The deal: Upson International Corporation [prospectus], the parent company of tech retailers, Octagon Computer Superstore, Micro Valley, and Gadget King, has applied with the SEC to conduct an IPO to raise P5.4 billion through the sale of 986 million common shares at a maximum price of P5.50/share. Pricing will be on June 27, with the IPO offer period running from July 1 through July 7. The IPO listing is tentatively scheduled for July 15.
Ticker symbol: The prospectus did not include a ticker symbol. While Upson International Corporation has not asked for my ticker symbol consultation, I am here to offer it, free of charge. My suggestion is “OCTGN”, the five-letter representation of its flagship brand, Octagon, which has the best name recognition among consumers and investors, and the brand that plays the largest part in the company’s expansion plans going forward (more on that below). I think it would be a huge mistake to name it after the initials of the corporate parent company (“UIC”), like Figaro Coffee Group [FCG 0.50 1.01%] and Haus Talk Inc [HTI 1.02]. Not only is “Upson International Corporation” a clumsy name with almost zero name recognition, the initialism created by its corporate name is even less representative of the company and what it’s known for. While OCTGN is the first tech retainer on the PSE, there isn’t an easy tech-related ticker symbol available that it could take, like “TECH”, as that’s already taken by Cirtek [TECH 2.92 2.99%] which doesn’t even have “tech” in its name. Sayang. I’m going to refer to the stock as OCTGN, optimistic that the owners will avoid the lazy pitfalls of corporate naming and follow the Converge [CNVRG 26.30 6.24%] example.
Primary/secondary split: 80% of the shares sold are primary, meaning that the money raised will go to growing OCTGN’s business in accordance with its use of proceeds plan. 10% of the offer shares are secondary, being sold by Lawrence O. Lee (LOL), one of OCTGN’s significant owners, and the remaining 10% of the shares are also secondary shares that form the over-allotment option/stabilization fund. Any money raised through the sale of secondary shares will go to LOL, the selling shareholder, and will not be available for use by OCTGN.
Use of proceeds: 86% of the proceeds from the sale of the primary shares will be put to store expansion, where OCTGN plans to build 250 new stores across the country over the next three years. As part of that goal, OCTGN said that it plans to build 50 new stores in the NCR and in “key cities” by the end of this year. OCTGN said that it also plans to spend some of the proceeds on improving its supply chain and logistics through the construction of distribution facilities and warehouses, and the purchase of additional trucks and vans to move product and make deliveries. The remaining 14% of the proceeds will go toward “general corporate purposes” like buying inventory.
The growth story: OCTGN made P85 million in profit in 2019 on P7.6 billion in sales, P207 million in profit in 2020 on P8.2 billion in sales, and P403 million in profit in 2021 on P8.6 billion in sales. That’s a 143% increase in net income, followed by a 94% increase in net income. That’s significant, especially considering its operating expenses for this period are essentially flat at P1.2 billion, but also somewhat misleading considering sales only increased 8% and 5% between those same time-frames.
Leads for more investigation: I haven’t had the chance to really spend some quality time with this prospectus yet, but here are a few things that I’ve flagged for myself for closer inspection. The first is that the debt/equity ratio of the company is rather high, at 3.63 (P3.27 billion in liabilities, to P0.89 billion in equity). While the IPO itself jacks the equity up significantly, such that the post-IPO debt-to-equity ratio is just 0.65 (P3.27 billion in liabilities, to P5.0 billion in equity), I still want to check to see what cause the D/E to reach 3.63 (which is pretty high) in the first place. The second avenue of exploration is that in November, the owners sold themselves 232 million shares at par value, which was then pegged at P1.00/share, and then in February, pushed a 5:1 stock split by adjusting the par value down to P0.20/share. This gave the owners 1.16 billion shares for just P232 million in cost, just a few months before trying to sell the same shares to investors for P5.50/share. This kind of move is nothing new MerryMart [MM 1.65 3.77%] had a similar pre-IPO transaction), but I always like to see what a company does in the months just before it goes public to get a feel the IPO’s context.
I’m always excited for investors to get new investing options.
This will be the PSE’s first tech retailer, and while that by itself doesn’t necessarily mean that OCTGN is a good buy, it does make it worthy of consideration for those that invest based on a thesis that has anything to do with middle-class growth, work-from-home growth, or a combination of the two.
The IPO market has been particularly brutal over the past few months, as Solar Philippines NEC [SPNEC 1.82 ?2.82%] is the only recent IPO still trading above its IPO offer price, so this shouldn’t be seen as an easy way to make money. IPOs are not an automatic, get-rich-quick hack.
Just take a look at the IPO Tracker for why I’d say that.
I’m not trying to be overly negative here, my goal is only to recognize the clear risks that come with buying shares in a new public company, and to help Barkadans be discerning consumers of potential IPO buying opportunities!