankly I'd be much more interested here if DM was ipo'ing just their higher margin, higher growth Professional Services segment here without the print publication business attached. I wouldn't pay up for this deal, but in range it is worth a shot due only to the Professional Services segment.
July 24, 2007, 12:39 pm
OWW - Orbitz Worldwide
all of this week's deals analyzed pre-ipo at http://www.tradingipos.com
While only 35 or so delayed pieces appear annually on the blog, every ipo is in the subscriber section of the site before ipo debut.
2007-07-11
OWW - Orbitz Worldwide
OWW - Orbitz Worldwide plan on offering 39.1 million shares at a range of $16-$18. Morgan Stanley, Goldman Sachs, JP Morgan and Lehman are lead managing the deal, six other firms co-managing. Post-ipo OWW will have 88 million shares outstanding for a market cap of $1.497 billion on a $17 pricing. IPO proceeds will be going to parent company Travelport, which is essentially Blackstone(BX). They've structured the bulk of these proceeds directed to Blackstone as debt repayment, but it is essentially a nice payday for the Blackstone controlled Travelport.
This is 'round two' for Orbitz. Orbitz initially went public in December of 2003 under the symbol 'ORBZ'. Orbitz website was originally formed in 1999(and launched in 2001) by a group of major US airlines including American Airlines, Continental Airlines, Delta Air Lines, Northwest Airlines and United Air Lines. In 11/04 Orbitz was acquired by Cendant. Cendant combined Orbitz with other online travel sites including cheaptickets.com to form the online segment of Cendant's Travelport. Travelport was then acquired by Blackstone and TCV in 8/06 via a leveraged buyout. Less than a year later, Blackstone is flipping Orbitz Worldwide back onto the public markets. As usual, Blackstone is making out nicely here on the transaction.
Through Travelport, Blackstone will own a 59% stake in OWW post-ipo. As one might imagine through Orbitz leveraged buyout history there is a bit of debt here post ipo, approximately $600 million. Not nearly as high as many similar leveraged buyout flips back onto the market, but a substantial debt presence none the less. In fact since OWW operates in a highly competitive, razor thin margin business the debt on the books is THE difference here between a bottom line profit and a bottom line loss.
From the prospectus:
'We are a leading global online travel company that uses innovative technology to enable leisure and business travelers to research, plan and book a broad range of travel products.'
In addition to Orbitz and cheaptickets, assets include ebookers, HotelClub, RatesToGo and the Away Network and corporate travel brands, Orbitz for Business and Travelport for Business.
Air travel is OWW's largest on-line business segment. Other services include the obvious, hotels, rental cars and vacation packages that are customized by travelers. As Orbitz was originally designed and geared as a site for air travel, OWW feels they are currently under penetrated in the non-air online travel market. In 2006 OWW generated approximately $10 billion in worldwide bookers, 87% of which was US based.
Industry - Online travel is the largest e-commerce category. Approximately 47% of travel bookings in the US were booked online in 2006, and worldwide online travel growth grew by 30% in bookings for the year. While the US is by far the largest online travel segment, growth going forward in online travel is expected to be driven by Europe and Asia.
OWW has approximately 25 million unique users monthly and is the second largest online US travel company. Air travel accounts for 70%-75% of revenues annually. With 87% of revenues derived from the US it is not a stretch here to define OWW as an online US air travel booking entity. Yes OWW is branching out from this base via hotel related and non-US focused travel sites, but still the overwhelming majority of revenues are derived from air travel bookings in the US.
Risks here are obviously any occurrence that slows US air travel. Also competition is fierce in this space with a myriad of travel booking sites including the US airlines own websites. A few of the discount carriers such as Southwest do not make their fares available for OWW's sites either. Personally, I'm always much more comfortable booking directly from the airline site itself. I utilize sites such as Orbitz to locate fares, then I'll go directly to that airlines website to purchase, bypassing the booking fees that Orbits and related sites take.
Direct US competitors include Expedia, Hotels.com and Hotwire, which are owned by Expedia; Travelocity and lastminute.com as well as the airline sites themselves and a myriad of smaller fare aggregators/bookers. Offline competition includes travel agents and travel professional companies such as Liberty and American Express.
Financials
$600 million in debt, negative book value post-ipo.
2006 - As OWW has made a number of acquisitions comparing revenues from 2006 to prior periods does not indicate a whole lot. It appears that OWW's organic revenues were up 5%-10% or so for 2006 to $753 million. OWW has something I never like to see in a rather mature company coming public: Operating expenses for 2006 were higher than revenues. So OWW is already in the red before debt servicing charges are added in as 2006 operating margins were negative. Yes a portion of this is due to depreciation & amortization charges, but really OWW's cash flows for '06 were more or less flat as well. Factoring in debt servicing, OWW lost about $1 per share in 2006.
2007 - OWW had positive operating margins for the first quarter of '07(just barely), something they did not manage to do in 2006. Revenues were solid in Q1 and it appears OWW may grow revenues to $850-$900 million in 2007, a 16% increase over 2006. Yes a portion of this is due to acquisitions, and fully expect OWW to lay on additional debt in the future to continue to acquire smaller travel related websites and operations. I would anticipate OWW to be approximately break-even operationally in 2007, with a bottom line net loss of $0.50 due to debt servicing costs.
Note - OWW has been experiencing the past two quarters lower revenue per transaction. It appears they're getting squeezed a bit on their transaction fees. As I mentioned above, this is a very competitive sector and that will not change going forward.
Conclusion - a quick flip leveraged buy-out related ipo with a negative bottom line. I rarely recommend a leveraged buyout related quick flip ipo. Why? The leveraged buyout entity is essentially sucking out capital to profit themselves and that profit usually comes at the expense of the future public shareholders. OWW is an interesting combination of a number of online travel sites, primarily of course Orbitz itself. There is some value here. It is simply not an ipo for me. Orbitz struggled as a public company the first go round after pricing and opening enthusiastically. I'm not certain we need the leveraged quick-flip version of the Orbitz ipo a second time. Pass in range here, I'm simply not interested.
While only 35 or so delayed pieces appear annually on the blog, every ipo is in the subscriber section of the site before ipo debut.
2007-07-11
OWW - Orbitz Worldwide
OWW - Orbitz Worldwide plan on offering 39.1 million shares at a range of $16-$18. Morgan Stanley, Goldman Sachs, JP Morgan and Lehman are lead managing the deal, six other firms co-managing. Post-ipo OWW will have 88 million shares outstanding for a market cap of $1.497 billion on a $17 pricing. IPO proceeds will be going to parent company Travelport, which is essentially Blackstone(BX). They've structured the bulk of these proceeds directed to Blackstone as debt repayment, but it is essentially a nice payday for the Blackstone controlled Travelport.
This is 'round two' for Orbitz. Orbitz initially went public in December of 2003 under the symbol 'ORBZ'. Orbitz website was originally formed in 1999(and launched in 2001) by a group of major US airlines including American Airlines, Continental Airlines, Delta Air Lines, Northwest Airlines and United Air Lines. In 11/04 Orbitz was acquired by Cendant. Cendant combined Orbitz with other online travel sites including cheaptickets.com to form the online segment of Cendant's Travelport. Travelport was then acquired by Blackstone and TCV in 8/06 via a leveraged buyout. Less than a year later, Blackstone is flipping Orbitz Worldwide back onto the public markets. As usual, Blackstone is making out nicely here on the transaction.
Through Travelport, Blackstone will own a 59% stake in OWW post-ipo. As one might imagine through Orbitz leveraged buyout history there is a bit of debt here post ipo, approximately $600 million. Not nearly as high as many similar leveraged buyout flips back onto the market, but a substantial debt presence none the less. In fact since OWW operates in a highly competitive, razor thin margin business the debt on the books is THE difference here between a bottom line profit and a bottom line loss.
From the prospectus:
'We are a leading global online travel company that uses innovative technology to enable leisure and business travelers to research, plan and book a broad range of travel products.'
In addition to Orbitz and cheaptickets, assets include ebookers, HotelClub, RatesToGo and the Away Network and corporate travel brands, Orbitz for Business and Travelport for Business.
Air travel is OWW's largest on-line business segment. Other services include the obvious, hotels, rental cars and vacation packages that are customized by travelers. As Orbitz was originally designed and geared as a site for air travel, OWW feels they are currently under penetrated in the non-air online travel market. In 2006 OWW generated approximately $10 billion in worldwide bookers, 87% of which was US based.
Industry - Online travel is the largest e-commerce category. Approximately 47% of travel bookings in the US were booked online in 2006, and worldwide online travel growth grew by 30% in bookings for the year. While the US is by far the largest online travel segment, growth going forward in online travel is expected to be driven by Europe and Asia.
OWW has approximately 25 million unique users monthly and is the second largest online US travel company. Air travel accounts for 70%-75% of revenues annually. With 87% of revenues derived from the US it is not a stretch here to define OWW as an online US air travel booking entity. Yes OWW is branching out from this base via hotel related and non-US focused travel sites, but still the overwhelming majority of revenues are derived from air travel bookings in the US.
Risks here are obviously any occurrence that slows US air travel. Also competition is fierce in this space with a myriad of travel booking sites including the US airlines own websites. A few of the discount carriers such as Southwest do not make their fares available for OWW's sites either. Personally, I'm always much more comfortable booking directly from the airline site itself. I utilize sites such as Orbitz to locate fares, then I'll go directly to that airlines website to purchase, bypassing the booking fees that Orbits and related sites take.
Direct US competitors include Expedia, Hotels.com and Hotwire, which are owned by Expedia; Travelocity and lastminute.com as well as the airline sites themselves and a myriad of smaller fare aggregators/bookers. Offline competition includes travel agents and travel professional companies such as Liberty and American Express.
Financials
$600 million in debt, negative book value post-ipo.
2006 - As OWW has made a number of acquisitions comparing revenues from 2006 to prior periods does not indicate a whole lot. It appears that OWW's organic revenues were up 5%-10% or so for 2006 to $753 million. OWW has something I never like to see in a rather mature company coming public: Operating expenses for 2006 were higher than revenues. So OWW is already in the red before debt servicing charges are added in as 2006 operating margins were negative. Yes a portion of this is due to depreciation & amortization charges, but really OWW's cash flows for '06 were more or less flat as well. Factoring in debt servicing, OWW lost about $1 per share in 2006.
2007 - OWW had positive operating margins for the first quarter of '07(just barely), something they did not manage to do in 2006. Revenues were solid in Q1 and it appears OWW may grow revenues to $850-$900 million in 2007, a 16% increase over 2006. Yes a portion of this is due to acquisitions, and fully expect OWW to lay on additional debt in the future to continue to acquire smaller travel related websites and operations. I would anticipate OWW to be approximately break-even operationally in 2007, with a bottom line net loss of $0.50 due to debt servicing costs.
Note - OWW has been experiencing the past two quarters lower revenue per transaction. It appears they're getting squeezed a bit on their transaction fees. As I mentioned above, this is a very competitive sector and that will not change going forward.
Conclusion - a quick flip leveraged buy-out related ipo with a negative bottom line. I rarely recommend a leveraged buyout related quick flip ipo. Why? The leveraged buyout entity is essentially sucking out capital to profit themselves and that profit usually comes at the expense of the future public shareholders. OWW is an interesting combination of a number of online travel sites, primarily of course Orbitz itself. There is some value here. It is simply not an ipo for me. Orbitz struggled as a public company the first go round after pricing and opening enthusiastically. I'm not certain we need the leveraged quick-flip version of the Orbitz ipo a second time. Pass in range here, I'm simply not interested.
July 22, 2007, 3:07 am
LIMC - Limco-Peidmont
As alway analysis pieces on every ipo every week available to subscribers at http://www.tradingipos.com
disclosure - at date of blog post(7/20/07), tradingipos.com does have a position in LIMC at an average of $12.60 per share.
following analysis piece was completed for sunscribers 7/08/07
2007-07-08
LIMC - Limco-Piedmont
LIMC - Limco-Piedmont plans on offering 4 million shares at a range of $9.50 - $11.50. Majority owner TAT Technologies(TATTF) will be selling 1/2 a million shares in the offering. Oppenheimer and Stifel are co-leading the deal. Post-ipo LIMC will have 12.5 million shares outstanding for a market cap of $131 million on a $10.50 pricing. IPO proceeds will be used for general corporate purposes.
Pre-ipo, LIMC is a wholly owned subsidiary of TAT Technologies(TATTF). With this ipo TATTF is spinning off LIMC and will retain a 65% stake in LIMC post-ipo. It does not appear the TATTF is in a hurry to spin off the remainder of their ownership stake. TATTF has actually agreed to a one year lock-up arrangement instead of the usual 180 day lock-up period. If TATTF plans on divesting the remainder of their LIMC interests, it doesn't appear as if we'll get an announcement to that effect for at least a year. By agreeing to the extended lock-up period, it appears to me that TATTF plans on holding their majority stake in LIMC indefinitely.
From the prospectus:
'We provide maintenance, repair and overhaul, or MRO, services and parts supply services to the aerospace industry.'
LIMC operates four FAA certified repair stations. Two are located in Tulsa, Oklahoma, and the other two are located in Kernersville and Winston-Salem, North Carolina. The four service centers provide aircraft component maintenance, repair and overhaul services(MRO) for airlines, air cargo carriers, maintenance service centers and the military. In addition LIMC also is an equipment manufacturer of heat transfer equipment for airplane manufacturers and operates a parts services division that provides inventory management and parts services for commercial, regional and charter airlines and business aircraft owners.
As the name would suggest, Limco-Piedmont is the result of two merged operations, Limco and Piedmont. Limco bought Piedmont in 7/05.
MRO Services - 61% of revenues in first quarter of 2007. Government regulations and manufacturing specs require aircraft to undergo MRO servicing at regular intervals, usually each three to five years of service. Warranty covers the first one to five years of aircraft components, LIMC's MRO services usually 'kick in' after the warranty expires. LIMC specializes in the repair and overhaul of heat transfer components for the aerospace industry, special air conditioning units for military operations, APUs, propellers, landing gear and pneumatic ducting, which is used to channel air through the air conditioning and other pneumatic systems on the aircraft. LIMC works on aircraft and components from all the major manufacturers including Boeing, Airbus, Lockheed Martin, General Dynamics and GE.
Parts Servicing - 39% of revenues in first quarter of 2007. LIMC supplies parts to approximately 500 commercial, regional and charter airlines and business aircraft owners.
Sector - MRO/parts servicing growth for aircraft is being fueled by the aging and growing worldwide aircraft fleet. 74% of the world aircraft fleet is 5+ years old. Global air travel is also expected to grow by 4%-5% annually over the next five years. While not a swift growing niche, the MRO component services sector generates over $8 billion in worldwide revenues and is expected to grow 4% annually over the next 5 years.
LIMC's five largest MRO customers account for 20% of revenues. Customers include Bell Helicopter, Fokker, Hamilton Sundstrand, KLM Royal Dutch Airlines NV, Lufthansa Technik AG, PACE Airlines, Piedmont Airlines and the U.S. Government. LINC derives nearly 10% of their revenues from the US Government, primarily Department of Defense related.
Competition - LIMC is a rather small player and competes directly with larger manufacturers whom also service their manufactured components. These include various segments of Honeywell, as well as Standard Aero Group, Aerotech, AAR, and a number of others.
LIMC's future growth strategies include expanding to additional MRO services as well as continuing to grow Western Europe based revenues. I would expect LIMC to utilize the ipo cash to make future acquisitions that assist them in their growth efforts. Fully expect one or more acquisitions here paid in LIMC's first year public.
70% of 2006 revenues derived from companies located in the US, 30% internationally.
Financials
$2 per share in cash, no debt. LINC does not plan on paying dividends.
3 X's book value on a $10 1/2 pricing.
LIMC has swiftly grown revenues since the mid 2005 acquisitions of Piedmont. In conjunction with the acquisition, LIMC instituted a number of cost cutting initiatives to reduce redundancies between the two companies.
Revenues in 2006 were $59 million. LIMC, which has been profitable since 2002, earned a fully taxed $0.38.
