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OJSC Live office (ОАО Живой офис) IPO – burning questions

Date: 02 Jul 2013 23:30

OJSC Live Office plans to do an IPO on MICEX on July 3, 2013 (

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.

EPAM – another overpriced technology IPO?

Date: 06 Feb 2012 23:00

EPAM IPO is scheduled for 7 February 2012 with the IPO price range at $16-18.

The result of my DCF model is $12.2 which is -24% of the lower IPO border.

Here is the prospectus: EPAM IPO S-1 Amendment No. 6

Since IPO of Yandex on 24 May 2011 on NASDAQ its shares fell ~45% while NASDAQ index grew on ~5% during the same period of time.

EPAM is another technology company from CIS which is about to be sold on an IPO. Is IPO price too high and the risk of Yandex fate is too probable? Here is a brief look at EPAM DCF valuation.


1) What is sustainable revenue growth rate?

Analysis of 2007-2010 growth rates shows that this is correlated to the underlying GDP growth in the countries of sales. Below is the chart showing dependency of EPAM.

Using IMF GDP forecasts as of 24 Jan 2012 and linear trend, around 50% growth for 2011-2013 should be forecasted. So there are no macro risks for revenue growth slowdown.

How sustainable is fast growth rate at 50%? Growth in 2010 was 47.9%, 1H 2011 was 66%, and growth in 9m 2011 was 59%. Those growth numbers in 2010 and 2011 are "pre-IPO" revenue increases. 2012 growth should be less. I keep it at 15% and then increase it to 30% in 2013-2016.


1) EBIT should contain two adjustments:

- Foreign exchange loss – it's a natural part of this business since 2007
+ Stock based compensation, as it is not a cash expense and later on we will add to the number of shares outstanding effects from the options outstanding calculated using treasury stock method

2) Adjusted EBIT margin jumps from 5.7% in 2008 to 11.2% in 2009 to 15.1% in 2010 to 17.5% in 2011. While I believe in the first two steps, the last two are clear "Pre-IPO" squeezes.

It can be proved by a good benchmarking. In this fast analysis I looked at Accenture:

Accenture (NYSE:ACN) EBIT Margin


Average for EPAM for 2009-2010 is 13.2%. I assume that the company will return to this level in two years.

Tax rates

How probable is that Belarus, Hungry and Russia will continue to give the company attractive tax breaks at current level? We would assume that as soon as the company becomes bigger and public, it will be harder to get tax benefits at the same level as a % of revenue, so it's assumed that effective tax rate will go to 25%.

Other value drivers

1) One of the risks stated at prospectus is: "Our agreement with one of our largest clients gives it the option to assume the operations of one of our offshore development centers, and the exercise of that option could result in a loss of future revenues and adversely affect our results of operations."

So, part of one of the offshore development centers was financed by a client and the clients can take this part and pay book value for the rest. Let's assume that if the client decides to execute this option, he will take only the part financed by him.

How big is the probability that it would happen? There is no information to judge, so it's 50%.

When can it happen? Any time between today and December 2014, so on average it would happen in 2013.

How to estimate the effect on EPAM operations? EPAM will get "de minimis price" for transferring of the offshore development center, so this will be effectively a loss of 6.1% of Revenue from 2013 with 50% probability.

2) Sell off stocks and execution of options by employees after lock-up period is over in 6m (beginning of July 2012)

This company was founded in 1993. Some of the people in the management team were waiting to cash out for 5, 10 or almost 20 years. According to the prospectus, nobody from individual or institutional owners are selling more than 18%. There is a considerable risk that they will start selling 6 months after the IPO.


The key questions are: in what revenue growth do you believe and what EBIT margin will the company manage to maintain? Both of them will not maintain current levels in the coming 5 years: one of them will be sacrificed to another.

What happens with stock prices of technology companies from emerging markets oversold during the IPO? They fall. Take a look at Yandex again.


Platforma IPO. 110x EV/EBITDA, 157x P/E – Finam's valuation tricks

Date: 20 Jul 2011 19:57

Finam IPO range IPO Price Author
Equity, b RUB 8.57-9.19 2.90-3.90 3.9 1.25
Share price, RUB 429-460 145-195 195 62

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 This is a good event from several dimensions:
  • Gives public investors more chances to invest in small cap Russian companies and in the growth of Russian internet
  • Creates exit market which will stimulate VC and PE investments in small and medium Russian companies
  • Brings more attention to Russian internet sector which is unfairly under covered
IPO was at 137x EV/EBITDA 2010 and 48x EV/EBITDA 2011.

Investor Presentation, 2009&2010 IFRS reports and Finam research report are here:

This research report is awesome. Just take a look at the chart below.

Utinet IPO Finam recommends investing in with a valuation in mind of 110x EV/EBITDA and 157x P/E:
  • Finam's estimation of fair value: 8.57-9.19b RUR or 429-460 RUR/share
  • IPO price range: 145-195 RUR/share
How did Finam come to so bullish views? Their report contains several big issues which explain it:
  • Several unjustified assumptions (which is in many cases fine as soon as they are explicitly described)
  • Violation or incompetent application of corporate finance rules (which is not professional)
If they are fixed, then
  • DCF would give fair value at $1.2b RUR or 62 RUR /share
  • Comparables valuation would be hard to apply due to negative EBITDA in 2011 and 2012
Let's go through the key issues in Finam report and try to understand what should be a more balanced and professional valuation.

1. EBITDA forecast

Revenue 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.

Utinet IPO

1.1 Gross Margin

If 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:
  • What defines discounts from distributors is market share and it will not grow that dramatically to justify additional 3-6%.
  • Intensifying competition in retail will lead to drops in retail margins
  • Between 2011 and 2015 there should be one-two "bad years" due to bad economy or other external conditions and margins should decrease in these years
My adjustments:
  • Gross Margin from trading business: 8.8% in 2011 (Finam), growing at 0.5% per year
  • Which gives Gross Margin from total business: 10.8% in 2015

1.2 Marketing Expenses

Benchmarks: 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%. Utinet IPO Source: Capital IQ

Company plans: "Согласно инвестиционной программе «Ютинета», до 70% привлеченного в результате IPO капитала пойдет на продвижение бренда «Ютинет»." (

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%


These two adjustments lead to drastic decrease in EBITDA Forecast.

My adjustment:

Overall conclusion: watch out for their marketing spending as % of revenue:
  • If they cut them in 2011, the company may show positive EBITDA, but then
    • Revenue growth for the coming years will be much slower than projected
    • Market share will drop which will lead to loss of Utinet's market leadership in laptop online retail with long term consequences for margins and growth prospects
  • If they don't cut them, then EBITDA will be negative in 2011 and 2012

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. DCF

There 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:
  • cost of debt
  • cost of equity
  • debt
  • equity

3.1 WACC – cost of debt

Finam assumed 13% for cost of debt. Can 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

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 equity

Investment in 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:
  • Small cap company requires 3- or 4- factor models (Fama and French and the Pastor-Stambaugh Model) that takes into account premiums for small cap, low liquidity and high book-to-market ratios.
  • Beta as a very important parameter requires clear justification

3.3 WACC

Finam 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.

My adjustments:

3.4 Working Capital

Positive 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 DCF

Below is the model DCF built with all discussed adjustments. fair value is $1.2b RUB or 62 RUB /share.

4. Summary

Finam 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 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 ( The collapse of Russian Sea stock gives insight about potential behavior of stock if IPO happens at the announced price range.

5.2 What it takes to achieve high growth

Finally 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 (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:(

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