IPO Update: Karat Packaging Finalizes $75 Million IPO Terms

Summary

• Karat Packaging has filed proposed terms for its $75 million IPO.
• The firm sells eco-friendly packaging products to the food and beverage industry.
• KRT has produced impressive financial results despite the pandemic and the IPO appears reasonably valued, so is worth a close look.
• Looking for more investing ideas like this one? Get them exclusively at IPO Edge. Learn More »

Photo by lithiumcloud/iStock via Getty Images

Quick Take

Karat Packaging (NASDAQ:KRT) has filed to raise $75 million from the sale of its common stock in an IPO, according to an amended registration statement.

The company provides eco-friendly packaging products for the food and beverage industry.

KRT has performed well across all major metrics and the IPO appears reasonably valued, so is worth consideration.

Company

Chino, California,-based Karat was founded in 2000 to produce a variety of single-use food packaging products that are environmentally friendly and ethically sourced.

The firm’s product categories include:

• Food packaging

• Tableware

• Cups and lids

• Cutlery

• Straws

Management is headed by co-founder, Chairman, and CEO Alan Yu. There's also Chief Financial Officer Ann Sabahat, CPA, who has more than 25 years experience in accounting and finance.

Customer Acquisition

KRT sells its products through distributors as well as directly to national and smaller restaurant chains.

The firm also sells via its online e-commerce platform, which is typically used by its smaller and medium-sized customers.

Selling expenses as a percentage of revenue have moved slightly higher as revenues have increased, as the figures below indicate:

Selling	Expenses vs. Revenue
Period	Percentage
2020	7.5%
2019	7.3%

Click to enlarge

Source: Company registration statement

The selling efficiency rate, defined as how many dollars of additional new revenue are generated by each dollar of selling spend, increased to 3.2x in the most recent period

Market and Competition

According to a 2018 market research report, the global "green packaging" market size was estimated to be approximately $152.2 billion in 2016.

The market is forecast to grow at a CAGR of 5.7% from 2016 to 2024.

Key elements driving this expected growth include a trend to downsize or reduce packaging materials, increasing usage of renewable materials and recycled content, and increased efficiencies in logistics.

The Asia Pacific region accounted for the highest growth in 2015 and is expected to continue in first position through 2024 due to the increasing prioritization of government policies.

Food and beverage products represented the largest sector market share by type, as the pie chart shows below:

Major competitive vendors that provide green packaging products include:

• Amcor (AMCR)

• Mondi (OTCPK:MONDF)

• DuPont (DD)

• Sealed Air (SEE)

• Tetra Lava

Management says it intends to increase its manufacturing and distribution capabilities via its Rockwall, Texas, plant and expand its geographic footprint and sales and marketing efforts focused on the Eastern U.S. region.

Financial Performance

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

• Growing topline revenue

• Increasing gross profit, higher gross margin

• Growing operating profit and net income

• A swing to positive cash flow from operations

Below are the firm’s major financial metrics:

Total Revenue
Period	Total Revenue	% Variance vs. Prior
2020	$ 295,518,000	31.4%
2019	$ 224,910,000
Gross Profit (Loss)
Period	Gross Profit (Loss)	% Variance vs. Prior
2020	$ 89,125,000	46.1%
2019	$ 61,019,000
Gross Margin
Period	Gross Margin
2020	30.16%
2019	27.13%
Operating Profit (Loss)
Period	Operating Profit (Loss)	Operating Margin
2020	$ 27,697,000	9.4%
2019	$ 5,836,000	2.6%
Net Income (Loss)
Period	Net Income (Loss)
2020	$ 17,517,000
2019	$ 1,724,000
Cash Flow From Operations
Period	Cash Flow From Operations
2020	$ 14,547,000
2019	$ (32,000)

Click to enlarge

As of Dec. 31, 2020, the company had $448,000 in cash and $141.2 million in total liabilities.

Free cash flow during the twelve months ended Sept. 30, 2020, was negative ($15 million).

IPO Details

KRT intends to sell 3.95 million shares of common stock at a proposed midpoint price of $19.00 per share for gross proceeds of approximately $75 million, not including the sale of customary underwriter options.

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

Assuming a successful IPO at the midpoint of the proposed price range, the company’s enterprise value at IPO (ex- underwriter options) would approximate $401 million.

Excluding effects of underwriter options and private placement shares or restricted stock, if any, the float to outstanding shares ratio will be approximately 20.66%.

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

We intend to use approximately $30 million of the net proceeds of this offering to discharge the following indebtedness:

Term debt with an original principal of $4,814,677, with an outstanding principal balance of approximately $2,322,000 as of December 31, 2020, with a fixed interest rate of 4.98% and a maturity date of March 2023;

Term debt with an original principal of $9,476,000, with an outstanding principal balance of approximately $7,450,000 as of December 31, 2020, with a fixed interest rate of 5.75% and a maturity date of July 2024; and

Payment of $20,000,000 on our existing line of credit with an interest rate of prime less 0.25%, subject to a minimum rate of 3.75%, with an outstanding balance of approximately $33,169,000 as of December 31, 2020.

We intend to use the balance of the net proceeds for other general corporate purposes, including possible facility expansion and acquisitions.

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

Listed underwriters of the IPO are Stifel, William Blair, Truist Securities, National Securities and D.A. Davidson & Co.

Commentary

KRT is seeking public investment capital to pay down debt and to provide for its expansion plans.

The company’s financials show strong growth across all major metrics.

Free cash flow for the calendar year 2020 was negative $15 million as the firm paid for significant equipment purchases.

Sales and Marketing expenses as a percentage of total revenue grew only slightly as revenues increased and its Sales and Marketing efficiency rate was a healthy 3.2x.

The market opportunity for green packaging products is large and expected to grow at a rate of 5.7% through 2024, so the firm has promising industry dynamics in its favor.

Stifel is the lead left underwriter and IPOs led by the firm over the last 12-month period have generated an average return of 120% since their IPO. This is a top-tier performance for all major underwriters during the period.

The primary risk to the company’s outlook is increased competition in the space driving down pricing.

As for valuation, compared to publicly held Amcor, the IPO appears reasonably valued, especially considering its higher growth rate, although Amcor is a much larger firm.

For investors seeking exposure to the "green packaging" industry, KRT looks to be a solid performer with bright prospects ahead of it, so the IPO is worth consideration.

Expected IPO Pricing Date: April 14, 2021.

Analyst’s 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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