Supergroup and Promethean join the market this month.
Who'd have thought we'd miss the not-so-humble Initial Public Offering? Sometimes seen as the canary in the coalmine of an overly excited market, IPOs became decidedly Lesser Spotted after the financial crisis deadened the appetite for risky assets.
But for leaner, more entrepreneurial would-be blue chips, things are looking up.
Two big new names cut from a very different cloth are joining the London market this month -- fashion house Supergroup, and education technology company Promethean.
Supergroup: Super dooper growth
Supergroup couldn't be more different from the tired and over-stretched IPOs of the pre-credit crunch era.
I'm not just talking about its trendy High Street threads, which I'm assured are all the rage amongst celebrities and edgy youth. I also mean the cut of its earnings, which are exploding.
Just look at the figures for the past few years, taken from the prospectus:
| | 2007 | 2008 | 2009 | First six
months
FY 2010 | First six
months
FY 2009 |
|---|
| Revenue | 24,681 | 40,633 | 76,143 | 54,659 | 28,235 |
| Gross profit | 10,952 | 19,855 | 36,266 | 27,173 | 13,663 |
| Final profits | 1,695 | 4,717 | 7,587 | 7,822 | 1,716 |
Note: All figures in thousands £
Profits multiplied more than four-fold in the two years between 2007 and 2009, and they look on course to double again in the next financial year, with adviser Seymour Pierce expecting £25 million.
This from a retailer trading through the worst recession since the war, remember.
Admittedly debt has also increased rapidly, from £5 million in May 2008 to over £13.5 million by November 2009. However financing costs amounted to £0.3 million in 2009 -- a mere fraction of the operating profits that year of £7.9 million.
I think that's what they call 'good debt'. Besides, a fast-growing unlisted company has little choice but to use debt if it wants to run ahead of the cash it's throwing off.
After listing, £15 million of the net £120 million the company will raise by releasing just over 31% of its ordinary shares into public hands will be used to fund further expansion. The rest -- a cool £105 million -- will be shared between staff, with the lion's share going to founder Julian Dunkerton who kick-started the business from a market stall 25 years ago. He will retain shares in a third of the company after flotation.
Supergroup begins trading next week under the ticker SGP. At a share price of 500p its market cap will be £395 million. Priced at 52 times last year's profits, falling to just under 16 on that £25 million estimate for 2010, they aren't overly expensive, if you trust the growth.
What price do you put on profits tripling in a single year and going up 15-fold in three years? Retail and fashion are notoriously risky -- and entrepreneurial fashion company founders have a particularly tricky history with the City -- but the likes of Next (LSE: NXT) and Burberry (LSE: BRBY) have shown the potential.
Promethean: Teacher's pet
Rather than clothes, Promethean World (LSE: PRW) is exploiting the fashion for using technology in education. It's a world leader in this burgeoning field, which boils down to replacing blackboards with interactive whiteboards. The 860-strong company claims its ActivClassroom is now in more than 550,000 classrooms worldwide, yet even the US still offers lots of headroom for further expansion.
Promethean's recent record isn't as super-charged as Supergroup's, but it's still the stuff of a growth investor's dreams.
Revenues almost doubled from £107 million in 2007 to £205 million in 2009, while the company swung from a loss in 2007 to £4.8 million profit in 2008 and then made £12 million in 2009.
Promethean though prefers to highlight the more steadily increasing EBITDA before exceptionals, which was just shy of £34 million in 2009.
No surprise there -- a key difference between Supergroup and Promethean World is that the educational technology outfit is private equity-backed, in this case by Apax Partners.
By the trail of debt yea shall know them. Finance expenses came to a whopping £14 million in 2009, with the company carrying some £192 million in debt as of 31 December 2009, after subtracting out the £22 million in cash and cash equivalents.
Importantly, however, these liabilities were mainly in the form of loan notes, preference shares, and deep discount bonds, including Apax's £65 million in the latter. Bank loans amount to just £23 million.
And after flotation, this debt (and the drag on profits) will be gone -- a big difference compared to the private equity IPOs of yesteryear. The company turned the preference shares and loan notes into shares before undertaking its IPO, and of the £186 million the flotation has raised, much of what's due to Promethean will be spent paying off those deep discount bonds.
As a result, "the group expects to have no net indebtedness following completion of the offer," according to the prospectus.
Its shares began trading at 200p at the end of last week, which valued the newly debt-free company at £400 million. That prices Promethean at over twice last year's sales, which seems expensive in the current market. The price has fallen a smidgen to 190p as I write.
The forecast P/E of 16 on £25 million in profits is much more reasonable, coming on the back of last year's 60% growth. Promethean also intends to start paying a dividend (albeit it with a yield of only around 1.5%).
Buying a newly-listed company is notoriously risky, but if you want to back a rare British technology success story, my hunch is you could do a lot worse.
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