As Blue Inc opts for a private share sale over a float and Bestseller buys MandM Direct, Peel Hunt analyst John Stevenson takes a look at the retail IPO market.
Every day the headlines include something on retail IPOs, whether a new candidate, a share price collapse or a pulled deal. So, is this unprecedented stream of retail transactions done, or are there still more deals to be brought to the market?
To put the recent spate of IPOs in context, it’s worth noting the stunning performance of the retail sector over the past two years. The average retail share price in my universe enjoyed gains of over 65% in 2012 and 56% in 2013.
As a consequence, by the end of 2013, the market was already fully expecting the sector to reap the benefits of consumer and economic recovery, leaving the structural growth stocks (the solid organic growth stories) trading on forward-price earnings ratios (PER) of greater than 25 times and the average retailer trading on a PER of 19 times - not bad for a sector that normally trades on about 12 times.
Since the start of 2014 investors have begun to switch out of retail into other sectors, reflecting the high valuations of the retailers and the implied increase in profitability required to justify them.
For some retailers, the impact has been quite severe.
A failure to hit profit expectations or deliver an upgrade can see a sharp decline in the share price as Asos, Supergroup, Ted Baker and N Brown can attest to. Some investors will begin to find the attraction to businesses they know well will outweigh the desire to invest in IPO candidates they don’t.
Three years ago, Wiggle and Pets at Home were set to be the first two retail IPOs for some time in a process that saw the owners pursue what is known as a dual track, lining up a potential sale and flotation at the same time.
The market was prepared to offer a premium but private equity was prepared to pay much more at the time, and so both businesses were sold.
Fast-forward to 2013 and market valuations were starting to outstrip what private equity would pay. This also coincided with significant flows of money back into equities – the IPO market for retail was now well and truly open.
Back at the start of the year, if you wanted e-commerce in general merchandise in the UK, you could only invest in Asos - hardly a reflection of the changing environment in the retail space.
Indeed, across the wider retail space there were only six other retailers with real, significant organic growth prospects (ie 10%-plus annual sales and profit growth). The sector had become pretty dull and lacked new, interesting growth stories. The likes of AO World and Poundland offered investors something new and exciting and not surprisingly, competitive tensions drove valuations higher.
Now, though, the pricing power is firmly back in the hands of investors.
As one fund manager told me recently, “just because it’s online, that doesn’t make it interesting”. Investors are becoming more discerning. A pure play retailer looking to float will need to demonstrate profitability and a strong business model and brand, not simply rising traffic statistics and hope.
Similarly mature, private equity-backed businesses with high debt levels will not command a high valuation without attractive growth prospects.
There are still many more retailers planning to come to the market in 2014 and 2015. As one business pulls out of a float process because of ‘market conditions’, so another handful succeed - interesting growth companies at the right price will secure investors.
- John Stevenson is general retail analyst at Peel Hunt