Stock Takes: DGL set to list, Ryman’s growing pains, Trustpower’s outlook

Auckland-based chemicals and dangerous goods company DGL expects to list on the NZX and the ASX on Monday.

The company’s initial public offering (IPO), aimed at raising $100 million at $1.00 a share, closed on May 12 and shares were allotted on Tuesday. There is no public pool.

DGL says the IPO provided additional capital for the company to pursue growth opportunities, including strategic mergers and acquisitions, as well as investing in assets, plant and equipment.

It will also cover deferred consideration for its acquisition late last year of Chem Pack, a Melbourne company that formulates and packs chemicals, predominantly for agriculture.

The offer documents say DGL is a well-established specialty chemicals and dangerous goods business offering solutions from manufacturing to recycling.

The business employs more than 280 people and operates a network of 26 sites in Australia and New Zealand with about 140,000 tonnes of manufacturing capacity, 126,000 tonnes of chemical storage, and 174,000 tonnes of waste processing capacity. It was founded by majority shareholder and current chief executive Simon Henry in 1999.

The company says it has established itself as a leader in the sector through a combination of organic growth and targeted acquisitions of business, property and other assets.

Revenue came to $180.1m in 2020 and is forecast to increase to $209.7m in 2022, representing a two-year compound annual growth rate (CAGR) of 7.9 per cent.

The company’s pro-forma consolidated EBITDA was $19.2m in 2020 and is forecast to increase to $29m in FY22 – a two-year CAGR of 22.9 per cent.

“With our highly specialised workforce, asset base, portfolio of licences, intellectual property and industrial expertise, the company expects to continue its growth in the coming years,” the offer documents say.

DGL said 9.8 million shares will also be issued to Chem Pack’s vendors at the offer price as part payment for the Melbourne business, which will be subject to a voluntary escrow period of up to 12 months from the listing date.

Henry, who is on the National Business Review’s Rich List, will retain his entire shareholding and will hold 57.3 per cent of the company on completion of the offer.

The offer documents forecast a net profit of $5.04m in the first half to June 30, and a net profit for the 2021 calendar year of $9.5m, rising to $10.45m in 2022.

The company is chaired by Peter Lowe, who has had more than 30 years’ experience in chief executive and chief financial officer roles. He also serves on some Australian boards.

Joint lead managers for the offer were Australian brokers Bell Potter and Canadian investment bank Canaccord Genuity.

At the offer price, DGL will have an indicative market capitalisation of $257m and a price earnings ratio of 24.6 times.

Ryman's growing pains

Jarden investment analyst Andrew Steele has sounded a warning about Ryman Healthcare’s debt level and the constraints it could place on the retirement operator’s growth ambitions.

Steele notes that Ryman’s gearing has grown every six months since 2016, from 29.1 per cent to 46.2 per cent.

“While adjustments mean the company’s effective gearing for bank covenants is likely below this level, we believe this level of relative and absolute debt is at a point which could be starting to constrain Ryman’s growth ambitions,” he says.

Steele points to evidence of this in the form of lower additions to Ryman’s land bank in recent times, with a 13 per cent decrease since the first half of its 2020 financial year and the fact the company is now offering an accommodation bond over care beds in New Zealand.

“This product in effect swaps a steady care cashflow today for aged care debt.”

Steele said the aged care debt was not taken into account when it came to Ryman’s banking covenants, which effectively gave it more debt headroom.

“However the economic leverage is unchanged and is supported by less operating cashflows.”

Steele said Ryman’s dividend policy further complicated its ability to deleverage as in most years the underlying equity growth had not covered dividends.

“As such, the company has not been retaining any equity from its core operational earnings and has been entirely dependent on fair value gains to drive equity growth.”

Steel said Ryman’s core cashflow from its existing asset base had only covered the dividend in one of the last five years.

Needless to say he has a sell rating on the stock with a target price of $12.10.

Trustpower's two-day result

One of New Zealand’s largest electricity companies effectively announced its results over two days this week after an about-turn at the request of its largest shareholder.

On Monday Trustpower left investors hanging when it decided not to provide any forward guidance for the coming year, as it reported a small rise in profit for the year to March 31.

The Tauranga-based company said it would update the market at the conclusion of its strategic review, which is expected to be finished in about six weeks.

The review is exploring the idea of selling its retail business to focus on becoming a generation company only.

But just 24 hours later the company reversed course, saying that if electricity prices remained in line with current forecasts and it retained its retail business, its earnings before interest, tax, depreciation, amortisation and fair value movements (EBITDAF) were expected to be $200m to $225m – ranging between flat on last year and a 12.5 per cent increase.

Chief executive David Prentice said “the main reason” for the change was that infrastructure fund Infratil – which owns 51 per cent of the company – needed an earnings forecast to include in its outlook, when it published its results on Wednesday.

At the end of April, Trustpower said it was progressing to due diligence in its strategic review.

The thinking behind the review appears to be a belief that companies which exclusively produce renewable electricity are valued more highly by the market than integrated generator-retailers.

Kiwifruit funding

Origin Capital Fund I, New Zealand’s first private equity fund dedicated to investing in the kiwifruit sector, has completedthe process to raise $85m, following its earlier close in February at $69m.

Managing director Dominic Jones said the group expects to invest more than $170m in kiwifruit orchards over the next two years.

Jones said that strong support from investors reflected recognition of the strong fundamentals of New Zealand agriculture, the kiwifruit sector, and kiwifruit marketer Zespri. He said there was clearly strong investor appetite for exposure to the sector.

Since the Fund’s first close in February, it has secured seven properties for the portfolio –a mix of producing orchards and bare land for development, in Kerikeri, Bay of Plenty and Gisborne.

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