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Forsyth Barr

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New Zealand Professional Investment Services Firm, Forsyth Barr

Equity Bottom-Up

<h2>Kathmandu Group (KMD)</h2>
Acquisition of Rip Curl
KMD has announced the acquisition of Rip Curl for NZ$368m (A$350m), representing 7.3x EV/EBITDA (FY19 pro forma), to be financed through a mixture of debt and equity raise.
At first glance the transaction price appears reasonable relative to a broader set of Australian peers and global sport leisure comps (Figure 1). KMD expects the acquisition to be +10% EPS accretive in FY20, largely reflecting the low cost of debt financing. Rip Curl offers a possible platform from which to leverage Kathmandu brand growth into international markets, given Rip Curl’s wholesale experience and established presence in the North American and European markets. However, we note surf/beach is a more mature category with greater exposure to fashion trends, and Rip Curl has exhibited no earnings growth over the three-year history provided (pro forma EBITDA FY17 A$49m, FY18 A$41m, FY19 A$49m).
The transaction remains subject to shareholder approval with a Special Meeting of shareholders to be held Friday 18 October.
Figure&nbsp;1. Compco table
<table class="table table-striped">
<tbody>
<tr>
<td>Company (metrics re-weighted to reflect KMD's balance date - July)</td>
<td>Code</td>
<td>Price</td>
<td>Mkt Cap (m)</td>
<td>PE 12m Fwd</td>
<td>EV/EBITDA 12Fwd</td>
<td>EV/EBIT 12mTrailing</td>
<td>Cash D/Yld 12mFwd</td>
</tr>
<tr>
<td>Kathmandu Group</td>
<td>KMD NZ</td>
<td>NZ$3.05</td>
<td>NZ$689</td>
<td>11.9x</td>
<td>7.1x</td>
<td>8.3x</td>
<td>5.6%</td>
</tr>
<tr>
<td>Super Retail</td>
<td>SUL AT</td>
<td>AUD$9.92</td>
<td>AUD$1958</td>
<td>12.7x</td>
<td>6.7x</td>
<td>9.8x</td>
<td>5.1%</td>
</tr>
<tr>
<td>Myer</td>
<td>MYR AT</td>
<td>AUD$0.61</td>
<td>AUD$501</td>
<td>13.6x</td>
<td>3.3x</td>
<td>8.6x</td>
<td>0.0%</td>
</tr>
<tr>
<td>Premier Investments&nbsp;</td>
<td>PMV AT</td>
<td>AUD$19.36</td>
<td>AUD$3067</td>
<td>21.4x</td>
<td>14.1x</td>
<td>17.1x</td>
<td>3.9%</td>
</tr>
<tr>
<td>City Chic Collective</td>
<td>CCX AT</td>
<td>AUD$2.49</td>
<td>AUD$479</td>
<td>26.5x</td>
<td>15.1x</td>
<td>18.0x</td>
<td>2.9%</td>
</tr>
<tr>
<td>Harvey Norman</td>
<td>HVN AT</td>
<td>AUD$4.53</td>
<td>AUD$5469</td>
<td>15.7x</td>
<td>9.8x</td>
<td>11.3x</td>
<td>5.7%</td>
</tr>
<tr>
<td>JB HI-FI</td>
<td>JBH AT</td>
<td>AUD$34</td>
<td>AUD$3906</td>
<td>15.5x</td>
<td>9.7x</td>
<td>11.2x</td>
<td>4.2%</td>
</tr>
<tr>
<td>Lovisa</td>
<td>LOV AT</td>
<td>AUD$12.81</td>
<td>AUD$1355</td>
<td>32.7x</td>
<td>18.3x</td>
<td>22.2x</td>
<td>2.7%</td>
</tr>
<tr>
<td>Accent Group</td>
<td>AX1 AT</td>
<td>AUD$1.705</td>
<td>AUD$923</td>
