The valuation of beauty chain CJ Olive Young is being closely watched ahead of its pre-initial public offering (IPO), amid indications that the company’s earnings may be greatly affected by pending changes in accounting standards for leases.
Joint deal managers Credit Suisse and Shinhan Investment recently sent investment memorandum to potential buyers of CJ Olive Young, industry sources said on Tuesday (September 22). Owner CJ Group, the South Korean food and entertainment conglomerate, has adopted a limited competitive bidding approach for the pre-IPO to boost prospects of a deal being struck.
CJ Group expects the unit to record sales of approximately 2.07 trillion won ($1.77 billion) in 2020, up 5.4 per cent from last year, while its operating profit is forecast at 109 billion won, an increase of 24 percent on 2019. Market insiders had expected the firm to see fallout from the Covid-19 pandemic, but CJ Group expects a stronger financial performance thanks to booming online sales.
There is an expectation that CJ Olive Young’s earnings before interest, tax, depreciation and amortization (EBITDA) will be affected by the new K-IFRS16 standards, as the beauty chain leases more than 1000 stores.
Based on the previous accounting model for leases, CJ Olive Young’s EBITDA would be expected to amount to 166 billion won in 2020; but if the new standard is applied, the EBITDA is likely to jump to about 313 billion won, CJ Group said.
Industry sources said the standard that is applied will have an impact on the valuation for CJ Olive Young. CJ Group reportedly wants a multiple of approximately 10 times, which puts the likely value of a 100 per cent stake in a wide range of 1.66 trillion won to 3.13 trillion won as of end-2020, depending on the calculation method applied.
Potential buyers are expected to tread cautiously as they decide whether to participate in the pre-IPO, as a huge gap is expected between the company’s financial performance and profitability indicators.
CJ Group is selling a minority stake in CJ Olive Young, including a 17.97 percent shareholding held by Lee Sun-ho, the only son and heir apparent of group chairman Lee Jae-hyun, and a 10.0 percent stake owned by the chairman’s younger brother Lee Jae-hwan. (Reporting by Ar-rum Rho)