Initial public offerings worth $2.4 billion are at risk as shares in discretionary retailers derate amid concerns about soft consumer spending and the impact of Amazon.
Fund managers say proposed initial public offerings for Wesfarmers’ Officeworks, Archer Capital’s Quick Service Restaurant Holdings and Navis Capital Partners’ Retail Apparel Group could be postponed or abandoned in favour of trade sales because investors are unlikely to value the companies as highly as vendors.
Price earnings multiples for discretionary retailers have fallen on average to 10 to 12 times 12-month forward earnings, while vendors are still hoping to secure 14 to 16 times earnings from investors through initial public offers.
“Retail IPOs have been caught in the crosshairs of medium-term concerns about Amazon but also soft short-term consumer data, which has led to a broad-based derating of the whole consumer sector,” said Yarra Capital portfolio manager and head of Australian equities research, Katie Hudson.
“The reset there is around growth, the presumption that previously they could roll out stores, they could generate earnings growth through those strategies, and now that’s much more challenging,” Ms Hudson said.
“A broad-based comment is that we haven’t seen a reset around vendor expectations,” she said. “You can see evidence of that in the fact that we’ve only had one or two IPOs this year above $50 million, so it’s more broad based than retail IPOs [and] what it reflects is that vendor expectations haven’t been reset.”
Fund managers say Officeworks, QSR and RAG have some appealing characteristics, but vendor expectations are too high, especially after a spate of profit downgrades and poor sales figures from listed retailers and growing concerns about long-term prospects if Amazon’s impact on the market is as material as that in the US.
Arnhem Investment Management analyst Chris Tynan said Officeworks was a well-run business that dominated its categories and had invested ahead of the curve in digital, so it was better placed than some retailers to compete with Amazon.
“But in the current climate realising the multiple they believe the business is worth might be more difficult,” Mr Tynan said. “Twelve months ago it would have been a lot easier to sell.”
“You can’t deny that retail sales are challenging and there are a number of listed and unlisted retailers who are doing it tough … but because no one knows what shape their offering will take, the scuttlebutt and hysteria around Amazon has reached fever pitch,” he said. “It’s led to some pretty savage deratings of some of these retailers.”
Officeworks’ joint lead managers, Macquarie Capital, JPMorgan and UBS, have valued the retailer between $1.14 billion and $1.5 billion, but fund managers indicated they would be prepared to pay closer to $1.2 billion.
“I wouldn’t be comfortable buying it at the upper end of the range because you have to leave something on the table for new shareholders,” Mr Tynan said.
Bennelong Australian Equity Partners fund manager Julian Beaumont said the market for retail IPOs had softened, particularly those with private equity vendors, as the sector faced weakening consumer spending and investors feared the “Amazon effect”.
“There’s an argument that concerns about Amazon are overdone, but at the same time it weighs on sentiment and makes it more difficult to get floats get off the ground,” Mr Beaumont said.
“Generally, public markets are pretty cautious on IPOs right now, particularly with the difficulties with Bingo and Zip, no less in retail and no less in private equity,” Mr Beaumont said, citing Quadrant Private Equity’s decision to scrap a $301 million IPO of Zip Industries and the fact that shares in Bingo Industries were trading below their $1.80 issue price.
“You typically need a growth story to your IPO to interest the market these days and in both those cases [RAG and QSR] they tend to be reasonably tentative,” he said.
It is understood that Retail Apparel Group, which owns menswear chains Tarocash, Connor, yd and Johnny Bigg, is pressing ahead with IPO plans, despite softer retail and equity market conditions and reservations about the wisdom of its new store plans. RAG, which has racked up double-digit same-store sales growth this year, plans to open 40 to 45 stores a year.