Baby Bunting, or BABY B DEF SET (ASX: BBN), made its long awaited debut on the Australian share market on Wednesday, generating early investors a very nice stag profit in the process.
The shares soared as high as $2.02, up 44% from the $1.40 offer price. They ended their first day trading at $1.83, and have risen another 1.6% to $1.86 this morning. That gives the company a market capitalisation of $234 million with TDM Asset Management, which retained a 30% stake in the business, sitting very pretty on its investment so far.
Who is Baby Bunting?
Baby Bunting is a name that is likely familiar to parents to new-born babies. With 33 stores across Australia, the company is Australia's largest specialty retailer for baby goods, offering products for children up to the age of three. That includes items such as nappies, prams, cots and nursery furniture, as well as food, babywear and a wide selection of toys.
Indeed, we are in the midst of a baby boom and this should drive growth for Baby Bunting for years to come. Although this chart also comes from the company's prospectus, it provides a suitable illustration for how demand growth could be driven for the retailer. This also reflects a similar growth trend to that experienced in the 10 years leading up to 2013.
Historically, Baby Bunting stores have been large in stature (ranging between 1,500 and 2,000 square metres) although the company appears to be veering away from this trend. It is now opening smaller stores (whilst being careful not to sacrifice customer service or product availability) with the aim to have over 70 stores open over the next five years.
They grow up so quick!
Of course, the adoption of a roll-out strategy is not without its risks but if the company's historical results are anything to go by, it could generate solid returns for shareholders in the future.
According to its prospectus, the group has grown sales at 24%, compounded annually, since the 2009 financial year, with a further 21.3% growth forecast for the 2016 financial year (FY16). More recently, earnings before interest and tax (EBIT) have grown at 129.4%, compounded annually since 2013, with expectations of 32% pro forma growth this financial year.
Notably, the company is striving to continue improving its margins (which should see earnings growth continue to outpace sales growth) by focusing on its product mix, improving sourcing options and by benefiting from increases in scale.
As is the case with most companies recording such strong growth, investors are being asked to pay up for the shares too. Net profit after tax (NPAT) for FY16 is expected to be $9.1 million (on a pro-forma basis), so, at its current price, the shares trade on a forward price-earnings multiple of 25.7x.
The company also expects to pay a 5.4 cent per share dividend in FY16, putting it on a yield of 2.9%.
The next Bellamy's?
Indeed, it's also likely that investors are willing to pay more for the shares based on the performance of Bellamy's Australia Ltd (ASX: BAL) which listed its shares on the ASX in August last year.
Indeed, Bellamy's (which provides food for babies) has blown away the market's expectations with its growth, which goes a long way in explaining why its shares are up more than 460% since the company listed its shares 14 months ago. The strength of the brand name and the way the company operates is also appealing.
Although Baby Bunting and Bellamy's both operate in the baby market, investors shouldn't simply assume Baby Bunting will go on to mimic Bellamy's success as a listed entity. As highlighted above, Baby Bunting has demonstrated its ability to generate strong sales and earnings growth but should be compared to other retailers more so than it is compared to Bellamy's.
A tough segment
Speaking of retail, Baby Bunting's success is by no means guaranteed – other baby goods specialists, including Babyco and Mothercare, have collapsed in recent years.
Some would argue that Baby Bunting's dominance was the cause of their demise. Indeed, according to its prospectus, it has 33 stores in Australia compared to 21 for My Baby Warehouse and 13 for Babies"R"Us Superstore, so that could well be the case. In saying that however, these rivals could still be forces to be reckoned with. Investors should keep this in mind before paying too much for Baby Bunting's shares.
Should you buy?
I personally believe that Bellamy's enormous success over the last 14 months has driven some of the interest in yesterday's IPO, and this is something that all investors need to keep in mind to ensure they're not speculating over what could happen.
In saying that however, Baby Bunting has certainly demonstrated its ability to grow sales and earnings and could be worthy of closer inspection.
