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Oliver’s real food has had a volatile first couple of months on the ASX. While the share price initially soared to a high of 39 cents, market sentiment cooled when the company announced at the end of July that they would narrowly miss their FY17 earnings and revenue projections. Although missing prospectus projections is never a great look, Oliver’s management stated that this was mainly due to delays in opening new locations and one-off costs rather than lower sales, and have re-committed to meeting their FY18 forecast of $41.9M revenue and 2.37M NPAT. At time of writing the share price is in the mid-twenties, still comfortably above the initial listing price, and Oliver’s have continued to provide market updates on the roll out of their new stores.
After such a dynamic first few months as a publicly listed company, I reached out to Oliver’s founder Jason Gunn, to see if he would answer some questions over email regarding the strategy of the business and how he felt things were travelling. Jason has kindly provided the below answers to six key questions of mine about the Oliver’s business and other related topics. Jason's answers give great insight into how the business is performing and his vision for Oliver's in the future. In a first for the IPO Review, I present my interview with Jason Gunn.
Oliver’s is obviously a business that has strong values and ideals, but now as a publicly listed company there is more pressure than ever on financial performance. How do you balance your desire to be ethical and responsible with the pressure and scrutiny of being a publicly listed company?
Jason Gunn:
-To me this is simple. To actually be a business we have to make a “Healthy profit” We have always had to do that, just to survive and attract investment. But it is not the main focus of the business; it is just something we have to do, just like we have to comply with the regulations and award rates of pay etc. Our number one goal is to make healthy food choices available to the travellers on the highways of Australia, focussing on providing a great product, in a very clean environment, with fantastic customer service, and we know that we have to do that profitably.
While there has been a revised guidance to your FY17 numbers, you have maintained your forecast for FY18. This now means you are forecasting revenue to grow from 20.436 Million to 41.909 million in one financial year. As an outsider, this seems like a hugely ambitious growth target. Are you able to explain why this is achievable?
Jason Gunn
-It is achievable for a couple of reasons. 1) We have bought back the 8 franchised stores. These stores were the best stores in our network, with significant turnover. As they are the highest turnover stores in the group, they are also the most profitable. Just buying these stores back will add over $11m to our group TO, and a significant EDBITDA contribution. 2) We are opening another 11 stores in FY18. All of the stores we are opening are expected to be good performers in great locations. Plus, with all of this growth comes scale, and with scale comes efficiencies.
You have gone from being the founder of a small start-up to the Managing Director of a publicly listed company. How do you feel your role has changed over this time, and have you had any challenges adjusting to the realities of running a larger company?
Jason Gunn
-Oh yes, there has been quite a transition. But you know, I love my role, and I absolutely LOVE this business, so I feel that this is what I am destined to do. At the end of the day the role is largely about building a really strong team of motivated and experienced people that are all pulling in the same direction. I have that now, more than ever, and with the support of a very strong board, and an committed investor base, who believe in what we are doing and where we can take this business, I feel more confident and clearer than ever before.
While online reviews of Oliver’s restaurants are generally very positive, one of the criticisms that is made from time to time is that prices are too high. You have said repeatedly that your margins are not excessive and that your prices reflect the costs of providing healthy food. Are you able to provide some detail on the costs of providing fresh, healthy food at highway locations, and do you see potential for your prices to come down as the business grows and economies of scale kick in?
Jason Gunn
-Good question, but realistically no, they wont come down. In fact I do not believe that we are expensive, it just seems that way to some people. It seems that way to some people because we have all been conditioned to think that food is cheap, when it is not. What is cheap, is highly processed food that is full of artificial colouring, flavourings, and preservatives. This is not actually food. We should stop asking why REAL FOOD is so expensive, and start asking, “How can this cheap food be so cheap?” I think it is also worth mentioning, that being the worlds first certified organic fast food chain, we face many challenges around supply chain management that traditional fast food business’s do not have to overcome.
Unlike a lot of food chains, Oliver’s has decided not to pursue a franchise model and is in the process of buying back existing franchises. Are you able to comment on your reasons for avoiding the franchise model? Was this decision at all influenced by recent franchise problems at 7-11 and Dominos?
Jason Gunn
-No, nothing to do with 7-11 and Dominos’. Like Ray Crock in the movie “The Founder” my first experience of franchising was a disappointing. We are a unique brand in that we have strict nutritional guidelines and we are out to set a new standard when it comes to the quality of the food and the way we do business. I am not saying that we wont have a degree of franchising again at some point in the future, but for now we want to have absolute control over the way our stores are run and retain the profitability in the listed entity, rather than sharing that with franchise partners.
The Oliver’s real food IPO eventually went ahead at a lower than expected price due to what I assume was limited interest from institutional investors, and recent proposed IPO’s from Craveable Brands and Sumo Salad have been cancelled in entirety for the same reason. Is the Australian market too conservative when it comes to new IPO’s from Australian companies? Are you able to comment on the reception you received when promoting the Olivier’s Real Food IPO?
Jason Gunn
-We received a fantastic reception from the institutions we met with, but the feeling was that we were over valuing the business. That said, we had significant applications from our customer base, so they did not think it was too expensive. But there were other factors affecting the overall market, and as a result, we lower the price to meet the institutional market, and thereby achieve our goal of listing.
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Sienna Cancer Diagnostics are seeking to raise 6 million dollars, with an indicative market capitalization based on full subscription of just under 37.5 million. Shares are being offered at 20 cents each.
