Secura Group Limited

Secura Group Limited ("Secura" or the "Company") is offering 112m shares at $0.25 each of which 108m shares are via placement with 4m shares for the public for a listing on Catalist. The market cap based on the IPO price will be $100m.

For the first time (at least for me), there are 224m free detachable warrants where you will get 2 free warrants for each share allotted. Each warrant allows you to convert into one shares at an exercise price of $0.35 each.

The offer will close on 26 Jan 2016 at 12pm and starts trading on 28 Jan 2016.

Principal Activities

The Company provides an integrated suite of security products, services and solutions.The Company has been providing security printing services since 1976 and owns one of the largest cheque printing businesses in Singapore. 

Services provided include:

• Security Printing
• Security Guarding
• Cyber Security
• Homeland Security
• Other consultancy services

Interesting shareholders names

An interesting list of shareholders in Secura. Seems like a mini club deal where the who's and who's in the local corporate world invested in this firm. 

Football fans will know who Peter Lim is. Wee Ee Chao takes care of UOB Kay Hian and we have City Developments as well as Mr. Kuok Khoon Hong (from Wilmar), Tony Tan Choon Keat and Berjaya Group. They invested at an average price of 1.47 cents to 6.70 cents. Public investors are coming in at 25 cents.

Financial Highlights

The Company generated a revenue of $30.4m for FY2014 and a net profit of $8.2m. Stripping out the non-recurring profit of $5m, the recurring net profit is around $3.2m.

While the prospectus go "rah-rah" about the Company being a "cyber security" company, a look at the actual revenue shows that the bulk of the money is still being earned from the bread and butter "security guarding" rather than the "high growth" cyber security which came off a very low base.

Probably positioning it as a cyber security will be more "sexy" and will warrant a higher "valuation" in the market place.

The Company also helped readers to project what FY2015 profit will be like. Using very simple arithmetic, where 1H2015 net margin is around 11.1%, full year revenue will be around $16.1m + $9.2m = $25.3m and net profit will be around $2.81m. Since the order book excludes security printing business, the actual revenue and profit will likely come in higher than this.

A slightly more aggressive way to project will be to use HY2015 growth in revenue and profitability of around 13%. That will translate into a revenue of $30.4m x 1.13 = $34.4m and a profit of $3.58m.

Taking a combination of two, the revenue should be between $25m-34m and net profit should come in between $2.8-3.6m

Based on the post IPO number of shares of 400m, the FY2015 EPS will come in around 0.7 to 0.9 cents. That translate into a PE ratio of between 27x to 36x.... 

The warrants served as a huge distraction to investors by providing potential "free upside" but do not take away the fact the IPO valuation is indeed very rich. The IPO is also sold at a huge premium to its NAV of 9.4 cents per share.

Used of proceeds

The Company is raising a huge amount of money of $28m. The use of proceeds as follows:

Assuming all warrants are exercised, the Company will receive another $78.4m in proceeds! 

What I like about the Company

• Very stable business in cheque printing. Many banks need to pre-qualify the vendors and once qualified, there is some stickiness with staying with the same vendor
• The volatile and uncertainty (such as potential terrorist attacks) has led to the increase of physical security guard. Having said that, my recollection is that in Singapore, only Certis Cisco can provide armed guards. Other firms such as Secura can only provide unarmed security guards
• Reputable and savy shareholders list but that doesn't mean they are going to give retail investors a free lunch. In fact, retail investors are probably the lunch. :-P
• Innovative structure with detachable warrants that expire in 3 years and exercisable at 35c. It seemed to tell investors that they should "hold" for at least 3 years
• Allowing investors to participate in this offering even though it is a small tranche
• Cyber Security is an interesting space and i believe the Company wants to use the high valuation for M&A opportunities
• Audited by a big 4 Ernst and Young. 

Some of my concerns

• While cheque printing is a stable business, it is also a sunset business. People still writing cheques will belong to "the older generation". Technology has since changed the way people pay for services. One good example will be i used to write cheque to pay my credit card bills but have since moved on to online platform such as Internet banking or www.axs.com.sg
• Uncertain and volatile markets sentiments may affect the debut
• Very rich valuation. There are many beaten down stocks that are currently worth a second look vis-a-vis this Company debuting at high valuation
• While the detachable warrants is novel, it creates another layer of complication to retail investors, who may not fully appreciate how warrants work
• Misleading prospectus where they list the PER of FY2014 at 8.9x, knowing jolly well that $5m of the net profit in FY2014 was non-recurring and using a pre invitation share capital as the denominator! 
• The Company took out the cash prior to the IPO through dividends amounting to around $12.8m over the last 3 years. If the prospects is so good, why didn't they keep the cash in the Company to grow the business?
• Huge placement tranche of more than 100m shares may mean selling pressure 

My Ratings

The reputable list of investors should provide some initial interest and support but the valuation, in my view, is really too rich and there isn't enough growth prospect to warrant such a high valuation.  My guess is that the Company will take advantage of the high valuation as currency for future acquisitions since all the "towkays" inside are deal makers but don't make yourselves their lunches. They got in a much lower valuation. 

It's a very mixed feeling for me. My gut feel is that the share will debut above its IPO Price but don't overstay your welcome. It's a one chilli rating for me as this is not a clear compelling buy and the towkays definitely didn't leave any meat on the table.