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.