2007 - LIMC had a strong first quarter. Revenues should hit $90 million in 2007, an impressive 52% revenue increase from 2006. LIMC attributes recent quarterly revenue growth from both existing customers as well as winning new MRO/parts services contracts. Both increased due to LIMC receiving FAA approval to expand MRO services to include a greater number of aircraft components. Gross margins are not strong in this sector. I would expect 2007 gross margins to hit the 23%-25% area. GSA expenses should hit 10% levels of revenues. Operating margins then should be in the 14% ballpark. Net margins for full year should be in the 8%- 9% ballpark. This is slightly higher then LIMC has booked in recent quarters and is attributable to debt paid off on ipo as well as pre-ipo stock compensation charges. Earnings per share should be $0.60-$0.65. On a pricing of 10 1/2, LIMC would be trading 17 X's 2007 earnings.
Conclusion - Market cap on ipo here gives LIMC plenty of room for growth. LIMC his hitting on all cylinders the 2 quarters leading into the ipo, booking two strongest quarters in corporate history. The gross margins in this sector are rather thin and this is not traditionally a high growth sector. Those two factors mean you do not pay fat multiples for this type of company. However coming at a $131 market cap(on a $10 1/2 pricing) and 17 X's 2007 earnings with a strong year to year growth rate this is an easy recommend in range. I like this ipo in the $9 1/2 - $11 1/2 range quite a bit actually. Strong recommend here, there is plenty of market cap room here for substantial appreciation going forward.
Note - While I would doubt 2008 revenues will grow at close to the pace of 2007 revenues, I fully expect LIMC to utilize the ipo cash to acquire one or more smaller component service companies
disclosure - at date of blog post(7/20/07), tradingipos.com does have a position in LIMC at an average of $12.60 per share.
following analysis piece was completed for sunscribers 7/08/07
2007-07-08
LIMC - Limco-Piedmont
LIMC - Limco-Piedmont plans on offering 4 million shares at a range of $9.50 - $11.50. Majority owner TAT Technologies(TATTF) will be selling 1/2 a million shares in the offering. Oppenheimer and Stifel are co-leading the deal. Post-ipo LIMC will have 12.5 million shares outstanding for a market cap of $131 million on a $10.50 pricing. IPO proceeds will be used for general corporate purposes.
Pre-ipo, LIMC is a wholly owned subsidiary of TAT Technologies(TATTF). With this ipo TATTF is spinning off LIMC and will retain a 65% stake in LIMC post-ipo. It does not appear the TATTF is in a hurry to spin off the remainder of their ownership stake. TATTF has actually agreed to a one year lock-up arrangement instead of the usual 180 day lock-up period. If TATTF plans on divesting the remainder of their LIMC interests, it doesn't appear as if we'll get an announcement to that effect for at least a year. By agreeing to the extended lock-up period, it appears to me that TATTF plans on holding their majority stake in LIMC indefinitely.
From the prospectus:
'We provide maintenance, repair and overhaul, or MRO, services and parts supply services to the aerospace industry.'
LIMC operates four FAA certified repair stations. Two are located in Tulsa, Oklahoma, and the other two are located in Kernersville and Winston-Salem, North Carolina. The four service centers provide aircraft component maintenance, repair and overhaul services(MRO) for airlines, air cargo carriers, maintenance service centers and the military. In addition LIMC also is an equipment manufacturer of heat transfer equipment for airplane manufacturers and operates a parts services division that provides inventory management and parts services for commercial, regional and charter airlines and business aircraft owners.
As the name would suggest, Limco-Piedmont is the result of two merged operations, Limco and Piedmont. Limco bought Piedmont in 7/05.
MRO Services - 61% of revenues in first quarter of 2007. Government regulations and manufacturing specs require aircraft to undergo MRO servicing at regular intervals, usually each three to five years of service. Warranty covers the first one to five years of aircraft components, LIMC's MRO services usually 'kick in' after the warranty expires. LIMC specializes in the repair and overhaul of heat transfer components for the aerospace industry, special air conditioning units for military operations, APUs, propellers, landing gear and pneumatic ducting, which is used to channel air through the air conditioning and other pneumatic systems on the aircraft. LIMC works on aircraft and components from all the major manufacturers including Boeing, Airbus, Lockheed Martin, General Dynamics and GE.
Parts Servicing - 39% of revenues in first quarter of 2007. LIMC supplies parts to approximately 500 commercial, regional and charter airlines and business aircraft owners.
Sector - MRO/parts servicing growth for aircraft is being fueled by the aging and growing worldwide aircraft fleet. 74% of the world aircraft fleet is 5+ years old. Global air travel is also expected to grow by 4%-5% annually over the next five years. While not a swift growing niche, the MRO component services sector generates over $8 billion in worldwide revenues and is expected to grow 4% annually over the next 5 years.
LIMC's five largest MRO customers account for 20% of revenues. Customers include Bell Helicopter, Fokker, Hamilton Sundstrand, KLM Royal Dutch Airlines NV, Lufthansa Technik AG, PACE Airlines, Piedmont Airlines and the U.S. Government. LINC derives nearly 10% of their revenues from the US Government, primarily Department of Defense related.
Competition - LIMC is a rather small player and competes directly with larger manufacturers whom also service their manufactured components. These include various segments of Honeywell, as well as Standard Aero Group, Aerotech, AAR, and a number of others.
LIMC's future growth strategies include expanding to additional MRO services as well as continuing to grow Western Europe based revenues. I would expect LIMC to utilize the ipo cash to make future acquisitions that assist them in their growth efforts. Fully expect one or more acquisitions here paid in LIMC's first year public.
70% of 2006 revenues derived from companies located in the US, 30% internationally.
Financials
$2 per share in cash, no debt. LINC does not plan on paying dividends.
3 X's book value on a $10 1/2 pricing.
LIMC has swiftly grown revenues since the mid 2005 acquisitions of Piedmont. In conjunction with the acquisition, LIMC instituted a number of cost cutting initiatives to reduce redundancies between the two companies.
Revenues in 2006 were $59 million. LIMC, which has been profitable since 2002, earned a fully taxed $0.38.
2007 - LIMC had a strong first quarter. Revenues should hit $90 million in 2007, an impressive 52% revenue increase from 2006. LIMC attributes recent quarterly revenue growth from both existing customers as well as winning new MRO/parts services contracts. Both increased due to LIMC receiving FAA approval to expand MRO services to include a greater number of aircraft components. Gross margins are not strong in this sector. I would expect 2007 gross margins to hit the 23%-25% area. GSA expenses should hit 10% levels of revenues. Operating margins then should be in the 14% ballpark. Net margins for full year should be in the 8%- 9% ballpark. This is slightly higher then LIMC has booked in recent quarters and is attributable to debt paid off on ipo as well as pre-ipo stock compensation charges. Earnings per share should be $0.60-$0.65. On a pricing of 10 1/2, LIMC would be trading 17 X's 2007 earnings.
Conclusion - Market cap on ipo here gives LIMC plenty of room for growth. LIMC his hitting on all cylinders the 2 quarters leading into the ipo, booking two strongest quarters in corporate history. The gross margins in this sector are rather thin and this is not traditionally a high growth sector. Those two factors mean you do not pay fat multiples for this type of company. However coming at a $131 market cap(on a $10 1/2 pricing) and 17 X's 2007 earnings with a strong year to year growth rate this is an easy recommend in range. I like this ipo in the $9 1/2 - $11 1/2 range quite a bit actually. Strong recommend here, there is plenty of market cap room here for substantial appreciation going forward.
Note - While I would doubt 2008 revenues will grow at close to the pace of 2007 revenues, I fully expect LIMC to utilize the ipo cash to acquire one or more smaller component service companies
July 4, 2007, 10:13 pm
SHOR - ShorTel
Note:
This analysis piece was done for http://www.tradingipos.com subscribers on 6/23 well before Mitel filed a patent infringement suit against SHOR. On site we've been discussing post-suit in subscribers forum section.
Also tradingipos.com does own shares in SHOR at an avg of $10.10, again as posted on forum section of susbcribers site real-time on tuesday 7/3.
2007-06-23
SHOR - ShorTel
SHOR - ShorTel plans on offering 7.9 million shares at a range of $8.50 - $10.50. Lehman and JP Morgan are lead managing the deal, Piper Jaffray, JMP, and Wedbush co-managing. Post-ipo SHOR will have 41.3 million shares outstanding for a market cap of $392 million on a $9.50 pricing. IPO proceeds will be utilized for working capital and general corporate purposes.
Crosspoint Venture Partners will own 22% of SHOR post-ipo. Note that Lehman and JP Morgan related venture funds will own a combined 22% of SHOR post-ipo also.
From the prospectus:
'We are a leading provider of Internet Protocol, or IP, telecommunications systems for enterprises. Our systems are based on our distributed software architecture and switch-based hardware platform which enable multi-site enterprises to be served by a single telecommunications system. Our systems enable a single point of management, easy installation and a high degree of scalability and reliability, and provide end users with a consistent, full suite of features across the enterprise, regardless of location.'
Enterprise IP communications systems. Products consist of ShoreGear switches, ShorePhone IP telephones and ShoreWare software applications. SHOR sells 9 switch products and 5 different IP phone systems. SHOR sells their products through 3rd party sales channels(resellers). As of 3/31/07, SHOR has sold to 4,500 enterprise customers through 400 different channel partners.
Of note, SHOR's enterprise IP telecommunications systems received PC Magazine’s Best of the Year 2005 Editors’ Choice designation. In addition for the past four years IT executives surveyed by Nemertes Research, an independent research firm, have rated ShoreTel highest in customer satisfaction among leading enterprise telecommunications systems providers. These two nuggets make this SHOR ipo at least worth a closer look.
Sector - This is a fairly large sector with an estimated $17 billion in overall worldwide enterprise telephony systems equipment revenues. The past few years has seen a shift by enterprises from separate voice and data networks to a single IP network for both. SHOR operates in the voice and date IP niche, expected to grow 19% annually, far outpace overall enterprise telephony growth. It is estimated that currently voice and data IP systems equipment market alone will be nearly $8 billion by 2010. As would be expected there is substantial competition in the space. The usual communications equipment players all offer some form of enterprise IP telecommunications equipment including Cisco, 3Com, Alcatel-Lucent, Inter-Tel Incorporated, Mitel Networks Corporation (which recently announced plans to acquire Inter-Tel Incorporated) and Nortel. In addition Microsoft is entering the space and appears to be developing an IP partnership with Nortel in which Nortel will produce IP-based communications equipment that will be integrated with the Microsoft systems and Office Communicator.
SHOR's IP solution. Many of SHOR's competitors offer a hybrid IP telecommunications solution, meshing it with existing legacy communications equipment and products. SHOR offers switch-based IP telecommunications systems for enterprises that address the limitations of hybrid and server-centric IP systems. SHOR lists the usual benefits in these prospectus including scalability, ease of use, reliability etc...A few highlights:
1) Personal Call Manager allows end users to control their phones from their PCs, regardless of their location, and integrates with enterprise software applications, such as Microsoft Outlook and salesforce.com.
2)IT management via anywhere use browsers.
3) SHOR believes their system costs less to install and operate.
In these filings every company states why their products are superior. In this case, SHOR has PC Magazine and four year's worth of IT managers' recognition to back their claims up. It would appear from gross margins below and awards that SHOR may indeed offer a superior product.
Historically SHOR has sold their products to small and medium size enterprises. A key growth strategy going forward in FY '08 is to begin selling into larger companies.
Financials
$2 a share in cash, no debt.
SHOR's fiscal year ends on 6/30 annually. FY '07 ends 6/30/07.
Revenues have increased sequentially each quarter for over two years. I always like to see this. Revenues past four quarters(ending 3/31/07) were(in millions) $19, $20.5, $22.5 and $26 million.
FY '07(ending 6/30/07)
2 quick points. SHOR has booked more stock compensation expenses in FY '07 then they will post-ipo. I smoothed this out a bit by 'pro forma'ing' the stock comp numbers for FY '07 cutting them slightly. SHOR does not have excessive options dilution in their future and stock compensation charges annually should be around $1 million, while for FY '07 pre-ipo they'll be in the $2.5 million ballpark.
2nd point is taxes. SHOR has substantial deferred losses as they did not shift into profitability until FY '06. Their effective tax rate for FY '07 and FY '08 should be in the 10% ballpark.
Revenues for FY '07 with one quarter to go should be in the $97 million ballpark, a strong 60% increase over FY '06. Gross margins for this type of highly competitive communications equipment sector are very strong at 62%. Gross margins are up in FY '07 from FY '06 56%. SHOR attributes this to the release of higher margin products. We've seen a slew of very aggressively valued networking equipment ipos with 40% gross margins, SHOR here in what should be a somewhat commoditized sector is doing something very right to be garnering 62% gross margins.
Operating expense margins have risen pretty evenly with revenues. Ideally you want to see expenses decreasing as a % of revenues as revenues increase. With SHOR we're not seeing that quite yet. for the past four quarter operating margin expense ratio has been in the 52%-55% of revenue range. Going forward I'd like to see SHOR be able to lower that operating expense ratio. That will be a key to future profit growth.
Operating margins for FY '07 were 8%. Plugging in taxes, earnings per share should be $0.17.
FY '08(ending 6/30/0 - If the past three years are indicative, SHOR should continue to grow revenues sequentially each quarter. I would estimate FY '08 revenues in the $120-$125 ballpark, a 25% increase over FY '07. Gross margins should be in the 60% ballpark again. I'd like to see operating expense ratio dip. However I'm not going to plug in much of an operating expense ratio dip as they've not demonstrated they've been able to do that past four quarters. Operating margins should be in the 9%-10% ballpark. Earnings per share should be in the $0.25 - $0.30 range. On a pricing of $9.50, SHOR would be trading 34 X's FY '08 earnings.
Conclusion - The only negative here is that earnings have not quite caught up yet with valuation on ipo. Still a number of things to like here: 1)Award winning product; 2) Gross margins actually increasing in a very competitive sector; 3) Quarter to quarter top and bottom line growth; 4) A valuation on ipo, that would make them very attractive buyout candidate; 5) Directly benefiting from the enterprise switch(pun
from legacy communications systems to an integrated single platform all IP network.
Definite recommend here in range. I like this one quite a bit in single digits. I've no idea if this works initially, but mid-term plus I can envision SHOR much higher down the line due to the factors
This analysis piece was done for http://www.tradingipos.com subscribers on 6/23 well before Mitel filed a patent infringement suit against SHOR. On site we've been discussing post-suit in subscribers forum section.
Also tradingipos.com does own shares in SHOR at an avg of $10.10, again as posted on forum section of susbcribers site real-time on tuesday 7/3.
2007-06-23
SHOR - ShorTel
SHOR - ShorTel plans on offering 7.9 million shares at a range of $8.50 - $10.50. Lehman and JP Morgan are lead managing the deal, Piper Jaffray, JMP, and Wedbush co-managing. Post-ipo SHOR will have 41.3 million shares outstanding for a market cap of $392 million on a $9.50 pricing. IPO proceeds will be utilized for working capital and general corporate purposes.
Crosspoint Venture Partners will own 22% of SHOR post-ipo. Note that Lehman and JP Morgan related venture funds will own a combined 22% of SHOR post-ipo also.
From the prospectus:
'We are a leading provider of Internet Protocol, or IP, telecommunications systems for enterprises. Our systems are based on our distributed software architecture and switch-based hardware platform which enable multi-site enterprises to be served by a single telecommunications system. Our systems enable a single point of management, easy installation and a high degree of scalability and reliability, and provide end users with a consistent, full suite of features across the enterprise, regardless of location.'
Enterprise IP communications systems. Products consist of ShoreGear switches, ShorePhone IP telephones and ShoreWare software applications. SHOR sells 9 switch products and 5 different IP phone systems. SHOR sells their products through 3rd party sales channels(resellers). As of 3/31/07, SHOR has sold to 4,500 enterprise customers through 400 different channel partners.
Of note, SHOR's enterprise IP telecommunications systems received PC Magazine’s Best of the Year 2005 Editors’ Choice designation. In addition for the past four years IT executives surveyed by Nemertes Research, an independent research firm, have rated ShoreTel highest in customer satisfaction among leading enterprise telecommunications systems providers. These two nuggets make this SHOR ipo at least worth a closer look.
