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Appetise
Appetise are a food ordering website that are seeking to raise between 4.8 and 6.8 million dollars. While they are listing on the ASX, they are so far only located in London, and have no connection to Australia. In a trend that has been growing lately, they seem to have chosen to list in Australia purely due to its lower compliance regulations and associated costs.
Background
By numbers alone, Appetise looks like one of the worst value IPOs I have reviewed on this blog. To explain, let me give a few simple facts presented in Appetise’s own prospectus:
After starting in 2008, Appetise was acquired for only $230,000 in May 2016 by Long Hill, an American investment company. After acquiring the business, Longhill poured $2,260,000 into Appetise to improve the company's website and increase the number of restaurants on the platform. However, despite these investments, revenue decreased from $91,715 in FY16 to $49,172 in FY17. This IPO now values Long Hill’s stake at $9 million, with total market capitallization on listing between 13.8 and 15 million, more than 200 times their 2017 revenue. If the IPO is successful, this will be a 261% return on investment over 18 months for Long Hill, despite no measurable improvement in Appetise’s performance. If you are getting flash backs of Dick Smith right now, you’re not the only one.
Management
When Long Hill bought Appetise they did the usual private equity thing of installing a completely new management team, getting rid of the original founder in the process. The newly appointed CEO, Konstantine Karampatsos, has had experience both setting up his own online business as well as a stint at Amazon, and the CFO Richard Hately has had a number of senior roles at both start-ups and established businesses. While the CEO and CFO both seem like logical choices, appointing such an experienced management team to a company of this size leads to some pretty ridiculous statistics.
Konstantine Karampatos will have an annual salary of $204,050, post listing, plus a bonus of $122,430. Richard Hately, the CFO, will have a salary of $195,888, and will receive a listing bonus of $81,620. The marketing director will receive a salary of $138,750, though no listing bonus. All up, this is an annual cost of over $700,000 for the three highest paid employees, for a company that had less than $50,000 in revenue last year. Even if Appetise’s FY17 revenue increased by 1000% in FY18, it would still not come close to covering the salary of its three most senior executives.
This is a perfect demonstration of why a public listing at such an early stage is a terrible idea. A $50,000 revenue company should be being run out of a garage or basement somewhere by a few dedicated founders on the smell of an oily rag, not burning through cash on highly paid executives.
This cost has real consequences too. Under their proposed allocation of funds, with a minimum $4.8 million raise, Appetise will spend $1.55 million on executive and head office expenses, vs only $2.15 million on marketing. Given that their primary goal over the next few years is to raise their profile, this seems like a ridiculous allocation of capital.
Product
As Appetise is currently only operating in England, the closest I could get to testing Apetise’s product was spending some time clicking through their website. Overall, it was a pretty underwhelming experience. There are three large tabs that block a significant part of the page, which makes scrolling through options difficult, and the colour scheme and overall design feels a little basic.
On the positive side, they seem to have invested some time into making the mobile experience work well; if anything the site actually seems to work and look better on a mobile phone. It is also worth mentioning that while the prospectus mentions that the business has a national footprint on numerous occasions, their coverage in London is pretty minimal, and at this stage they seem to be focused solely on the city of Birmingham.
The company’s social media presence is similarly disappointing. The prospectus talks a lot about social media engagement through their loyalty scheme, where users can get credit by sharing Appetise on their social network but so far they have failed to get much traction in this area. The Appetise Facebook page seems to only post bad food puns, and each post gets around 2 to 7 likes on average
(I also noticed that a company director and their marketing executive are two of their most common Facebook fans.) Compare this to Menulog’s page, an Australian food ordering and delivery service, where you’ll see content featuring available restaurants, slightly funnier puns, and as a result much higher engagement with customers. While Facebook posts might seem like a trivial thing to be hung up on in a company review, one of the key things that will affect Appetise’s success is how easily they can build an online following. The fact that so far they have demonstrated little nous in this area is definitely a cause for concern.
Market
Online food ordering is an industry with massive growth potential, and this is probably the main reason Long Hill felt they could get away with the prospectus valuation they have gone for. Appetise has a different model to the likes of Menulog or Deliveroo though, as Appetise does not take part in deliveries, instead, restaurants featured on the Appetise platform need to deliver the food themselves. The idea is this will allow them to scale more easily and not get bogged down with logistical complexities. While I don’t doubt this approach might work in the short term, (and Just Eat, a successful UK company with the same model as Appetise has proven that it can) in the long run an Uber Eats type model of flexible contractors, that can be sent wherever there is demand seems much more efficient. As websites like Uber Eats become more popular and economies of scale start to kick in, I feel there would be an incentive for restaurants to fire their delivery drivers and move from an Appetise type platform to an Uber Eats one.
Appetise makes the argument that their patform is currently cheaper, as Uber Eats charge delivery fees to customers, but just like with Uber, you would assume that these charges will eventually decrease as the site grows in popularity.
Appetise makes the argument that their patform is currently cheaper, as Uber Eats charge delivery fees to customers, but just like with Uber, you would assume that these charges will eventually decrease as the site grows in popularity.
Verdict
Appetise’s response to a lot of what I’ve said here would be that the company is uniquely placed to experience explosive growth in the near future. They have a workable website platform, and their only major competitor in the UK Just Eat has demonstrated that there is money to be made in this market. While a $50,00 revenue company with a board of directors looks ridiculous now, if in 12 months’ time their revenue is closer to $1,000,000 no one will be complaining. The problem I have with this argument though is it requires a lot of faith with not much evidence. If Appetise is really uniquely placed to grow so quickly, why not hold off on the prospectus for a few months so they can demonstrate this? Appetise runs on a March end financial year, so their first half FY18 figures should be available now. Once again, the cynic in me thinks that if revenue was actually growing, these figures would be included in the prospectus.
Even in a growing industry you need to be ahead of the curve and have a clear point of differentiation to succeed, and after reading the Appetise prospectus and looking over their website I simply don’t see this for Appetise. In one of the easier decisions I’ve had to make with this blog so far, I will not be investing in the Appetise IPO.
Even in a growing industry you need to be ahead of the curve and have a clear point of differentiation to succeed, and after reading the Appetise prospectus and looking over their website I simply don’t see this for Appetise. In one of the easier decisions I’ve had to make with this blog so far, I will not be investing in the Appetise IPO.
Oliver’s Real Food
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.
Overview
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.
Management
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.
Growth plans
One potential cause for concern is that growth has been slower than originally planned. In March 2015, Jason Gunn told The Australianthat 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 1
9 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.
Financials
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.
Food
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.
Conclusion
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.
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