Ozon Holdings PLC (OZON) intends to raise $750 million from the sale of ADSs representing underlying common stock in an IPO, according to an amended registration statement.

Nicosia, Cyprus-based Ozon was founded to develop an online marketplace connecting buyers and sellers of merchandise in Russia.

The firm also sells products directly to buyers. Essentially, the company is an 'Amazon' (NASDAQ:AMZN) for Russia as far as consumer product sales go.

Management is headed by Chief Executive Officer Alexander Shulgin, who has been with the firm since 2017 and was previously CEO of the Russian division of Yandex.

Below is a brief overview video of Ozon:

Source: CNBC International TV

Ozon's marketplace counted 18,100 active sellers as of September 30, 2020, and management says the company is 'most recognized e-commerce brand in Russia, with a top-of-mind awareness of 32%, compared to 18% for our nearest competitor for the month of June 2020.'

The company has developed a nationwide logistics infrastructure consisting of nine fulfillment centers, 43 sorting hubs, 7,500 parcel lockers, 4,600 pickup points, and 2,700 couriers.

Ozon provides 'same-day delivery service in Moscow and parts of the greater Moscow region and Saint Petersburg and next-day delivery service for 40% of the Russian population as of September 30, 2020.'

The firm has received at least $416 million from investors, including Sistema, Baring Vostok Private Equity, Index Ventures, and Princeville Global.

Ozon has a mobile-first approach and markets to buyers and sellers primarily through online channels.

Management contends the business has a network effect; as more buyers are attracted to the ease of online purchase and delivery, it attracts more sellers into its marketplace.

As more sellers come onto the platform, item selection increases, improving the value proposition for buyers.

Sales and Marketing expenses as a percentage of total revenue have been variable as revenues have increased.

The Sales and Marketing efficiency rate, defined as how many dollars of additional new revenue are generated by each dollar of Sales and Marketing spend, was 4.2x in the most recent reporting period.

According to a 2020 market research report by ecommerceDB, the market of e-commerce activity in Russia was an estimated $20 billion in 2019. This figure represented an increase of 13% over the previous year.

The report indicates an estimated CAGR of 9% from 2019 to 2023.

However, the COVID-19 pandemic will likely result in higher growth figures, and the company management has admitted that its growth results have in some part been due to the effects of the pandemic on consumer behavior, pushing them to purchase more goods than otherwise would have occurred.

Major competitive or other industry participants include:

  • Wildberries
  • M.video
  • Citilink
  • DNS Shop

Ozon’s recent financial results can be summarized as follows:

  • Sharp growth in topline revenue, at an accelerating rate of growth
  • Strong increase in gross profit and gross margin
  • Reduced operating losses
  • Lowered cash used in operations

Below are relevant financial results derived from the firm’s registration statement:

ozonpl

Source: Company registration statement

As of September 30, 2020, Ozon had $66.6 million in cash and $710.2 million in total liabilities.

Free cash flow during the twelve months ended September 30, 2020, was negative ($471.9 million).

Ozon intends to sell 30 million ADSs representing ordinary shares at a proposed midpoint price of $25.00 per ADS for gross proceeds of approximately $300 million, not including the sale of customary underwriter options.

Additionally, investors have entered into private placement agreements to purchase an aggregate of $135 million of ADSs at the IPO price.

Assuming a successful IPO at the midpoint of the proposed price range, the company’s enterprise value at IPO would approximate $4.5 billion.

Excluding effects of underwriter options and private placement shares or restricted stock, if any, the float to outstanding shares ratio will be approximately 16.94%.

Per the firm’s most recent regulatory filing, the firm plans to use the net proceeds as follows:

The principal purposes of this offering are to create a public market for the ADSs and obtain additional capital. We intend to use the net proceeds from this offering and the Concurrent Private Placements for general corporate purposes.

Management’s presentation of the company roadshow is not available.

Listed underwriters of the IPO are Morgan Stanley, Goldman Sachs, Citigroup, UBS Investment Bank, Sber CIB, VTB Capital and RenCap.

Commentary

Ozon is seeking U.S. public market capital to fund its continuing high operating losses and cash burn as it expands its operations within the vast Russian market.

The firm’s financials indicate it is growing topline revenue and gross profit at a high rate, while producing losses at an equally high rate.

Sales and Marketing expenses as a percentage of total revenue have been uneven; its Sales and Marketing efficiency ratio has improved markedly in the most recent reporting period, likely as consumers have switched to using its service to deliver goods during the Covid-19 pandemic.

The market opportunity for ecommerce services like Ozon’s in Russia is significant and the Covid-19 pandemic has materially pulled forward the demand curve, increasing adoption at a faster rate than would have occurred otherwise.

Morgan Stanley is the lead left underwriter and IPOs led by the firm over the last 12-month period have generated an average return of 54.1% since their IPO. This is a top-tier performance for all major underwriters during the period.

As a comparable-based valuation, Ozon is seeking lower revenue multiples than Amazon, yet Ozon does not have Amazon’s earnings, EBITDA or other highly profitable services such as AWS.

Additionally, the firm’s activity is denominated in Russian Rubles which continue to trend downward in value against the U.S. dollar, so investors will be exposed to currency losses over time.

Ozon is domiciled in Cyprus, whose status as a member of the EU is in suspension.

While OZON’s topline revenue and gross profit performance has been enviable, it is seeking a high valuation at IPO and I’m skeptical of its ongoing growth prospects net of a depreciating Ruble against the dollar.

My opinion on the IPO therefore NEUTRAL.

tstNEUTRAL

Expected IPO Pricing Date: November 23, 2020.

Glossary Of Terms

(I have no position in any stocks mentioned as of the article date, no plans to initiate any positions within the next 48 hours, and no business relationship with any company whose stock is mentioned in this article. IPO stocks can be very volatile in the days immediately after an IPO. Information provided is for educational purposes only, may be in error, incomplete or out of date, and does not constitute financial, legal, or investment advice.)

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