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Thursday, 31 July 2008

1000 shareholders

"The SGX also wants to scrap a 40-year-old rule that requires a newly listed
firm to have at least 1,000 shareholders. It proposes that the limit be cut to
500 investors. " - Straits Times 31 July 2008

SGX is proposing a new listing rule whereby IPO aspirants only need to ensure they have 500 shareholders at the point of listing instead of the current 1,000 requirement. During the bull run, this requirement seems to be a 'non-issue' but during current stale market sentiments, this rule seemed to be a very 'heavy burden' for IPO managers, underwriters and companies applying for listing. How do they get 1,000 people to subscribe for the shares when the market sentiment is poor (like now) ?!

Rationale behind the 1,000 shareholders.

Let's try to understand the rationale for this magical 1,000 shareholders. I had a discussion with an experienced IPO manager and understands that this 1,000 shareholders requirement in only applicable at the point of listing because no one can ensure how many shareholders there are post-listing as so many shares changed hands after a company is listed. In my opinion, the 1,000 shareholders listing requirement is to ensure that the shares are properly distributed so that it is more difficult for any one to corner the stock or control the prices post-listing. If you remember the mid-continental IPO saga, the share price experienced a sharp ramp up post-listing as 90% of its shares were placed with 5 shareholders. Even the then-DPM Lee has to answer queries with regards to Mid Continental saga in the parliament. As such, the motive behind the 1,000 shareholders is a good one, however, this listing criteria may prove to be a tough one during the bad times.

What do underwriters do to meet this 1,000 shareholders criteria?

As this is a very sensitive topic, i will not mention the names of the underwriters here. Let us first understand the IPO process for this part of the story. Before any listing, the underwriter and IPO managers will source for 'strong hands' to place out the shares to. Then they will place out the remaining shares to the clients who are interested to apply for the shares. After which they will then launch the public tranche of the IPO to ensure they meet the minimum 1,000 shareholders criteria. If they can meet this 1,000 criteria during the private placement tranche, they will be even happier.

There are a few ways in which the underwriters try to meet this criteria:

1. IPO club. Some firms will have IPO clubs to place out the shares to clients. Members of the IPO club have to 'eat' the shares in good times and bad and have to take the shares no matter if the issue is good or bad for a 6 months or 12 months period. During this time, any IPO that is underwritten by the firm will be placed out to IPO club members.

2. Large brokerage firm. Some IPO managers prefer to work with large brokering houses because of the huge clientele. It is easier for a large brokerage firm to ensure the 1,000 shareholders criteria is met.

3. Sub placement. Sometimes small brokerage firm may not have the capacity to meet this criteria, so they will 'sub out' the placement tranche to a bigger firm.

4. Special incentive fees. Dont be surprised if you hear of people being approached to apply for 1 lot of the IPO public tranche. They will give you a 'reward' to cover your expenses for the trouble to apply and sell the shares and to cover any potential losses.

5. Public tranche. The IPO tranche is another way to ensure they meet the 1,000 shareholders criteria. And to ensure they meet this "1000 shareholders" rule, an investor cannot take the private placement shares and apply for the public tranche shares as well so that there will not be 'multiple application' or double counting.

Let's see if the newly proposed minimum 500 shareholders rule will be push through. While it is easier to push through the amendments during bad times, dont be surprised if retail investors start to bang the table again and question about 'fairness' of the IPO allocation when they find it so difficult to get the IPO shares during a hot market and wants the "thousand" rule to be "reinstated". :P

I have started to update my personal trading blog again. Subscribe for the email if you are keen to know how I trade, invest and manage my personal money but do take note that these are my personal trades and are usually 'one or two days' later than the actual trades. Do not mimic the trades as losses are common in trading but hopefully, it may help you in one way or another in your path towards financial freedom.

