The IPO of ODEL Ltd issuing 16.7 million ordinary voting shares at Rs. 15 each is now on whilst its official opening is 5 July. Via the issue, Odel will be raising Rs. 250.5 million to fund retail branch expansion and to reduce borrowings as well as improve working capital. Given the stature of the company as well as the prospects in the business segment it operates in along with attractive valuation and future upside, the IPO is expected to draw a massive demand
Two brokers John Keells Stock Brokers as well as Asia Securities were quick to come out with their research last week on the IPO.
"At an issue price of Rs. 15 per share the counter trades a P/E multiple of 11.97x FY11E, which amounts to a 16.7% discount to market. We have prudently retained gross margins at 34% for our forecasts. An improved product mix and reduced need for promotional and discount sales would likely result in GP margin improvement. Our forecasts indicate a 27% increase in EPS above our forecasts to Rs. 1.52 for FY11E for a 200bp improvement in gross margins. We recommend subscribe," John Keells Stock Brokers said.
"In terms of earnings based valuations the share is attractive valued on 11.5X forecast FY11 net profit (based on the issue price of LKR15 per share) which is at a plus 20% discount to the forward market earnings multiple. Further on a free cash flow to the firm (FCFF) valuation, intrinsic value per share is circa LKR18 (given a cost of capital rate of 18%). Further strong upside for the share could be expected with steady income streams and Odel's brand image coupled with strong investor appetite for IPOs thus we recommend subscribe," Asia Securities said in its detailed Research Report.
John Keells Stock Brokers (JKSB) said with the cessation of the war, the Company's medium term focus is on expanding retail reach.
ODEL has successfully entered into several suburbs in the outskirts of the Colombo city filling in a void of quality high end retail stores.
The company intends to leverage on the strength of its brand to take advantage of untapped market potential for mid to high end clothing in urban cities in the Western Province and outstation cities following market surveys and feasibility studies conducted in ear marked locations. Our forecasts have only factored in 3 new branches in the current financial year, although several more may be opened in FY12 and beyond.
The company is expected to benefit significantly from the upturn in domestic demand and the expected increase in spending power of the Sri Lankan consumer which would filter down to increased footfall at stores and an incremental increase in average basket values.
This is already apparent with successive new stores opened having recorded average daily revenues above initial pre-launch estimates.
The company intends to carry their own line of clothing in the new stores along with a range of innovative and stylish merchandise retaining the brands identity with the same elegant interiors and exteriors and unique ambience created at its flagship store.
Odel reported earnings of Rs. 141mn for FY10, which JKSB estimates to amount to Rs. 112m excluding exceptional items that included capital gains from the sale of land and impairment losses from ODEL Lanka Pvt Ltd. "We expect the company to post earnings of Rs. 182m for FY11 stemming from increased sales volumes stemming from a sharp rise in tourist arrivals to the Ward Place and Airport stores as well as increased domestic spending across the range of stores in the suburbs of Colombo. We have factored a modest 5% increase in local footfall each year and an 8% inflationary increase in average basket size for our revenue forecasts," JKSB said.
The Company holds an extensive freehold land bank including 219.21 perches in Ward Place, Colombo 7 and 52 perches in Rajagiriya and leasehold property amounting to 112.2 perches in Ward Place, Colombo 7 and 35.69 perches in Rajagiriya, the broker added.
Asia Securities in its report said Odel Unlimited (ODEL), one of the nation's largest fashion, apparel and cosmetics retailers, will use the proceeds of the issue to support the expansion programme (LKR150.5 m) of the company and the rest (LKR100 m) would be employed to settle part of outstanding loans.
The Company focuses on delivering maximum fashion and value to its shoppers by offering compelling selections. Odel stores offer a broad selection of merchandise and feature products from both local and exclusive international brand sources. The Company operates 12 stores spanning within the three districts of the Western Province and plans to open three more stores during the year 2010 (possibly in Wattala, Battaramulla and Kandy).
source - www.dailymirror.lk
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