OJSC Live office (ОАО Живой офис) IPO – burning questions
Date: 02 Jul 2013 23:30OJSC Live Office plans to do an IPO on MICEX on July 3, 2013 (http://corporate.zhivojoffice.ru/ipo)
Live office is a B2B office products supplier in Russia - like Office Depo or Staples in the US.
One of IPO organizers is Finam known for Utinet IPO, though this time research report was written by EASTLAND Capital.
Company’s business model and financials raises several fundamental questions so I would not do a full-valuation and rather focus on these questions.
Overall investment story
It’s growth equity investment at a supposedly turnaround point.Current trends looks scary:
- EBITDA declines for at least the 2nd year in a row (2011, 2012) and we have not seen reports before 2010!
- EBITDA margin achieved 0.2% in 2012
The company plans to get 129 RUB * 4m shares=516m RUB to invest in working capital and CAPEX. The company is sincere that in 2013 situation will deteriorate and EBIT will go to negative zone. But suddenly in 2014
- Revenue will almost double
- EBITDA margin will increase from 0.5% to 5.9%
Can this happen on a …
- B2B market (=slow switching)
- Very competitive and price-sensitive market
- Market growing a bit faster than inflation: 10% a year
? The answer is hardly.
EBITDA Margin is not expected above 9% with 2-6% as a realistic target
Historical EBITDA for 2010-2012 was never higher than 0.8%. The company forecasts sudden increase to 10.3% in 2014 and 13.2% in 2017. Is it realistic?Live Office P&L history and forecast
Benchmarks given by EASTLAND Capital says no. Here is EBITDA Margin for all DM benchmarks and one EM benchmark (will discuss later why other from EM are not relevant benchmarks).
EBITDA Margin benchmarks - office suppliers
After 2008 crisis EBITDA Margin none of the benchmark companies went above 9%. It was in 2-9% corridor which suggests that a company like Live Office which is not a market leader should assume to achieve 5-6% maximum.
Looking at historical numbers 2%-6% can be considered as a good outcome of planned CAPEX and marketing investments.
EM benchmarks used are almost all not very relevant
Just looking at the core businesses of the proposed companies becomes clear that all except Officemate PLC could hardly be used as benchmarks due to different dynamics in their industries vs. office products supply industry.Comparables suggested in the IPO research report
Shanghai Xinhua Media Co. – not very relevant
Shanghai Xinhua Media Co., Ltd. engages in the book publishing, newspaper operation, advertising agency, e-commerce, media investment, and logistics and distribution businesses in China. The company is also involved in the wholesale and retail of books, magazines, electric publics, and stationeries. In addition, it engages in the publishing, printing, and distribution of newspapers, journals, and magazines; wholesale, retail, and leasing of video and audio products; design, production, and issue of advertisements; trading business; property management business; and provision of economic trading consulting services, as well as warehousing and delivery services. The company operates 200 bookstores. Shanghai Xinhua Media Co., Ltd. was formerly known as Hualian Supermarket Holdings Co., Ltd. The company is headquartered in Shanghai, China.
Jarir Marketing Company (Jarir) – not very relevant
The company is offering a wide range of products including school & office stationeries/supplies, education aids & books, PCs & laptops, PCs & laptop accessories, digital electronics & video games and smart phones & PC tablet. According to the given information, the company has strong relationships with worldwide leading brands and companies particularly in PCs segment. Moreover, Jarir has a strong and well-diversified wholesale customer base, which includes oil companies, banks, government and health care.
Gestetner, Sri Lanka – not very relevant
Gestetner of Ceylon is the sole distributor of Gestetner brand B&W and colour photocopying machines in Sri Lanka. In addition the Company is the authorized distributor of the prestigious brand of Fujitsu Laptops and Daito stencil duplicators.
The Company is a leading provider of Total Document Solutions in Sri Lanka making available cutting edge IT based hardware and software solutions. The document life cycle combined with a range of business and professional services are also provided to our customers.
Office Equipment PLC – not very relevant
Office Equipment PLC engages in the import, distribution, and maintenance of office equipment in Sri Lanka. Its products include note counting machines, coin counting machines, time recorders, and currency sorting systems. The company is based in Colombo, Sri Lanka.
Officemate PLC - ok
Officemate Public Company Limited supplies office products through printed and online catalogues in Thailand. Its products comprise writing and correction, office stationery, glue, tape, packing, filing, storage, conference presentation, beverage, canteen, and cleaning products, as well as furniture, ink and toners, computer supplies, papers, books, envelopes, business machines, electronics, and factory products. The company is based in Bangkok, Thailand.
EV/Sales for Officemate PLC was too high for 2012 (4.0x) due to reverse merger and is not representative. So 2013 EV/Sales for EM would be 0.6x vs. 1.16x which will considerably decrease multiples valuation.
Leaving only Officemate PLC as an only comp will considerably decrease multiples valuation in 2012-13.
Investments in working capital didn’t work that efficiently in the past
In 2012 working capital grew 90.7m RUB while revenue grew 35% (203m RUB).If the company invests ~350m RUB in working capital in 2013-15, would it help to grow the revenue on 3,857m RUB? Probably not, even not close to that.
To conclude, IPO research by EASTLAND Capital has several unjustified assumptions which are critical for valuation. If they are corrected, resulted valuation would probably hardly justify the proposed IPO price, not to mention required equity upside.
Tags: BRIC, IPO, Russia