Pet store and veterinary chain Pets at Home is one of several retailers lining up to go public this year. But, unlike many of its counterparts, Pets has opened up its IPO to retail investors with a minimum investment of £1,000. The question, then, is whether one should take the plunge.
A good place to start is the valuation. The shares will be priced at between 210p and 260p, with 500m in issue. That means the market cap of the company on admission will be between £1.05bn and £1.3bn. Based on our own, admittedly rough, pro forma pre-tax profit estimates for the financial year to March 2014 of £80m, and net profit of £60m, the shares would be trading on a forward PE ratio of 17 at the lower end of the price range and 20 at the higher. The board intends to target a payout ratio of 30 to 40 per cent of fully taxed earnings, which would indicate a yield of 1.8 per cent to 2.4 per cent. Turning to the debt, the company plans to use £316m from the initial offer proceeds to pay down the current hefty debt pile of £548m. So the rating is pretty punchy rating for a retailer, the dividend yield is average, and the debt is not exactly low.
What about the growth strategy? Well, management has ambitious plans to roll out more stores, veterinary surgeries and grooming salons and increase its online presence. Its unique selling point is offering customers a differentiated service, with a wide range of specialised products, knowledgeable staff and services, all in-house. Its scale is presumably a major advantage.
Historic growth is fairly decent. Between 2011 and 2013, sales grew 15 per cent to £598m, while underlying cash profit rose 7.6 per cent to £98m. In the 40-week period to 2 January 2014, sales were running 12 per cent higher (2.4 per cent like-for-like) and profit was up 11 per cent. Margins are generous, too. The 'services and other' segment, which includes grooming, veterinary and insurance, accounts for just 7 per cent of total revenue, but there's significant scope for expansion and like-for-like sales growth in this segment appears impressive - 17 per cent in 2013, compared with 2.6 per cent across the group.
The shares are by no means a bargain, but Pets at Home has a good growth story and a decent track record. Also, if it gets into the FTSE 250, tracker fund managers will have to pile in, which will flatter the share price. A growing appetite for retail stocks could also offer a short-term boost. We think it could be worth a punt, but emphasise the risks involved - not one for widows and orphans. Deadline for retail investors is 11 March.