Sienna was originally founded in 2002. The company’s focus is the development of diagnostic tools for cancer, and more specifically using tests that look at levels of Telomarese in the body to aid in diagnosis. I spent around 10 minutes clicking on links on Wikipedia trying to understand what exactly Telomarese is, but I quickly realised it goes well beyond whatever I can remember from year 10 science. Instead, as usual I will do my best to evaluate the Sienna IPO using the tools available to an average investor.
IPO’s in the biotechnology space can be broadly broken down into two categories: Pre-revenue, where all the company has is an idea and maybe some patents, and post-revenue, where the company has a proven method of generating revenue, and is now looking to ramp things up. Sienna Cancer Diagnostics falls awkwardly somewhere in the middle. While technically Sienna has been receiving revenue from product sales since 2015, if you exclude research and development expenses, revenue for the first six months of FY2017 was $291,588. There are small café’s that turn over more money than that. It’s an unusual time to list, as the immediate question is why Sienna didn’t hold off until the listing until they had demonstrated their growth potential.
Background
Like many companies, Sienna’s past does not seem to be as straightforward and linear as the Prospectus would like you to believe.
In January 2015, Sienna Cancer Diagnostics announced their first sales agreements with a Major American pathology company. Kerry Hegarty, the CEO at the time gave an interview to The Age, where she explained that “ …Sienna has succeeded where other cancer diagnostic ventures have failed because it has been able to stay an unlisted company so far.” Hegarty goes on to talk about the flexibility of being an unlisted company when you are still in a pre-revenue stage.
4 months after giving this interview Hegarty left Sienna Cancer Diagnostics. Later that same year in September, Street Talk reported the company was planning a 10 million-dollar IPO with Pac Partners as lead manager. Did Hegarty leave because she felt that the company’s decision to list was premature? I have no idea.
For whatever reason, the 10 million-dollar IPO with Pac Partners did not eventuate, and the company is now listing 18 months later raising only 6 million with the much smaller lead manager Sequoia Corporate Finance. A CEO leaving a company and an IPO being delayed aren’t exactly unusual occurences, but it would be interesting to get some background on why both these events happened.
Financials
As mentioned earlier, Sienna has largely relied on government rebates and Australia’s very generous research and development tax incentive program for revenue. I take the view that if the company is going to achieve long term success, it will need to eventually stop relying on government handouts and therefore these revenue streams should be excluded from any analysis.
The worrying thing is though, once you take this money out revenue has gone backwards from 2016 to 2017. In 2016, Sienna’s first full year of receiving product revenue, the company had annual revenue of $640,664 excluding government rebates, or $320,332 every six months. The first six months of FY17 saw revenue of only $291,588, a pretty sizeable decrease at a time you would naturally expect revenue to grow.
While there may be legitimate reasons for the decline in revenue, it is not addressed anywhere in the Prospectus that I could find. The decline in revenue also puts into question Sienna’s chosen listing date. August is an interesting time to list, as it means the prospectus does not include the full FY17 numbers, even though the financial year is over by the time the offer closes. The cynic in me says that if the FY17 numbers were any good the IPO would be delayed a couple of months, as strong FY17 numbers would make the IPO a much more straightforward process.
To further illustrate the odd timing of the listing, the balance sheet as of January 2017 showed over 1.5 million dollars
in cash, vs annual expenses of around $570,000. Whatever was behind the decision to list before FY17 numbers were available, it wasn’t because the company was about to run out of money.
Shareholders
Sienna have not put any voluntary escrow arrangements in place, so a key question for any potential investor is who the existing shareholders are, and how likely they would be to dump their shares as soon as the company lists.
Earlier articles about Sienna mention the ex-CEO of Macquarie Allan Moss as one of the main shareholders and backers. Interestingly enough, his name does not appear in the current prospectus, so either he has sold out completely, or now holds less than 5% of the company. Why a shrewd investor like Moss would sell-out before an IPO is another question a prospective investor should probably think about.
Instead, the current largest shareholder is now someone called David Neate, who owns just over 10% of the company. I was immediately curious about who this person was, as I could not find him listed on the board or the senior management team of the company. After digging around online, the only information I could find on him was in regards to Essential Petroleum Resources Limited, a now delisted oil and gas exploration company that someone called David Neate (and I’m aware it might not be the same guy) held 12.6% of in October 2007.
There is an October 2008 Hot Copper thread where someone wondered why Neate was unloading so many shares in Petroleum Resources Limited. A few months after the post in January 2009, shares fell to below 1 cent following unfavourable drilling announcements and the company delisted later that year.
Of course, there are perfectly reasonable explanations for a major investor deciding to offload shares, but it’s not really the sort of information you want to find when you start googling the major shareholder of a potential investment.
Verdict
As this is an IPO in an area where I have no technical knowledge, I am acutely aware that I could be completely off the mark with my analysis. If using Telomarese to diagnose cancer proves to be the next big breakthrough, this could easily be the IPO of the year. However, if I’m going to invest in a company that’s actual product revenue is less than one fiftieth of the indicative market capitalisation, I would at least want to see revenue growth, not revenue going backwards. Furthermore, the small amount being raised does make me wonder if the IPO is more about existing shareholders unloading stock than actually raising capital. Contributed equity is listed on the balance sheet as only 16.6 million, which means at least some initial investors would still be making significant profits if they unload their shares well below the initial listing price.
While I may well live to regret it, this is one IPO I will not be taking part in.
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