Sector - This is a fairly large sector with an estimated $17 billion in overall worldwide enterprise telephony systems equipment revenues. The past few years has seen a shift by enterprises from separate voice and data networks to a single IP network for both. SHOR operates in the voice and date IP niche, expected to grow 19% annually, far outpace overall enterprise telephony growth. It is estimated that currently voice and data IP systems equipment market alone will be nearly $8 billion by 2010. As would be expected there is substantial competition in the space. The usual communications equipment players all offer some form of enterprise IP telecommunications equipment including Cisco, 3Com, Alcatel-Lucent, Inter-Tel Incorporated, Mitel Networks Corporation (which recently announced plans to acquire Inter-Tel Incorporated) and Nortel. In addition Microsoft is entering the space and appears to be developing an IP partnership with Nortel in which Nortel will produce IP-based communications equipment that will be integrated with the Microsoft systems and Office Communicator.
SHOR's IP solution. Many of SHOR's competitors offer a hybrid IP telecommunications solution, meshing it with existing legacy communications equipment and products. SHOR offers switch-based IP telecommunications systems for enterprises that address the limitations of hybrid and server-centric IP systems. SHOR lists the usual benefits in these prospectus including scalability, ease of use, reliability etc...A few highlights:
1) Personal Call Manager allows end users to control their phones from their PCs, regardless of their location, and integrates with enterprise software applications, such as Microsoft Outlook and salesforce.com.
2)IT management via anywhere use browsers.
3) SHOR believes their system costs less to install and operate.
In these filings every company states why their products are superior. In this case, SHOR has PC Magazine and four year's worth of IT managers' recognition to back their claims up. It would appear from gross margins below and awards that SHOR may indeed offer a superior product.
Historically SHOR has sold their products to small and medium size enterprises. A key growth strategy going forward in FY '08 is to begin selling into larger companies.
Financials
$2 a share in cash, no debt.
SHOR's fiscal year ends on 6/30 annually. FY '07 ends 6/30/07.
Revenues have increased sequentially each quarter for over two years. I always like to see this. Revenues past four quarters(ending 3/31/07) were(in millions) $19, $20.5, $22.5 and $26 million.
FY '07(ending 6/30/07)
2 quick points. SHOR has booked more stock compensation expenses in FY '07 then they will post-ipo. I smoothed this out a bit by 'pro forma'ing' the stock comp numbers for FY '07 cutting them slightly. SHOR does not have excessive options dilution in their future and stock compensation charges annually should be around $1 million, while for FY '07 pre-ipo they'll be in the $2.5 million ballpark.
2nd point is taxes. SHOR has substantial deferred losses as they did not shift into profitability until FY '06. Their effective tax rate for FY '07 and FY '08 should be in the 10% ballpark.
Revenues for FY '07 with one quarter to go should be in the $97 million ballpark, a strong 60% increase over FY '06. Gross margins for this type of highly competitive communications equipment sector are very strong at 62%. Gross margins are up in FY '07 from FY '06 56%. SHOR attributes this to the release of higher margin products. We've seen a slew of very aggressively valued networking equipment ipos with 40% gross margins, SHOR here in what should be a somewhat commoditized sector is doing something very right to be garnering 62% gross margins.
Operating expense margins have risen pretty evenly with revenues. Ideally you want to see expenses decreasing as a % of revenues as revenues increase. With SHOR we're not seeing that quite yet. for the past four quarter operating margin expense ratio has been in the 52%-55% of revenue range. Going forward I'd like to see SHOR be able to lower that operating expense ratio. That will be a key to future profit growth.
Operating margins for FY '07 were 8%. Plugging in taxes, earnings per share should be $0.17.
FY '08(ending 6/30/0
- If the past three years are indicative, SHOR should continue to grow revenues sequentially each quarter. I would estimate FY '08 revenues in the $120-$125 ballpark, a 25% increase over FY '07. Gross margins should be in the 60% ballpark again. I'd like to see operating expense ratio dip. However I'm not going to plug in much of an operating expense ratio dip as they've not demonstrated they've been able to do that past four quarters. Operating margins should be in the 9%-10% ballpark. Earnings per share should be in the $0.25 - $0.30 range. On a pricing of $9.50, SHOR would be trading 34 X's FY '08 earnings. Conclusion - The only negative here is that earnings have not quite caught up yet with valuation on ipo. Still a number of things to like here: 1)Award winning product; 2) Gross margins actually increasing in a very competitive sector; 3) Quarter to quarter top and bottom line growth; 4) A valuation on ipo, that would make them very attractive buyout candidate; 5) Directly benefiting from the enterprise switch(pun
from legacy communications systems to an integrated single platform all IP network. Definite recommend here in range. I like this one quite a bit in single digits. I've no idea if this works initially, but mid-term plus I can envision SHOR much higher down the line due to the factors
June 23, 2007, 2:02 pm
SLT - Sterlite
9 deals on tap upcoming week, just after the huge Blackstone ipo. http://www.tradingipos.com this week celebrated our 2nd anniversary of providing in-depth pre-ipo analysis from a trading/investing perspective on every ipo every week.
Every pre-ipo analysis piece is available to subscribers. We also have stored every piece since 3/05 and we feature a lively forum section in which we discuss ipos and give pre-open indications.
Past few weeks have featured pieces we've not been interested in buying here at tradingipos.com. We do like/own SLT however.
Disclosure: Tradingipos.com has a position in SLT at date of blog post.
2007-06-17
SLT - Sterlite Industries
Sterlite Industries, SLT plans on offering 125 million American Depository Shares (ADS) at an estimated price of $14 per ADS. Each ADS is equivalent to one share. This offering includes 113.5 million ADS on the NYSE and 11.5 million ADS in Japan. The ADS offering in Japan will not be listed in an exchange. Merrill Lynch, Morgan Stanley and Citibank are lead managing the deal, Nomura co-managing. Post-offering SLT will have 683.5 million shares outstanding for a market cap of $9.57 billion on a pricing of $14. IPO proceeds (which will be significant at an estimated $1.65 billion) will be used for general corporate purposes.
Note - The SLT offering on the NYSE is technically a secondary as Sterlite is currently listed and traded in India on the NSE and the BSE; it is also a component of the exchanges’ major index. Over the past year, SLT's dollar adjusted shares have traded in a range of approximately $6 - $14. Like many foreign stocks trading elsewhere in the world, they tend to make their debut in the US right at all-time highs in stock price. The overall trend has been an initial 'sell the news' on the US debut, although that is not an across the board trend.
Vedanta Resources, a listed London metals and mining company will own 60% of SLT post-offering. Vedanta ipo'd in London in late 2003 and is up over 300% since ipo.
From the prospectus:
'We are India’s largest non-ferrous metals and mining company based on net sales and are one of the fastest growing large private sector companies in India based on the increase in net sales from fiscal 2006 to 2007.'
SLT operates three primary businesses in India:
1) Copper - SLT is one of the two custom copper smelters in India, with a 42% primary market share by volume in India in fiscal 2007. In 2006, SLT was the worldwide 5th largest custom copper smelter and operated two of the five lowest costs of production copper refineries in the world.
2) Zinc - SLT is India’s only integrated zinc producer and had a 61% market share by volume in India in fiscal 2007. SLT's zinc mine is the third largest in the world in terms of production and 4th largest on a reserves basis. SLT operates both zinc mining and smeltering operations in India. SLT has plans to open an additional zinc smelter over the next couple of years.
3) Aluminum - one of four primary aluminum producers in India, with a 25% market share in FY '07. In addition to current production, SLT owns a 30% minority interest in Vedanta Alumina. Vedanta Alumina has commissioned a new 1.0 million tons per annum aluminum plant in India. While initial product is expected to be shipped from the plant beginning in June 2007, it will be 2009-2010 before the plant is shipping extensive product.
In addition to copper, zinc, and aluminum, SLT is getting into the power generation business in India. SLT has experience in building and managing the seven power plants that service their metal smelting operations. SLT is now investing $1.9 billion to build the first phase, totaling 2,400 MW, of a thermal coal-based power facility expected to be complete in 2010. This is an aggressive investment for SLT, as the power plant will be 2 1/2 X's the size in terms of power generated as all of their smelter power plants combined. This facility will be used to sell power to the Indian power grid.
SLT has grown revenues swiftly the past three years due to capacity growth and commodity price increases. Really SLT has been positioned perfectly over the past 3-4 years. If this entity had come public 4-5 years ago it would be one of the biggest winners this decade. Keep in mind that here in 2007, SLT is coming to the US with a $9.57 billion market cap, far far higher than wold have been the case had they listed in the US closer to the beginning of the commodities boom.
Being located in India, SLT enjoys a low cost of production making them quite competitive in the world commodities market. SLT enjoys a leading market share in India in all three of their primary business lines, Copper, Zinc and Aluminum production.
While zinc mines much of their own end product, they source the majority of their copper and aluminum requirements from third parties. Copper concentrate is purchased on the London Metals Exchange, alumina from third party suppliers.
78% of revenues are derived from sales in India and Asia combined.
Indian government - There appears to be some issues in the divestiture of the Indian government’s minority ownership in both SLT's aluminum operations and zinc operations. The Indian government currently owns 49% of SLT's aluminum operations and 30% of SLT's zinc operations. The issue with the zinc operations actually pertains to the government of India's original divestiture of 64% of the zinc operations to SLT earlier this decade. This one by a public interest group appears to have little chance of success. In 2004, SLT exercised an option to purchase the remaining 40% Indian government interest in SLT's aluminum operations. The Indian government has and still is disputing this exercise. As of 6/07 there has been no resolution. There is also another issue with SLT's optioning the 30% remaining Indian government interest in the zinc mines. This pertains to claims that SLT did not act in the best interest of India. This one has been dragging on for over 5 years, although there has been no further action by the Indian government since 2005. If down the line the Indian government again asserts these claims and were to eventually win the resulting legal case, the penalties for SLT are quite harsh. I've no idea what the chance of this happening may be, although it would appear this would not occur for 4-5 more years at least....and it appears the Indian government may have decided to drop this last one altogether. Also it appears SLT plans on ending this, by issuing a 'call right' in which SLT would overpay the Indian government for their remaining 30% interest in SLT's zinc operations. SLT is actually planning on using the ipo cash for this very purpose. I think the takeaway here overall is that government intervention is a definite risk here. At the least, SLT has extensive regulation and a not so silent partner in the Indian government. If for some reason the government of India shifts to a more anti-capitalist stance, operations such as SLT would indeed suffer. In other words, public shareholder would suffer.
Commodity risks -- stating the obvious, but should the strong commodity market of the past 5 years turn down, SLT would definitely be affected. With the continued strong growth in Asia and India, it would probably take a prolonged worldwide economic slump for this to occur.
Financials
SLT's fiscal year ends 3/31 annually. FY '07 ended 3/31/07.
$1.8 billion in cash post-ipo, $300 million in debt. SLT will most likely use the cash on hand to purchase the Indian government’s minority ownership of SLT's zinc operations. This is not a given however.
Dividends - SLT has paid dividends in the past and plans to in the future. Dividends are payable annually soon after the end of the fiscal year(3/31). FY '07's dividend was equal to $0.075 per share. On a pricing of $14, SLT would be yielding 1/2 of 1% annually.
2 1/2 X's book value on a pricing of $14.
Fueled by the strong commodity market in both demand and price, SLT doubled revenues in FY '06 and then again in FY '07.
FY '07(ending 3/31/07) - Revenues increased by 100% to $5.65 billion. Copper operations accounted for 47% of revenues, zinc operations 33% of revenues and aluminum operations 20% of revenues. Gross margins were a strong 40%. Operating margins were 38%. SLT's tax rate was 27%. Net margins after taxes were 28%. After removing minority interests (which will remain post-ipo also), net earnings were $1.61. On a $14 pricing, SLT would trade 9 x's trailing earnings. Interestingly, the bulk of SLT's net earnings are derived from their zinc operations. While the zinc operations accounted for 33% of revenues, they accounted for 60% of operating profits. Pretty easy to discern the reason: SLT mines the majority of their own zinc production, while they source the majority of their raw aluminum and copper. The cost of production for their zinc operations remains rather constant even with the underlying commodity price rise. Because SLT mines their own zinc they're able to benefit from any commodity price rise of zinc in their end selling price. While they're able to pass along the commodity costs of the procured aluminum and copper, their raw materials costs in these two segments rises with the underlying commodity price rise. The following fueled earnings for SLT: 'The daily average zinc cash settlement price on the LME increased from $1,614 per ton in fiscal 2006 to $3,581 per ton in fiscal 2007, an increase of 121.9%.' SLT's operating margins in their zinc business literally went through the roof in FY '07 to the tune of 73%!
FY '08(ending 3/31/0 - Copper and aluminum are low margin segments for SLT, as long as zinc prices remain robust, SLT will produce strong results. Through the first quarter of FY '08, zinc prices have remained quite strong. Results for FY '08 will also depend on SLT's ability to purchase the Indian government’s 30% remaining stake in SLT's zinc operations. If they're able to reclaim this stake, the bottom line should grow nicely the remainder of the fiscal year as few earnings in SLT's zinc operations will be funneled off to minority investors. SLT has increased capacity each of the past two years across their operating segments. I would anticipate a 5% -10% capacity increase in FY '08. Assuming a continued robust end market price/demand wise for copper, aluminum and (especially) zinc, I would expect to see SLT grow the top-line by 10%-15% in FY '08. This does not assume SLT is successful in buying that 30% zinc stake from the government. Bottom line could grow 20% due to very little relative GSA expense. Earnings per share on $6.4 billion in revenues would be $1.80 - $1.90. Note that these estimates assume rather flat commodity prices in 2007, no large gains or dips in aluminum, zinc and copper. Zinc is the one to watch here. If zinc prices fall, SLT's earnings will as well. If SLT earns $1.80 - $1.90, on a pricing of $14 it would trade 8 x's FY '08 earnings.
Power generation is sort of the wild card here. While SLT already operates seven power plants that supply power to their metal production facilities, they're planning construction of a general power plant. This plant will not be online until at least 2010.
The other wild card is SLT's ability post-offering to purchase the remaining 30% interest in their zinc operations from the Indian Government. If this transpires, and if the price of zinc remains strong, SLT's earnings will be substantially higher then projected.
Conclusion - SLT will be an institutional favorite on offering. There are a huge number of shares being offered here. Also there most likely will not be the usual 'ipo effect' as SLT is already trading in India. The result should be a rather muted opening here. This is a solid operation, printing money in this commodity bull run the past few years. If this were a straight ipo with fewer shares, this would be a 'must own' on the offering price of $14. I like this deal even with the large number of shares and that it is a secondary coming to the US market at all-time trading highs. Keep in mind the huge number of shares in this deal (125 million) and the run-up to all-time highs for Sterlite on the Indian exchange pre-US offering. Plus this deal is pretty substantially dilutive, adding 23% to SLT's worldwide market cap. I like this company and think the deal works over time. The external factors mentioned just prior, however, should really mute near-term performance. I would be very surprised if SLT appreciated substantially near-term. Over time, if the price of zinc remains strong, SLT will do quite well.
Also keep an eye on SLT's efforts to purchase the Indian government's 30% stake in SLT's zinc operations. If they're successful that could be a nice bottom line driver in a strong zinc pricing market. Recommend the deal, but with substantial near term deal related headwinds would not expect much appreciation here near term. Recommend as mid-term plus play in a strong zinc pricing environment.
copyright © 2007 tradingipos.com
Every pre-ipo analysis piece is available to subscribers. We also have stored every piece since 3/05 and we feature a lively forum section in which we discuss ipos and give pre-open indications.
Past few weeks have featured pieces we've not been interested in buying here at tradingipos.com. We do like/own SLT however.
Disclosure: Tradingipos.com has a position in SLT at date of blog post.
2007-06-17
SLT - Sterlite Industries
Sterlite Industries, SLT plans on offering 125 million American Depository Shares (ADS) at an estimated price of $14 per ADS. Each ADS is equivalent to one share. This offering includes 113.5 million ADS on the NYSE and 11.5 million ADS in Japan. The ADS offering in Japan will not be listed in an exchange. Merrill Lynch, Morgan Stanley and Citibank are lead managing the deal, Nomura co-managing. Post-offering SLT will have 683.5 million shares outstanding for a market cap of $9.57 billion on a pricing of $14. IPO proceeds (which will be significant at an estimated $1.65 billion) will be used for general corporate purposes.
