MYOB to file for $3bn Australian IPO in weeks, page-20

Comments by The Motley Fool

MYOB Group Ltd has officially lodged its initial public offer (IPO) prospectus which could see it become the biggest IPO of 2015.
The group, which provides bookkeeping, accounting and payroll software to approximately 1.2 million businesses, will aim to raise as much as $833.8 million when it lists a portion of its shares next month. The shares will be priced between $3 and $4 which would indicate a valuation of 20.6 times to 24.9 times pro-forma net profit after tax and amortisation (NPATA) for the year ended June 2016.
Here are some of the important facts you need to be aware of:
About the Business

• MYOB previously traded on the ASX in 2009, before being taken private in a deal worth roughly $500 million
• MYOB was then acquired by private equity owner Bain Capital in 2011 from Archer Capital and HarbourVest Partners for roughly $1.2 billion.
• MYOB enjoys high user retention rates. According to its prospectus, MYOB’s SME (Small & Medium Enterprises) user retention rate was 78% in 2011 and grew to 81% in 2014

The Offer

• The offer is expected to raise between $831.7 million and $833.8 million
• Total number of shares under the offer: 208.5 million – 272.2 million
• Total number of shares on issue at completion: 564.6 million – 633.4 million (Private equity owner Bain Capital will not sell any of its shares in the offer – it will retain a 57% stake in the business)
• The funds raised will be used to repay debt and improve capital flexibility. Management shareholders will also be allowed to realise their investments
• The shares are expected to begin trading on the ASX on 4 May, 2015

The Value

• MYOB will have a total enterprise value of roughly $2.34 – $2.69 billion
• Enterprise value/pro-forma 12 month June 2016 forecast EBITDA (earnings before interest, tax, depreciation and amortisation): 14.5 times to 16.8 times
• Price/pro-forma June 2016 forecast NPATA per share: 20.9 times to 24.9 times
• Implied forecast dividend yield for 12-months ended 31 June 2016: 2.8% to 3.3% (60%-80% payout ratio)
• CEO Tim Reed’s stake will be worth $20 million at the lower end of the share price range

Key Risks

• Competition is a key risk (more on that below)
• Failure to grow paying user base, or maintain client retention
• A key aspect to MYOB’s growth is its ability to generate more revenue from existing paying users. Failure to do so could impact profits
• If conditions in the Australian/New Zealand economies deteriorate, some businesses could close shop which would result in lost customers for MYOB

What to take from this
It appears that MYOB is taking a similar approach to its float as Medibank Private Ltd (ASX: MPL) did late last year in that it is providing a price range for its shares, rather than giving investors an exact figure. This can lead to uncertainty over how many shares each investor will actually receive, and will largely depend on the level of demand for the company’s shares. The final price will be announced on 1 May.
Although MYOB has delivered fantastic growth over the last four years under the control of Bain Capital, it’s no shoe-in to be a fantastic investment. Indeed, the company is well positioned to benefit from the shift towards cloud-based accounting solutions, but it will also face tough competition from rivals such as Reckon Limited (ASX: RKN) and particularlyXERO FPO NZ (ASX: XRO).
In fact, Xero recently announced that it had surpassed 200,000 Australian customers – compared to just 109,000 in March 2014 – demonstrating its impressive growth rate. In addition, Motley Fool Pro analyst Matt Joass highlighted that Xero is attracting more interest from Australian and New Zealand internet users based on data from Google Trends.
While MYOB could continue growing at a steady pace, investors should consider the alternatives that are already trading on the ASX which may well be a better buy. At this stage, I won’t be participating in the IPO.