<td>15.9x</td>
<td>8.1x</td>
<td>11.0x</td>
<td>5.0%</td>
</tr>
<tr>
<td>Columbia</td>
<td>COLM US</td>
<td>USD$96.89</td>
<td>USD$6546</td>
<td>20.3x</td>
<td>13.1x</td>
<td>16.1x</td>
<td>1.0%</td>
</tr>
<tr>
<td>Dick's Sporting Goods</td>
<td>DKS US</td>
<td>USD$40.81</td>
<td>USD$3688</td>
<td>12.0x</td>
<td>10.4x</td>
<td>16.7x</td>
<td>2.6%</td>
</tr>
<tr>
<td>VF Corp</td>
<td>VFC US</td>
<td>USD$88.99</td>
<td>USD$35434</td>
<td>26.4x</td>
<td>19.6x</td>
<td>23.4x</td>
<td>2.0%</td>
</tr>
<tr>
<td></td>
<td></td>
<td colspan="2">Compo Average:</td>
<td>19.3x</td>
<td>11.7x</td>
<td>15.0x</td>
<td>3.2%</td>
</tr>
<tr>
<td>EV=Current Market Cap + Actual Net Debt</td>
<td></td>
<td colspan="2">KMD Relative:</td>
<td>-38%</td>
<td>-39%</td>
<td>-45%</td>
<td>+75%</td>
</tr>
</tbody>
</table>
Source: Forsyth Barr analysis, Bloomberg Consensus
Billabong, a key competitor, was acquired in January 2018 for A$380m at a similar multiple of 7.4x trailing EV/EBITDA.
Rip Curl
Rip Curl is an Australian based global action sports brand with exposure to beach/surf category. It operates a multi-channel model across the wholesale, retail, and online channels with a global brand presence. The wholesale channel represents ~41% of Rip Curl’s sales and is a key area of expertise KMD may look to leverage given its international expansion plans.
Financing
<ul>
<li>The transaction is to be financed via a 1 for 4 pro-rata accelerated entitlement offer to raise NZ$145m (A$138m) at an application price of NZ$2.55 (A$2.37);</li>
<li>A placement of ~NZ$32m (A$31m) new KMD shares to the founders and CEO of Rip Curl; and</li>
<li>NZ$231m (A$220m) from new senior secured debt facilities.</li>
</ul>
Post the transaction, pro forma net debt/EBITDA (FY19) is expected to be 1.5x. KMD expects to reduce debt to within the range of 0.9x to 1.1x by FY21.
Conference call
KMD will host a conference call today at&nbsp;1:00pm NZ time&nbsp;(10:00am AEST). Dial in details for New Zealand&nbsp;0800 452 782&nbsp;(Australia 1800 123 296), conference ID&nbsp;8835029.&nbsp;
Guy Hooper&nbsp;
Analyst, Equities&nbsp;
<table class="table table-striped">
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T:&nbsp;
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<td>
+64 4 495 5255
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TF:&nbsp;
</td>
<td>
0800 367 227
</td>
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<td>
F:&nbsp;
</td>
<td>
+64 4 495 8193
</td>
</tr>
<tr>
<td>
P:&nbsp;
</td>
<td>
PO Box: 5266, Wellington 6145
</td>
</tr>
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W:&nbsp;
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<td>
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<tr>
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</td>
</tr>
</tbody>
</table>

