Company: Kathmandu Holdings Limited

Share Price: $1.65 to $1.90

Market Cap: $330m to $380m

Anticipated Commencement of Trading: 20th Nov 2009

With global equity markets well off their lows and investor confidence appearing to return in a flurry, the likes of Myer, Kathmandu and Rebel Sport are taking this opportunity to publicly list their wares. The Myer float is estimated to raise $2.3bn and marks the largest listing in years. The coming to market by these retail giants signifies drastic improvements in risk appetite, and floats have been timed to ride the crest of sharemarket momentum. Whilst a chance to participate in the Kathmandu initial public offering (IPO) is only available to institutions and eligible employees, should Kathmandu shares be chased once they begin to freely trade? We take a closer look.

Kathmandu is the leading outdoor clothing and adventure goods retailer in Australia and New Zealand. Formed in 1987, the business was purchased off its founder, Jan Cameron, in 2006 by Goldman Sachs JB Were and Quadrant Private Equity Group. Paying a reported $400m, the joint venture group has since poured over $70m into building the brand and increasing store presence. With 45 stores in Australia, 31 in NZ and 4 in the UK, a further 12 stores have been earmarked for opening in the next 8 months. Since the buyout, the joint venture has managed to consistently post sales growth of +20%, except for FY09 which saw sales growth of 11.8%. The fact that stores remained profitable during the downturn – none were loss making – is indicative of the company’s proud history as the market leader in ‘facilitating’ outdoor adventure.

Shares in Kathmandu are expected to list at between $1.65 and $1.90, equating to an implied market cap of $330m to $380m. Forecast 2010 earnings are for 12.7c per share and a dividend yield of 3%. Potential listing prices place Kathmandu on a forward PE multiple of 13 to 15 times, undemanding for a market leading retailer that has consistently been increasing sales since inception. Since taking over, the joint venture group has managed to increase sales at an average of 18.5% pa, including the relatively poor performance of FY09.

Past performance is all well and good, but what strategies are in place to ensure ongoing growth? Like most other retailers, earnings growth will be incrementally linked to new stores and overall improvements to consumer spending. Already with an established presence on both sides of the Tasman, management have indicated their intentions to consolidate the operating position and focus on new store rollouts in Australia and NZ only. Funds raised from the IPO will drive the rollout program and reduce net debt of $57.4m, still leaving plenty of cash to spare. Kitty left over could be used for store refurbishments, the introduction of new product lines and marketing initiatives. With industry trends showing an increase in more affordable outdoor recreation activity due to the downturn, Kathmandu may be ‘hitting its straps’ at just the right time.

It is important to highlight that Kathmandu is no different from any other retailer in its targeted strategy for growth. On top of the 12 new stores planned over the next 8 months, management have identified 70 potential locations, meaning that a Kathmandu store may pop up somewhere near you. Similar to the likes of JB Hi-Fi and The Reject Shop, an aggressive long-term rollout strategy is the main driver to earnings and the necessary funding for Kathmandu will be made available by the IPO.

So what’s the verdict? Considering the current PE multiples of a selection of its more famous peers – Harvey Norman (21 times), David Jones (19 times) and the upcoming Myer float (15 to 17 times) – Kathmandu, which arguably offers a clearer growth path, could be the ‘cheaper’ alternative. Although not operating in a ‘staple’ market such as a Woolworths or Super Cheap Auto per se, the Kathmandu listing is shaping as solid exposure to an increasingly competitive retail sector.

Joshua Terlich is an analyst at

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