Five takeaways from the Kogan IPO prospectus

Australian online retailer Kogan.com released its initial public offering (IPO) plans yesterday, as the company hopes to raise $50 million in share sales.

Kogan.com was founded in 2006 by entrepreneur Ruslan Kogan and currently attracts more than 620,000 unique customers per annum.

The company’s revenue for the 2015 financial year was $200.3 million, which increased to approximately $201.1 million for the current financial year. Revenue is forecast to increase to $241.2 million for the 2017 financial year.

The prospectus reveals Kogan.com has recorded positive earnings before interest, tax, depreciation and amortisation (EBITDA) for 10 years, with EBITDA forecast to come in at $6.9 million for the 2017 financial year.

Kogan.com will be selling approximately 28 million shares at a price of $1.80 each, with offers opening on the June 17. The retailer plans to list on the Australian Securities Exchange by July with an expected market capitalisation of $168 million.

With Kogan.com’s founder and chief executive Ruslan Kogan claiming the float will be “different to all the others”, SmartCompany took a closer look at Kogan.com’s prospectus.

Here’s five key takeaways.

1. The Dick Smith acquisition does not factor in the company’s sales forecasts

Kogan.com acquired the intellectual property and online businesses of Dick Smith electronics in March this year for $2.6 million, according to the prospectus.

However, this acquisition was not taken into account when calculating revenue forecasts for the retailer’s IPO.

This means that Kogan.com’s valuation and revenue forecasts could be significantly higher than suggested, if its operation of the Dick Smith brand is successful.

Included in the acquisition were 1.5 million Dick Smith email subscribers, which Kogan.com says 1.3 million of are not Kogan.com subscribers.

The company may release products under the Dick Smith private label brand in the future but has not released detailed plans.

“Kogan.com believes that significant financial benefits will arise from the integration of the Dick Smith assets, in the form of increased revenue and earnings,” the company says.

“However, given the Dick Smith Assets were not acquired as a going concern, Kogan.com has no reliable basis upon which to quantify the financial or operating performance of the Dick Smith Assets under Kogan.com’s ownership.”

2. Kogan will retain a significant chunk of the business

Both Ruslan Kogan and executive director David Shafer will retain 69.2% of Kogan.com following the float, with Kogan retaining 50.5% and Shafer retaining 19.1%.

This equates to 59.5 million shares, or approximately $107 million at the initial offer price of $1.80

Of the $50 million raised through the float, Kogan and Shafer will take $15 million of that, split to $7.5 million each.

This is in exchange for selling a part of their ownership.

Kogan has defended this action, telling Fairfax investors had “demanded more liquidity” in the business.

Kogan and Shafer will be able to sell their shares further down the line, after the company’s listing.

However, Kogan is not planning to do so anytime soon, saying “my name is on the door, this is my baby. I can’t imagine doing anything else.”

3. IPOs come with risks

The Kogan.com prospectus outlines a number of risks for potential investors to keep in mind.

In his chief executive’s letter, Kogan said Kogan.com is a business “subject to a range of risks”, including reduced growth in the retail market and increased competition.

Kogan encouraged investors to read the prospectus carefully before making investments.

Section five of the prospectus addresses these risks, ranging from intellectual property infringement claims, to potential search engine marketing cost increases.

Kogan lists the acquisition of Dick Smith assets as a risk, stating there could be a risk that the Dick Smith assets will not be properly integrated into the site.

The prospectus acknowledges natural occurrences such as developments in technology, which could “lead to increased obsolete inventory risk, if change results in a shift in customer preferences for certain products”.

Data loss and theft is also covered in the risk section, acknowledging the risks of online business operating in the modern day.

4. The employee offer includes a bonus for employees

Certain key management personnel and certain other senior management will receive a one-off bonus from the listing, coming in the form of shares.

The amount of this bonus will be $1.18 million to be included with the IPO’s Employee Offer, and will not be available to Kogan and Shafer.

The employee offer is only open to Kogan.com employees who have received an invite to bid from the company itself, which reserves the right to make the decision.

There will be 657,638 shares available to employees under the Employee Offer, totalling at approximately $1.1 million.

5. Kogan.com will continue to grow its non-electronics business

The prospectus also gives an insight into Kogan.com’s future business model.

“Kogan.com believes that it is part of a “Next Generation” of Online Retailers who are evolving the Online Retail format beyond its origins as a disruptive, low‑cost distribution platform,” states the prospectus.

Kogan.com plans to expand its recently launched travel and mobile verticals, which have accounted for 3% of the company’s gross transaction value in the first half of the 2016 financial year, while dicksmith.com.au is included in the retailer’s listed Core Website Channels.

The prospectus also outlines the increasing diversity of Kogan.com’s private label brand products, which have contributed to a 19% increase in the amount of general merchandise sold by the retailer from 2014 to 2016.

This indicates Kogan.com’s private label brands will continue to cover more bases, compared to the consumer electronics focus of years earlier.