MailPac Group IPO Analysis – Caribbean Value Investor

MailPac Group IPO Summary:

MailPac Group Limited has released released its prospectus inviting investors to apply for and purchase 500,000,000 ordinary shares in their newly formed consolidated company MailPac Group Limited (MGL). The shares are being offered to various pools at two different price points. Shares reserved for Employees amounting to 50,000,000 are being offered at $0.90 per share whereas all other shares are on offer for J$1.00 per share. The shares are being sold on behalf of the company and one of its majority shareholders, Norbrook Equity. The combined offer is broken down as follows:

150,000,000 Key Partner Reserve Pool Shares at J$1.00 per share,

150,000,000 Financiers Reserve Pool Shares at J$1.00 per share

50,000,000 Employee Reserve Pool Shares at J$0.90 per share and

150,000,000 Ordinary Shares for the general public at J$1.00 per share.

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The invitation opens on Friday, November 22 at 9:00 am and is expected to close on December 06, 2019. Historically, we have seen where offers seeking to raise less than J$200,000,000 from the general public have been oversubscribed in short order. It is our expectation that the same will follow true for the MailPac Group Limited IPO.

The invitation will raise $495,000,000 if successful and will be the largest amount raised from the Junior market by a single company. Of this amount J$ 250,000,000 will be due to MailPac Group Limited and $245,000,000 will be due to the selling shareholder, Norbrook Equity. The MailPac Group is being arranged by NCB Capital Markets Limited.

 

MailPac Group IPO: Company Description:

Extracted in large part from the Prospectus

Mailpac Services Limited was formed in 1998 as the first international agent to Metropolitan International Services (Aeropost), a technology focused freight forwarding platform based in Miami, Florida. The idea behind Mailpac Services Limited was to provide an address in the United States where online shoppers in Jamaica could send their purchases to make the process of receiving their items more seamless. The company did that successfully for many years, introducing various value-added enhancements in the process. These include package tracking, home and

office delivery, insurance coverage and weight-based pricing as opposed to dimensional-based pricing.

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In 2010, Norbrook Caribbean Investment Company (the Predecessor to Norbrook Equity Partners Limited) an investment holding company founded by Khary Robinson, approached the owners of Mailpac Services Limited and proposed an acquisition. At this time Amazon, which started just a year

before Mailpac Services Limited, had already grown to US$25B in revenue. The expectation was that this level of explosive growth in online shopping would inevitably take hold in Jamaica and it did. NCIC acquired the business with the goal of enhancing the capacity of the platform for what was to come.

MailPac Group Limited (MGL) is a recently incorporated company that acquired the businesses, including all the assets and liabilities utilised for operating purposes, of Mailpac Services Limited and Mailpac Local Limited. MGLto this point is a wholly owned subsidiary of Norbrook Equity Partners. The company was incorporated on September 19, 2019 and started trading on September 30, 2019 also acquiring the debt owed by Mailpac Services Limited to Norbrook Equity Partners. The purpose of the acquisitions was to amalgamate both ecommerce platforms into one efficient operating business. The acquisitions were executed in a manner that ensured the core operations of both companies remained as is but would benefit from the economies of scale and synergies in being one operating company. This would also bolster well for shareholders.

MailPac Group IPO – Financials

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The Management Discussion and Analysis section of the MailPac Group IPO prospectus gives a very detailed review of the industry and the competitive landscape in which MailPac operates. One of the major concerns for Prospective Investors was the low barrier to entry. This being evidenced by the fact that there are now 60 providers that can clear goods at the Norman Manley International Airport. In 2010, the number was six (6). In addressing the issue of competition MailPac Group said it considers how KFC came to sure up its position as the dominant player in the out-of-home dining transformation that took place in Jamaica a few decades ago.

MailPac reasons that the existence of so many small providers will spread awareness of the benefits of shopping online. Furthermore, it is the expectation of the Group that these newly enlightened customers will tend toward a more established and more technologically advanced provider over time. MailPac Reports that growth in the number of packages handled has seen marked improvement since 2013 moving from a growth rate of approximately 5.72% between 2013 and 2016 to about 12.20% and 25.70% for 2017 and 2018 respectively. Year over year growth has been 28.8% for the first half of 2019, a new record. The proliferation of credit cards and VISA Debit cards has also benefited the company and is expected to continue to provide new clientèle. WU now allows persons to buy things abroad and pay at the outlets. I imagine this will also support growth in MailPac’s business.

MailPac has sought to differentiate itself by providing more pickup locations, incorporating more sophisticated tracking technology, a tax-free address, comprehensive insurance, a prepaid Mastercard, free returns, and a local e-commerce solution. The company also has an exclusive arrangement with both Amazon and Ebay. As far as moats go in this type of business, MailPac has secured a most valuable one.

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MailPac Group : Balance Sheet

MailPac Group Limited was incorporated in September of 2019. As mentioned earlier, at this point, the company took over the assets and liabilities of MailPac Local. The assets of the new company totaled $338,534,000 and is projected to reach J$ 418,680,000 by the end of 2019. The great majority of the company’s assets were in intangible assets which totaled J$ 244,579,000 at the end of September 2019.

Note 9 in explains the constituents of the company’s intangible assets, which include trademarks, material contracts with vendors, customers, tradenames, goodwill and phone numbers. MailPac Group had 15 million in cash and 41 million as receivables and prepayments. The company had 262,698,000 as a note payable to its parent company, Norbrook Equity Partners. We note here that this liability will be largely eliminated post IPO. MailPac will keep 12,698,000 on its books as a note payable to the parent company.

MailPac Group : Income Statement

MailPac Group Limited recorded 38,108,000 for the quarter ended September 30 2019 with a gross profit of $176,773,000. The group projects that as online shopping gained prominence in Jamaica they will be able to eventually realise a gross profit north of $1,000,000,000. Due to the nature of the business, the major expense will be that of salaries for the staff. The company projects that Administrative, Selling, and General Expenses will rise from its current level of about J$350.56 million to as much as J$430 million over the next 5 years.

MailPac Group IPO : Caribbean Value Investor Opinion

The MailPac Group IPO will be the largest ever on the Junior Stock Market of the Jamaica Stock Exchange. Despite MailPac Group Limited being a newly formed entity, MailPac Services Limited has been in operation for some 10 years and has built up a loyal customer base and an easily recognisable brand. The capital raise from the MailPac Group Limited IPO will allow the company to sure up its position in the market place and even potentially acquire some of the smaller fish in the pond. MailPac has a management team with a wealth of knowledge in the field and a young, active and visionary Chairman who is willing to adopt new ideas for the growth of the company.

We at Caribbbean Value Investor Corporation think that the MailPac Group IPO is attractively price based on its forward P.E 6.58 times 2020 earnings. Additionally, the IPO is priced at a psychologically acceptable price with a structure that sees the company’s debt obligations being lessened. We also consider that as more Jamaican’s get access to options that allow them to shop online they will in fact seek out the best value for their money. Having revised the MailPac service, we feel that that customers will migrate from some of the lesser known shipping companies to one that is more established.

Finally we are satisfied with the response offered by the Management on the issue of competition. We rate the MailPac Group IPO as a BUY.