Note - The SLT offering on the NYSE is technically a secondary as Sterlite is currently listed and traded in India on the NSE and the BSE; it is also a component of the exchanges’ major index. Over the past year, SLT's dollar adjusted shares have traded in a range of approximately $6 - $14. Like many foreign stocks trading elsewhere in the world, they tend to make their debut in the US right at all-time highs in stock price. The overall trend has been an initial 'sell the news' on the US debut, although that is not an across the board trend.
Vedanta Resources, a listed London metals and mining company will own 60% of SLT post-offering. Vedanta ipo'd in London in late 2003 and is up over 300% since ipo.
From the prospectus:
'We are India’s largest non-ferrous metals and mining company based on net sales and are one of the fastest growing large private sector companies in India based on the increase in net sales from fiscal 2006 to 2007.'
SLT operates three primary businesses in India:
1) Copper - SLT is one of the two custom copper smelters in India, with a 42% primary market share by volume in India in fiscal 2007. In 2006, SLT was the worldwide 5th largest custom copper smelter and operated two of the five lowest costs of production copper refineries in the world.
2) Zinc - SLT is India’s only integrated zinc producer and had a 61% market share by volume in India in fiscal 2007. SLT's zinc mine is the third largest in the world in terms of production and 4th largest on a reserves basis. SLT operates both zinc mining and smeltering operations in India. SLT has plans to open an additional zinc smelter over the next couple of years.
3) Aluminum - one of four primary aluminum producers in India, with a 25% market share in FY '07. In addition to current production, SLT owns a 30% minority interest in Vedanta Alumina. Vedanta Alumina has commissioned a new 1.0 million tons per annum aluminum plant in India. While initial product is expected to be shipped from the plant beginning in June 2007, it will be 2009-2010 before the plant is shipping extensive product.
In addition to copper, zinc, and aluminum, SLT is getting into the power generation business in India. SLT has experience in building and managing the seven power plants that service their metal smelting operations. SLT is now investing $1.9 billion to build the first phase, totaling 2,400 MW, of a thermal coal-based power facility expected to be complete in 2010. This is an aggressive investment for SLT, as the power plant will be 2 1/2 X's the size in terms of power generated as all of their smelter power plants combined. This facility will be used to sell power to the Indian power grid.
SLT has grown revenues swiftly the past three years due to capacity growth and commodity price increases. Really SLT has been positioned perfectly over the past 3-4 years. If this entity had come public 4-5 years ago it would be one of the biggest winners this decade. Keep in mind that here in 2007, SLT is coming to the US with a $9.57 billion market cap, far far higher than wold have been the case had they listed in the US closer to the beginning of the commodities boom.
Being located in India, SLT enjoys a low cost of production making them quite competitive in the world commodities market. SLT enjoys a leading market share in India in all three of their primary business lines, Copper, Zinc and Aluminum production.
While zinc mines much of their own end product, they source the majority of their copper and aluminum requirements from third parties. Copper concentrate is purchased on the London Metals Exchange, alumina from third party suppliers.
78% of revenues are derived from sales in India and Asia combined.
Indian government - There appears to be some issues in the divestiture of the Indian government’s minority ownership in both SLT's aluminum operations and zinc operations. The Indian government currently owns 49% of SLT's aluminum operations and 30% of SLT's zinc operations. The issue with the zinc operations actually pertains to the government of India's original divestiture of 64% of the zinc operations to SLT earlier this decade. This one by a public interest group appears to have little chance of success. In 2004, SLT exercised an option to purchase the remaining 40% Indian government interest in SLT's aluminum operations. The Indian government has and still is disputing this exercise. As of 6/07 there has been no resolution. There is also another issue with SLT's optioning the 30% remaining Indian government interest in the zinc mines. This pertains to claims that SLT did not act in the best interest of India. This one has been dragging on for over 5 years, although there has been no further action by the Indian government since 2005. If down the line the Indian government again asserts these claims and were to eventually win the resulting legal case, the penalties for SLT are quite harsh. I've no idea what the chance of this happening may be, although it would appear this would not occur for 4-5 more years at least....and it appears the Indian government may have decided to drop this last one altogether. Also it appears SLT plans on ending this, by issuing a 'call right' in which SLT would overpay the Indian government for their remaining 30% interest in SLT's zinc operations. SLT is actually planning on using the ipo cash for this very purpose. I think the takeaway here overall is that government intervention is a definite risk here. At the least, SLT has extensive regulation and a not so silent partner in the Indian government. If for some reason the government of India shifts to a more anti-capitalist stance, operations such as SLT would indeed suffer. In other words, public shareholder would suffer.
Commodity risks -- stating the obvious, but should the strong commodity market of the past 5 years turn down, SLT would definitely be affected. With the continued strong growth in Asia and India, it would probably take a prolonged worldwide economic slump for this to occur.
Financials
SLT's fiscal year ends 3/31 annually. FY '07 ended 3/31/07.
$1.8 billion in cash post-ipo, $300 million in debt. SLT will most likely use the cash on hand to purchase the Indian government’s minority ownership of SLT's zinc operations. This is not a given however.
Dividends - SLT has paid dividends in the past and plans to in the future. Dividends are payable annually soon after the end of the fiscal year(3/31). FY '07's dividend was equal to $0.075 per share. On a pricing of $14, SLT would be yielding 1/2 of 1% annually.
2 1/2 X's book value on a pricing of $14.
Fueled by the strong commodity market in both demand and price, SLT doubled revenues in FY '06 and then again in FY '07.
FY '07(ending 3/31/07) - Revenues increased by 100% to $5.65 billion. Copper operations accounted for 47% of revenues, zinc operations 33% of revenues and aluminum operations 20% of revenues. Gross margins were a strong 40%. Operating margins were 38%. SLT's tax rate was 27%. Net margins after taxes were 28%. After removing minority interests (which will remain post-ipo also), net earnings were $1.61. On a $14 pricing, SLT would trade 9 x's trailing earnings. Interestingly, the bulk of SLT's net earnings are derived from their zinc operations. While the zinc operations accounted for 33% of revenues, they accounted for 60% of operating profits. Pretty easy to discern the reason: SLT mines the majority of their own zinc production, while they source the majority of their raw aluminum and copper. The cost of production for their zinc operations remains rather constant even with the underlying commodity price rise. Because SLT mines their own zinc they're able to benefit from any commodity price rise of zinc in their end selling price. While they're able to pass along the commodity costs of the procured aluminum and copper, their raw materials costs in these two segments rises with the underlying commodity price rise. The following fueled earnings for SLT: 'The daily average zinc cash settlement price on the LME increased from $1,614 per ton in fiscal 2006 to $3,581 per ton in fiscal 2007, an increase of 121.9%.' SLT's operating margins in their zinc business literally went through the roof in FY '07 to the tune of 73%!
FY '08(ending 3/31/0
- Copper and aluminum are low margin segments for SLT, as long as zinc prices remain robust, SLT will produce strong results. Through the first quarter of FY '08, zinc prices have remained quite strong. Results for FY '08 will also depend on SLT's ability to purchase the Indian government’s 30% remaining stake in SLT's zinc operations. If they're able to reclaim this stake, the bottom line should grow nicely the remainder of the fiscal year as few earnings in SLT's zinc operations will be funneled off to minority investors. SLT has increased capacity each of the past two years across their operating segments. I would anticipate a 5% -10% capacity increase in FY '08. Assuming a continued robust end market price/demand wise for copper, aluminum and (especially) zinc, I would expect to see SLT grow the top-line by 10%-15% in FY '08. This does not assume SLT is successful in buying that 30% zinc stake from the government. Bottom line could grow 20% due to very little relative GSA expense. Earnings per share on $6.4 billion in revenues would be $1.80 - $1.90. Note that these estimates assume rather flat commodity prices in 2007, no large gains or dips in aluminum, zinc and copper. Zinc is the one to watch here. If zinc prices fall, SLT's earnings will as well. If SLT earns $1.80 - $1.90, on a pricing of $14 it would trade 8 x's FY '08 earnings. Power generation is sort of the wild card here. While SLT already operates seven power plants that supply power to their metal production facilities, they're planning construction of a general power plant. This plant will not be online until at least 2010.
The other wild card is SLT's ability post-offering to purchase the remaining 30% interest in their zinc operations from the Indian Government. If this transpires, and if the price of zinc remains strong, SLT's earnings will be substantially higher then projected.
Conclusion - SLT will be an institutional favorite on offering. There are a huge number of shares being offered here. Also there most likely will not be the usual 'ipo effect' as SLT is already trading in India. The result should be a rather muted opening here. This is a solid operation, printing money in this commodity bull run the past few years. If this were a straight ipo with fewer shares, this would be a 'must own' on the offering price of $14. I like this deal even with the large number of shares and that it is a secondary coming to the US market at all-time trading highs. Keep in mind the huge number of shares in this deal (125 million) and the run-up to all-time highs for Sterlite on the Indian exchange pre-US offering. Plus this deal is pretty substantially dilutive, adding 23% to SLT's worldwide market cap. I like this company and think the deal works over time. The external factors mentioned just prior, however, should really mute near-term performance. I would be very surprised if SLT appreciated substantially near-term. Over time, if the price of zinc remains strong, SLT will do quite well.
Also keep an eye on SLT's efforts to purchase the Indian government's 30% stake in SLT's zinc operations. If they're successful that could be a nice bottom line driver in a strong zinc pricing market. Recommend the deal, but with substantial near term deal related headwinds would not expect much appreciation here near term. Recommend as mid-term plus play in a strong zinc pricing environment.
copyright © 2007 tradingipos.com
June 15, 2007, 2:40 pm
BAGL
Pre-ipo analysis of all deals available to subscribers at http://www.tradingipos.com/
2007-06-01
BAGL - Einstein Noah Restaurant Group
BAGL - Einstein Noah Restaurant Group plans to offer 5.8 million shares(assuming over-allotments) at a range of $19-$21. Morgan Stanley and Cowen are lead managing the deal, Piper Jaffray co-managing. Post-ipo BAGL will have 16.4 million shares outstanding for a market cap of $328 million on a pricing of $20. IPO proceeds will be used to repay debt.
Greenlight Capital(affiliated with recent ipo GLRE) will own 60% of BAGL post-ipo. Greenlight assumed 97% ownership in BAGL following BAGL's reorganization from bankruptcy in 2003. Greenlight was a corporate bond holder in BAGL prior to the bankruptcy and those debt notes were converted to a nearly full equity stake following reorganization. Greenlight is not selling any shares on ipo, although a chunk of ipo proceeds will be used to close out a debt note held by Greenlight.
BAGL's shares currently trade(pre-ipo) on the 'pink-sheets' under the symbol NWRG. Looking through NWRG's most recent earnings release, it appears this is a very 'clean' move from the pink sheets to the nasdaq on ipo. Company structure wise it will act as a secondary offering of 5.8 million shares, which will be used to clean the balance sheet up by paying down debt. Debt levels will go from $227 million pre-ipo to $138 million post-ipo, assuming a pricing of $20. NWRG's stock price has ranged from $17-$22 over the 30 days pre-ipo, with very few shares generally traded.
From the prospectus:
'We are the largest owner/operator, franchisor and licensor of bagel specialty restaurants in the United States. We have approximately 600 restaurants in 36 states and the District of Columbia under the Einstein Bros. Bagels, Noah’s New York Bagels and Manhattan Bagel brands.'
The Einstein brand is located in 33 states, Noah's in 3 states and Manhattan concentrated in the northeast US. As with most bagel spots, focus is on morning and into early afternoon. Offerings include fresh bagels and other bakery items baked on-site, made-to-order breakfast and lunch sandwiches on a variety of bagels and breads, gourmet soups and salads, decadent desserts, premium coffees and an assortment of snacks.
Fast casual morning niche - Highly competitive segment in which BAGL operates. BAGL's largest component Einstein Bagels was created in 1995 by Boston Chicken. It appears much as Boston Chicken, Einstein expanded too quickly laying on debt to open new locations. This actually occurred pretty much across the board in the bagel segment as the bagel chains races to open new stores to grab the 'bagel' segment market share in attempts to be the 'bagel' Starbucks. Pretty much all of them ran into financial difficulty as debt servicing overcame sluggish revenues. Consolidation ensued, the debt holders took over the various companies and a few years later we get the BAGL ipo. Even with consolidation in the sector, competition is fierce. BAGL competes directly with other bagel chains such as Brueggers, as well as coffee chains such as Starbucks, Dunkin' Donuts and Caribou and other 'fast casual' morning stops such as Panera. In addition many fast food restaurants such as McDonalds are focusing more on premium coffee and offerings that are directed at taking market share from the coffee chains and fast casual breakfast spots such as BAGL. It is a tough niche. The history of the 'bagel wars' from the late '90's is a perfect example of why debt levels are always extremely important to keep an eye on. When operations lay on heftier and heftier debt to expand either through new locations or acquisitions, the bar to insolvency gets lower and lower. For those that are interested in a primer on the importance of debt should research the bagel 'boom' and the theater chain expansions of the late '90's.
60% of BAGL's revenues are derived during the 'breakfast' portion of the day. BAGL post-ipo will be the largest 'bagel' operator in the US. 10 consecutive quarters of positive same store sales. This should have an asterisk though as BAGL had negative same store sales for 2-3 years in a row prior to this pick-up, so the starting point here was low.
New stores - For the past 5 years BAGL has focused on getting their financial house in order. This has included closing under performing stores, reworking their entire in-store concept and managing the business(and each store) more efficiently. The result has been that BAGL has seen the number of stores decrease annually each of the past 5 years. As of 4/4/07, BAGL had 597 total locations, 410 of which were company owned, 100 licensed and 87 franchised. In 2007 however, BAGL plans to begin a moderate expansion of company owned stores by opening 10-15 new stores under the Einstein and Noah brands. BAGL also plans on much more aggressive licensing and growth. Licensed locations are located in airports, colleges and universities, hospitals, military bases and on turnpikes. BAGL opened 29 new licensed locations in 2006 and plans to open 30-40 new licensed locations in 2007. During BAGL's reorganization and aftermath, the franchising segment suffered greatly. BAGL has lost franchises annually each year this decade. They plan on growing this part of the business, however it appears much of the non-company owned growth is being directed towards the licensing concept.
Company owned restaurants account for 90%-95% of overall revenues.
Property - BAGL does not own any properties, they lease all restaurant space at company owned locations.
Financials
BAGL will have fairy significant debt post-ipo of $138 million.
Even with 10 straight quarters of same store sales growth, revenues have been sluggish this entire decade. As BAGL has operated more efficiently and grown same store sales the past 2 1/2 years, the impact in overall revenues has been nil due to store closings and loss of franchisees. Overall, looking at BAGL's revenues the past five years is akin to looking at a flat line with revenues 'stuck' from 2002-2006 at $374 million - $399 million.
2006 - $390 million in revenues, 20% gross margin. Indicative of improving store performance(and closing poorly performing locations), gross margins were highest in 4 years. Operating margins were 11%. Debt servicing costs(factoring in reduced debt servicing based on debt paid on ipo) ate up 40% of operating profits. Depreciation & amortization charges took away a bit more as well. Note that BAGL has approximately $150 million in tax loss carryforwards from pre/post bankruptcy days. Even though they're capped on how much they can utilize in a given year, BAGL won't be paying taxes on any earnings for the foreseeable future. So we'll give a 'no tax' number here for net and then a 'tax plugged in' number so that BAGL can be compared apples to apples with the sector. 'No tax' net margins for 2006 were 3%, fully taxed would have been 2%. Earnings per share not taxed were $0.80, plugging in taxes they would have been $0.50.
2007 - Much as rest of decade previous, first quarter 2007 revenues were flat compared to first quarter 2006. Same store sales increased 1%. BAGL had 21 fewer restaurants in the first quarter of 2007 as compared to first quarter 2006. It would appear BAGL is about completed shuttering non-performing stores(only 20 more anticipated closing next three years as leases expire) and is about to embark on company owned store expansion. The plan is for controlled growth, so I would expect the number of overall company stores to grow all that much in 2007 overall. I would expect overall revenues to be in the $390-$400 million ballpark for 2007. Gross and operating margins should be similar to 2006. BAGL will benefit in 2007 from decreased amortization & depreciation costs which will assist to boost the net margins and bottom line. Net margins('no tax') should improve to 3 1/2%, taxed to 2 1/2%. Official untaxed earnings should be in the $0.85-$0.90 range. Plugging in taxes, earnings would be $0.55-$0.60.
