Initial Public Offering | Mailpac Group Ltd. (MGL)
In our opinion Mailpac’s prospectus is one of the most peculiar prospectuses that we have seen in recent years. The peculiarity, however, is not one which we view favourably. This is because, we assume that, in the offer’s and lead broker’s attempt to innovate the way and type of data is presented in a prospectus, they failed to present to prospective investors with very key information needed to make an educated investment decision. Regrettably, instead of opting to overtly relay some key information to facilitate investment analysis, they opted to provide more nuanced and subjective information, some of which cannot be verified.
Regrettably, it is our opinion that the chosen methodology of relaying information has somewhat failed to fulfil the modus operandi of a prospectus. Subsequent the reviewing the document, our analytical team was left with more questions than answers. Consequently, CUFMC’s research department could not arrive at a conclusion in relation to Mailpack’s Initial Public Offering (IPO) share offering. A key example of where Mailpac’s prospectus attempted to differentiate itself from other prospectuses of companies who previously went public in recent years is that Mailpac’s prospectus was devoid of audited financial information. Yes, in the past there have been companies which had no or little financial data to present while seeking to go public, however, those companies were generally start-up companies. Mailpac, however, is not a start-up. While the entity going public is technically newly incorporated, the parts which make up the company were in existence before, and therefore cannot reasonably be extended the same type of consideration as a true start-up company would. Furthermore, the start-up argument is further invalidated by the fact that the company provided Performa financials in the prospectus. However, the company only took steps to provide a single solitary year of proforma finaicnals for financial year 2018 and preform financial for the first nine (9) months of operation in financial year 2019. Why could such steps be taken for the other previous years? As a consequence of having only one (1) full year of financial data, we were unable to undertake fulsome financial analysis which includes trend analysis.
The second issue we took issue with was the use of vague phrases whose meaning we could not ascertain. In describing Mailpac’s market position, the prospectus often used the phrase, “differentiated leadership position”. Regrettably this phrase was never explained and we have no idea what it means. The theory of differentiated leadership was developed by famed therapist, Edwin Friedman. When Friedman developed the theory, he proposed in his book, A Failure of Nerve: Leadership in the Age of the Quick Fix (2007), that, “leadership is an emotional process of regulating one’s own anxiety.” And referred to this process as, “self-differentiation. Or knowing where one ends and the other begins.” We fail to see the connection between Friedman’s theory and Mailpac’s effort to “maintain its differentiated leadership position in the growing ecommerce fulfilment industry”. Now if it is that the company is claiming to be the industry leader, such a claim must be anecdotal, or as they call it in advertising spaces, puffery. This is because the company has not presented any data to substantiate such a claim. They have not asserted that they clear the most packages through customs relative to their competition, they have not asserted that they have the highest revenue or net income in the industry. In fact, the only claim the company has made was about the robustness of its technological framework. Maybe that is the basis, but regrettably, we do not know what they meant.
Additionally, it was asserted that the most dominant driver of growth for the company is likely to be linked to growth in E-commerce penetration in Jamaica. We acknowledge the merits in this hypothesis and, frankly, agree with it. However, we are less inclined to agree with Mailpac’s management team’s assertion that the online shopping penetration amongst adults in Jamaica lies between 4% and 6%. Our lack of inclination to not agree stems from the fact that the prospectus provided no contextual information of how this estimate was arrived at. Was the estimation scientific or was it anecdotal, or was it a combination of the two? Yet again, we are left asking questions instead of feeling fulfilled with the information provided.
Furthermore, the issuer and broker in our opinion seems to have underestimated the competitive landscape that the business in operating in, brushing it aside with an argument of technological superiority. However, it is our opinion that technological superiority does not necessarily equate to grasping and maintain of superior market share. This is especially true if the cost of such superiority is one which is paid for by cost conscious consumers who have tremendous power to dictate pricing and service offering by exercising their ability to switch from one provider to another. In fact, Mailpac itself acknowledged the power of highly competition industry by having to change its business model. The company switched from a paid subscription service to an open service, and by reducing its rate (which anecdotally are still higher than those charged by its competitors). It is our opinion, despite the lack of information provided in the prospectus that this is a highly competitive industry, and as such it may curtail growth of any one player in the industry.
The uncertainties presented in the prospectus, regrettably, takes away from what appears to have been an attractively priced IPO in a growing industry. The offer is priced at a Price to Earnings Ratio of approximately 9 times earnings based on the Mailpac’s projected 2019 earnings. This compares favourably to the entirety of the Jamaica Stock Exchange’s Junior Market which has an outlier adjusted price to earnings multiple of approximately 26.5 times earnings. It also compares favourably to the services sector of the Jamaica Stock Exchange’s Junior Market which has an outlier adjusted multiple of approximately 32 times earnings. Nonetheless, due to the previously outlined inadequacies in data presented, we are unable to make any recommendation in relation to this offer.