I've changed jobs recently which has kept me busy, and with the Oliver’s Real Food IPO only open for two weeks I thought I would have to publish my review after the offer closed. It was with some relief then that I checked my email Friday night and saw they had decided to push things out by a week and reduced the share price from 30 to 20 cents in response to limited interest from institutional investors. The reduction in the share price isn’t as dramatic as it initially looks. Oliver’s has increased the number of shares at the same time, so while under the original offer the maximum subscription was to sell 30% of the company for 15 million at 30 cents per share, this has now been adjusted to 35.8% for 15 million at 20 cents a share. Although the share price has gone down by a third, the actual reduction in pre-offer valuation has only gone down by 25% thanks to the increase in the number of shares.
This last-minute drop in price and wrangling of share numbers puts you more in mind of a fishmonger trying to move some dodgy prawns than a multi-million dollar IPO offering. Pricing an IPO is meant to be a precise and scientific exercise, developed through numerous meetings with fund managers and other institutional investors to accurately gauge the market. Wesfarmers recently put a pin in their Officeworks IPO plans precisely because they failed to hear much enthusiasm from institutional investors at this stage of the process. For Oliver’s to be forced to drop their price at the last minute suggests that they either their fund manager skipped this step, or that Oliver's management didn't listen to the advice that was given to them.
Putting this last-minute price drop aside, Oliver’s Real Food is one of the more interesting IPO’s of 2017. The business runs a chain of healthy fast food options on major arterial roads on Australia’s eastern seaboard. While healthier fast food chains have been around for a while (Sumo Salad are rumoured to be planning an IPO of their own), Oliver’s is the first healthy fast food business that is targeting the highway service station market. As anyone who has ever tried to get a meal on a freeway can tell you, your meal choices are typically restricted to KFC, Mcdonalds, or a dodgy cafe with burgers and chicken wings sitting in bain-maries, so there does seem to be an opening for a healthier and more expensive alternative.
Jason Gunn, the main founder of Oliver’s is your classic new age guru. You can watch videos of him online talking earnestly about his love of transcendental meditation (17% of Oliver’s staff apparently are now practising transcendental meditation thanks to Jason, one statistic that was left out of the prospectus) and one of his go-to quotes is that Oliver’s is the first business that he has run that “satisfies his soul.” He also seems to have gone all-out on the photo shop options for his Prospectus photo.
While it might be tempting to dismiss Jason as some snake oil peddling charlatan, he does seem to genuinely believe in the stuff he talks about, and he has successfully built a business around a set of values that seem to work for him. He also is balanced out by his co-founder Kathy Hatzis, who has held senior marketing positions in the finance sector and seems to the more down-to-earth of the duo. The only thing I could find by her online was a much more mundane article about managing brands that manages to not mention meditation, vaccines or enlightenment. Overall, they seem like a good pair of founders, and exactly the sort of people you would want to be leading a health food chain with a new age vibe.
One potential cause for concern is that growth has been slower than originally planned. In March 2015, Jason Gunn told The Australian that he expected revenue to grow to 30 million per year within 12 months, yet even the projected figures for the 2017 financial year show revenue of only 21 million. More interesting still, is that in the same article Jason stated that he was aiming for an annual revenue of 30 million before proceeding with the IPO. I’m not really as concerned about this as I perhaps would be in other cases. After reading and watching a few videos on or by Jason, overestimating growth rates in a conversation with a journalist seems to be exactly the sort of thing he would do. As long as there are more sober minds around him this potential character flaw shouldn’t really be a problem. What’s more, Oliver’s growth is largely a factor of the number of stores they open, and this seems to be pretty reliant on when the big petrol stations have leases coming up. Store growth seems to have stagnated somewhat in late 2015/early 2016 with the number of company owned stores going backwards in the first half of FY2016 from 8 to 7. However, more recently things seem to have gotten going again, with 12 company owned stores at the time of the prospectus, and firm plans to increase this to 19 by the end of FY2017.
Longer term, Oliver’s have 60 sites in total they have identified for potential store locations in Australia for the next 4 years, which indicates the business has a lot of room to grow.
One of the things I like about the Oliver’s prospectus is the lack of massive pro forma adjustments to the financials. Too often, you flick through pages of rosy pro forma figures in the financial section of a prospectus only to find a few brief lines of statutory figures that show the company has actually been making massive losses. With Oliver’s the first figures presented in the financial section are the statutory profit and loss statements, and the only pro forma figures I could find were in the balance sheet. The numbers also seem to stack up pretty well. Margin over cost of sales has been steadily in the mid-thirties, and margin plus labour expenses has been consistently around 75%. While Oliver’s did make a small loss in the first half of 2017, for a company going through an IPO and growing this quickly it’s actually impressive the loss is this small.
In order to get a sense of what Oliver’s could look like as a more mature business, I projected two scenarios of a future Oliver’s profit and loss based on 40 stores here. In the first more conservative scenario, I projected that Oliver’s revenue per store would be the same as in 2015 at just under 1.6 million per year (I didn’t want to use the 2016 numbers as I wasn’t sure who store openings affected the figures), and that labour and cost of sales would stay steady at 75% of revenue. I increased the head office and general administration budget to what I feel is a generous 4 million and all other costs were simply based on the 2015 figures increased to reflect the higher number of stores. With these rather conservative estimates, the business would make just over 2.6 million per year after tax.
In the second more optimistic forecast, I projected a growth in sales per store by 20% to just over 1.75 million based on the assumption that increased brand recognition and familiarity would lead to more customers per store (Mcdonalds in Australia apparently averages over $5 million in sales per store so this is far from being unrealistic). I also used a lower cost of sales + labour to revenue ratio of 65% on the assumption that the higher revenue per store and supply chain efficiencies of having a larger business would help drive these costs down. With a slightly more optimistic leaner head office budget of £3.5 million, this shows a projected profit after tax of just under 9 million.
The indicative market capitalization based on a maximum subscription is $41.9 million at the revised offer price. The fact that a business like this has such a clear path to a profit of 9 million, while at the same time a more pessimistic model still shows profitability is a promising sign.
You can pore over the financials until you are the blue in the face, but at the end of the day if you are thinking of investing in a restaurant chain It probably makes sense to actually eat in the place. For this reason, I drove down to the nearest Oliver’s to me in the Melbourne outer suburb of Scoresby last Sunday afternoon. The Oliver’s was located in a BP service station on a freeway next to an business park, with a KFC and Mcdonalds for competition. At 3:50pm on a Sunday Trade wasn’t exactly brisk. In the 20 minutes or so I was there only three other customers came into Oliver’s while the other two fast food restaurants probably served around 12 people each.
My meal of a chicken pizza pocket, one of Oliver’s trademark cups of green beans with salt and an Oliver’s brand non-alcoholic Organic Tumeric Beer came to a pricey $22.75 (the organic turmeric beer was an amazing $6.95 for 350mls, if Oliver’s can sell enough of them they should have no issues hitting their profit margins).
Pricing aside, I was pleasantly surprised with the food, the Pita wrap was fresh and tasty, and a cup of green beans flavoured with nothing but a little bit of salt is less boring than you’d think. I wouldn’t get the turmeric beer again, but I’m sure it is to some people’s taste.
Overall, there’s a lot to like about the Oliver’s IPO. While the last minute price change does potentially reflect badly on management, the rare opportunity of listing in a business that has both a proven track record of achieving profitability and great growth potential is too good for me to give this one a miss.