Shaver Shop Group Ltd to list on ASX today. Is it a Buy?

Source; Shaver Shop

Shaver Shop Group Ltd (ASX: SSG) is set to list on the ASX today, with shares issued in the IPO at $1.05 each.

Shaver Shop has around 100 retail stores selling products related to hair removal, from wet and dry shavers, electric toothbrushes, hair styling products and even pet grooming clippers. The company says it has 28% of the market in personal care appliances and just 3% of the wet shave category – which includes razors and blades.

Shaver Shop products and categories #2

Source: Shaver Shop Prospectus

Shaver Shop products and categories

Source: Shaver Shop Prospectus

Share trading will kick off at 11 am, and there are high expectations that shareholders will see a stag profit – with the share price set to soar. According to media reports, the offering was twice covered at the bottom end of the range (in other words, institutions and other bidders applied for twice as many shares that were available).

93 million shares are being offered, with 125 million shares on issue after completion, giving the company an indicative market cap of $131 million. At that price, shares are trading on a 2016 financial year (FY16) P/E of 17.5x and 14.4x FY17. The company is forecasting a dividend yield of 3.5% fully franked based on forecast pro forma net profit in 2017 of $9.1 million.

Shaver Shop is expecting to report $7.5 million of net profit in FY16 from sales of $106 million.

Warning signs

At face value, the IPO looks like a great offering. A strong retail brand with plenty of opportunities to grow and offered to investors at a reasonable price.

However, it is worth noting that of the $98 million being raised will be used to grow the business. Almost all of it will be used to pay a pre-IPO dividend to existing shareholders ($18.2m), pay management ($2.3m), repay debt ($15.3m) and to pay out existing shareholders ($55m), as well as costs of the offer and director and management exit bonuses ($7.3m).

After the float, the chairman and CEO will hold just 2.7% of the share on issue, meaning that management interests are not totally aligned with shareholders. They might dispute that, but I’d would have preferred that they held onto a significant portion of their shares.

Foolish takeaway

Cynical investors might also consider that Shaver Shop is capitalising on the success of another recent retail IPO – Baby Bunting Group Ltd (ASX: BBN) which listed at $1.40 and shares are currently trading at $2.40.

Despite the cheapish price, I won’t be rushing into Shaver Shop shares.

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Motley Fool writer/analyst Mike King doesn't own shares in any companies mentioned. You can follow Mike on Twitter @TMFKinga

The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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