Energy Mad IPO: An ethical investment

Energy Mad is a light bulb manufacturer.  Its currently carrying out an IPO and its offer ends next week.  There haven’t been many IPOs over the last 3 years so when one finally comes along, it stands out.

Their claimed competitive advantages can be summarised into two main areas:

  • Competitive technology:  Their energy efficient light bulbs have features that give electricity networks an incentive to subsidize the price of the bulbs because they allow them to defer millions of dollars of network investment.
  • Targeted marketing:   By targeting electricity networks and enlisting established retail chains to join the campaign, the company has had considerable success.

Their story about regulation driving demand is believable.  In the Western World, there is a will to regulate against the use of conventional incandescent lightbulbs because of their high energy usage.

Although the offer is being made on both sides of the Tasman there is no mention of a dual listing, and their public presentations look like they are all in NZ.  Yet three out of the four Directors are based in Australia and a significant proportion of their sales have been there.  Perhaps Australia may yet feature in the company’s future.

The amount required is $5m.  The small size of the offer means it could be difficult to get investor attention in Australia.

Breakeven sales looks something like $11.5m. They value the company at approximately $32m on current EBITDA of $1.4m which looks high unless high growth rates are achievable and sustained.  Depending on your assumptions one could argue a long term growth rate greater than 15% post-FY 2013 will be needed to justify the pricing.

This will be the first IPO since the FMA was established and the world is still in the midst of the GFC.  Not the greatest time to carry out an IPO but necessity may not give them much flexibility.  On the other hand, without any IPOs to distract investors, they will get plenty of attention.

Energy Mad own 20% of a Chinese manufacturing facility and they claim current order quantities utilize 10% of its capacity.   Their ownership means that they should get preferential access to manufacturing capacity.

Large orders are what makes it much more economical so regular pushes are necessary through Utilities and other partners.  EM say that they have done repeat pushes with good results.

Dividends won’t be paid prior to FY 2013

What we like:  Market demand looks believable.  It has an established sales model and its profitable.  It’s a company transitioning out of its start up phase into its growth phase.  There is a nice ethical element to this story.

What we don’t:  Much of the demand is being driven by government policy.  Public policy can be fickle.  Without subsidies, payback periods for this technology is still long.  The possibility of substitutional competition is a real threat:  Other manufacturers claim to make lightbulbs with similar characteristics.  LED lights are an emerging threat.  There is little promotional effort of the offer in Australia. They recently canned a direct to market channel initiative.  But why did they do it in the first place?  Were there insufficient sales through the Utility-Retail Chain partnership channel?  During the height of the GFC, their bank withdrew their working capital facility at short notice.  What did the bank see or not see about the business that we can’t?  Pricing looks high but this depends on what you assume for a growth rate and an acceptable rate of return.

Their combined investment statement and prospectus can be downloaded from here.

Offer closes:  Friday 23 September 2011.

Trading commences 3 October under the NZX code,  MAD.

Leave a Reply