Kathmandu Group (KMD)
Acquisition of Rip Curl
KMD has announced the acquisition of Rip Curl for NZ$368m (A$350m), representing 7.3x EV/EBITDA (FY19 pro forma), to be financed through a mixture of debt and equity raise.
At first glance the transaction price appears reasonable relative to a broader set of Australian peers and global sport leisure comps (Figure 1). KMD expects the acquisition to be +10% EPS accretive in FY20, largely reflecting the low cost of debt financing. Rip Curl offers a possible platform from which to leverage Kathmandu brand growth into international markets, given Rip Curl’s wholesale experience and established presence in the North American and European markets. However, we note surf/beach is a more mature category with greater exposure to fashion trends, and Rip Curl has exhibited no earnings growth over the three-year history provided (pro forma EBITDA FY17 A$49m, FY18 A$41m, FY19 A$49m).
The transaction remains subject to shareholder approval with a Special Meeting of shareholders to be held Friday 18 October.
Figure&nbsp;1. Compco table



Company (metrics re-weighted to reflect KMD's balance date - July)
Code
Price
Mkt Cap (m)
PE 12m Fwd
EV/EBITDA 12Fwd
EV/EBIT 12mTrailing
Cash D/Yld 12mFwd


Kathmandu Group
KMD NZ
NZ$3.05
NZ$689
11.9x
7.1x
8.3x
5.6%


Super Retail
SUL AT
AUD$9.92
AUD$1958
12.7x
6.7x
9.8x
5.1%


Myer
MYR AT
AUD$0.61
AUD$501
13.6x
3.3x
8.6x
0.0%


Premier Investments&nbsp;
PMV AT
AUD$19.36
AUD$3067
21.4x
14.1x
17.1x
3.9%


City Chic Collective
CCX AT
AUD$2.49
AUD$479
26.5x
15.1x
18.0x
2.9%


Harvey Norman
HVN AT
AUD$4.53
AUD$5469
15.7x
9.8x
11.3x
5.7%


JB HI-FI
JBH AT
AUD$34
AUD$3906
15.5x
9.7x
11.2x
4.2%


Lovisa
LOV AT
AUD$12.81
AUD$1355
32.7x
18.3x
22.2x
2.7%


Accent Group
AX1 AT
AUD$1.705
AUD$923
15.9x
8.1x
11.0x
5.0%


Columbia
COLM US
USD$96.89
USD$6546
20.3x
13.1x
16.1x
1.0%


Dick's Sporting Goods
DKS US
USD$40.81
USD$3688
12.0x
10.4x
16.7x
2.6%


VF Corp
VFC US
USD$88.99
USD$35434
26.4x
19.6x
23.4x
2.0%




Compo Average:
19.3x
11.7x
15.0x
3.2%


EV=Current Market Cap + Actual Net Debt

KMD Relative:
-38%
-39%
-45%
+75%



Source: Forsyth Barr analysis, Bloomberg Consensus
Billabong, a key competitor, was acquired in January 2018 for A$380m at a similar multiple of 7.4x trailing EV/EBITDA.
Rip Curl
Rip Curl is an Australian based global action sports brand with exposure to beach/surf category. It operates a multi-channel model across the wholesale, retail, and online channels with a global brand presence. The wholesale channel represents ~41% of Rip Curl’s sales and is a key area of expertise KMD may look to leverage given its international expansion plans.
Financing

The transaction is to be financed via a 1 for 4 pro-rata accelerated entitlement offer to raise NZ$145m (A$138m) at an application price of NZ$2.55 (A$2.37);
A placement of ~NZ$32m (A$31m) new KMD shares to the founders and CEO of Rip Curl; and
NZ$231m (A$220m) from new senior secured debt facilities.

Post the transaction, pro forma net debt/EBITDA (FY19) is expected to be 1.5x. KMD expects to reduce debt to within the range of 0.9x to 1.1x by FY21.
Conference call
KMD will host a conference call today at&nbsp;1:00pm NZ time&nbsp;(10:00am AEST). Dial in details for New Zealand&nbsp;0800 452 782&nbsp;(Australia 1800 123 296), conference ID&nbsp;8835029.&nbsp;
Guy Hooper&nbsp;
Analyst, Equities&nbsp;




T:&nbsp;


+64 4 495 5255




TF:&nbsp;


0800 367 227




F:&nbsp;


+64 4 495 8193




P:&nbsp;


PO Box: 5266, Wellington 6145




&nbsp;


&nbsp;




W:&nbsp;


www.forsythbarr.co.nz



Twitter:

@forsythbarr





Kathmandu Group (KMD): Acquisition of Rip Curl

Kathmandu Holdings

Kathmandu Group (KMD): Acquisition of Rip Curl