Conclusion - Coming out of bankruptcy reorganization, management the past 3 years has done a nice job improving margins and same store sales comparables. Keep in mind much of this same store sales growth is attributable to sluggish performance in 2003/2004 as well as management simply closing non-performing stores. BAGL has extensive tax carry-forwards, meaning the bottom line here is greatly benefiting from not being taxed. Plugging in taxes, BAGL looks awfully pricey in range, especially keeping in mind past bankruptcy(for Einstein and Noah) and the not insignificant debt being carried on the books. Revenues have been stagnant, competition is fierce. BAGL to me looks to be a turn-around story at least fully valued in range.
2007-06-01
BAGL - Einstein Noah Restaurant Group
BAGL - Einstein Noah Restaurant Group plans to offer 5.8 million shares(assuming over-allotments) at a range of $19-$21. Morgan Stanley and Cowen are lead managing the deal, Piper Jaffray co-managing. Post-ipo BAGL will have 16.4 million shares outstanding for a market cap of $328 million on a pricing of $20. IPO proceeds will be used to repay debt.
Greenlight Capital(affiliated with recent ipo GLRE) will own 60% of BAGL post-ipo. Greenlight assumed 97% ownership in BAGL following BAGL's reorganization from bankruptcy in 2003. Greenlight was a corporate bond holder in BAGL prior to the bankruptcy and those debt notes were converted to a nearly full equity stake following reorganization. Greenlight is not selling any shares on ipo, although a chunk of ipo proceeds will be used to close out a debt note held by Greenlight.
BAGL's shares currently trade(pre-ipo) on the 'pink-sheets' under the symbol NWRG. Looking through NWRG's most recent earnings release, it appears this is a very 'clean' move from the pink sheets to the nasdaq on ipo. Company structure wise it will act as a secondary offering of 5.8 million shares, which will be used to clean the balance sheet up by paying down debt. Debt levels will go from $227 million pre-ipo to $138 million post-ipo, assuming a pricing of $20. NWRG's stock price has ranged from $17-$22 over the 30 days pre-ipo, with very few shares generally traded.
From the prospectus:
'We are the largest owner/operator, franchisor and licensor of bagel specialty restaurants in the United States. We have approximately 600 restaurants in 36 states and the District of Columbia under the Einstein Bros. Bagels, Noah’s New York Bagels and Manhattan Bagel brands.'
The Einstein brand is located in 33 states, Noah's in 3 states and Manhattan concentrated in the northeast US. As with most bagel spots, focus is on morning and into early afternoon. Offerings include fresh bagels and other bakery items baked on-site, made-to-order breakfast and lunch sandwiches on a variety of bagels and breads, gourmet soups and salads, decadent desserts, premium coffees and an assortment of snacks.
Fast casual morning niche - Highly competitive segment in which BAGL operates. BAGL's largest component Einstein Bagels was created in 1995 by Boston Chicken. It appears much as Boston Chicken, Einstein expanded too quickly laying on debt to open new locations. This actually occurred pretty much across the board in the bagel segment as the bagel chains races to open new stores to grab the 'bagel' segment market share in attempts to be the 'bagel' Starbucks. Pretty much all of them ran into financial difficulty as debt servicing overcame sluggish revenues. Consolidation ensued, the debt holders took over the various companies and a few years later we get the BAGL ipo. Even with consolidation in the sector, competition is fierce. BAGL competes directly with other bagel chains such as Brueggers, as well as coffee chains such as Starbucks, Dunkin' Donuts and Caribou and other 'fast casual' morning stops such as Panera. In addition many fast food restaurants such as McDonalds are focusing more on premium coffee and offerings that are directed at taking market share from the coffee chains and fast casual breakfast spots such as BAGL. It is a tough niche. The history of the 'bagel wars' from the late '90's is a perfect example of why debt levels are always extremely important to keep an eye on. When operations lay on heftier and heftier debt to expand either through new locations or acquisitions, the bar to insolvency gets lower and lower. For those that are interested in a primer on the importance of debt should research the bagel 'boom' and the theater chain expansions of the late '90's.
60% of BAGL's revenues are derived during the 'breakfast' portion of the day. BAGL post-ipo will be the largest 'bagel' operator in the US. 10 consecutive quarters of positive same store sales. This should have an asterisk though as BAGL had negative same store sales for 2-3 years in a row prior to this pick-up, so the starting point here was low.
New stores - For the past 5 years BAGL has focused on getting their financial house in order. This has included closing under performing stores, reworking their entire in-store concept and managing the business(and each store) more efficiently. The result has been that BAGL has seen the number of stores decrease annually each of the past 5 years. As of 4/4/07, BAGL had 597 total locations, 410 of which were company owned, 100 licensed and 87 franchised. In 2007 however, BAGL plans to begin a moderate expansion of company owned stores by opening 10-15 new stores under the Einstein and Noah brands. BAGL also plans on much more aggressive licensing and growth. Licensed locations are located in airports, colleges and universities, hospitals, military bases and on turnpikes. BAGL opened 29 new licensed locations in 2006 and plans to open 30-40 new licensed locations in 2007. During BAGL's reorganization and aftermath, the franchising segment suffered greatly. BAGL has lost franchises annually each year this decade. They plan on growing this part of the business, however it appears much of the non-company owned growth is being directed towards the licensing concept.
Company owned restaurants account for 90%-95% of overall revenues.
Property - BAGL does not own any properties, they lease all restaurant space at company owned locations.
Financials
BAGL will have fairy significant debt post-ipo of $138 million.
Even with 10 straight quarters of same store sales growth, revenues have been sluggish this entire decade. As BAGL has operated more efficiently and grown same store sales the past 2 1/2 years, the impact in overall revenues has been nil due to store closings and loss of franchisees. Overall, looking at BAGL's revenues the past five years is akin to looking at a flat line with revenues 'stuck' from 2002-2006 at $374 million - $399 million.
2006 - $390 million in revenues, 20% gross margin. Indicative of improving store performance(and closing poorly performing locations), gross margins were highest in 4 years. Operating margins were 11%. Debt servicing costs(factoring in reduced debt servicing based on debt paid on ipo) ate up 40% of operating profits. Depreciation & amortization charges took away a bit more as well. Note that BAGL has approximately $150 million in tax loss carryforwards from pre/post bankruptcy days. Even though they're capped on how much they can utilize in a given year, BAGL won't be paying taxes on any earnings for the foreseeable future. So we'll give a 'no tax' number here for net and then a 'tax plugged in' number so that BAGL can be compared apples to apples with the sector. 'No tax' net margins for 2006 were 3%, fully taxed would have been 2%. Earnings per share not taxed were $0.80, plugging in taxes they would have been $0.50.
2007 - Much as rest of decade previous, first quarter 2007 revenues were flat compared to first quarter 2006. Same store sales increased 1%. BAGL had 21 fewer restaurants in the first quarter of 2007 as compared to first quarter 2006. It would appear BAGL is about completed shuttering non-performing stores(only 20 more anticipated closing next three years as leases expire) and is about to embark on company owned store expansion. The plan is for controlled growth, so I would expect the number of overall company stores to grow all that much in 2007 overall. I would expect overall revenues to be in the $390-$400 million ballpark for 2007. Gross and operating margins should be similar to 2006. BAGL will benefit in 2007 from decreased amortization & depreciation costs which will assist to boost the net margins and bottom line. Net margins('no tax') should improve to 3 1/2%, taxed to 2 1/2%. Official untaxed earnings should be in the $0.85-$0.90 range. Plugging in taxes, earnings would be $0.55-$0.60.
Conclusion - Coming out of bankruptcy reorganization, management the past 3 years has done a nice job improving margins and same store sales comparables. Keep in mind much of this same store sales growth is attributable to sluggish performance in 2003/2004 as well as management simply closing non-performing stores. BAGL has extensive tax carry-forwards, meaning the bottom line here is greatly benefiting from not being taxed. Plugging in taxes, BAGL looks awfully pricey in range, especially keeping in mind past bankruptcy(for Einstein and Noah) and the not insignificant debt being carried on the books. Revenues have been stagnant, competition is fierce. BAGL to me looks to be a turn-around story at least fully valued in range.
June 1, 2007, 7:44 pm
RRR
pre-ipo analysis pieces available to subscribers at http://www.tradingipos.com
2007-05-19
RRR - RSC Equipment Rental
RRR - RSC Equipment Rental plans on offering 24 million shares(assuming over-allotments) at a range of $23-$25. Note that 11.5 million shares in this deal are being offered by insiders. Deutsche Bank, Lehman and Moran Stanley are lead managing the deal, five firms co-managing. Post-ipo RRR will have 103.1 million shares outstanding for a market cap of $2.47 billion on a $24 pricing. IPO proceeds will be used to repay debt as well as $25 million going to terminate a 'monitoring' fee. This $25 million is heading into insiders pockets.
Ripplewood and Oak Hill will each own approximately 32% of RRR post-ipo. combined they'll own 64% of RRR. Recently RRR recapitalized their operation resulting in the Ripplewood and Oak Hill majority ownership. As is the norm these days with this these sort of deals, Ripplewood and Oak Hill funded their recap investment primarily by laying on substantial debt to the back of RRR. RRR operates in a business in which they will have debt on the books as it is. They finance equipment purchases and then enter into leasing agreements with customers for said equipment. However the recapitalization more then doubles RRR's debt on the books, and did so without generating any future revenues as RRR's business related debt would. Even by paying off debt on ipo, RRR will have $2.7 billion in debt on the books post-ipo. This is simply too much for my tastes, especially with RRR's type of operation. By laying more debt onto RRR, Ripplewood and Oak Hill slow RRR's ability post-ipo to grow via laying on debt to finance greater number of equipment to then lease. RRR is a large established successful operation. However the balance sheet here stands in direct contrast to the recent ACM ipo whose balance sheet post-ipo is pristine. Different businesses yes, but all in all I'll go with a cleaner balance sheet ipo every time. Not only will the 'un-natural' debt laid on in the recap potentially slow growth, this substantial debt level will also eat into operating profits. As usual, I dislike seeing third parties come in and finance company purchases(or majority ownerships) via laying debt onto the back of a solid cash flow generating operation. It really handicaps the newer public shareholders post-ipo. Oak Hill, Ripplewood and minority owner ACF are the selling shareholders in this deal. ACF was the owner that sold a % in the recap to Ripplewood and Oak Hill. These two private equity firms will do quite well on this deal with the ipo cash-out as well as shares held post-ipo. We've seen this sort of thing a number of times previously.
Contingent 'earn-out' notes - In addition to the debt outstanding, there is the potential for more due to something called a contingent 'earn out' notes deal. If RRR has combined EBITDA of $1.54 billion or better for the fiscal years 2006 and 2007 combines, RRR will owe the pre-ipo shareholders(primarily Oak Hill, Ripplewood and ACF), a $150+ million bonus. If EBITDA is $800+ million in FY '08 then an additional $250+ million bonus is due. these bonuses would mature beginning in a decade or so and would go on the books I believe as new debt until then. There are a number of exceptions to this payout delay that would kick in principal payment earlier. It would appear RRR has a 50/50 or so chance at hitting the $1.54 combined 2006/2007 EBITDA number which would kick in the 'earn out' notes deal.
From the prospectus:
'We are one of the largest equipment rental providers in North America. As of March 31, 2007, we operate through a network of 459 rental locations across 10 regions in 39 U.S. states and four Canadian provinces.'
RRR believes they're the #1 or #2 equipment rental provider in the majority of regions in which they operate. Customers are primarily non-residential construction and industrial markets. Equipment ranges from large equipment such as backhoes, forklifts, air compressors, scissor lifts, booms and skid-steer loaders to smaller items such as pumps, generators, welders and electric hand tools.
85% of revenues are derived from equipment rentals, 15% from sales of used equipment. Average fleet age is 25 months, which RRR believes is one of the youngest in the industry. Original equipment cost of the fleet was $2.5 billion. RRR has invested $2.2 billion in their fleet over the past four years.
Fleet utilization was 70% over the 15 months concluding 3/31/07. Over the period, RRR has had over 470,000 customers with the top 10 customers representing 7% of overall revenues.
Business has been strong the past 4 years as RRR has achieved 15 consecutive quarters of positive 'same store sales' growth. This would mesh with the strong nature of the of non-residential real estate construction sector since 2003. The equipment rental market was $34.8 billion business in 2006 and is expected to grow 8%-9% overall in 2007. The top 10 companies in the sector accounted for 30% of overall revenues in 2006. Interestingly while this is a fairly fragmented sector, RRR has grown exclusively organically and not via acquisitions.
Competition - National competitors include United Rentals, Hertz Equipment Rental Corporation and Sunbelt Rentals. Regional competitors are Neff Rental, Ahern Rentals,. and Sunstate Equipment Co. A number of individual Caterpillar dealers also participate in the equipment rental market in the United States and Canada.
Financials
Substantial debt of $2.7 billion post-ipo is the issue here. The nature of RRR's business is going to mean there will be debt on the books. Prior to the recapitalization however, RRR was doing a very nice job of maintaining level debt levels of $1.2 billion in 2004, 2005 and into 2006 while expanding their equipment fleet. They were adding a lot of new equipment through cash flows while keeping debt levels stable. Sign of a strong business and solid management. My issue here(and it is a big one) is that the substantial additional debt added recently due to the recapitalization did nothing to help grow the business. All it did was help the private equity interests make money.
As RRR states, 'Our revenues and operating results are driven in large part by activities in the non-residential construction and industrial markets. These markets are cyclical with activity levels that tend to increase in line with growth in gross domestic product and decline during times of economic weakness.'
Debt servicing costs will now eat up roughly 50% of RRR's operating profits post-ipo. While business is strong currently RRR will still have nice cash flows even at these debt levels. However their business is highly dependent on overall non-residential construction. We saw this segment of the economy slow substantially in 2001-2002. While a similar future slowdown most likely would not mean difficulty in servicing their debt, it could easily mean servicing debt wipes away cash flows and bottom line net profits. My issue here is not RRR's debt as they're going to have debt in their line of business. My issue is the substantial debt laid on during the recap that does nothing to assist the business. The newer debt is debt that is dragging the business, not debt in which they're making a profit by leasing equipment financed. Big difference. THE difference maker for me when it comes to this RRR ipo.
Business has been strong: Same store sales increases were 12% in 2004, 18% in 2005, 19% in 2006 and 13% the first quarter of 2007. Keep in mind this sector is not apples to apples comparison to retail and restaurant same store sales growth. While the latter two tend to have a finite selling space, RRR is able to add equipment and overall rental capacity annually much easier in a strong demand environment. This is not really a 'finite selling space' type business. Still the same store sales do indicate an overall healthy operating climate for RRR the past few years.
Note that 2006/2007 numbers include a look at the company as if both the recapitalization and the ipo had closed 12/31/05. In other words a look at operations as the company will be structured post-ipo.
2006 - Revenues were strong at $1.65 billion, a 14% increase over 2005. Reasons for the increase were additional rental equipment added as well as higher purchase and rental rates on equipment. Gross margins are rather strong here at 36%. RRR is in many ways a 'middle man' type operation. These are impressive margins for this type of business. Operating expenses were 11% of revenues. RRR has held operating expenses in this 10%-11% range over the years. Operating margins were 26%. Pre-recapitalization, net margins would have been 12% with earnings per share of nearly $2. Without the recap debt, RRR would be dirt cheap in range and strong recommend. However that isn't the case. Including the recap debt, 2006 net margins were 7% with earnings per share of $1.17. Huge difference, all into the pockets of the Oak Hill and Ripplewood.
2007 - RRR had a solid first quarter, even though equipment sales were down a bit. It appears in 2006 RRR cleared out a lot of old equipment via sales and replaced rental fleet with newer stuff. Overall revenues look as if they may grow by 10% in '07 to $1.82 billion. Gross margins should again be in the 36% range. As RRR as managed operating expenses to that 10%-11% area for years now, I would expect similar in 2007 meaning operating margins should again come in around that 25%-26% number. Debt servicing will 'eat' up approximately 50% of all operating profits in 2007. Again a chunk of this debt is recap related and not debt RRR will be making money off of through equipment purchases and then renting out said equipment. Net margins should be 7 1/2% - 8%. Earnings per share should be in the $1.30 range. On a pricing of $24, RRR would trade 18 x's '07 earnings.
