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Knowlton Development Corporation (TSX:KDC) Files to List on the TSX Index

Posted on July 16, 2021 by Mathieu Litalien

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September 19, 2021 - In what seems like a very long-time in the IPO world, KDC finally released pricing details late last week. The comapny now expects to raise between US$742.9-$857M  through the issuance of 57,142,857 common shares at an initial public offering price between $US13-15.00 per share. 

The company will be dual-listed and trade on both the NYSE and TSX Index. 

Cornell Capital LLC, Caisse de dépôt et placement du Québec (CDPQ) and Upper Invest Ltd./Clare Thorpe control 93,136,890 common shares, 38,851,140 common shares, and 15,681,860 common shares respectively. Collectively they control 78% of of pre-IPO outstanding shares. Following the closing of the IPO, their stake will be reduced to 68% (43%, 18%, 7%) or 66% (42%, 17%, 7%) if over-allotment option is exercised in full.

Post offering, KDC will have 214,661,117 common shares (or 223,232,545 common shares if overallotment is exercised in full).

Assuming the IPO is fully exercised, this gives it a valuation of between 2.9-3.35B. This gives it a price-to-sales ration just above one (1.4-1.6). This is quite reasonable. A more accurate view would be to use enterprise value. We know it has a high debt load ($2.7B) as of end of July 31, 2021 and that proceeds from the offering will be used to reduce that debt load.

The company estimates that it will have $1.048B in LT debt post-closeing and $96.2M in cash for an EV of ~$4.1B assuming it prices at the mid-range. This gives EV to revenue and EV to EBITDA ratios of 1.95 and 17.1 respectively. Fairly reasonable, but nothing that screams bargain here. 

There aren't too many direct competitors as it operates in a very fragmented industry. However, when you compare it to the industry averages which include P/S ratios below 1, EV to revenue of 1.4 and EV to EBITDA of 4.5, Knowlton is looking to price above the industry average - at least in Canada. 

In the US its a different story, since industry averages are 3.4, 3.7 and 18.69 and if we use this as a comparison, Knowlton is pricing below averages. Since it is going to be listing on the US exchange, I believe the US averages are a more direct comparable. 

Overall, it seems that if it prices at the top end of its range, then it will be fairly valued. 

July 16, 2021 - Earlier this week, Knowlton Development Corporation filed to list on both the TSX Index and NYSE. The company is privately held by Cornell Capital LLC and Caisse de dépôt et placement du Québec. The company intends to dual-list under the symbol "KDC". No details on pricing have been released, so lets take a look at what the company does. 

KDC is global provider of solutions to many of the world’s leading brands in the beauty, personal care and home care categories. From ideation, formulation and design to packaging and manufacturing, KDC has helped to develop 9,000+ products that are sold by brand partners in more than 70 countries worldwide. It counts 18 of the 20 largest CPG companies as customers. 

KDC has evolved its capital structure over time but in its current form, has been operating since 2018. Over that period of time has closed on 16 acquisitions. In 2020, it acquired 7 companies (Alkos, Swallowfield, Benchmark, HCT, Paristy, CLA and Zobele) which led to a pretty significant spike in revenue year over year. Thanks to its rapid growth of expansion, the company has taken on a considerable amount of debt. It currently has $177M outstanding on its Revolving Credit Facility and $1.531B outstanding on term loans. 

The listing comes at a time where the company needs to raise cash to further expand and fund growth. Funds from the issue will be used to paid down the entirety of its Revolving Facility + a portion of its term loans. 

The company has grown revenue and adjusted EBITDA from $516.2M and $61.5M in Fiscal 2016 to $2,143M and $238.5M in Fiscal 2021. That is equal to a compound annual growth rate of 26.67 and 25.34% respectively. Of note the company is not yet profitable and has posted sizable losses in recent years. 

While the company has a diverse business model and it is diversifying its customer base, the top 2 customers still account for approximately 20% of company revenue. Should one of these customers part ways with the company, it could have a significant impact. 

In terms of competition, one could argue that any company in the industry is a competitor - even its partners. There is a real risk that current partners are currently insourcing some of these activities, or could move to insource as a more cost-effective way of getting products form the idea stage to the market. 

On the flip side, KDC's ability to provide end-to-end solutions provides it with a competitive advantage and enables it many cross selling opportunities. 

KDC is a large global company and one of the biggest to file to list on the TSX Index this year. While it is too early to tell how this one will turn out, it is unique in that it is one of the few stocks in the consumer defensive sector to list on the TSX over the past couple of years. IPOs have been dominated by stocks in the tech, healthcare and material sectors. 

It is too early to take a definitive position on the company, but KDC does have an impressive growth profile and is a global player. It is likely to generate some interest as it is provides investors with something different in the IPO space. We'll report back once pricing is announced. 

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Mathieu Litalien

About the author

Mathieu is an individual investor and has been investing part-time for the better part of the past 20 years. He is primarily interested in fundamental analysis, focusing on the long-term and his portfolio is composed primarily of dividend-paying equities. Mathieu has a moderate risk profile and also looks for growth and value. His passion for finance and the markets have led him to his MBA and writing for Seeking Alpha and Stocktrades. Mathieu also focuses primarily on stock research and content production for Stocktrades.ca Premium and the Stocktrades blog.