Singapore IPOs: Why I No Longer Cover Every Listing
Some readers may have noticed that I have not been writing about every Singapore IPO since last year. The simple reason is that life has become busier. Between my day job, an increasingly packed travel schedule, family commitments and desire to play more golf, I have become much more selective about how I spend my time. Writing detailed IPO reviews takes time — reading prospectuses, analysing financials, comparing valuations and understanding the competitive landscape. While I still enjoy investing and writing, I no longer feel the need to cover every IPO that comes to market. Instead, going forward, I will probably focus only on IPOs where I am seriously considering investing my own money or where there is something particularly interesting that is worth discussing. I suspect this will make the blog more useful as well. Rather than writing about every deal, I can spend more time sharing my thoughts on the handful that I believe deserve attention. That bring...
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Hotel Johor Bahru
On page 61, it says
As adjusted for the Restructuring Exercise, the net proceeds from the issue of New Shares and the intended use of such proceeds ($’000)
Cash and Cash Equivalents 58,882
Indebtedness
Current
Term Loans (Secured and Guaranteed)(2) 20,147
Non-current
Term Loans (Secured and Guaranteed)(2) 443,035
Total Indebtedness 463,182
Total Shareholders’ Equity 299,119
Total Capitalisation and Indebtedness 762,301
Now, here is the crucial part. Assuming a 2.5% interest rate (page 190, first sentence states loan facilities between approximately 2%to 3%per annum) on the long term loan, in the next few years, the company will have to pay interest expense of 443m x 2.5% = 11m
On page 120, under audited 9m2011,
The pretax, pre-finance cost profit is (21.248 – 2.158)m = 19m
Adjusting it for 12 months, 19m / 3 x 4 = 25m
Accounting for the 11m interest expense per annum, pretax profit = 14m
Accounting for tax of 18%, net profit after tax = 11.5m
Therefore eps = $0.0115 (total 1,000,000,000 shares after IPO)
Considering a share price of $0.26, PER = 23 !!! WITH LARGE LEVERAGE
Even if shareholders are willing to forgo their dividends, it will take 443m/11.5 = 38 years to clear off its debt. What if interest rate rises to 5% in the next few years?
Can someone point out where I have gone wrong? Would really appreciate it.
Anyway, assuming I am correct, I would conclude that this IPO is a speculative investment. As a value investor, I think if we have friends or relatives interested in this IPO, we should make an effort to advise them.
Nice blog you have here! I am James, a new blogger at kissinvesting.blogspot.com.
I would like to exchange links with you.
Hope you can email me back at kissinvestor@gmail.com if you are interested :)
Cheers,
James
Thank you for sharing your insights on the indebtedness of the Company. It is definitely correct to assume that the company will be highly geared. The question is whether the company can meet its debt obligations. The use of good leverage do have a good impact on the Return on Equity.
You are right to point out that finance cost will escalate for FY2012 and thereby reducing the profits and increasing the PE ratio. Based on your EPS, this also means the dividend yield is now 3.53%, which is still decent.
This is a hit and run for me. Perhaps you may want to analyze if Fragrance Group Limited is a better buy now that it has spun off the hotel arm and will receive 'huge' cash payout of $420.5m.
There are a few mitigation factors if interest rates goes up. The company can issue more shares to boost up its equity, FGL can subscribe for more shares in the company using its cash hoard (if it has not paid it out as dividends).
There is this strong rush to IPO a company's hotel portfolio because the CAGR is starting to grow less strongly, hence, companies will want to sell off at the best price possible, this is true for Fragrance too.
Next, one weird thing in the prospectus is that their creditors are largely finance companies instead of the usual banks. Yup, the three local banks are there, but if their credit is so safe, why bother to go Hong Leong Finance or Sing Investment? These places charge higher interest and also, will be hard to get funding in times of a freeze up.
As a hotelier, I think it is very risky to hold only 2 mil cash as compared to debt of 200 mil, asset of 700 mil, NAV of 500mil. It is around 0.4% of the NAV. In this case, I think it is very risky. If there is a fine (due to bad activities), interest rate changes, or just more receivables, I think it will need to call for help. Its sponsor is Fragrance, thus I think it is not a strong sponsor after all. Many REIT that can survive in the 2009 crisis is because of them having strong banks and sponsors. In this case, I hope ppl will consider more and treat this as a hit and run only.
But i want to give them the benefit of the doubt as this is a strong cashflow business unless SARS happen again.
Its interesting to hear that you are a hotelier, so you should be in a better position than me to share some insights about this company. :)