Sunday, 20 July 2008

Kencana Agri Limited

Kencana Agri Limited ("Kencana") is a crude palm oil producer in Indonesia. Its integrated plantation operations comprise plantations, palm oil mills, bulking facilities and logistic services and renewable biomass power plant. Its revenue for FY07 was US$69.3m and its net profit was US$39.2 million.

There seemed to be much growth potential ahead as it has a huge land bank and that 50% of its palm plantation are still not matured (< 3 years) yet. The shares will be offered at $0.305 per shre and the total no. of shares post IPO will be 998m. The market cap will be US$223.3 million.

It is "amazing" that CIMB being one of the placement agent for 49.75m shares, downgraded the sector and several palm oil stocks like Wilmar, Indoagri and Golden Agri when Kencana's IPO was launched. I am wondering how CIMB placees will feel when they receive the Kencana shares!! "Why do you place out the shares to me when you downgrade the sector ah and the palm oil stocks ah?!"...

Assuming the EPS grow by 25% for FY2008 (which i think is still possible), the net profit for FY2008 will be US$49 million. EPS will be US$49m/998m = US 4.9 cents or Singapore 6.6 cents. At the IPO price of 30.5 cents, the IPO is priced at a forward PE of 4.6x.

Based on the information from Shareinvestor and as of 20 July 2008, Golden Agri is priced at 4.1x historical, IndoAgri 17x, Wilmar 29x, First Resource 19x. (Sorry... I am too lazy to look for the forward PE figures).

Valuation wise, i think Kencana is priced attractively relative to its peers and with potential for growth in the next few years given its relative younger plantation and underutilized land. However, with all the bearish sentiments affecting palm oil stocks, it will take a big effort to sustain the price above its IPO for the short term. The actual IPO price of 30.5 cents was way below its original indicative pricing between 35 to 40 cents when DBS first launched its book building exercise in June. However, over the longer term, it may prove to be an attractive acquisition target for the other bigger plantation firms if it continues to trade at such cheap valuation.

For short term investors, i will avoid this IPO but may consider it if it falls to ridiculously low levels. My gut feel is that Wilmar (being one of its major customer), is likely to take a stake in the company via placement tranche. However, i am not sure if its competitors like IndoAgri, Golden Agri, First Resources will be invited to the party. It will certainly make this IPO more interesting if the rivals are allowed to take a stake in it.

Tuesday, 1 July 2008

Heng Long International Ltd

Heng Long International Ltd is offering 68m New shares at S$0.34 per share with 3m for the public and 65m via placement. Heng Long started in 1950s and is one of the world's 5 top-tier tanneries. (I never knew that until today. hahaha. A crocodile dundee in our own backyard! Don't play play..) Heng Long sources, tans and processes raw crocodilian skins into finished leather.

Revenue for FY2007 is S$66.23m and net profit is S$11.142m. The NTA is 25.9 cents post IPO and EPS based on post-ipo shares is Singapore 4.157 cents. At the IPO price of 34 cents, the issue is priced at a historical PE of 8.2x. The market cap is $91.1m based on the IPO price.

Actually i quite like this unique business with not many similar competitors in Singapore and the promise to pay 30% of the net profit for FY2008 as dividends. However, what i dont really like is the 'family-style' management team. The 2 Managing Directors are brothers and their wives are also helping out in the business. One of the MD's spouse has a title of Payroll Manager and the other has a title of Treasury and Corporate Affairs. All 4 of them used to make between $250,000 to $499,999 per annum for FY 2007. While you can do that as a private company, it is really good to see that the wives have the discipline to 'take a pay cut' to below $250,000 per annum for FY2008. Frankly, a good Financial Controller will be able to take on the functions currently undertaken by both the spouses. In addition, what is the point of having a payroll manager when you already have a HR Manager and a Financial Controller?!

I would have given it a 2 Chilli rating if not for the current bearish IPO sentiments and the 'family-run' management team. While i am unable to predict FY2008 performance, a 20% increase in EPS and a PE valuation of 8 to 10x will imply a fair value of 40 cents to 50 cents.

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