Kreate announced today, 2020-01-25, its intention to go public.
Let’s start a thread to dissect the company!
Kreate Group is one of Finland’s leading infrastructure builders. The company offers solutions for bridges, roads and railways, environmental and foundation construction, circular economy, and geotechnical needs. A specialist in demanding projects, Kreate focuses on comprehensive quality and cost-effectiveness. The group’s turnover in 2019 was approximately 220 million euros, and the company employs over 400 people.
At a quick glance, revenue has been growing. Both operating margin %, EBITA %, and operating profit % are relatively consistent, meaning no wild fluctuations, and at an acceptable level for a construction company. Invested capital and equity have yielded good returns of 15%…20% / 20%…25%. Indebtedness is under control.
The target for 2024 is revenue of 300 MEUR, meaning continued growth, EBITA slightly up from current levels, >5%.
There is so little information about the offering itself here that it is difficult to say anything about its attractiveness to the subscriber.
Old shares are being sold, 10 MEUR is being raised, anchor investors have committed to subscribe if the final market value remains at max 73 MEUR.
The planned IPO is expected to consist of a share sale, in which certain Kreate shareholders sell their shares, and a share issue of approximately EUR 10 million (after fees and expenses related to the IPO). The funds raised by the share issue are intended to be used to strengthen Kreate’s capital structure, which will create better conditions for Kreate to implement its growth strategy. The Finnish family company Harjavalta Oy and Tirinom Oy (Timo and Ritva Pekkarinen’s investment company) have committed to becoming anchor investors (“Anchor Investors”) in the planned IPO. The Anchor Investors have each separately committed to subscribe for shares at the final subscription price in a possible IPO under certain conditions and provided that the valuation of Kreate’s entire share capital at the final subscription price (after funds from the offering) is no more than EUR 73 million. The Anchor Investors have committed to purchase Kreate shares in amounts that will result in the following relative shares of all Kreate’s issued shares after the possible IPO: Harjavalta Oy 15.5 percent and Tirinom Oy 10.5 percent.
Based on the numbers, things look pretty good to me, with strong return on equity and steady organic growth in recent years. It remains to be seen if they can execute good acquisitions, and of course, the IPO price if they go public is important.
Otherwise, urbanization supports the need for infrastructure construction, and the repair business provides good continuity and visibility to the business. The service offering is very broad overall. Environmental issues and the circular economy are also highlighted well, which fits today’s climate and may even help the company achieve some cost savings.
With the company focusing specifically on infrastructure projects requiring specialized expertise, I could imagine this creating a certain moat against competitors, as those with the expertise and a strong track record will win projects in the long run.
Perhaps the risks could be various accidents in projects or unexpected costs and delays. All in all, at this point, I think the overall picture looks good, and now I’m still interested in the potential IPO price. We’ll wait and see
Quite a catchy title!
Kreate mentioned in their daily news that 61% of invoicing comes from the public sector, and some of the private sector invoicing might actually be public sector contracts.
Looking at Kreate’s project examples, it becomes quite clear…
Kreate’s clientele consists mostly of public sector clients. Between 1.1.2019 and 30.9.2020, 31 percent of Kreate’s sales came from state-owned entities, 30 percent from municipal clients, and the remaining 39 percent from private sector clients.
The company’s website only has a pretty shoddy half-year report from last year. By comparing and digging through history, I got the following fundamental analysis. More detailed analysis and figures are still needed once they become available.
Year 2020, assuming identical H2 vs H1:
Revenue €216M / growth % -2.9%
EBIT €8.8M / EBIT % +4.1%
Net profit €4.7M
The COVID year would therefore show a slight decrease in revenue and profitability.
However, this is -€11M behind Opan’s Q1-Q3 posted revenue, so maybe this is a bear scenario
According to their own forecast, they aim for €300M revenue and >=5.0% EBITA by 2024. I adjusted and calculated with 5.0% EBIT:
Revenue 2021: €244.0M 2022: €272.0M 2023: €300.0M (+13.0%/+11.5%/+10.3%)
Revenue growth is in line with the historical median, and a slight improvement in productivity is assumed.
With productivity and indebtedness being OK, this is a quite interesting potential case specifically due to growth. EPS growth >30%, EPS CAGRs are also good figures, good revenue growth in the past and in the forecast, and excellent historical net profit growth considering the COVID dip.
Let’s wait for more detailed specs and especially the price.
I’ve been following Kreaten’s operations and they seem really good. They’ve been under budget and ahead of schedule on projects, so I’m definitely on board if the price is right.
So that there’s no need to do those H1/H2 comparisons like that, they state in the announcement that the 2020 revenue would be, according to preliminary data, €235m, and EBITA approx. €10.5m (4.5%). I also understood that the revenue would be exactly €300m in 2024, not 2023. In any case, if it is €300m in 2024, it would correspond to an average annual growth of approx. 6.3%. This would also correspond quite well to the 2019->2020 growth of 221m->235m (6.33%).
I’ve also heard from people in the industry that it’s a good company, and judging by the numbers, there’s potential. The stated targets (€300m and >5% EBITA) are also good in my opinion, and I wouldn’t see any excessive optimism here. Hopefully, the pricing won’t ruin this.
Alright, thanks, this indeed went over my head. If the 2000 revenue is in that state and 300M€ has been given as the revenue target only for 2024, it would seem there’s even room to raise the targets.
Yeah, definitely not. Another one of those offerings where a 10,000 euro investment gets you a thousand euros worth of shares. It’s clear there will be a many times oversubscription.
So, only about 10% of the entire offering size will be available to the public. That sounds really brazen. This means only crumbs will be left if you don’t subscribe on the institutional side. By the way, those who subscribe on the institutional side will definitely hype this on social media and blogs to get quick-profit seekers to subscribe. IPOs are a casino nowadays, and it will continue until people are left with 10x more shares than they actually wanted for the first time. It feels wild to hear stories about people going in with large loan leverage without really researching these.
I find the small size of the public offering understandable, as the entire transaction is quite small.
Of the 3.8 million shares in the institutional offering, I understand that 2.3 million have been pre-sold to anchor investors Harjavalta Oy and Tirinom Oy. This leaves only 1.5 million shares to be distributed to other institutions. Compared to this, the (at least) 0.4 million shares in the public offering seems like a reasonable allocation to me. Of course, when scarcity is allocated, disappointments easily arise.
So far, this IPO seems interesting to me and the valuation reasonable. I need to study it more closely when more material becomes available on Monday.