RRR's closest public comparable is United Rentals(URI). A quick look at each.
URI - $2.83 billion market cap, currently trades 0.72 X's '07 revenues and 13 X's 07 earnings estimates. URI is heavily leveraged with $2.7 billion in debt. Revenue growth estimates are in the 5%-7% range.
RRR - $2.47 billion market cap on a $24 pricing. Would trade 1.4 X's '07 revenues and 18 x's '07 earnings estimates. RRR is heavily leveraged post-ipo with $2.7 billion in debt. Revenue growth estimates for '07 in the 10% ballpark.
Conclusion - If not for the recap debt laid onto RRR, this would be an easy recommend. As it is, the multiple here seems a bit steep in relation to both URI and the amount of debt on the books post-ipo. RRR is a solid company that has booked strong cash flows and earnings the past four years. This is a good company that appears to have managed growth very well. However I can't recommend this deal, due to the debt laid on here to directly benefit Ripplewood and Oak Hill(and not the company and public shareholders). In solid economic climate, I would expect RRR operationally to continue to do well. Neutral overall here on this deal. Strong business and sector leadership with a private equity related drag on the bottom line.
2007-05-19
RRR - RSC Equipment Rental
RRR - RSC Equipment Rental plans on offering 24 million shares(assuming over-allotments) at a range of $23-$25. Note that 11.5 million shares in this deal are being offered by insiders. Deutsche Bank, Lehman and Moran Stanley are lead managing the deal, five firms co-managing. Post-ipo RRR will have 103.1 million shares outstanding for a market cap of $2.47 billion on a $24 pricing. IPO proceeds will be used to repay debt as well as $25 million going to terminate a 'monitoring' fee. This $25 million is heading into insiders pockets.
Ripplewood and Oak Hill will each own approximately 32% of RRR post-ipo. combined they'll own 64% of RRR. Recently RRR recapitalized their operation resulting in the Ripplewood and Oak Hill majority ownership. As is the norm these days with this these sort of deals, Ripplewood and Oak Hill funded their recap investment primarily by laying on substantial debt to the back of RRR. RRR operates in a business in which they will have debt on the books as it is. They finance equipment purchases and then enter into leasing agreements with customers for said equipment. However the recapitalization more then doubles RRR's debt on the books, and did so without generating any future revenues as RRR's business related debt would. Even by paying off debt on ipo, RRR will have $2.7 billion in debt on the books post-ipo. This is simply too much for my tastes, especially with RRR's type of operation. By laying more debt onto RRR, Ripplewood and Oak Hill slow RRR's ability post-ipo to grow via laying on debt to finance greater number of equipment to then lease. RRR is a large established successful operation. However the balance sheet here stands in direct contrast to the recent ACM ipo whose balance sheet post-ipo is pristine. Different businesses yes, but all in all I'll go with a cleaner balance sheet ipo every time. Not only will the 'un-natural' debt laid on in the recap potentially slow growth, this substantial debt level will also eat into operating profits. As usual, I dislike seeing third parties come in and finance company purchases(or majority ownerships) via laying debt onto the back of a solid cash flow generating operation. It really handicaps the newer public shareholders post-ipo. Oak Hill, Ripplewood and minority owner ACF are the selling shareholders in this deal. ACF was the owner that sold a % in the recap to Ripplewood and Oak Hill. These two private equity firms will do quite well on this deal with the ipo cash-out as well as shares held post-ipo. We've seen this sort of thing a number of times previously.
Contingent 'earn-out' notes - In addition to the debt outstanding, there is the potential for more due to something called a contingent 'earn out' notes deal. If RRR has combined EBITDA of $1.54 billion or better for the fiscal years 2006 and 2007 combines, RRR will owe the pre-ipo shareholders(primarily Oak Hill, Ripplewood and ACF), a $150+ million bonus. If EBITDA is $800+ million in FY '08 then an additional $250+ million bonus is due. these bonuses would mature beginning in a decade or so and would go on the books I believe as new debt until then. There are a number of exceptions to this payout delay that would kick in principal payment earlier. It would appear RRR has a 50/50 or so chance at hitting the $1.54 combined 2006/2007 EBITDA number which would kick in the 'earn out' notes deal.
From the prospectus:
'We are one of the largest equipment rental providers in North America. As of March 31, 2007, we operate through a network of 459 rental locations across 10 regions in 39 U.S. states and four Canadian provinces.'
RRR believes they're the #1 or #2 equipment rental provider in the majority of regions in which they operate. Customers are primarily non-residential construction and industrial markets. Equipment ranges from large equipment such as backhoes, forklifts, air compressors, scissor lifts, booms and skid-steer loaders to smaller items such as pumps, generators, welders and electric hand tools.
85% of revenues are derived from equipment rentals, 15% from sales of used equipment. Average fleet age is 25 months, which RRR believes is one of the youngest in the industry. Original equipment cost of the fleet was $2.5 billion. RRR has invested $2.2 billion in their fleet over the past four years.
Fleet utilization was 70% over the 15 months concluding 3/31/07. Over the period, RRR has had over 470,000 customers with the top 10 customers representing 7% of overall revenues.
Business has been strong the past 4 years as RRR has achieved 15 consecutive quarters of positive 'same store sales' growth. This would mesh with the strong nature of the of non-residential real estate construction sector since 2003. The equipment rental market was $34.8 billion business in 2006 and is expected to grow 8%-9% overall in 2007. The top 10 companies in the sector accounted for 30% of overall revenues in 2006. Interestingly while this is a fairly fragmented sector, RRR has grown exclusively organically and not via acquisitions.
Competition - National competitors include United Rentals, Hertz Equipment Rental Corporation and Sunbelt Rentals. Regional competitors are Neff Rental, Ahern Rentals,. and Sunstate Equipment Co. A number of individual Caterpillar dealers also participate in the equipment rental market in the United States and Canada.
Financials
Substantial debt of $2.7 billion post-ipo is the issue here. The nature of RRR's business is going to mean there will be debt on the books. Prior to the recapitalization however, RRR was doing a very nice job of maintaining level debt levels of $1.2 billion in 2004, 2005 and into 2006 while expanding their equipment fleet. They were adding a lot of new equipment through cash flows while keeping debt levels stable. Sign of a strong business and solid management. My issue here(and it is a big one) is that the substantial additional debt added recently due to the recapitalization did nothing to help grow the business. All it did was help the private equity interests make money.
As RRR states, 'Our revenues and operating results are driven in large part by activities in the non-residential construction and industrial markets. These markets are cyclical with activity levels that tend to increase in line with growth in gross domestic product and decline during times of economic weakness.'
Debt servicing costs will now eat up roughly 50% of RRR's operating profits post-ipo. While business is strong currently RRR will still have nice cash flows even at these debt levels. However their business is highly dependent on overall non-residential construction. We saw this segment of the economy slow substantially in 2001-2002. While a similar future slowdown most likely would not mean difficulty in servicing their debt, it could easily mean servicing debt wipes away cash flows and bottom line net profits. My issue here is not RRR's debt as they're going to have debt in their line of business. My issue is the substantial debt laid on during the recap that does nothing to assist the business. The newer debt is debt that is dragging the business, not debt in which they're making a profit by leasing equipment financed. Big difference. THE difference maker for me when it comes to this RRR ipo.
Business has been strong: Same store sales increases were 12% in 2004, 18% in 2005, 19% in 2006 and 13% the first quarter of 2007. Keep in mind this sector is not apples to apples comparison to retail and restaurant same store sales growth. While the latter two tend to have a finite selling space, RRR is able to add equipment and overall rental capacity annually much easier in a strong demand environment. This is not really a 'finite selling space' type business. Still the same store sales do indicate an overall healthy operating climate for RRR the past few years.
Note that 2006/2007 numbers include a look at the company as if both the recapitalization and the ipo had closed 12/31/05. In other words a look at operations as the company will be structured post-ipo.
2006 - Revenues were strong at $1.65 billion, a 14% increase over 2005. Reasons for the increase were additional rental equipment added as well as higher purchase and rental rates on equipment. Gross margins are rather strong here at 36%. RRR is in many ways a 'middle man' type operation. These are impressive margins for this type of business. Operating expenses were 11% of revenues. RRR has held operating expenses in this 10%-11% range over the years. Operating margins were 26%. Pre-recapitalization, net margins would have been 12% with earnings per share of nearly $2. Without the recap debt, RRR would be dirt cheap in range and strong recommend. However that isn't the case. Including the recap debt, 2006 net margins were 7% with earnings per share of $1.17. Huge difference, all into the pockets of the Oak Hill and Ripplewood.
2007 - RRR had a solid first quarter, even though equipment sales were down a bit. It appears in 2006 RRR cleared out a lot of old equipment via sales and replaced rental fleet with newer stuff. Overall revenues look as if they may grow by 10% in '07 to $1.82 billion. Gross margins should again be in the 36% range. As RRR as managed operating expenses to that 10%-11% area for years now, I would expect similar in 2007 meaning operating margins should again come in around that 25%-26% number. Debt servicing will 'eat' up approximately 50% of all operating profits in 2007. Again a chunk of this debt is recap related and not debt RRR will be making money off of through equipment purchases and then renting out said equipment. Net margins should be 7 1/2% - 8%. Earnings per share should be in the $1.30 range. On a pricing of $24, RRR would trade 18 x's '07 earnings.
RRR's closest public comparable is United Rentals(URI). A quick look at each.
URI - $2.83 billion market cap, currently trades 0.72 X's '07 revenues and 13 X's 07 earnings estimates. URI is heavily leveraged with $2.7 billion in debt. Revenue growth estimates are in the 5%-7% range.
RRR - $2.47 billion market cap on a $24 pricing. Would trade 1.4 X's '07 revenues and 18 x's '07 earnings estimates. RRR is heavily leveraged post-ipo with $2.7 billion in debt. Revenue growth estimates for '07 in the 10% ballpark.
Conclusion - If not for the recap debt laid onto RRR, this would be an easy recommend. As it is, the multiple here seems a bit steep in relation to both URI and the amount of debt on the books post-ipo. RRR is a solid company that has booked strong cash flows and earnings the past four years. This is a good company that appears to have managed growth very well. However I can't recommend this deal, due to the debt laid on here to directly benefit Ripplewood and Oak Hill(and not the company and public shareholders). In solid economic climate, I would expect RRR operationally to continue to do well. Neutral overall here on this deal. Strong business and sector leadership with a private equity related drag on the bottom line.
May 24, 2007, 3:30 am
SKH
As always analysis pieces on ipos are available in subscriber section of site before offering dates. http://www.tradingipos.com
2007-05-10
SKH - Skilled Healthcare
SKH - Skilled Healthcare Group plans on offering 19.1 million shares(assuming over-allotments) at a range of $14-$16. Insiders are selling 10.8 million shares in the deal. Credit Suisse is lead managing the deal, with eight firms co-managing. Post-ipo SKH will have 37.4 million shares outstanding for a market cap of $561 million on a $15 pricing. IPO proceeds will be used to repay debt.
Onex, a Canadian conglomerate, will own 47% of SKH post-offering. Onex will control SKH through a separate share class. Onex is the primary selling shareholder in this deal. Onex brought EMS public in 12/05. Post-ipo Onex owned 77% of EMS, they currently have an approximately 27% stake. EMS has nearly tripled since ipo debut.
Onex formed SKH in 12/05 by merging together two nursing/assisted living companies. They owned one and completed a leveraged buyout of the other on the merge. Post-merger Onex owned 95% of the combined entity. It also appears as if there was a roughly $100 million dividend payout to Onex in there as well. The result is that SKH was heavily leveraged after the merger. Even after paying off debt on ipo, SKH will still have significant debt on the book of $414 million. Keep in mind that one of SKH's predecessor's filed for bankruptcy in 2001.
I would much prefer to see Onex withhold selling shares on ipo here to allow SKH to offer more shares themselves and help the balance sheet.
From the prospectus:
'We are a provider of integrated long-term healthcare services through our skilled nursing facilities and rehabilitation therapy business. We also provide other related healthcare services, including assisted living care and hospice care.'
As of 4/1/07, SKH owned or leased 64 nursing facilities and 13 assisted living facilities comprising 8,900 beds. SKH owns 75% of their operated facilities which are located in California, Texas, Kansas, Missouri and Nevada. SKH focuses on urban and suburban locations with 67% of locations in non-rural areas.
Higher reimbursed non-Medicaid patients comprised 70% of patients the first quarter of 2007. Medicare patients accounted for 38% of 2006 revenues, while Medicaid patients accounted for 30% of revenues. Medicare patients are reimbursed at a pre-determined rate adjusted for inflation. SKH is seeing downward reimbursement pressure on Medicaid patients due to rapid Medicaid spending growth and slower state revenue receipts. Currently Medicaid is reimbursed at lower rates then Medicare, a trend SKH foresees continuing. Both Medicare/Medicaid tend to be reimbursed at lower rates then private insurance.
Roll-up - SKH has grown via the acquisition route, making 30 nursing home and/or assisted living purchases over the past 4 years. Count on SKH to continue to grow by purchasing(or leasing) additional facilities going forward. I would expect SKH to mimic the 7 1/2 facility per year acquisition pace of the previous four years.
Sector - The US nursing home market is a $120 billion annual business. Growth is being driven by the aging of the US population coupled with longer life expectancies. The annual growth rate of those in the US 65 years of age or older is expected to be 2% over the next decade. The market is highly fragmented and consists of approximately 16,000 facilities with 1.7 million licensed beds. The top 5 operators run only 10% of these facilities. This is a prime consolidation niche and companies such as SKH plan on growing via the consolidation/acquisition route.
Organic growth - In addition to future acquisitions, SKH is constructing two new facilities: a nursing facility in the Dallas/Fort Worth area and an assisted living center in the Kansas City, MO area. The Kansas City location will add 45 beds by 9/08 while the Dallas location will add 385 beds by 4/09.
53% of revenues are derived from facilities in California, 32% from Texas. Occupancy percentage in SKH facilities has been 85%-86% the past few years. 85% of all revenues are derived from SKH's nursing facilities.
Medicare/Medicaid - Approximately 70% of SKH's annual revenues come from Medicare/Medicaid. An ongoing risk for this type of business is the annual budgeting process. In the current budget proposal, there is a 'freeze' on Medicare nursing home payments as well as reduce payments for hospice services. The same budget including a proposed $25 billion cut in Medicaid over the next five years. SKH expects Medicaid/Medicare cost containment measures for nursing homes to be an ongoing issues for them into the future.
Referral Network - SKH relies on a hospital referral network for a portion of their new business. SKH believes forming alliances with leading medical centers improves their ability to attract high-acuity patients to their facilities because an association with such a medical center typically enhances SKH's reputation. Current alliances include Baylor Health Care System in Dallas, Texas, St. Joseph’s Hospital in Orange County, California and White Memorial in Los Angeles, California.
Financials
Debt is the issue here, $414 million post-ipo. Nearly a third of this debt is at a rather high interest rate of 11%. Debt servicing in 2007 will be $40 million, approximately 50% of operating profits. That is substantial and more then I'm comfortable with.
Negative book value post-ipo.
2006 was SKH's first year of operations as a combined entity. SKH was kind enough to 'back in' acquisitions as if they occurred 12/31/05, as well as take into effect alterations based on ipo. Essentially the following 2006 numbers take into account how the company will look post-ipo. All numbers then are pro forma, but a better indication of public SKH then the actual numbers. Revenues for 2006 were $564 million. Gross margins were 25%. Operating margins were 14%. Debt servicing is the killer here eating up substantial operating profits. Net margins after debt servicing and taxes were 4%. Earnings per share were $0.56. On a pricing of $15, SKH would be trading 27 X's 2006 earnings.
2007
SKH is adding 500 beds just in time for the 2nd quarter of 2007. Following numbers take that into account but do not take into account any future acquisitions in 2007...of which I've no doubt there will be a few.
2007 revenues should be in the $625 range, an 11% increase over 2006. Gross margins should be in the same 25% ballpark as 2006. Operating margins also should be in the 14% range. Debt servicing will still be in the $40 million ballpark, but due to greater operating earnings, it will be less a % which will help net margins slightly. Debt servicing is still hefty here, make no doubt. I believe debt servicing in 2007 will ear up close to 1/2 of all operating profits. I would anticipate net margins in the 4 1/2% range. Earnings per share should be in the $0.75 range. On a pricing of $15, SKH would be trading 20 X's 2007 earnings.
