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Sunday, 19 July 2020

Singapore Paincare Holdings

Singapore Paincare Holdings ("SPH" or the "Company") is offering 24.246m placement shares at 22 cents each. The offer will close on 21 July at 12pm and there is no public tranche. Based on the IPO price, the market cap is $35.56m.

 The medical group focuses on treatment of patients suffering from chronic pain.   

Financial Performance

Looking at the unaudited proforma, the revenue of SPH was around $9m for FY2019 with a profit of $2.5m. 1H 2020 has a revenue of $5.1m and profit of $1m. I would assume that the full year 2020 revenue and profits to be higher than $9m and $2.5m respectively.

Based on the IPO price of 22 cents and historical EPS of 1.24 cents, it is listing at a PER of 17.74x. 

Given that the firm is impacted by Covid 19 in the last quarter (i.e. from April to June), I would expect revenue and EPS to be affected in the last quarter as patients defer non-essential treatments.  I am not privy to the financials and if I assume revenue is just sufficient to cover costs in the last quarter, then EPS will come in at 1.24 + 1.24/2 = 1.86 cents.  Based on the IPO price of 22 cents, it translates into a forward PER of 11.8x


Looking at the valuations implied by the peers, I would say that the IPO valuation of Singapore Paincare is not excessive as they are in the high teens. Having said that, I wouldn't say it is exactly a "value or growth play" either as the reasons for why the peers are trading at such high valuations were primarily because they didn't perform to expectation post IPO. This is a segment of the healthcare sector which has always over-promised and under-delivered. 

What I like about the Company
  • Good intent - SPH aims to provide accessible paincare in Singapore and provide alternative non-surgical" treatment solutions for chronic pain patients and bridging the "gap" between open surgery (higher risk, longer recovery) and conservative physical therapies (less immediate effect)
  • Essential service and ageing population - Healthcare is always considered as essential and with an ageing population, the demand for non-invasive and affordable pain relief will increase in the coming years. (After my post, the IR firm reached out to state that there is already a growing awareness by the public on pain care management and this will help provide a strong tailwind for SPH. The IR also mentioned that SPH enjoyed high patient satisfaction and word of mouth referrals)
  • Dividend paying for next 3 years - The Company intents to pay no less than 70% of its NPAT as dividends for FY 2020, FY 2021 and FY 2022
Some of my concerns
  • No real distinct branding - Paincare Center is a pretty straightforward description of what the clinic does and there is no distinct branding behind the firm. In addition, only two of the centers have "Paincare Center" while the rest of the clinics look and feel more like more generic GP clinics that "feeds patients" to the paincare centers
  • Competitive market and consumer behaviours - Singapore is a highly competitive market and when you have an acute pain condition, you would usually turn to your family GP first, who will then refer you to a specialist. If you have a back pain, you usually find an orthopaedic doctor directly. You wouldn't go to a paincare center to diagnose that you need an orthopaedic. Hence, to become a one-stop "pain center" may require some mindset change by patients who prefer a more holistic review of their conditions unless you are able to get all the GPs to send referrals along your way (with some referral fees of course)   
  • History is stacked against them - This is a sector where many "up and coming" doctors tried to work together as a group to get themselves listed and unfortunately, in my view, they had under-delivered on their promises to be profitable and expand. There was previously an orthopedic group which tried to get itself listed but was eventually "poison-penned" away.I would say that history is stacked against them as a longer term investment, i.e. it will be challenging for the firm to expand locally and regionally  
  • Bernard Lee has quite a few "risk factors" highlighted - While it is not unusual to have risk factors associated with doctors, Dr Lee had a temporary suspension for 3 months, given demerit points as well as kana spot checked by IRAS and assessed to be liable for additional tax for "tax avoidance". These taxes will be indemnified by him. 
  • Covid-19 will likely impact the firm aversely - I would classify the treatments as non time critical in nature. It is still important but not time sensitive. As such, patients may have to defer non-essential treatments if there is a resurgence of community cases under Phase 2. The current travel restrictions and any further tightening of measurements will affect the business

Since there is no public tranche, the chilli ratings don't really matter. I have shared with you what I think about the Company and probably, would have given it a one chilli rating at best. 

