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Saturday, 18 May 2013

Soilbuild Construction Group Ltd

Soilbuild Construction Group Ltd ("Soilbuild" or the "Company") is offering 168m new shares for its initial public offering at $0.25 each. The prospectus is here.
  • 2m shares will be for the public 
  • 166m share via placement.
The IPO will close on 22 May 2013 at 12pm and starts trading on 27 May.

Soilbuild is a A1-graded construction group with design and build, turnkey and project management services. It has a 36 year old track record in consulting business spaces, HDB and condominiums. By definition, A1-graded means that it can tender for public sector projects in Singapore with unlimited contract value. The areas of focus for Soilbuild is residential and business spaces As of the date of the prospectus, the order book stands at over $500m.

Financial Highlights

I never like the construction sector because the revenue and profitability is rather lumpy even though this Company has been able to show increasing revenue and profitability. As of FY 2012, the revenue was $213m and the net profit was $22m. To be honest, i have no idea if this profit level is able to be sustained for FY2013 and FY2014. Perhaps more enlightened readers can shed some light.

Business projects are the "significant contributor" to the revenue line but the gross margins are in my views, too low and there is no room for errors.

The EPS for FY2012 adjusting for new shares is around Singapore 3.3 cents and that translate into a listing PER of around 7.6x.  The NAV post IPO is around 8.6 cents, hence investors who are coming in at IPO price, please be aware as the price to book is around 2.9x. I am not sure why the Company couldn't include the pro-forma bonus under the service agreement in the FY2012 results.

The market cap of the Company is $166m based on the IPO price and public shareholders will hold 25% post IPO and the Company intends to pay out at least 25% of it net profit from Listing Date till 31 Dec 2013 and at least 25% of its net profit after tax for FY2014. Assuming the EPS is maintained, it will imply a yield of approximately 3.3% based on the IPO price (3.3c x 25% divide by 25c).

What i like about the Company
  • A1 graded company and the ability to provide comprehensive suite of construction services with proven track record
  • Playing up IPO story with a "Myanmar angle" with 2 contracts there. Yoma was "chased up" recently due to its Myanmar connection.
  • The promise to pay out 25% of its net profits as dividends for FY2013 and FY2014 but what i don't understand is why limited to only from listing date to 31 Dec 2013 for FY2013? Can't they just pay out based on the full year profits?
  • Founder who contributes back to society. He was recently featured in the Sunday Times. You can read the article here.

My concerns
  • I never like the construction sector. A lot of opportunities for dubious practices. Poh Lian construction, a wholly-owned subsidiary of United Fiber System Limited, was recently placed under judicial management due to mis-management of funds and poor contractual deals. The news is here. Considering that Singapore is having a construction boom for the last few years, this is quite sobering.
  • The revenue and profits are always lumpy and difficult to predict and suffers from low margins.
  • Myanmar is probably the "last frontier" but the concern is that this is a un-chartered territory and the company may not be able to do well there and this strategy may back-fire.
  • The owners have already made one round of money 'delisting' the company a few years back. Now they are back with a revised structure but do investors know how to appreciate Soilbuild better now? There have been a list of companies doing a relisting here, Amtek, Courts, etc. The performance post IPO has been mixed.
  • Arms length transactions between the parent company and Soildbuild.
  • Tight labor market and increasing material costs will eat into the margins if the Company is unable to project its costs properly.
Valuation and fair value

As mentioned above, i have no idea if the profit level for FY2012 will be maintained. In this regard, i will just use the audited FY2012 profit level as a "gauge". The peers should include the likes of Chip Eng Seng, Koh Bros and Lian Beng.

According to shareinvestor, as of 18 May 2013,
- Chip Eng Seng is trading at a PER of 6.1x, dividend yield of 5.2%, Price to Book of 1.02x and has a market cap of $499m.
- Koh Bros is trading at a PER of 7.3x, no dividend and a price to book of 0.7x and has a market cap of $143m
- Lian Beng is trading at a PER of 5.3x, dividend yield of 1.9%, price to book of 1.1x and has a market cap of $278m.

As such, i see no compelling reasons to buy into Soilbuild. It is actually quite expensive if i use a Price to Book ratio. Investors might as well put their money into Chip Eng Seng which offers a better value proposition if they want such an industry exposure. However, having said that, the current IPO market and the sentiment is "hot" and the low price of $0.25 will probably mean that investors can "hit and run" but the low public float probably means it is very difficult to get meaningful shares anyway so i will probably give it a miss.

I will give it a 1.5 chillis for IPO punt and a 1 chilli for the longer term. 


Anonymous said...

MR IPO, what's your valuation? the opening price range. to be honest I find the A1 construction most attractive, the fact that they delisted years ago most unattractive.

Mr. IPO said...

Already fairly valued unless there is another 30% profit improvement. Probably 20-30c range is fair to me.

Anonymous said...

I read the prospectus, and was wondering why total asset is decreasing despite increased revenue? Please advise! Thanks!

Mr. IPO said...

Paid out as dividends lor. Page I-7. They always pay out dividends to themselves before going for IPO lor. Why share the cash with others ah :-P

Dividends Wizard said...

Avoid !

p.satay said...

Hi Mr IPO, thanks for your write up.
I would however like to enquire the following 2 qns as you wrote "The owners have already made one round of money 'delisting' the company a few years back. Now they are back with a revised structure ...".

1) What is the criteria(/valid reasons/quorum etc) for a company to be delisted fr SGX?
2) How does SGX protect the rights of minority shareholders in event of such action?

Anonymous said...

[[ anonymous 7 ]]

p.satay said...

Hi Mr IPO, thanks for your write up. the following 2 qns ...


how about presenting the two questions to either SGX and SIAS?

If I'm not mistaken, shareholders in CapitaLand and SMRT are provided free SIAS membership.

As for SGX, I doubt if you'd get any answers from SGX, but presumably no harm trying.

Mr. IPO said...

I think they leave it to the board. Remember the recent case where SC Global privatise the company. As long as the offer is "fair" and the board find a 3rd party independent valuer to cover themselves and if the offer is higher than the prevailing market price, what is to stop shareholders for accepting the privatisation offer.

SIAS will probably just ensure procedures are followed. In the owners mind, they are probably thinking that if the market don't know how to value them properly, they might as well "offer" them an exit. ^_^

No right or wrong answers in the prior Soilbuild privatisation. Why will owners privatise a company unless they see value in it. They are not out there for charity work I guess.

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