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Platforma Utinet.ru IPO. 110x EV/EBITDA, 157x P/E – Finam's valuation tricksDate: 20 Jul 2011 19:57
Key valuation assumption: revenue growth projections from Finam are correct. If they are decreased, valuation will be much lower.
Today (20.07.2011) Finam did an IPO of JCS Platforma Utinet.ru. This is a good event from several dimensions:
Investor Presentation, 2009&2010 IFRS reports and Finam research report are here: http://www.finam.ru/investments/promo00008/default.asp
This research report is awesome. Just take a look at the chart below.
Finam recommends investing in Uninet.ru with a valuation in mind of 110x EV/EBITDA and 157x P/E:
1. EBITDA forecastRevenue grows at 70% CAGR in 2011-2015. It's too questionable, but let's assumes that this is a good enough forecast. The company goes from -5% EBITDA margin in 2009 to 10% in 2015. Why?
General comment: the company cut many expenses in 2010 to get a high EBITDA in 2010 (pre-IPO year), so I almost don't take 2010 numbers into account as this level of costs is obviously pre-IPO manipulation and is not sustainable.
1.1 Gross MarginIf we adjust for high Gross Margin for "Platforma" business (assuming 30% in 2010 and taking 57% in 2015 from Finam report), we will get that Gross margin for own trading business grows from 7%, 5% and 10% in 2008-2010 to 13% in 2015. The growth of discounts from laptop distributors should explain this growth. But there are three counter arguments:
1.2 Marketing ExpensesBenchmarks: Marketing Expences as a % of revenue are declining from 6.0% in 2009 to 0.3% in 2015. This is unsustainable and in the long term will lead to market share loss. Below is the comparable data for all the companies WW in Internet Retail Industry with data for Advertising Expense available. Average: 9.8% of revenue. Amazon has 2.4%. Source: Capital IQ
Company plans: "Согласно инвестиционной программе «Ютинета», до 70% привлеченного в результате IPO капитала пойдет на продвижение бренда «Ютинет»." (http://www.rbcdaily.ru/2011/07/13/media/562949980627656).
How is this ambitions brand promotion plan consistent with decrease in Marketing Expenses as a % of revenue?
My adjustment: keep Marketing Expense at 2009 level of 6%
1.3 EBITDAThese two adjustments lead to drastic decrease in EBITDA Forecast.
Overall conclusion: watch out for their marketing spending as % of revenue:
2. Comparables Valuation"Отметим, что аналоги из развивающихся стран обладают большим потенциалом роста продаж по сравнению с аналогами из развитых стран (ежегодные темпы роста продаж аналогов развивающихся стран в долларовом выражении в 2011-2015 гг. составляют 35-40%, в развитых странах – 24-28% по сравнению с 89%-м ростом продаж Ютинет.Ру), и оценки на основе их мультипликаторов не отражают перспектив роста, которые мы прогнозируем для Ютинет.Ру."
I assume these 24-28% growth forecasts for 2011-15 are average forecasts from many banks while 89% from Finam is an extremely optimistic forecast from one bullish bank motivated to sell shares on the IPO. For many on the discussed companies in emerging markets you can find local "Finam's" who can forecast 89% growth for them.
"Мы считаем, что данные Компании за 2011 г. не являются репрезентативными по сравнению с ожиданиями доходов на 2012 г. и далее с учетом экспансии в регионы, выхода в новые товарные категории, поэтому далее оцениваем стоимость Ютинет.Ру по средним прогнозным показателям 2011-2013 EV/EBITDA и P/E."
This phrase in bold can be applied to any of the comparables used as they are all fast growing companies.
My adjustment: If comparables' multiples are calculated based on 2011F numbers, then Utinet's equity should also be calculated based on 2011F EBITDA and Net Income.
New valuation range at Finam's EBITDA forecast: 1.3-2.3b RUR
At the same time, if EBITDA forecast from 1. is used, it will be almost impossible to use comparables as EBITDA<0 in 2011 and 2012.