Competitors include Manor Care(HCR) and Sun Healthcare(SUNH). In the same general sector is 2005 IPO Brookdale(BKD). BKD focuses more on senior living and senior communities but does also operate low to mid acuity assisted living centers. SKH and BKD are not 'apples to apples' comparables as BKD is not nearly as reliant overall on Medicare/Medicaid as SKH. BKD has done well, even though they came public heavily leveraged.
BKD - $4.5 billion market cap
Conclusion
Pretty simple business model. This is a rather low margin business with very little gross/operating margin improvement potential. 70% of revenues come directly from Medicaid/Medicare and if margins look a little high, they'll slash reimbursements next cycle. Also we're currently in a budget deficit with both the Executive/Legislative branch looking for places to cut. The 30% non direct Medicare/Medicaid is often indirectly linked to Medicare rates. Pretty much any way you look at it this is not a business in which gross/operating margins are going to improve much. To lay more money on the bottom line, facility operators are looking to acquire and consolidate what is a very fragmented sector. That is the SKH plan, to grow through acquisition as well as constructing new facilities in key areas.
Thus far that plan is working for them SKH is on pace to have a strong operational 2007. The issue here for me is the debt. I'm not comfortable with the debt levels here, particularly in a sector that had a rash of bankruptcies just 6-7 years prior.
The pluses: SKH appears well managed and operationally should put together a strong 2007. This ipo is being brought public by Onex, which also brought public EMS. EMS is up 3 fold since 2005 debut. Also in the same general 'senior living' sector, another heavily leveraged ipo BKD has performed quite well over the past 1 1/2 years. 20 X's 2007 earnings here is not unreasonable at all considering SKH growth patterns.
The negatives: The debt. Debt servicing will eat up nearly 50% of 2007 operating revenues. Also should something occur to slash either Medicare/Medicaid funding, the drag on SKH's cash flow could potentially cause repayment issues. Also current debt levels could slow future growth.
Without the debt, this would be a strong recommend in range. I can't recommend a company leveraged this much. I like the niche and I like the business and growth plan. In range I think this deal works. However keep in mind this is a heavily leveraged company, and it doesn't take too much bad news before a leveraged operation runs into trouble.
2007-05-10
SKH - Skilled Healthcare
SKH - Skilled Healthcare Group plans on offering 19.1 million shares(assuming over-allotments) at a range of $14-$16. Insiders are selling 10.8 million shares in the deal. Credit Suisse is lead managing the deal, with eight firms co-managing. Post-ipo SKH will have 37.4 million shares outstanding for a market cap of $561 million on a $15 pricing. IPO proceeds will be used to repay debt.
Onex, a Canadian conglomerate, will own 47% of SKH post-offering. Onex will control SKH through a separate share class. Onex is the primary selling shareholder in this deal. Onex brought EMS public in 12/05. Post-ipo Onex owned 77% of EMS, they currently have an approximately 27% stake. EMS has nearly tripled since ipo debut.
Onex formed SKH in 12/05 by merging together two nursing/assisted living companies. They owned one and completed a leveraged buyout of the other on the merge. Post-merger Onex owned 95% of the combined entity. It also appears as if there was a roughly $100 million dividend payout to Onex in there as well. The result is that SKH was heavily leveraged after the merger. Even after paying off debt on ipo, SKH will still have significant debt on the book of $414 million. Keep in mind that one of SKH's predecessor's filed for bankruptcy in 2001.
I would much prefer to see Onex withhold selling shares on ipo here to allow SKH to offer more shares themselves and help the balance sheet.
From the prospectus:
'We are a provider of integrated long-term healthcare services through our skilled nursing facilities and rehabilitation therapy business. We also provide other related healthcare services, including assisted living care and hospice care.'
As of 4/1/07, SKH owned or leased 64 nursing facilities and 13 assisted living facilities comprising 8,900 beds. SKH owns 75% of their operated facilities which are located in California, Texas, Kansas, Missouri and Nevada. SKH focuses on urban and suburban locations with 67% of locations in non-rural areas.
Higher reimbursed non-Medicaid patients comprised 70% of patients the first quarter of 2007. Medicare patients accounted for 38% of 2006 revenues, while Medicaid patients accounted for 30% of revenues. Medicare patients are reimbursed at a pre-determined rate adjusted for inflation. SKH is seeing downward reimbursement pressure on Medicaid patients due to rapid Medicaid spending growth and slower state revenue receipts. Currently Medicaid is reimbursed at lower rates then Medicare, a trend SKH foresees continuing. Both Medicare/Medicaid tend to be reimbursed at lower rates then private insurance.
Roll-up - SKH has grown via the acquisition route, making 30 nursing home and/or assisted living purchases over the past 4 years. Count on SKH to continue to grow by purchasing(or leasing) additional facilities going forward. I would expect SKH to mimic the 7 1/2 facility per year acquisition pace of the previous four years.
Sector - The US nursing home market is a $120 billion annual business. Growth is being driven by the aging of the US population coupled with longer life expectancies. The annual growth rate of those in the US 65 years of age or older is expected to be 2% over the next decade. The market is highly fragmented and consists of approximately 16,000 facilities with 1.7 million licensed beds. The top 5 operators run only 10% of these facilities. This is a prime consolidation niche and companies such as SKH plan on growing via the consolidation/acquisition route.
Organic growth - In addition to future acquisitions, SKH is constructing two new facilities: a nursing facility in the Dallas/Fort Worth area and an assisted living center in the Kansas City, MO area. The Kansas City location will add 45 beds by 9/08 while the Dallas location will add 385 beds by 4/09.
53% of revenues are derived from facilities in California, 32% from Texas. Occupancy percentage in SKH facilities has been 85%-86% the past few years. 85% of all revenues are derived from SKH's nursing facilities.
Medicare/Medicaid - Approximately 70% of SKH's annual revenues come from Medicare/Medicaid. An ongoing risk for this type of business is the annual budgeting process. In the current budget proposal, there is a 'freeze' on Medicare nursing home payments as well as reduce payments for hospice services. The same budget including a proposed $25 billion cut in Medicaid over the next five years. SKH expects Medicaid/Medicare cost containment measures for nursing homes to be an ongoing issues for them into the future.
Referral Network - SKH relies on a hospital referral network for a portion of their new business. SKH believes forming alliances with leading medical centers improves their ability to attract high-acuity patients to their facilities because an association with such a medical center typically enhances SKH's reputation. Current alliances include Baylor Health Care System in Dallas, Texas, St. Joseph’s Hospital in Orange County, California and White Memorial in Los Angeles, California.
Financials
Debt is the issue here, $414 million post-ipo. Nearly a third of this debt is at a rather high interest rate of 11%. Debt servicing in 2007 will be $40 million, approximately 50% of operating profits. That is substantial and more then I'm comfortable with.
Negative book value post-ipo.
2006 was SKH's first year of operations as a combined entity. SKH was kind enough to 'back in' acquisitions as if they occurred 12/31/05, as well as take into effect alterations based on ipo. Essentially the following 2006 numbers take into account how the company will look post-ipo. All numbers then are pro forma, but a better indication of public SKH then the actual numbers. Revenues for 2006 were $564 million. Gross margins were 25%. Operating margins were 14%. Debt servicing is the killer here eating up substantial operating profits. Net margins after debt servicing and taxes were 4%. Earnings per share were $0.56. On a pricing of $15, SKH would be trading 27 X's 2006 earnings.
2007
SKH is adding 500 beds just in time for the 2nd quarter of 2007. Following numbers take that into account but do not take into account any future acquisitions in 2007...of which I've no doubt there will be a few.
2007 revenues should be in the $625 range, an 11% increase over 2006. Gross margins should be in the same 25% ballpark as 2006. Operating margins also should be in the 14% range. Debt servicing will still be in the $40 million ballpark, but due to greater operating earnings, it will be less a % which will help net margins slightly. Debt servicing is still hefty here, make no doubt. I believe debt servicing in 2007 will ear up close to 1/2 of all operating profits. I would anticipate net margins in the 4 1/2% range. Earnings per share should be in the $0.75 range. On a pricing of $15, SKH would be trading 20 X's 2007 earnings.
Competitors include Manor Care(HCR) and Sun Healthcare(SUNH). In the same general sector is 2005 IPO Brookdale(BKD). BKD focuses more on senior living and senior communities but does also operate low to mid acuity assisted living centers. SKH and BKD are not 'apples to apples' comparables as BKD is not nearly as reliant overall on Medicare/Medicaid as SKH. BKD has done well, even though they came public heavily leveraged.
BKD - $4.5 billion market cap
Conclusion
Pretty simple business model. This is a rather low margin business with very little gross/operating margin improvement potential. 70% of revenues come directly from Medicaid/Medicare and if margins look a little high, they'll slash reimbursements next cycle. Also we're currently in a budget deficit with both the Executive/Legislative branch looking for places to cut. The 30% non direct Medicare/Medicaid is often indirectly linked to Medicare rates. Pretty much any way you look at it this is not a business in which gross/operating margins are going to improve much. To lay more money on the bottom line, facility operators are looking to acquire and consolidate what is a very fragmented sector. That is the SKH plan, to grow through acquisition as well as constructing new facilities in key areas.
Thus far that plan is working for them SKH is on pace to have a strong operational 2007. The issue here for me is the debt. I'm not comfortable with the debt levels here, particularly in a sector that had a rash of bankruptcies just 6-7 years prior.
The pluses: SKH appears well managed and operationally should put together a strong 2007. This ipo is being brought public by Onex, which also brought public EMS. EMS is up 3 fold since 2005 debut. Also in the same general 'senior living' sector, another heavily leveraged ipo BKD has performed quite well over the past 1 1/2 years. 20 X's 2007 earnings here is not unreasonable at all considering SKH growth patterns.
The negatives: The debt. Debt servicing will eat up nearly 50% of 2007 operating revenues. Also should something occur to slash either Medicare/Medicaid funding, the drag on SKH's cash flow could potentially cause repayment issues. Also current debt levels could slow future growth.
Without the debt, this would be a strong recommend in range. I can't recommend a company leveraged this much. I like the niche and I like the business and growth plan. In range I think this deal works. However keep in mind this is a heavily leveraged company, and it doesn't take too much bad news before a leveraged operation runs into trouble.
May 14, 2007, 9:58 pm
ACM - Aecom Technology
Disclosure. At date of posting to blog(5/14/0, tradingipos.com does have a position in ACM from 21.2 avg.
2007-05-08
ACM - Aecom Technology
ACM - Aecom Technology Corporation plans on offering 35.2 million shares at a range of $18-$20. Insiders are selling 15.3 million shares in the deal. Morgan Stanley, Merrill Lynch and UBS are lead managing the deal, Goldman Sachs, Credit Suisse, and DA Davidson are co-managing. Post-ipo, ACM will have 92.4 million shares outstanding for a market cap of $1.76 billion on a $19 pricing. approximately 1/2 the ipo proceeds will be used to repay debt, 1/5 to fund employee stock plan and the rest for general corporate purposes.
Note that ACM is paying off essentially all debt on offering. For a company that has made numerous acquisitions the past decade, a clean balance sheet gives them a nice competitive advantage.
ACM's own retirement and trust plan will own 20% of ACM post-ipo. this is a bit unusual and is a result of Aecom beginning life as an independent entity from an employee buyout in 1990.
From the prospectus:
'We are a leading global provider of professional technical and management support services to government and commercial clients on all seven continents. We provide planning, consulting, architectural and engineering design, and program and construction management services for a broad range of projects, including highways, airports, bridges, mass transit systems, government and commercial buildings, water and wastewater facilities and power transmission and distribution. We also provide facilities management, training, logistics and other support services, primarily for agencies of the United States government.'
A government engineering and construction contractor focusing on general building, transportational and environmental markets. Quite similar in project scope to 2006 ipo KBR. ACM is large, in fact they're the largest general architectural and engineering design firm in the world. ACM has grown via acquisitions with over 30 acquisitions over the past 10 years. Interestingly, while ACM absorbs these acquisitions under the ACM 'umbrella' nearly all of them continue to operate under their original names and keep much of their organizational structures intact. The result is that ACM operates subsidiaries all under different names.
ACM operates under two business segments, Professional Technical Services and Management Support Services. Professional Technical Services is ACM's higher margin growth driver in which they've a worldwide leadership role in their target markets. Management Support Services is ACM's low margin employee intensive government fulfillment segment.
Professional Technical Services
81% of revenues, this is the business driving segment. planning, consulting, architectural and engineering design, and program and construction management services to government, institutional and commercial clients worldwide. Current projects include 2012 London Olympics, Pentagon Renovation, JFK airport in New York, and a Russian Independent Power Project. Private sector accounts for 45% of revenue, public sector 55%. Public sector breakdown is 31% US state and local, 11% direct US federal and 13% non-US government.
A quick look at ACM's core Professional Technical Services end markets:
Transportation - ACM's prime growth driver includes design and construction management of airports, seaports, bridges, tunnels, railway lines and highways. Domestically this is a direct play on the aging US infrastructure.
General Building - Includes the construction of commercial buildings, office complexes, schools, hotels and correctional facilities.
Water, Wastewater and Environmental - Projects include water treatment facilities, water distribution systems, desalination plants, solid waste disposal systems, environmental impact studies, remediation of hazardous materials and pollution control.
Energy/Power - Revitalizing energy and power transmission and distribution systems in the United States.
Management Support Services
19% of revenues. Facilities management and maintenance, training, logistics, consulting, technical assistance and systems integration services, primarily for agencies of the U.S. government. Clients include Department of Defense, Department of Energy and the Department of Homeland Security. Projects include managing and maintaining Camp Arifjan Army Base in Kuwait, Fort Polk Training Center and operating for the Department of State an international civilian police force.
ACM 25 largest worldwide projects accounted for 14% of 2006 revenues. ACM operates in 60 countries worldwide. Backlog was $3.1 billion as of 3/31/07. Overall a little over 60% of revenues are derived from government contracts.
Financials
$3 a share in cash post-ipo. This takes into account the small amount of debt on the books after offering. What impresses me here is the lack of debt on the books post-ipo. Fully expect ACM to use the clean balance sheet and cash on hand to aggressively acquire smaller operations first year public.
Dividends - ACM does not plan on paying dividends.
4 X's book value on a $19 pricing.
ACM's fiscal year ends 9/30 annually. FY '07 will end 9/30/07.
FY '07
Revenues appear on track to grow 24% to $4.2 billion for the year. Much of this growth is due to acquisitions. Gross margins are in the 26% range.
Operating margins are 3.3%. Note that ACM has much stronger gross margins then similarly sized recent government contractor ipos SAI/KBR. While this is in part due to nearly 40% of ACM's revenues being derived from non-government sources, it also appears to be in part an accounting function of employee costs. The operating margins of the three are the apples to apples comparison. Based on recent quarters, operating margins of the three look like this:
ACM 3.3%
KBR 2.7%
SAI 6.8%
Note that SAI has a much lower employee intensive business then ACM/KBR. KBR is a closer pure comparable to ACM.
Net margins for FY '07 look to be in the 2% range. Earnings per share look to be in the $0.90 range. On a pricing of $19, ACM would be trading 21 X's FY '07 earnings.
A quick glance at ACM/KBR
KBR - $3.7 billion market cap, trading 0.4 X's revenues, 2 X's book value and 19 X's FY '07 earnings. Note KBR is expecting a significant revenue decrease in FY '08 due to splitting of Iraq contracts.
ACM - $1.76 billion on a $19 pricing. Would be trading 0.4 X's revenues, 4 X's book value and 21 X's FY '07 earnings. Difference here is that ACM is growing revenues to the tune of 24% in FY '07. ACM fueled with IPO cash and a clean balance sheet should be able to grow revenues double digits in FY '08 through acquisitions as well.
ACM is much strong then KBR simply due to their ability to grow revenues(and the bottom line) going forward.
Conclusion - ACM has a very nice revenue mix from government contracts and private contracts. They rank #1 or #2 in US companies in engineering and consulting services for the following sectors: Mass Transit and Rail; Airports; Marine and Ports; Highways; Bridges; Educational Facilities; Government Offices; Correctional Facilities; Sewage & Solid Waste. That is one impressive list. Factor in the clean balance sheet post-ipo and the strong cash position and this is an easy recommend in range.
