Interactive Investor

This IPO promises an 8% yield

16th October 2014 15:13

Lee Wild from interactive investor

With global stockmarkets in freefall it might not seem like a great time for an IPO, a number of companies have already shelved plans to float in London, and others may decide to think again. Not entu (UK), the Manchester-based supplier of home improvement and energy efficiency products. Profits are growing fast and management wants to reward investors with a knockout dividend yield of 8%.

Entu is a new holding company of well-known regional brands like Zenith, Penicuik, Weatherseal, Staybrite Solar, Energy Hypermarket, Job Worth Doing and Europlas. Revenue grew by 4% to £95.5 million in the year ended 31 October 2013, although underlying cash profits dipped to £6.34 million. However, for the six months to April 2014, sales surged by almost a third to £57.9 million and profit doubled to £5.6 million.

Keep that up and for the year ending 31 October 2015, bosses "intend to pay a dividend that equates to a dividend yield of 8% based on the placing price."

The placing price is very likely to be 100p. It's not official, but the company is selling up to 32.8 million shares and wants to raise £32.8 million. You do the maths. If we assume a full-year dividend of 8p, even if the share price surges to 120p, the shares will trade on a prospective yield of 6.7%. Rocket to 150p, and it's still 5.3%.

It's understood that the company has no formal progressive dividend policy, but this mega-payout is, I'm told, not an IPO sweetener. Much, of course, will depend on how the business grows - that means a further recovery in consumer confidence and buoyant housing market - but management are keen for entu to be a high-yield stock.

No kidding? Major shareholders are halving their stakes as part of the placing which will value the company at £65.6 million. Brian Kennedy set up the company in 2008 with current chief executive Ian Blackhurst and finance boss Darren Cornwall. An 8% dividend will be a tasty income.

Kennedy is not involved in the day-to-day management of the business, but will still own 30% post-IPO worth at least £20 million. He already has a reputation as a shrewd businessman and owned double-glazing firm Everest for a time before selling it on. He's now the majority owner of the Sale Sharks rugby club and once tried to buy Rangers football club.

Ian and Belinda Blackhurst will each own 7.5% of entu post-float (£5 million each) and Cornwall will keep a 5% stake worth £3.3 million. If the shares take off, they'll be worth much more. We'll find out on 30 October.

Clearly, demand for shares and risk has much reduced in recent weeks. Whether this is just down to a seasonally difficult month - October is the most volatile month of the year, and shares tend to do well in the run-up to Christmas - or something more long-lasting, remains to be seen.

In terms of valuation, closest peer, double-glazing firm Safestyle has fallen sharply since September and now trades on 7.2 times 2013 cash profits and about 9 times forward earnings. It yields over 5%, too. Entu will be valued at 10.3 times 2013 cash profits, although with no forecasts yet and a big increase in half-year profit already, that multiple could fall substantially. This is an income play worth watching.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

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