Picture this: your company grows and distributes hundreds of millions of perishable items each year. They are sent to thousands of retailers in Australia and China, have a shelf-life of 5-7 days, and many sales occur on a few special days.
Lynch wants to disrupt flower retailing in the Asia-Pacific. It believes Australia is following international floral trends, where more flowers are sold at supermarkets than in florist shops, and where demand for “valued-added” flowers (such as plants in pots) is rising.
The Sydney-based company has made a big bet on China, believing the boom in middle-class consumption there will boost flower demand. Lynch’s $206-million capital raising through its IPO was partly about acquiring the 80% of VDB Asia it did not own (VDB is a premium rose grower in China and has two farms there).
“It’s been a busy time for Lynch,” says CEO Hugh Toll. “In the space of a year, we transitioned from a privately owned family company into a listed company, did the IPO, and completed a major acquisition in China – all during a pandemic. I’m proud of our team’s achievements, but it’s just the start.”
Life as an ASX-listed company has had early challenges for Lynch. IPOs are lots of work and promoting one during a pandemic is tough. Toll recalls doing more than 100 meetings online with Australian and international investors during the IPO roadshow.
“Zoom was an incredibly efficient way to do those meetings,” says Toll. “The downside is you lose the personal connection that comes from meeting investors face-to-face, explaining the business, and showing the depth of our team to the market.”
Lynch initially sought $315 million of capital through its IPO, but later revised that to $206 million. “We had a group of cornerstone investors who strongly believed in Lynch’s growth strategy in Australia and China,” says Toll. “But other investors worried about the impact of the pandemic on flower demand - and China.”
Like many companies, Lynch grappled with uncertainty during COVID-19. Flower demand initially fell as people shopped less during lockdowns, and as weddings and funerals were cancelled. Demand recovered as people bought flowers for loved ones they hadn’t seen, on events such as Mother’s Day or Valentine’s Day.
The pandemic also affected Lynch’s supply and profit margins. As in other industries, goods became harder to source and distribute this year due to supply-chain bottlenecks. In May 2022, Lynch downgraded its FY22 earnings guidance, citing rising international freight costs and pandemic-inducted labour shortages.
“Managing a flower supply chain in Australia and China is complex at the best of times,” notes Toll. “The pandemic took that complexity up several notches. It was one thing after another, but we’ve kept growing the business and implementing our strategy.”
Geopolitical tensions added to the uncertainty. China contributes about a fifth of Lynch’s revenue.[i] As China implemented trade bans or increased tariffs on Australian wine, lobster, beef, and barley, the market feared other sectors could be hit.
“Lynch is a domestic producer in China rather than a big exporter to that country,” says Toll. “We continue to have a positive view on long-term Chinese flower demand. But short-term market sentiment towards China-focused producers was a headwind.”
In a volatile market, Lynch shares have fallen from their IPO offer price of $3.60 a share in April 2021 to $2.[ii] In its first-half result for FY22, Lynch slightly beat its revenue prospectus forecast. Underlying earnings[iii] were 6.2% behind the prospectus forecast, impacted by supply-chain disruptions and COVID-19.
Lynch has two main investor relations challenges. The first is market awareness and education. Australian investors aren’t familiar with listed floriculture companies or their business models. Few analysts research the flower industry and there is limited understanding of structural trends within the international floral sector.
It’s not well known, for example, that UK supermarkets have increased their share of floral sales there from 18% to 55% over 15 years. Or that China’s floral market is at an earlier stage compared to developed economies and has few large vertically integrated floral firms, even though flowers are an important part of Chinese culture.
“Lynch’s strategy is essentially about building greater scale,” said Toll. “Having the largest scale means we can supply more flowers and arrangements to supermarkets, at lower prices, and faster so that flowers stay fresher for longer. We’re also able to invest more in value-adding, through potted plants, arrangements, or other gift formats.”
The second investor relations challenge is share liquidity. Lynch secured a small group of cornerstone investors (fund managers) for its IPO. The upside was having institutional investors on its share register. The downside was lower retail ownership and less liquidity in Lynch’s turnover. Lynch’s top 20 shareholders own 95% of its stock.
Liquidity is a recurring challenge for many small-cap IPOs. Over time, these companies need to attract new investors to their share register through equity capital raisings, or as existing institutional shareholders exit or reduce their holding.
Toll says Lynch has implemented several investor-relations initiatives to aid market awareness and understanding. These include four major communications events (after its interim and full-year results, after Mother’s Day, and at its annual general meeting).
An annual investor day and site tours also feature. The completion of a new purpose-built production facility at Ingleburn in Sydney in the first quarter of FY23 will help Lynch showcase its operations to market analysts and fund managers.
Broking research is another priority. Lynch is covered by broking analysts at Citi, Jarden, and JP Morgan – the joint lead managers in its IPO. Lynch is starting to attract more broking coverage and hopes to secure other research in the coming years.
Toll says broking research provides valuable feedback on Lynch. “As a CEO, you can learn from analysts and fund managers who look independently at a business and its markets and have questions and ideas. It takes time to build long-term relationships with the investment community and communicate a consistent message.”
Toll was well prepared for his first role as a CEO of an ASX-listed company. He worked in investment banking and private equity for more than 20 years before joining Lynch in 2017 in business development. A year later, he became Chief Financial Officer and in 2019 was appointed CEO.
Toll’s brief was to prepare Lynch for an IPO. In 2015, Next Capital, a private equity firm that was behind the JB HI-Fi and InvoCare floats, acquired a majority interest in Lynch. Like all private-equity-backed ventures, an “exit” was in the cards.
Toll had previously been an investment director at Next Capital. Lynch’s chairman, Patrick Elliott, is a partner and co-founder of Next Capital. “Private-equity investment in Lynch meant the groundwork for an IPO had been laid, in terms of its governance and systems,” says Toll. “But like any IPO, it still took a lot of work to get it over the line.”
Toll’s main learning from the IPO was resourcing. “From a CEO’s perspective, investor relations and board matters, while very important, add new workloads. In Lynch’s case, we spent a lot of time ensuring we had sufficient management depth and bandwidth to do the IPO and keep growing the business in Australia and China.”
Another learning is to focus on the business rather than its market price. “If an IPO judges its success only on short-term price movements, you could quickly become disillusioned,” says Toll. “My belief is that if companies keep growing, doing what they say they will do, and implementing well, the market eventually recognises that.”
Toll expects more agribusinesses to list on ASX this decade. “Obviously it depends on the assets and how their owners want to raise capital. But as Australia’s agribusiness sector grows and companies need to raise larger funds, a listing makes sense. An ASX listing suits companies, like Lynch, that are targeting offshore markets.”
For its all challenges, the pandemic has provided some respite for Toll from international travel – and a bit more time to spend with his wife and two teenagers. “I really enjoy leading Lynch,” he says. “We’re a unique business on ASX in a long-term growth sector. That creates a lot of opportunity.”
To learn more about Lynch Group Holdings, visit www.lynchgroup.com.au
[i] Market size forecasts based on management views in Lynch’s 2021 IPO prospectus
[ii] Based on 1H FY22 (actual) sales of A$36 million. Australian sales were $A149 million in this period.
[iii] At 21 July 2022
[iv] Based on Earnings Before Interest Tax Depreciation and Amortisation (EBITDA)