In the short run, a small float and a well executed share placement arrangement may help with the post IPO market. In the longer term, history is stacked against the firm unless it proves otherwise.

Sunday, 21 June 2020

Southern Alliance Mining Ltd.

Southern Alliance Mining Ltd ("SAM" or the "Company") is placing out 76m placement shares comprising 56m new shares and 20m vendor shares at $0.25 each for the upcoming IPO. The IPO will close on 24 June 2020 at 12pm. The market cap is $122.25 million.

There is no public offering, hence i will not spend too much time to cover it.

Business Overview

The Company is  based in Pahang Malaysia and principally involved in the exploration, mining and processing of iron ore. They have been operating the Chaah Mine in Johor since 2008 and have been granted the right to carry out exploration and mining operations at 3 other assets.

Mining Assets

No idea why the corporate office is in Pahang when all the sites are in Johor. They should relocate the corporate office?!

Financial Highlight

As you can see from the table above, SAM only became profitable in FY 2019, where revenue was 189.1m MYR and profit was 60.4m. Profit margin was 32%. 
The financial year ends on 31 July each year.

For 1Q 2020, the revenue continued to show strong growth. Do note that the Company suspended operations from 18 March 2020 to 22 April 2020 due to Covid-19 and no revenue was recorded for this period. Based on the trend, this year should be a better year than last year (I hope).    

Proposed dividends

The increasing dividend payout from FY 2020 to FY 2022 sends a good signal and probably is well aligned with the owners as they still own 82% of the Company.

Iron Ore Price Chart (sourced from Financial Times - Iron Ore 62% Fe chart)

The price of Iron Ore is on a nice uptrend and bodes well for SAM.

What I like about the Company
  • Long track record - SAM has been in the mining operations since 2008 with long track record and the founders are experienced
  • Tensions between Australia and China is probably going to benefit this Company as they may have to turn to alternative sources
  • Exploration assets going to provide new growth if the assets are proven
  • High iron ore price is going to benefit this company as they sell mostly at spot prices. They don't have long term contracts. 
  • Dividend paying - Company promised to pay dividends (if they are profitable) over the next 3 years
Some of my concerns
  • Environmental concerns - Not sure if the Company is adopting the best ESG mining practices 
  • Cyclical business and currently dependent on single Chaah Mine- mining stocks can be highly unpredictable as revenue and mining is highly dependent on supply and demand. SAM sells crushed iron ore as raw materials to pipe coating companies in the offshore oil and gas industry, which is facing significant industry headwinds. The mining lease for Chaah Mine will expire on 22 March 20204 but the state authority has extended for another 25 years
  • Owners selling out at IPO and SAM is not the registered holder of the mining leases for all its assets - I believed they are not the holder as the rights were granted to Bumiputras - which basically means favoring certain races in Malaysia. According to the prospectus, there is a risk that the 2011 Mining Agreement may be revoked
  • Access to Chaah Mine is dependent on an arrangement with Sime Darby Plantation
  • Liquidity of stocks will drop post IPO - The shares are tightly held and if you use Fortress Mineral as an example, the liquidity will dry up post listing. 

SAM is listed at 6.5x FY 2019 PER using enlarged share capital and assuming service agreements are in place. The closest listed peer on Catalist would be Fortress Minerals, which is currently trading at 10.7x PE. Fortress Mineral listed in March 2019 at 20c and it is still trading at 20c with minimal trading volume

My Chilli Ratings

Since there is no public tranche, my chilli rating is meaningless. SAM is the first post Covid listing and the valuation is probably realistic - i.e. it is listing at a better valuation than its closest peer Fortress Minerals. I am personally not into mining stocks, so wouldn't have given it more than 1 chilli anyway. I understand that the vendors have placed the shares to their close friends and family, so whether you can "flip it or not" will depend greatly on their generosity on listing day.

Happy Iron Oring

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