Note - With 35 million shares(15 million from insiders) in the offering this is a bulky deal. It is also a low margin business. While ACM has enough going for it to make this a very easy 'recommend' in range, I'm less constructive the higher the pricing/open. This is not the type of company or offering you want to pay way up for, however ACM ipo does offer a nice mid-term risk reward opportunity in pricing range.
, tradingipos.com does have a position in ACM from 21.2 avg. 2007-05-08
ACM - Aecom Technology
ACM - Aecom Technology Corporation plans on offering 35.2 million shares at a range of $18-$20. Insiders are selling 15.3 million shares in the deal. Morgan Stanley, Merrill Lynch and UBS are lead managing the deal, Goldman Sachs, Credit Suisse, and DA Davidson are co-managing. Post-ipo, ACM will have 92.4 million shares outstanding for a market cap of $1.76 billion on a $19 pricing. approximately 1/2 the ipo proceeds will be used to repay debt, 1/5 to fund employee stock plan and the rest for general corporate purposes.
Note that ACM is paying off essentially all debt on offering. For a company that has made numerous acquisitions the past decade, a clean balance sheet gives them a nice competitive advantage.
ACM's own retirement and trust plan will own 20% of ACM post-ipo. this is a bit unusual and is a result of Aecom beginning life as an independent entity from an employee buyout in 1990.
From the prospectus:
'We are a leading global provider of professional technical and management support services to government and commercial clients on all seven continents. We provide planning, consulting, architectural and engineering design, and program and construction management services for a broad range of projects, including highways, airports, bridges, mass transit systems, government and commercial buildings, water and wastewater facilities and power transmission and distribution. We also provide facilities management, training, logistics and other support services, primarily for agencies of the United States government.'
A government engineering and construction contractor focusing on general building, transportational and environmental markets. Quite similar in project scope to 2006 ipo KBR. ACM is large, in fact they're the largest general architectural and engineering design firm in the world. ACM has grown via acquisitions with over 30 acquisitions over the past 10 years. Interestingly, while ACM absorbs these acquisitions under the ACM 'umbrella' nearly all of them continue to operate under their original names and keep much of their organizational structures intact. The result is that ACM operates subsidiaries all under different names.
ACM operates under two business segments, Professional Technical Services and Management Support Services. Professional Technical Services is ACM's higher margin growth driver in which they've a worldwide leadership role in their target markets. Management Support Services is ACM's low margin employee intensive government fulfillment segment.
Professional Technical Services
81% of revenues, this is the business driving segment. planning, consulting, architectural and engineering design, and program and construction management services to government, institutional and commercial clients worldwide. Current projects include 2012 London Olympics, Pentagon Renovation, JFK airport in New York, and a Russian Independent Power Project. Private sector accounts for 45% of revenue, public sector 55%. Public sector breakdown is 31% US state and local, 11% direct US federal and 13% non-US government.
A quick look at ACM's core Professional Technical Services end markets:
Transportation - ACM's prime growth driver includes design and construction management of airports, seaports, bridges, tunnels, railway lines and highways. Domestically this is a direct play on the aging US infrastructure.
General Building - Includes the construction of commercial buildings, office complexes, schools, hotels and correctional facilities.
Water, Wastewater and Environmental - Projects include water treatment facilities, water distribution systems, desalination plants, solid waste disposal systems, environmental impact studies, remediation of hazardous materials and pollution control.
Energy/Power - Revitalizing energy and power transmission and distribution systems in the United States.
Management Support Services
19% of revenues. Facilities management and maintenance, training, logistics, consulting, technical assistance and systems integration services, primarily for agencies of the U.S. government. Clients include Department of Defense, Department of Energy and the Department of Homeland Security. Projects include managing and maintaining Camp Arifjan Army Base in Kuwait, Fort Polk Training Center and operating for the Department of State an international civilian police force.
ACM 25 largest worldwide projects accounted for 14% of 2006 revenues. ACM operates in 60 countries worldwide. Backlog was $3.1 billion as of 3/31/07. Overall a little over 60% of revenues are derived from government contracts.
Financials
$3 a share in cash post-ipo. This takes into account the small amount of debt on the books after offering. What impresses me here is the lack of debt on the books post-ipo. Fully expect ACM to use the clean balance sheet and cash on hand to aggressively acquire smaller operations first year public.
Dividends - ACM does not plan on paying dividends.
4 X's book value on a $19 pricing.
ACM's fiscal year ends 9/30 annually. FY '07 will end 9/30/07.
FY '07
Revenues appear on track to grow 24% to $4.2 billion for the year. Much of this growth is due to acquisitions. Gross margins are in the 26% range.
Operating margins are 3.3%. Note that ACM has much stronger gross margins then similarly sized recent government contractor ipos SAI/KBR. While this is in part due to nearly 40% of ACM's revenues being derived from non-government sources, it also appears to be in part an accounting function of employee costs. The operating margins of the three are the apples to apples comparison. Based on recent quarters, operating margins of the three look like this:
ACM 3.3%
KBR 2.7%
SAI 6.8%
Note that SAI has a much lower employee intensive business then ACM/KBR. KBR is a closer pure comparable to ACM.
Net margins for FY '07 look to be in the 2% range. Earnings per share look to be in the $0.90 range. On a pricing of $19, ACM would be trading 21 X's FY '07 earnings.
A quick glance at ACM/KBR
KBR - $3.7 billion market cap, trading 0.4 X's revenues, 2 X's book value and 19 X's FY '07 earnings. Note KBR is expecting a significant revenue decrease in FY '08 due to splitting of Iraq contracts.
ACM - $1.76 billion on a $19 pricing. Would be trading 0.4 X's revenues, 4 X's book value and 21 X's FY '07 earnings. Difference here is that ACM is growing revenues to the tune of 24% in FY '07. ACM fueled with IPO cash and a clean balance sheet should be able to grow revenues double digits in FY '08 through acquisitions as well.
ACM is much strong then KBR simply due to their ability to grow revenues(and the bottom line) going forward.
Conclusion - ACM has a very nice revenue mix from government contracts and private contracts. They rank #1 or #2 in US companies in engineering and consulting services for the following sectors: Mass Transit and Rail; Airports; Marine and Ports; Highways; Bridges; Educational Facilities; Government Offices; Correctional Facilities; Sewage & Solid Waste. That is one impressive list. Factor in the clean balance sheet post-ipo and the strong cash position and this is an easy recommend in range.
Note - With 35 million shares(15 million from insiders) in the offering this is a bulky deal. It is also a low margin business. While ACM has enough going for it to make this a very easy 'recommend' in range, I'm less constructive the higher the pricing/open. This is not the type of company or offering you want to pay way up for, however ACM ipo does offer a nice mid-term risk reward opportunity in pricing range.
April 30, 2007, 1:19 am
EDN - Edenor
2007-04-17
EDN - Edenor
EDN - Edenor plans on offering 15.2 ADS on the NYSE and 4.07 ADS equivalent shares in Argentina at a US dollar price range of $16-$18. 11.4 million of the 19.9 million total ADS offering will be coming from selling insiders. Citigroup and JP Morgan will be co joint book runners on the ipo. Post ipo EDN will have 45.3 million ADS equivalent shares outstanding for a market cap of $770 million on a $17 pricing. IPO proceeds will be utilized to repay debt, capital expenditures and general corporate purposes.
Electricidad Argentina will own 51% of EDN post-ipo.
From the prospectus:
'We are the largest electricity distribution company in Argentina in terms of number of customers and electricity sold (both in GWh and in Pesos) in 2006...We believe we are also one of the largest electricity distributors in Latin America in terms of customers and volume of electricity sold.'
EDN has the exclusive concession to distribute electricity to the northwestern zone of the greater Buenos Aires metropolitan area and the northern portion of the City of Buenos Aires. Electricity distribution area comprises 4,637 square kilometers and a population of approximately seven million people. In 2006, EDN sold 16,632 GWh of energy and purchased 18,700 GWh of energy. EDN purchases 19% of all electricity wholesale purchases in Argentina.
Approximately 2.5 million total customers in 2006. 32% of total energy revenues are derived from residential customers. EDN has averaged 11%-11.5% losses of energy power the past three years. This being power that EDN purchased but did not pass through to paying customers. EDN is reimbursed by the Argentina government for lost energy up to 10% annually.
Regulation - EDN is regulated by the Argentinian government. EDN passes through to customers their cost of energy plus a regulated distribution margin. In January '07 EDN received a a 28% increase in the distribution margin charged to non-residential customers.This is the first margin increase approved for EDN since 2002. The increase was effective retroactively to 11/05. EDN's non residential customers will be charged the retroactive margins monthly over 55 months. The upshot for EDN is that the margin increases they're now able to charge non-residential customers coupled with the retroactive payments mean their gross margins in 2007 should be significantly stronger then historical gross margins. EDN's long term viability is a public company depends squarely on EDN's ability to continue to receive distribution margin increases from the Argentinian government.
Dividends - Since electricity distribution isn't normally a growth business, there is often a pretty significant dividend to entice shareholders. Note though that EDN does not plan on paying a dividend initially. In fact they're not permitted to pay dividends until mid-'08 at the earliest. Expect then no yield here for at least the first year public. All things being equal, a significant negative.
Argentina - During 2001 and 2002, Argentina went through a period of severe political, economic and social crisis. The inflation rate in 2002 reached 41%. Beginning in 2003, the Argentinian economic climate has stabilized and since Argentina has outpaced most of the rest of the world. Inflation still tends to be high in the country with inflation rates topping 12% in 2005 and nearly 10% in 2006. GDP growth has averaged 9% annually since 2003. Argentina's strong economic growth the past few years has boosted electricity demand in the country. EDN estimates that overall electricity demand in Argentina has grown 5.8% annually from 2003-2006.
EDN collects revenues in pesos but their debt is denominated in US dollars. EDN does not hedge for currency risk.
Financials
Debt - In 4/06 EDN restructured the bulk of their debt. Note that until this restructuring EDN had been in default on this debt since 2002. Post-ipo EDN will have a substantial amount of debt on the book, approximately $358 million. In a very slim operating margin business, you don't want to see substantial debt on the books. This is particularly the case here in which the slim operating margin is strictly regulated by the Argentina government.
1.3 X's book value in a $17 pricing.
Thanks to a strong economy in Argentina, EDN has been able to grow electricity sold and revenues by 8% - 10% the past 3 years.
Note that EDN seems to consistently be fined substantial amounts of monies. In 2006 EDN was fined approximately $8 million, in 2005 approximately $22 million and in 2004 approximately $12 million.
2006 - Total revenues were $450 million a 9% increase over 2005. Gross margins were 42%. If EDN's retroactive distribution margin increase was in effect for 2006, gross margins would have been a much stronger 57%. Operating margins were a very slim 2 1/2%. EDN has plenty of relatively fixed costs, the only hope they've got of growing operating margins are government regulated increases in the distribution margins. Again if those 2/07 retroactive distribution margin increases had been in place for all of 2006, operating margins would have been 18%. Debt servicing ate up all actual operating margins in 2006. Losses for the year were in the $0.50 range for 2006. Actual numbers look quite different in the prospectus due to 1) a one-time $59 million gain from debt restructuring and 2) $55 million in income tax gain. EDN lost massive amounts of money in 2001 and 2002 and still has substantial tax breaks and refunds assisting the bottom line. Neither of these are operational earnings, so I folded both out.
2007 - Revenues should grow strongly due to 1)the distribution margin increase for non-residential customers; 2) received payments for the retroactive increases covering 9/05-1/07; 3) the continued strong economy in Argentina. I would expec
EDN - Edenor
EDN - Edenor plans on offering 15.2 ADS on the NYSE and 4.07 ADS equivalent shares in Argentina at a US dollar price range of $16-$18. 11.4 million of the 19.9 million total ADS offering will be coming from selling insiders. Citigroup and JP Morgan will be co joint book runners on the ipo. Post ipo EDN will have 45.3 million ADS equivalent shares outstanding for a market cap of $770 million on a $17 pricing. IPO proceeds will be utilized to repay debt, capital expenditures and general corporate purposes.
Electricidad Argentina will own 51% of EDN post-ipo.
From the prospectus:
'We are the largest electricity distribution company in Argentina in terms of number of customers and electricity sold (both in GWh and in Pesos) in 2006...We believe we are also one of the largest electricity distributors in Latin America in terms of customers and volume of electricity sold.'
EDN has the exclusive concession to distribute electricity to the northwestern zone of the greater Buenos Aires metropolitan area and the northern portion of the City of Buenos Aires. Electricity distribution area comprises 4,637 square kilometers and a population of approximately seven million people. In 2006, EDN sold 16,632 GWh of energy and purchased 18,700 GWh of energy. EDN purchases 19% of all electricity wholesale purchases in Argentina.
Approximately 2.5 million total customers in 2006. 32% of total energy revenues are derived from residential customers. EDN has averaged 11%-11.5% losses of energy power the past three years. This being power that EDN purchased but did not pass through to paying customers. EDN is reimbursed by the Argentina government for lost energy up to 10% annually.
Regulation - EDN is regulated by the Argentinian government. EDN passes through to customers their cost of energy plus a regulated distribution margin. In January '07 EDN received a a 28% increase in the distribution margin charged to non-residential customers.This is the first margin increase approved for EDN since 2002. The increase was effective retroactively to 11/05. EDN's non residential customers will be charged the retroactive margins monthly over 55 months. The upshot for EDN is that the margin increases they're now able to charge non-residential customers coupled with the retroactive payments mean their gross margins in 2007 should be significantly stronger then historical gross margins. EDN's long term viability is a public company depends squarely on EDN's ability to continue to receive distribution margin increases from the Argentinian government.
Dividends - Since electricity distribution isn't normally a growth business, there is often a pretty significant dividend to entice shareholders. Note though that EDN does not plan on paying a dividend initially. In fact they're not permitted to pay dividends until mid-'08 at the earliest. Expect then no yield here for at least the first year public. All things being equal, a significant negative.
Argentina - During 2001 and 2002, Argentina went through a period of severe political, economic and social crisis. The inflation rate in 2002 reached 41%. Beginning in 2003, the Argentinian economic climate has stabilized and since Argentina has outpaced most of the rest of the world. Inflation still tends to be high in the country with inflation rates topping 12% in 2005 and nearly 10% in 2006. GDP growth has averaged 9% annually since 2003. Argentina's strong economic growth the past few years has boosted electricity demand in the country. EDN estimates that overall electricity demand in Argentina has grown 5.8% annually from 2003-2006.
EDN collects revenues in pesos but their debt is denominated in US dollars. EDN does not hedge for currency risk.
Financials
Debt - In 4/06 EDN restructured the bulk of their debt. Note that until this restructuring EDN had been in default on this debt since 2002. Post-ipo EDN will have a substantial amount of debt on the book, approximately $358 million. In a very slim operating margin business, you don't want to see substantial debt on the books. This is particularly the case here in which the slim operating margin is strictly regulated by the Argentina government.
1.3 X's book value in a $17 pricing.
Thanks to a strong economy in Argentina, EDN has been able to grow electricity sold and revenues by 8% - 10% the past 3 years.
Note that EDN seems to consistently be fined substantial amounts of monies. In 2006 EDN was fined approximately $8 million, in 2005 approximately $22 million and in 2004 approximately $12 million.
2006 - Total revenues were $450 million a 9% increase over 2005. Gross margins were 42%. If EDN's retroactive distribution margin increase was in effect for 2006, gross margins would have been a much stronger 57%. Operating margins were a very slim 2 1/2%. EDN has plenty of relatively fixed costs, the only hope they've got of growing operating margins are government regulated increases in the distribution margins. Again if those 2/07 retroactive distribution margin increases had been in place for all of 2006, operating margins would have been 18%. Debt servicing ate up all actual operating margins in 2006. Losses for the year were in the $0.50 range for 2006. Actual numbers look quite different in the prospectus due to 1) a one-time $59 million gain from debt restructuring and 2) $55 million in income tax gain. EDN lost massive amounts of money in 2001 and 2002 and still has substantial tax breaks and refunds assisting the bottom line. Neither of these are operational earnings, so I folded both out.
2007 - Revenues should grow strongly due to 1)the distribution margin increase for non-residential customers; 2) received payments for the retroactive increases covering 9/05-1/07; 3) the continued strong economy in Argentina. I would expec