3. DCFThere is one key principle of DCF method which is often misused by starting corporate finance professionals and which Finam clearly ignores in its report: DCF method requires use of market values for:
3.1 WACC – cost of debtFinam assumed 13% for cost of debt. Can Utinet.ru borrow on the open market at 13%? Obviously not and we have facts supporting that. Based on 2010 report Utinet has two external loans from AlfaBank, each at 25% rate and each with a "Related-party collateral and guarantee" which for the question discussed is an external (to the company) guaranty. That means a loan taken on the open market will have even higher rate, if any bank agrees to give it to Utinet.ru.
With EBITDA growth borrowing rate will drop, but I don't believe it will drop below 15-20% even in 2015 as the company will still operate in a very competitive and fast-changing environment.
My adjustments: cost of debt is 30% in 2011 and decreases to 15% in 2015
3.2 WACC – cost of equityInvestment in Utinet.ru is between investment in a venture (expected return on equity 50%) and a small cap public stock (15%).
My adjustment: cost of equity is 30%
CAPM could also be applied, though Finam's application of CAPM has two big mistakes:
3.3 WACCFinam used book values for Debt and Equity in their calculation of the share of debt capital.
This allowed then to increase share of debt capital which is cheaper in their model and significantly decrease WACC.
Real calculation of WACC is circular as E required for WACC and WACC required for E. That's why I would calculate here only approximate WACC, In the assumption that the company costs 1b RUR now, so share of Debt in 2011 is 0.25/1=25% and let's assume that the company will maintain this level of debt.
3.4 Working CapitalPositive change in WC is the biggest source of cash in 2011 and the second biggest in 2012. It mostly comes from growth in Accounts Payables as suppliers give 10 days credit to Utinet.
By looking at turnover, the first question is why it's jumping from 20 days in 2010 to 43 in 2011? The other question is how does this 10 days reconcile to 40 days? I don’t know well enough numbers for payment terms between electronic distributors and retailers, but would like to notice that this is very questionable and manipulative assumption to generate big positive cash flow in 2011 and 2012. One reason to explain that may be that to increase gross margin in 2010 the company agreed with suppliers to get bigger discounts and decrease financing from their terms. I would adjust this number close to 2010.
My adjustments: Accounts Payable turnover is 25 days in 2011-2015
3.5 Updated Utinet.ru DCFBelow is the model DCF built with all discussed adjustments.
Utinet.ru fair value is $1.2b RUB or 62 RUB /share.
4. SummaryFinam did so aggressive valuation for a purpose. Are real numbers so unattractive that it was the only way to attract investors for the IPO? It's hard to know the real story behind but my estimation of negative EBITDA in 2011 and 2012 tells me that Utinet.ru doesn't look attractive to most of public stocks investors.
5. Other facts
5.1 IPO Russian Sea Group (Русское Море)In April 2010 Finam did IPO of Russian Sea Group (http://www.finam.ru/investments/ipo0000B00075/default.asp). The collapse of Russian Sea stock gives insight about potential behavior of Utinet.ru stock if IPO happens at the announced price range.
5.2 What it takes to achieve high growthFinally here is a post from a blog showing how high growth is often achieved:
Исайкин Денис Сергеевич 13.10.2009 08:36 Ответить
Серёга привет, меня зовут Ден, живу в Южно-Сахалинске, ты такой умный, может подскажешь что делать? Заказал в интернет магазине utinet.ru (ООО ГлавИнформСистема) ноутбук. Прислали модель ту которую заказывал, НО конфигурацию урезанную, которая стоит гораздо дешевле. Переговоры по телефону, а так же переписка по мылу ничего не дали. В ОЗПП сказали написать официальную претензию. Написал на директора Уколова. Вернулось письмо с пометкой, что такой организации по такому адресу не существует. Что делать? Вообще, существует ли справедливость?:( Редиски, обманывают народ и это постоянно сходит им с рук:(
Tags: BRIC, IPO, Stocks - fundamental analysis, ОАО «Платформа Ютинет.Ру»