Lynch Group courts investors ahead of initial public offering

Picture: Zoe Phillips

Prospective investors in flower company Lynch Group will need assurance that the company’s earnings are not vulnerable to China and Australia’s strained relations with the Asian superpower as the group starts promoting the business for its initial public offering.

Advised by JPMorgan, Jarden, Citi and Stanton Road Partners, Lynchhas started meetings with investors this week ahead of its float plans.

The business is a major seller of flowers into supermarkets such as Woolworths, Coles and IGA. Earlier in the week, Jarden analysts released research suggesting that the wholesaler could be worth between $572m and $729m including debt.

So far, prospective investors seem impressed by the company’s Australian business, which accounts for about two-thirds of earnings.

Another plus is that the Lynch chief executive, Hugh Toll, is highly regarded in the market.

The understanding is that Lynch hopes to grow earnings through its Chinese operations, which largely consists of floral farms with some flowers sold locally.

While most of the Lynch flowers are sourced from local growers for sales in Australia, about 20 per cent are imported from its Chinese farms.

However, fresh in their minds will be the impact of the tariffs slapped on Penfolds owner Treasury Wine Estate and the collapse in the daigou trade also hurting A2 milk.

The company is said to be pinning its earnings growth hopes on the Chinese market along with supermarkets in Australia growing their market share of flower sales.

Pricing the business only based on the company’s Australian earnings would likely achieve a strong result.

But given that Lynch is owned by private equity, in the form of Next Capital, expectations are that is unlikely to be the case.

Jarden’s valuation estimates of Lynch equate to between 10.9 and 13.9 times its forecasted annual earnings before interest, tax, depreciation and amortisation for the 2021 financial year.

This is on an enterprise value basis.

The analysts say that the peers of Lynch in the agricultural space trade at about 11.5 times while listed fruit and vegetable Costa Group trades at about 10.6 times.

Lynch expects to generate annual revenue of about $316m and net profit after tax and amortisation of $28.7m for the 2021 financial year, up 140 per cent from the previous corresponding period.

This follows the impact from the global pandemic and after China increased costs from the previous corresponding period.

The company describes itself as country’s largest floral wholesaler in Australia, providing 88 per cent of the supplies to supermarkets.