Deacons Kenya Ltd, the company behind lifestyle apparel stores such as 4U2, Woolworths, Mr. Price and Angelo, is offering 12.8 million shares at KES 62.50 looking to raise KES 800 Million for its medium-term expansion plan across the region. The offer runs from Wednesday 17th November, 2010 to Friday, 3rd December 2010 with the shares being credit to CDSC/share certificates being dispatched on Tuesday, 7th December 2010. The minimum number of shares for Individual and Corporate investors is 2,400 shares at KES 150,000.
Deacons owns and manages the upscale Woolworths, Truworths, Identity, 4U2, Mr. Price, Mr Price Home, Angelo, Adidas and Life Fitness brands. The company was founded in 1958 and traded for 22 years, until 1980, as the Marks and Spencer (M&S) franchise for the East Africa region. It changed direction in 1980 when the Kenyan Government placed restrictions on all imported goods to protect local industries, and Deacons gave up the M&S franchise to work with over 70 local textile suppliers. In the early 90s, with the liberalization of the Kenyan economy, Deacons changed its strategy again, this time to identify international brands that met the lifestyle need of the Kenyan market. In 1994, Deacons signed a distribution deal with Woolworths (which later became a franchise), and this was followed in 1999 with the acquisition of the Truworths franchise, launch of the 4U2 brand in 2003, Identity in 2006, Mr Price Home and Mr. Price (weekend) in 2007, Angelo in 2008 and Adidas in Feb 2010. The company currently has 23 stores, with 19 in Kenya, 3 in Tanzania and 1 in Uganda.
The company is now offering the 12.8 million shares to the public in a public offer. This means that the shares, for the time being, and for at least the next 12 months, shall not be traded on the NSE until the company lists by introduction. The shares will, however, be tradable on a willing seller, willing buyer arrangement. The company has also expressed interest in getting listed on the Nairobi Stock Exchange by introduction.
Financials
The company made a Net Profit of KES 79.6Million for the year ended Dec 2009, resulting in Earnings per Share of KES 4.06, and had a dividend per share of KES 1.79. It forecasts that it will make KES 149 M, for the year ending Dec 2010, a 87% increase. At the current offer price of KES 62.5. the implied Price to Earnings ratio (How many more times the share costs than it earned) as at 31/12/2009 was 15.41 and the implied P/E ratio based on the offer price and forecast earnings per share (on current issued capital) of KES 7.59 is 8.23
The tables below give a snapshot of the company’s earnings and financial positions over the last 5 years
Looking to the Future
Deacons is looking to ride on the growth of the East African, and particularly Kenyan, economy and middle class. The company targets the middle, upper middle and high income classes (LSM categories 8-17 inclusive) which represents approximately 15% of the population.
It lists its current strengths as:
- Being the leading fashion retail house in the region, as a result of its 53 year history
- Franchise agreements and partnerships with international brands
- Market segmentation and brand diversification
- Premiere locations
- Diverse and loyal customer base
- Management capability
- Regional presence
- Robust business systems software
- Being a cash- based business
It outlines its strategy for the next 5 years as:
- Extending the reach thru roll out of existing brands in new locations, and possible spin offs of various categories in the key brands.
- New opportunities such as fitness, sporting and wellness, School and corporate uniforms, health beauty and cosmetics, specialized men’s and women’s boutique/specialty stores and fashion accessories and jewelry.
- Acquisition of existing reputable local brands in Kenya
- Expansion of distributions channels eg. E-commerce sites
- Expansion to other territories
Deacons highlights its significant risk factors as:
- Adverse economic conditions that may have a material adverse effect on Deacon’s results
- Competition in the sector it operates
- Suffer as a result of weak sales during peak selling seasons
- Relationships with franchisers
- Key management and other personnel
- Failure to implement store roll- out successively
- Currency fluctuations as the company is a 100% importer
- Borrowing and interest risk
- Credit risk
- Risks associated with Deacons’ properties which are all rented
- Acquisitions consuming resources and management attention
- Changes to governmental policies
The full prospectus can be obtained from Deacons or from the selling agents Kestrel Capital EA and Standard Investment Bank.
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EDITOR’ NOTE
A research note obtained from one of the sponsoring stockbroker’s recommends this as a BUY, with the price expected to rise between 10% and 15% within the next 12 months. In the same note, the comparative median P/E ratio for companies in the Commercial and Allied sector (excluding automobiles) is 18.8 resulting in a per value share of KES 84.55 and a discounted offer price of KES 76.10. When compared to other apparel retail companies such as Mr. Price (SA), the P/E ratio is 14.01 resulting a per share value of KES63.19