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Stock Watch

Is London set for IPO bonanza?

Dr Martens

This year looks like it could see a strong start for the London IPO market, following the announcement of a couple of new issues in the wake of the recent UK-EU trade deal at the end of last year.

It was slightly more subdued for IPOs in the London market in 2020, with The Hut Group (THG) the highest profile one to come to market, when it launched back in September at a premium from its 500p offer price, and a £5bn valuation. Since then, THG  has gone from strength to strength, with revenues just above £1.1bn in 2019, a rise of 24.5% on the previous year. THG’s main strength is its technology and operating platform called THG Ingenuity, which is used by big blue-chip corporate brands like Nestle, Procter & Gamble and Johnson & Johnson for their e-commerce operations. It is also an online retail business which operates brands like Lookfantastic.com and ESPA, which is a luxury skin and body care company.

Recently we’ve heard that Moonpig Group and Dr Martens are looking to float in the next few weeks. The last 12 months have been a boon for online retailers, and Moonpig, the online digital greeting card maker, has seen a surge in popularity amid the various lockdowns and restrictions. This growth in its business appears to have prompted the realisation that in order to expand they will probably need to raise extra capital. It is expected that Moonpig will make 25% of its share capital available to list when the company launches on the London Stock Exchange, with a valuation expected to be in the region of £1bn or more. The latest accounts show that revenues for the end of last year to 30 April increased to £173.1m, a rise of 44%. It stands to reason that the revenues for this year should come in much higher.

Even allowing for the fact that Moonpig is likely to do well from the recent shift to online, a £1bn valuation does seem a little on the optimistic side, and that’s being charitable, particularly if you look at the likes of Paperchase, which has gone into administration, and Card Factory. While both have a large high-street presence, they operate in a similar space.

Card Factory has a market cap of £140m, and its last full fiscal year ending 31 January 2020, generated revenue of £451.5m, and profit-before-tax of £65.2m. In its most recent first-half trading update, the effect of Covid lockdowns and various restrictions have been more noticeable, with revenue falling by almost half to £100.5m, down from £195.6m in the first half the year before, with a 64.4% rise in online revenue helping to absorb some of the worst effects, though that still wasn’t enough to prevent a loss of £22.2m.

The company is now in talks with its banks after a further loss of sales in December, which resulted in losing over 30% of its trading days in this financial year. This loss for the year is expected to come in at around £10m, partly helped as a result of a 137% rise in like-for-like sales in its online channel. Nonetheless, the poor performance in this sector, which is traditionally very low margin, points to a difficult trading environment even without the additional costs of a big high-street footprint.

Card Factory also came to the market by way of an IPO, all the way back in May 2014, pricing at 225p, and while the shares did well for a year or two, rising to as high as 400p, it has been one-way traffic down ever since, hitting a low of 22p at the end of March last year, before rebounding to current levels. 2014 was a decent year for UK IPOs, with the likes of Patisserie Valerie, Poundland, Pets at Home, Just Eat and AO World all racing out of the traps. Of those five, only three of those are still around, with Just Eat getting absorbed by Takeaway.com, while up until last year, Pets at Home and AO World were still under water on their IPO valuations, of 245p and 285p respectively. In the case of the latter two, the pandemic has turbo charged their valuations, with AO World at one point seeing its share price fall as low as 48p less than a year ago. Now both companies have share prices above 400p.

Another IPO set to generate a lot of interest in the coming weeks is boot and shoe maker Dr Martens, who are considering launching their brand for a public listing. The iconic brand, once a staple of the 1970s punk and skinhead scene, is also mulling a float in February, now that a good proportion of its business is being done online. Private equity group Permira, which bought the brand in 2013, is said to be looking at options regarding a sale, with the business expected to be valued at close to £1bn, which also seems a touch on the optimistic side. Revenue for the most recent six months to the end of September last year jumped 18% to £318.2m, as more consumers opted to purchase their footwear online. This followed the closure of a good proportion of high-street retail, leading to shoe chain Clarks falling into administration at the end of last year. In Dr Martens last full financial year, ending March 2020, revenue came in at £672m.

While the Clarks business was saved with a £100m rescue plan led by LionRock Capital, the main reason behind its demise was a weak online presence, which this new deal will hopefully address. It is certainly true the DM brand, as it was colloquially known in the 1960s and 1970s, has retained a resilience that has spanned the decades, however the durability of the boots does appear to have declined in recent years. The hope is that these problems have been addressed, while the motives behind the sale will also need to be assessed, almost one year after Permira diversified the business, paying £1.3bn for trainer brand Golden Goose at the end of February 2020. 

Recent private equity sales have saddled newly floated businesses with lots of debt, which subsequently has proved too onerous to pare down, resulting in the subsequent failure of the said business, recent cases in point being Debenhams and the AA. Let us hope that these new IPOs turn out to be the first of many for the London market this year, however their success is likely to be more dependent on obtaining a realistic valuation, than any economic recovery story over the rest of this year.

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