Quick Take

Hydrofarm Holdings Group (HYFM) has filed to raise $100 million in an IPO of its common stock, according to an S-1 registration statement.

The firm manufactures and distributes a range of hydroponic equipment and supplies.

HYFM is producing strong growth, slight profitability and operates in a growing industry.

I’ll provide an update when we learn more about the IPO.

Company & Technology

Petaluma, California-based Hydrofarm was founded to design, manufacture, and distribute controlled environment agriculture products, also known as vertical farming, primarily in the United States and Canada.

Management is headed by Chairman and CEO Bill Toler, who has been with the firm since 2019 and was previously CEO of Hostess Brands (TWNK) and has more than 35 years’ experience in the supply chain management and CPG business.

Below is a brief overview video of a high-tech vertical farming operation:

Source: Bloomberg Quicktake

The company’s primary offerings include:

  • Lighting

  • Equipment

  • Grow Media

  • Nutrients

  • Supplies

The graphic below shows examples of the above categories:

Hydrofarm has received at least $182 million from investors.

Customer Acquisition

The company markets its products primarily through its eCommerce marketplace.

Hydrofarm sells more than 80% of its products to specialty hydroponic retailers, with the remaining sales through a smattering of gardening equipment and supply locations such as garden centers, hardware stores, commercial greenhouse builders and commercial resellers.

Selling, G&A expenses as a percentage of total revenue have been dropping as revenues have increased, as the figures below indicate:

Selling, G&A

Expenses vs. Revenue

Period

Percentage

Nine Mos. Ended Sept. 30, 2020

14.6%

2019

18.6%

2018

19.9%

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Source: Company registration statement

The Selling, G&A efficiency rate, defined as how many dollars of additional new revenue are generated by each dollar of Selling, G&A spend, quadrupled to 2.0x in the most recent reporting period, as shown in the table below:

Selling, G&A

Efficiency Rate

Period

Multiple

Nine Mos. Ended Sept. 30, 2020

2.0

2019

0.5

Source: Company registration statement

Market & Competition

According to a 2018 market research report by Grand View Research, the global market for vertical farming was an estimated $2.5 billion in 2018 and is expected to reach $9.7 billion by 2025.

This represents a forecast very strong CAGR of 21.3% from 2019 to 2025.

The main drivers for this expected growth are a growing adoption by consumers of fruits and vegetables that are produced in an environmentally friendly manner as well as the strong growth of population in large urban centers.

Also, indoor farming can produce crops throughout the year, protecting crops from extreme weather. Below is a chart showing the historical and projected future growth rate of various aspects of the vertical farming market in Canada:

Major competitive or other industry participants include:

  • Scotts Miracle-Gro (NYSE:SMG)

  • National wholesale distributors

  • Small regional competitors

Financial Performance

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

  • Growing topline revenue, at an accelerating rate

  • Increasing gross profit and gross margin

  • A swing to operating profit and net income

  • Uneven cash used in operations

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

Total Revenue

Period

Total Revenue

% Variance vs. Prior

Nine Mos. Ended Sept. 30, 2020

$ 254,763,000

40.5%

2019

$ 235,111,000

11.0%

2018

$ 211,813,000

Gross Profit (Loss)

Period

Gross Profit (Loss)

% Variance vs. Prior

Nine Mos. Ended Sept. 30, 2020

$ 47,624,000

120.7%

2019

$ 27,086,000

12.5%

2018

$ 24,070,000

Gross Margin

Period

Gross Margin

Nine Mos. Ended Sept. 30, 2020

18.69%

2019

11.52%

2018

11.36%

Operating Profit (Loss)

Period

Operating Profit (Loss)

Operating Margin

Nine Mos. Ended Sept. 30, 2020

$ 10,264,000

4.0%

2019

$ (26,733,000)

-11.4%

2018

$ (25,328,000)

-12.0%

Net Income (Loss)

Period

Net Income (Loss)

Nine Mos. Ended Sept. 30, 2020

$ 135,000

2019

$ (40,083,000)

2018

$ (32,892,000)

Cash Flow From Operations

Period

Cash Flow From Operations

Nine Mos. Ended Sept. 30, 2020

$ (7,777,000)

2019

$ (13,302,000)

2018

$ 4,437,000

(Glossary Of Terms)

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Source: Company registration statement

As of September 30, 2020, Hydrofarm had $32.9 million in cash and $181.3 million in total liabilities.

Free cash flow during the twelve months ended September 30, 2020, was negative ($33.5 million).

IPO Details

Hydrofarm intends to raise $100 million in gross proceeds from an IPO of its common stock, although the final amount may differ.

No existing shareholders have indicated an interest to purchase shares at the IPO price.

Management says it will use the net proceeds from the IPO as follows:

The principal purposes of this offering are to repay existing indebtedness, for acquisitions, for working capital and other general corporate purposes, which may include the hiring of additional personnel and capital expenditures, to establish a public market for our common stock and to facilitate our future access to the public capital markets.

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

Listed bookrunners of the IPO are JPMorgan (NYSE:JPM), Stifel, Deutsche Bank Securities, Truist Securities, and William Blair.

Commentary

Hydrofarm is seeking public capital market funding to pay down its debt and fund its growth plans.

The firm’s financials show impressive topline revenue and gross profit growth, at an accelerating rate of growth and a turn to slightly positive earnings, likely part of a ‘window dressing’ approach to the IPO.

Selling, G&A expenses as a percentage of total revenue have been dropping; its Selling, G&A efficiency rate has quadrupled to 2.0x.

The market opportunity for selling vertical/hydroponic farming products in North America is expected to expand at a very substantial rate over the coming years, so presents the company with a positive industry backdrop for its growth trajectory.

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HYFM certainly has momentum, is headed by a seasoned CEO and enjoys a strong industry growth tailwind, so I’m looking forward to additional information about the IPO.

I’ll provide a final opinion when we receive that info.

Expected IPO Pricing Date: To be announced.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.



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